Yahoo Finance Should You Retain Digital Realty (DLR) Stock in Your Portfolio?
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 various development and redevelopment activities, which is encouraging. However, competition in its industry and high interest rate environment remain concerns.
What’s Aiding it?
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. It has a global presence, with 309 data centers in more than 50 metros with decent occupancy. The company is poised for growth with more than 5,000 global customers and growing.
Its tenant roster includes several behemoths and investment grade, and numerous customers use multiple locations across the portfolio. This assures stable revenue generation for the company. For 2024, management expects total revenues to grow 2% and adjusted EBITDA to grow 4% at the midpoint of their guidance ranges.
Digital Realty is making efforts to enhance its portfolio by carrying out various development and redevelopment activities. The company has a robust development pipeline, which seems encouraging. As of Mar 31, 2024, it had 8.2 million square feet of space under active development and 4.1 million square feet of space held for future development.
Further, in recent years, Digital Realty has expanded in the Americas by adding capacity in New York, Northern Virginia and Toronto. For 2024, the company expects to incur capital expenditures for its development activities in the range of $2.0-$2.5 billion.
Digital Realty has a solid balance sheet with ample liquidity and diversified sources of capital. Its capital-recycling efforts aimed at bolstering balance sheet strength and driving long-term growth are encouraging. For 2024, it expects to carry out dispositions/joint venture capital in the range of $1.0-$1.5 billion.
As a result of its proactive balance sheet management, Digital Realty exited the first quarter of 2024 with cash and cash equivalents of $1.19 billion. Its debt maturity schedule is well-laddered, with a weighted average maturity of 4.3 years and a 2.8% weighted average coupon as of Mar 31, 2024.
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.
Solid dividend payouts are the biggest enticements for REIT shareholders, and Digital Realty remains committed to that. The company increased its dividend three times in the past five years, with an annualized dividend growth rate of 3.07%. Given its solid operating platform and balance sheet management efforts, DLR remains well-poised to sustain the dividend payment.
Shares of this Zacks Rank #3 (Hold) company have gained 4.7% over the past three months against the industry’s decline of 2.5%.
Image Source: Zacks Investment Research
What’s Hurting It?
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.
A high interest rate environment is a concern for Digital Realty. Elevated interest rates imply high borrowing costs for the company, which can hinder its ability to acquire or develop its real estate holdings. It has a substantial debt burden, and the total debt outstanding as of Mar 31, 2024, was $17 billion. Its debt-to-capital ratio is 48.52%, higher than the industry’s average of 47.73%. Further, with high interest rates in place, the dividend payout may seem less attractive than the yields on fixed-income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the broader REIT sector are Lamar Advertising LAMR and Paramount Group PGRE, 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 LAMR’s 2024 funds from operation (FFO) per share has moved 3.7% northward over the past two months to $8.03.
The Zacks Consensus Estimate for PGRE’s current-year FFO per share has been raised 5.5% over the past month to 77 cents.
Note: Anything related to earnings presented in this write-up represents FFO, a widely used metric to gauge the performance of REITs.
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