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

Amid strong demand for data centers, Digital Real Estate DLR is well prepared to grow through acquisitions and development efforts. A solid balance sheet position also bodes well. However, with fierce competition in the industry, aggressive pricing pressures are a concern.

Strong growth in cloud computing, the Internet of Things and big data, and increased demand for third-party IT infrastructure are driving demand for data center infrastructure. In addition, growth in the AI, autonomous vehicles and virtual/augmented reality markets is expected to be robust over the next five to six years.

Demand is strong in top-tier data center markets and despite high occupancy rates, these markets are rapidly absorbing new construction, which is expected to drive data center demand. In addition, data centers are poised to take advantage of an over-reliance on technology and an acceleration of enterprise digital transformation strategies.

By capitalizing on such factors, Digital Realty is expanding its portfolio through increasing acquisitions and developments. In January 2022, DLR announced its agreement to acquire a majority stake in African carrier-neutral data center and interconnection service provider, Teraco Data Environments. It also made land purchases worth $186.3 million in the first quarter of 2022. In recent years, the company has strengthened its presence in Europe, Australia, Africa and Asia through the development of high-quality facilities.

In the first quarter of 2022, Digital Realty’s development pipeline reached an all-time high. It had 44 projects running, with 300 megawatts of IT capacity in 28 metros worldwide. This reflects strong customer demand. Digital Realty has also expanded in the Americas by adding capacity in New York, Northern Virginia and Toronto. To benefit from its growth efforts, the company continues to invest in EMEA, with active development projects in 17 of its 18 markets.

We believe such expansion efforts have helped Digital Realty make its business global and will drive the company’s top and bottom lines in the years to come.

Digital Realty focuses on maintaining a solid balance sheet and has adequate liquidity, with diversified sources of capital. After the end of the first quarter, Digital Realty expanded its global revolving credit facility from $3.0 billion to $3.75 billion. As of May 3, 2022, the company had approximately $2.8 billion in loans available under its global revolving credit facilities.

In March, DLR announced that its board of directors has approved a quarterly cash dividend of $1.22 per share, representing a sequential increase of 5.2% from its previous $1.16 dividend.

However, Digital Realty faces stiff competition from its industry. The company competes with several data center developers, owners and operators, many of whom own similar assets in the same locations as Digital Realty. There are also several local developers in the United States and several regional operators in Europe, Asia and Australia. Given the solid growth potential of the data center real estate market, competition from existing players and the entry of new players is expected to increase in the coming period. In the midst of this, there will likely be aggressive pricing pressure in the data center market.

Digital Realty has a significant number of properties outside the United States. This exposes the company’s profits to foreign currency conversion. With the US dollar strengthening further, management expects a drag of approximately 250 to 300 basis points in revenue and core FFO per share growth for the full year 2022.

A rise in interest rates worries Digital Realty. Rising rates imply higher borrowing costs for the company, which will affect its ability to purchase or develop real estate. The company has significant indebtedness and total debt as of March 31, 2022 was approximately $14.4 billion. In addition, the dividend payout may become less attractive than the returns on fixed income and money market accounts.

Shares of this Zacks Rank #2 (Buy) player are down 11.8% in the past three months, down from the industry’s 16.6% decline. You can see the full list of current Zacks #1 Rank (Strong Buy) stocks here

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Other Stocks to Consider

Some other key REIT industry picks include: Extra Space Storage Inc. EXR and OUTFRONT media FROM.

Zacks’ consensus estimate for Extra Space Storage’s 2022 FFO per share has risen slightly to $8.20 in the past month. EXR currently has a Zacks Rank of 2.

Zacks’ consensus estimate for OUTFRONT Media’s FFO per share for the current year has increased 1.5% over the past two months to $2.09. OUT currently has a Zacks Rank #2.

Remark: Everything to do with income presented in this article represents Funds from Operations (FFO) – a commonly used metric to measure REIT performance.

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