Digital Realty Is One Of Our Favorite Income Growth Ideas

Summary

We are huge fans of Digital Realty Trust’s income growth potential.

The high end of our fair value estimate range sits at $200 per share of DLR. Shares of DLR are trading at ~$175 per share.

Digital Realty’s growth runway is immense and underpinned by secular tailwinds as data consumption continues to increase across the globe, which in turn supports the REIT’s cash flow growth outlook.

The data center REIT is steadily bulking up its presence in Europe and Asia while investing in its core North American market.

sefa ozel/E+ via Getty Images By Valuentum Analysts

The data center real estate investment trust (‘REIT’) industry is one of our favorites. Secular growth tailwinds support the industry’s longer term outlook as data consumption around the globe continues to surge, driving up demand for existing and future data center operations. REITs with meaningful scale in this space such as Digital Realty Trust Inc. ( DLR ) – which is one of our favorite income growth opportunities – should thrive going forward. From 2005 to 2021 , Digital Realty has seen its annual per share dividend grow by ~10% CAGR as the data center REIT pushed through 16 consecutive years of increases, with ample room for additional upside going forward. Shares of DLR yield a nice ~2.7% as of this writing. Investment Highlights

Source: Data as of December 3, 2021.

Digital Realty develops and manages technology-related real estate, namely data centers along with the related co-location and interconnection operations. The firm targets high-quality, strategically-located properties containing applications and operations critical to technology industry tenants and corporate data center users. It operates as a REIT for tax purposes. The company was founded in 2004 and is headquartered in San Francisco.

The REIT’s international upside is immense. Demand for data centers and interconnection services is supported by powerful secular trends in the ever-evolving tech landscape. The proliferation of AI and computing cloud operations underpins Digital Realty’s promising growth outlook. In March 2020 , Digital Realty completed its acquisition of the European-focused data center firm Interxion through an all-stock deal worth ~$8.4 billion including the assumption of net debt. Digital Realty continues to pursue bolt-on acquisitions to further strengthen its presence in Europe’s data center market such as its recent strategic investment in AtlasEdge. The firm is also investing in building new European data centers as well. In September 2021 , Digital Realty announced it had brought another data center facility online in Paris, France.

Digital Realty is also pursuing growth opportunities in India via a joint-venture with Brookfield Infrastructure Partners L.P. ( BIP ), while investing in projects in South Korea and Singapore . These efforts are steadily paying off, as Digital Realty raised its full-year outlook for 2021 as it concerns its expected funds from operations (‘FFO’) per share when reporting its third quarter 2021 earnings update. We appreciate that Digital Realty is becoming increasingly confident in its near-term performance. For reference, FFO is a non-GAAP metric used by REITs to highlight the trajectory of their cash flows.

In December 2021 , Digital Realty announced it had listed Digital Core REIT on the Singapore Exchange and that “Digital Realty contributed a 90% interest in a portfolio of 10 assets concentrated in top-tier data center markets across the U.S. and Canada valued at $1.4 billion” according to the related press release. Digital Core REIT is sponsored and externally managed by Digital Realty and represents how Digital Realty continues to optimize its corporate structure to the benefit of its shareholders.

The REIT is still investing heavily in its core North American business, a strategy that includes bulking up its presence in Dallas, Texas and Toronto, Canada . Back in February 2020, Digital Realty announced it was acquiring a 49% stake in the Westin Building Exchange in Seattle, Washington, which “serves as the primary interconnection hub for the Pacific Northwest, linking Canada, Alaska and Asia along the Pacific Rim” according to the press release. In January 2021, Digital Realty announced it was moving its global headquarters to Austin, Texas.

Digital Realty has a number of competitive advantages: 1) a high-quality portfolio that is difficult to replicate, 2) a presence in key geographical markets, demonstrated acquisition capability, 3) flexible data center solutions, and differentiating development advantages. The REIT’s investment-grade credit rating (BBB/Baa2/BBB) offers nice support for its payout, though despite the attractive credit ratings, the REIT’s payout is still dependent on its capital market access.

At the end of September 2021 , Digital Realty had a net debt load of $14.0 billion (inclusive […]

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