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Key Factors to Impact Digital Realty's (DLR) Q4 Earnings

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Digital Realty Trust DLR is scheduled to release fourth-quarter and full-year 2019 results on Feb 13, after the closing bell. The company’s quarterly results are expected to reflect year-over-year growth in revenues, while funds from operations (FFO) per share might display a decline.

In the last reported quarter, this San Francisco, CA-based data-center real estate investment trust (REIT) delivered a positive surprise of 1.83% in terms of funds from operations (FFO) per share. Results were supported by growth in revenues.

The company has a decent surprise history. In fact, over the trailing four quarters, the company beat the Zacks Consensus Estimate on all four occasions, the average beat being 1.97%. This is depicted in the graph below:

Digital Realty Trust, Inc. Price and EPS Surprise
 

Digital Realty Trust, Inc. Price and EPS Surprise

Digital Realty Trust, Inc. price-eps-surprise | Digital Realty Trust, Inc. Quote

Let’s see how things are shaping up for Digital Realty prior to this announcement.

Factors to Consider

Digital Realty is likely to have gained from solid fundamentals of the data-center market in the to-be-reported quarter. Particularly, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, demand for space at properties of data-center REITs has been shooting up.

Also, the artificial intelligence, autonomous vehicle and virtual/augmented reality markets have been growing at a solid pace, fueling demand for such real estates. In fact, demand is outpacing supply in top-tier data-center markets and despite enjoying high occupancy, these markets are absorbing new construction at a faster pace.

In fact, the full spectrum of data-center solutions across a global platform is likely to have helped the company witness growth in customers, with several having multiple locations across the portfolio. Additionally, significant customer investment is likely to have ensured stable retention.

Amid these, the Zacks Consensus Estimate for the quarterly total revenues is $799.3 million, indicating 2.7% year-over-year growth.

Digital Realty is also banking on strategic acquisitions and development efforts for building a premium portfolio of high-quality facilities located across North America, Europe, Latin America, Asia and Australia.

In October, Digital Realty announced that it has agreed to acquire European provider of carrier and cloud-neutral colocation data-center services, Interxion, in a deal valued at $8.4 billion, including debt. The combined company will enjoy enhanced presence in major European metro areas, and its size and scale is expected to result in an efficient cost structure and superior EBITDA margins. The acquisition transaction is likely to close in 2020. During the fourth quarter, the company also announced the launch of a global data-center platform — PlatformDIGITAL — aimed at helping customers scale digital businesses.

Nevertheless, given the solid growth potential in the data-center real estate market, competition has intensified in its markets. This is likely to have resulted in aggressive pricing pressure in the quarter under review. In addition to this, interest-expense burden is a concern, with the company having a substantial debt position.

Moreover, in November, Digital Realty announced closing of the $1-billion joint venture (JV) with Mapletree Investments and Mapletree Industrial Trust on three existing Turn-Key Flex® hyper-scale facilities in Ashburn, VA.  Digital Realty retained 20% interest in the JV, while the entity acquired 80% stake for around $811 million. The company’s full-year 2019 core FFO per share projections incorporates an impact of 5 cents per share from dilution from the JV transaction and two long-term capital raises in October.

Amid these, Digital Realty’s activities during the soon-to-be-reported quarter were inadequate to gain analysts’ confidence. The Zacks Consensus Estimate for the fourth-quarter FFO per share remained unchanged at $1.58 in a month’s time. However, it indicates a decline of nearly 6% from the year-ago quarter’s reported figure.

For 2019, Digital Realty expects core FFO per share of $6.55-$6.65. The full-year outlook provided by the company is backed by revenue projections of $3.2 billion, year-end portfolio occupancy decline of 150 bps, and same-capital cash NOI growth of -2.0% to -4.0%. The Zacks Consensus Estimate for 2019 FFO per share is currently pinned at $6.62, indicating 0.3% year-over-year increase on revenues of $3.2 billion.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Digital Realty this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Although Digital Realty carries a Zacks Rank of 3, its Earnings ESP of 0.00% makes surprise prediction difficult.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Healthpeak Properties, Inc. PEAK, slated to release fourth-quarter earnings on Feb 11, has an Earnings ESP of +1.15% and carries a Zacks Rank of 3, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Vornado Realty Trust VNO, set to report quarterly numbers on Feb 18, has an Earnings ESP of +5.62% and carries a Zacks Rank of 3, currently.

Host Hotels & Resorts, Inc. HST, scheduled to release October-December period results on Feb 19, has an Earnings ESP of +1.52% and currently holds a Zacks Rank #3.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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