Digital Realty’s DLR portfolio of data centers globally is well-positioned to benefit from the growing reliance on technology and an acceleration in digital transformation strategies by enterprises. A solid tenant base assures stable revenues. It also carries out strategic investments in land, infrastructure and acquisitions, which is encouraging. Its healthy balance sheet position will likely aid its growth endeavors. However, competition in its industry and concentration of assets remain concerns.
What’s Supporting DLR?
High growth in cloud computing, the Internet of Things and Big Data and the elevated demand for third-party IT infrastructure are spurring the demand for data center infrastructure. Growth in the artificial intelligence, autonomous vehicles and virtual/augmented reality markets is anticipated to be robust in the upcoming years. Demand is strong in top-tier data center markets, and despite enjoying high occupancy, the top-tier markets are absorbing new construction at a faster pace.
DLR has a high-quality, diversified customer base comprising tenants from cloud, content, information technology, network, and other enterprise and financial industries. The company is poised for growth, with more than 5,000 global customers and growing. Its tenant roster includes several behemoths, and numerous customers use multiple locations across the portfolio. This assures stable revenue generation for the company.
Digital Realty is expected to ride on its growth curve backed by strategic investments in land, infrastructure and acquisitions. Following the third quarter of 2024, it closed on the acquisition of a 6.7-acre parcel in Richardson, TX, for around $15 million to support the development of more than 80 megawatts (MW) of incremental IT capacity. In the third quarter of 2024, Digital Realty acquired the land and shell of one of its existing data centers in Schiphol Rijk, Amsterdam, for approximately €43 million, or $48 million. The site encompasses approximately 15 MW of fully leased capacity.
Digital Realty has a solid balance sheet with ample liquidity. The company exited the third quarter of 2024 with cash and cash equivalents of $2.18 billion. Its debt maturity schedule is well-laddered, with a weighted average maturity of 4.7 years and a 2.8% weighted average coupon as of Sept. 30, 2024. The company has no debt maturities until early 2025.
Its capital-recycling efforts aimed at bolstering balance sheet strength and driving long-term growth are encouraging. For 2024, it expects to have carried out dispositions/joint venture capital in the range of $1.0-$1.5 billion. With proceeds from asset sales and growth in cash flows as the signed leases commence, the company is expected to experience an improvement in net debt-to-adjusted EBITDA.
Shares of this Zacks Rank #3 (Hold) company have gained 14.7% over the past six months against the industry’s decline of 2.9%.
Image Source: Zacks Investment Research
What’s Affecting DLR?
Digital Realty faces intense competition in its industry. Given the solid growth potential of the data center real estate market, competition is expected to increase in the upcoming period from existing players and the entry of new players. Amid this, there is likely to be aggressive pricing pressure in the data center market.
Although the company has been focusing on expanding its global footprint, some of its assets are concentrated in certain regions. As of Sept. 30, 2024, Northern Virginia, Chicago and Frankfurt accounted for 18.5%, 7.5% and 5.9%, respectively, of the company’s total annualized rent. Therefore, its performance is susceptible to the economic condition of these regions.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Cousins Properties CUZ and SL Green Realty SLG, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for Cousins Properties’ 2024 FFO per share has been raised marginally over the past two months to $2.68.
The Zacks Consensus Estimate for SL Green’s 2024 FFO per share has been raised 2.2% over the past month to $7.83.
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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