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

Data-center REITs are experiencing a boom market, with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure. Also, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five to six years. Apart from these, data centers are poised to benefit from the heightening reliance on technology in wake of the coronavirus pandemic.Thus, data-center REITs like Digital Realty Trust, Inc. DLR, Equinix, Inc. EQIX, CyrusOne Inc. CONE and CoreSite Realty Corporation COR will keep witnessing significant demand.

Particularly, Digital Realty is poised to benefit from this healthy market fundamental through accretive acquisitions, development and expansion efforts. During the first quarter, the company completed the acquisition of Interxion, a European provider of carrier and cloud-neutral colocation data-center services for a total consideration of $8.4 billion, including debt. The combined company enjoys 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. During the March-end quarter, Digital Realty also closed on the buyout of 49% stake in the Westin Building Exchange in Seattle, WA, for around $368 million.

Also, the company has enhanced its presence in Europe, Australia and Asia in recent years through the development of high-quality facilities. These apart, the acquisition of Ascenty, a data-center provider in Brazil, and merger with DuPont Fabros played a significant role in boosting the company’s footprint in key markets. We believe such expansion efforts will drive the company’s top and bottom lines in the years ahead.

Digital Realty has a high-quality diversified customer base comprising tenants from Cloud, Content, Information technology, Network and Enterprise, and Financial industries. Majority of its tenants are investment grade and numerous customers use multiple locations across the portfolio.

Moreover, the company delivered a healthy performance in first-quarter 2020 on solid data-center demand. Signed total bookings during the quarter are estimated to generate $75 million of annualized GAAP rental revenues. This marks the second highest quarter on record. In addition, the company signed renewal leases, marking $92 million of annualized GAAP rental revenues.

The company focuses on maintaining a solid balance sheet and enjoys ample liquidity, with diversified sources of capital. As a result of its proactive balance-sheet management, the company had $250 million of cash on the balance sheet as of Mar 31, 2020, together with $1.7 billion of additional equity following the quarter end and $2 billion of availability on its global revolving credit facilities. Its debt-maturity schedule is well laddered, with weighted average maturity of 6.2 years and 3% weighted average coupon. Further, 98% of its total debt is unsecured, offering flexibility for capital recycling.

Additionally, solid dividend payouts are the biggest enticement for REIT shareholders and Digital Realty remains committed to that. Furthermore, this February, the company announced a 4% hike in dividend to $1.12 per share. The company has raised dividend every year since its initial public offering and the latest dividend hike marked the 15th consecutive year of increase. Given its solid operating platform and balance-sheet management efforts, the company is well poised to sustain the dividend payment.

Such encouraging factors have helped Digital Realty’s shares gain 9.2% so far this year, as against the industry’s decline of 21%.

Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, Digital Realty faces stiff competition from several data-center developers, owners and operators, many of which enjoy ownership of similar assets in locations same as the company. As the data-center market has the potential of further growth, these REITs remain under aggressive pricing pressure.

While data centers remain unaffected by the coronavirus pandemic, the company noted that though its April rent collections were in line with historical averages, tenants accounting for roughly 2% of total revenues, have requested for rent relief. Also, there is likely to be a modest drag from development delivery delays in select markets.

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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