Image shown: The performance of Digital Realty Trust’s stock since the beginning of 2016.
The data center REIT continues to be on the acquisition hunt, and momentum in its business couldn’t be stronger, in our opinion. Its debt levels are elevated, but not unlike that of other REITs that are dependent on the external capital markets. We continue to like the strength of Digital Realty’s end market and think the REIT is fundamentally well-positioned to capture increased demand.
By Brian Nelson, CFA
On the heels of Digital Realty Trust’s (DLR) increased guidance for core funds from operations (FFO) for 2018 to the range of $6.50-$6.60 from $6.45-$6.60 when it reported first-quarter results in April, the REIT in mid-June issued $650 million of unsecured notes yielding 4.45% and maturing in 2028, in part to acquire new properties or businesses.
It wasn’t but a couple weeks after the debt issuance that Bloomberg reported July 5 that Digital Realty Trust was in talks to acquire Brazilian data center company Ascenty. The news helped to propel not only Digital Realty Trust’s equity higher at the time, but also several peers including Cyrus One (CONE), QTS Realty (QTS), Equinox (EQIX), CoreSite (COR), and Uniti Group (UNIT). We await more details on the potential transaction.
The need for more data centers remains apparent, in our view, and we would expect ongoing consolidation in the group, provided stakeholders continue to be comfortable with the elevated levels of leverage across the space. Digital Realty merged with DuPont Fabros Tech in an all-stock deal in September 2017, and in 2016, it acquired several European data centers from Equinox.
At the end of the first quarter of 2018, Digital Realty Trust held $9.1 billion of total outstanding debt, with a net debt to adjusted EBITDA ratio of 5.3x. The REIT yields ~3.5% at the time of this writing.
Related: SWCH, INXN, INAP
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.