Image: Digital Realty Trust has outperformed the broader REIT sector by quite the margin since the beginning of 2023.
By Brian Nelson, CFA
Real estate investors have had a difficult time the past year, with shares of the Vanguard Real Estate Index ETF (VNQ) falling roughly 6% versus a 22%+ return on the S&P 500 (SPY), both measured on a price-only basis. Data center REIT Digital Realty (DLR), however, has bucked the trend of the broader real estate sector’s weakness advancing 20% over the same time period on a price only basis. Digital Realty’s fourth-quarter results and guidance for 2024, released February 15, weren’t great, but the company is much better positioned than other REITs, in our view. Shares yield ~3.6% at the time of this writing.
Digital Realty reported constant-currency core funds from operations of $1.62 per share in the fourth quarter, which came in below the consensus estimate, but same-capital cash net operating income was solid at nearly 10% growth in the quarter. Reported revenue expanded 11% in the quarter on a year-over-year basis. The data center operator recorded rental rate increase on renewal leases of 8.2% on a cash basis in the quarter, while new rental business in the quarter on an annualized basis totaled $110 million. Here is what CEO Andy Power had to say about the quarter:
Our fourth quarter results marked the culmination of a transformative year for Digital Realty. We delivered on our strategic priorities and positioned the company for the growing opportunity that lies ahead. During the fourth quarter, we bolstered and diversified our capital sources through the formation of two new development joint ventures, while continuing to evolve our portfolio to capture the tremendous opportunities created by AI.
Looking ahead to 2024, Digital Realty issued constant-currency core funds from operations guidance in the range of $6.60-$6.75, which also came in lower than what the Street was looking for, but the range was slightly stronger than the $6.57 mark it reported in 2023. Total revenue for the year is expected in the range of $5.55-$5.65 billion, while adjusted EBITDA is targeted at $2.8-$2.9 billion. At the end of the year, Digital Realty had ~$17.4 billion in total debt and a net-debt-to-adjusted EBITDA ratio of 6.2x, which is rather elevated. Though Digital Realty’s outlook came in below expectations, we think the REIT could make sense for investors seeking real estate exposure but not looking to leap into the traditional office or retail REIT spaces, where pockets are facing secular headwinds.
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Tickerized for VNQ, DLR, KREVF, DBRG, KKR, BX, IRM, EQIX, AMT, VPN, CCI, SBAC, UNIT, GDS, APLD, IHS, VNET
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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