Here's Why You Should Hold Digital Realty (DLR) Stock Now

Shares of data center REIT Digital Realty Trust (NYSE:DLR) have outperformed the industry it belongs to in the past month. The stock has gained 2% against the industry’s slip of 0.4%. The stock has still room for growth.

With projected growth in cloud computing, Internet of Things and big data plus an increasing number of companies opting for third-party IT infrastructure, data-center REITs are experiencing a market boom. In fact, demand is outpacing supply in the top-tier data center markets and despite enjoying high occupancy, the said markets continue to randomly absorb new constructions at a faster pace. This, along with improved outlook for economic growth, is anticipated to drive demand for data centers. Amid these, accretive acquisitions and development efforts are expected to boost top-line growth for Digital Realty.

In September 2017, Digital Realty announced the completion of a merger with DuPont (NYSE:DWDP) Fabros in an all-stock deal for an enterprise value of about $7.8 billion. This move enhanced Digital Realty’s portfolio in the top U.S. data center metro areas across Northern Virginia, Chicago and Silicon Valley. It helped Digital Realty upgrade hyper-scale product offering and grow its blue-chip customer base.

The company had bought Telx in October 2015 and a portfolio of eight high-quality, carrier-neutral data centers in Europe (Amsterdam, Frankfurt and London) from Equinix (NASDAQ:EQIX) in July 2016. Such buyouts offered a leading colocation and interconnection platform, a superior connectivity infrastructure and better growth scope at attractive locations. The company is also focused on expanding its footprint in Europe and Australia.

Further, the company aims at maintaining an investment grade balance sheet and is committed to a conservative capital structure. It enjoys ample, growing liquidity with diversified sources of capital and has a well-laddered debt maturity schedule with no material maturities until 2020.

Additionally, solid dividend payouts are arguably the biggest enticement for REIT shareholders and Digital Realty remains committed to disbursing the same. The company’s dividend has witnessed a hike at 12% compound annual growth rate since 2005. Furthermore, much to the shareholders’ delight on Mar 1, 2018, it announced an 8.6% dividend increase. The company has annually raised dividend since its initial public offering and the recent March 2018 hike marked the 13th consecutive year of increase.

However, Digital Realty faces stiff competition in its industry. In fact, the company contends with several data center developers, owners and operators, many of which enjoy ownership of similar assets at locations same as Digital Realty. Also, there are multiple local developers in the United States and several regional operators across Europe, Asia and Australia.
Given the solid growth potential of the data center real estate market, competition is expected to intensify in the upcoming period from existing as well as new players. Amid all this, an aggressive pricing pressure is anticipated in the data center market.

Moreover, Digital Realty’s earnings have a notable exposure to foreign currency translation. Also, the company has substantial debt burden. Further, the rate hike adds to its woes.

The stock has seen the Zacks Consensus Estimate for 2018 funds from operations (FFO) per share remaining unchanged at $6.54 over the past month.

Digital Realty has a Zacks Rank #3(Hold).

Stocks Worth a Look

A few better-ranked stocks from the same industry are Arbor Realty Trust (NYSE:ABR) , Extra Space Storage Inc. (NYSE:EXR) and Sotherly Hotels Inc. (NASDAQ:SOHO) , all three carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arbor Realty Trust’s Zacks Consensus Estimate for 2018 FFO per share has been revised 2.3% upward to 90 cents over the past month. Its share price has risen 10.9% in six months’ time.

Extra Space Storage’s FFO per share estimates for the current year inched up 1.6% to $4.57 in a month’s time. Its shares have gained 7.1% over the past six months.

Sotherly Hotels’ FFO per share estimates for 2018 have been revised approximately 1.9% upward to $1.05 over the past month. The stock has climbed 7.4% during the past six months.

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


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