Digital Realty (DLR) Beats Q4 FFO Estimates, Affirms View

Data center REIT Digital Realty Trust, Inc.’s (NYSE:DLR) fourth-quarter 2017 core funds from operations (FFO) per share of $1.55 exceeded the Zacks Consensus Estimate of $1.52. The core FFO per share also came in higher than the year-ago quarter tally of $1.43. Results were supported by growth in revenues.

The company reported revenues of $731.4 million for the fourth quarter, which also surpassed the Zacks Consensus Estimate of $729.3 million. The revenue figure also marked 26.8% year-over-year growth. Further, the company reiterated its 2018 core FFO per share outlook.

For full-year 2017, core FFO per share came in at $6.14, well ahead of the prior-year tally of $5.72. This was backed by 14.7% year-over-year growth in total revenues to $2.5 billion.

Signed total bookings during the reported quarter are estimated to generate $56 million of annualized GAAP rental revenues. This would include a $6-million contribution from interconnection. Notably, the weighted-average lag between leases signed during the recently-reported quarter and the contractual commencement date was eight months.

Moreover, the company signed renewal leases, marking $64 million of annualized GAAP rental revenues. Rental rates on renewal leases signed during the reported quarter rolled up 2.3% on a cash basis and ascended 5.7% on a GAAP basis.

Notable Portfolio Activity

During fourth-quarter 2017, Digital Realty entered into a 50/50 joint venture with Mitsubishi Corporation to offer data-center solutions in Japan. Furthermore, the company acquired a 250,000-square-foot data center on a 19-acre site in suburban Chicago for a purchase price of $315 million.

On the other hand, Digital Realty closed on the sale of 44874 Moran Road — a 78,000-square-foot-data center — in Sterling, VA, for $34 million as well as 1 Solutions Parkway — a 156,000 square foot suburban office building — in St. Louis, MO, for $37 million.

Balance Sheet

Digital Realty exited 2017 with cash and cash equivalents of around $0.05 million, down from $10.5 million recorded at the prior-year end.

Additionally, as of Dec 31, 2017, the company had around $8.6 billion of total debt outstanding, substantially all of which was unsecured. Also, as of the same date, its net debt-to-adjusted EBITDA was 5.2x, while fixed charge coverage was 4.2x.

Outlook Reaffirmed

Digital Realty reaffirmed its 2018 core FFO per share outlook of $6.45-$6.60. The Zacks Consensus Estimate for the same is currently pegged at $6.54 and lies within this range.

The full-year outlook provided by the company is backed by revenue expectations of $3.0-$3.2 billion, year-end portfolio occupancy growth of +/- 50 bps and "same-capital" cash NOI growth of 0-3.0%.

Our Take

Digital Realty’s better-than-expected performance in the fourth quarter is impressive. Notably, solid fundamentals of the data-center market offers scope to the company to ride on the growth curve. Additionally, its accretive acquisitions and development efforts augur well for long-term growth. Nevertheless, the company faces cut-throat competition in the industry. The company also has a substantial debt burden. Further, rate hike add to its woes.

Digital Realty currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

The stock has edged down 1.5% in the past month, outperforming the 4.9% loss incurred by the industry.

We are now looking forward to the earnings releases of Public Storage (NYSE:PSA) , Host Hotels & Resorts, Inc. (NYSE:HST) and Welltower Inc. (NYSE:HCN) , all of which are expected to report in the next week.

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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