Image Shown: Digital Realty Trust Inc continues to secure new leases which supports its growth outlook. Image Source: Digital Realty Trust Inc – Second Quarter of 2022 Earnings Press Release
By Callum Turcan
Data center real estate investment trusts (‘REITs’) are a great source of income with ample growth opportunities given the secular tailwinds underpinning data demand growth. The proliferation of cloud computing, the Internet of Things (‘IoT’) trend, the rise of autonomous automobiles, households that previously did not have access to the Internet gaining access (particularly in sub-Saharan Africa and South Asian), the rollout of 5G wireless services, and other factors are all driving up data demand around the world. In turn, that makes it easier for data center REITs to renew existing leases, sign new leases, and expand their asset bases.
Digital Realty Trust Inc (DLR) is one of our favorite data center REITs given its global footprint, scale, and commitment to income seeking investors as it has pushed through 15+ years on consecutive annual dividend increases. Shares of DLR yield ~4.1% as of this writing. We include Digital Realty as an idea in both our Dividend Growth Newsletter portfolio and our High Yield Dividend Newsletter portfolio (more on that publication here).
Earnings and Guidance Update
On July 28, Digital Realty reported second quarter 2022 earnings that missed consensus top-line estimates and beat consensus bottom-line estimates. Foreign currency headwinds arising from the strong US dollar seen of late is weighing negatively on its top-line performance though Digital Realty continues to generate ample cash flows. The REIT benefited from its renewal rates rising by 3.4% on a cash basis and 5.3% on a GAAP basis during the second quarter.
Digital Realty’s GAAP revenues grew by 4% year-over-year to reach $1.1 billion and its non-GAAP core funds from operations (‘FFO’) per share rose by 12% year-over-year to reach $1.72 in the second quarter. While an imperfect metric, the trajectory of a REIT’s FFO per share is useful to gauge the underlying performance of its business. Growth in its asset base, new lease signings, and increases in the rental rates on renewed leases were key to driving Digital Realty’s revenues and FFO higher in the second quarter.
When reporting its first quarter 2022 earnings Digital Realty raised its full-year constant currency core FFO per share guidance for 2022 up to $6.95-$7.05 from $6.90-$7.00 previously. The company maintained that guidance during its second quarter earnings update. However, it trimmed its full-year core FFO per share guidance for 2022 down to $6.75-$6.85 from $6.80-$6.90 previously during its second quarter earnings update, with foreign currency headwinds being the main reason for the guidance cut.
In 2021, Digital Realty generated $6.53 in core FFO per share which was up 5% from 2020 levels. This year, at the midpoint of its current core FFO and constant currency core FFO per share guidance, the company is guiding for 4% and 7% annual growth, respectively. We appreciate the momentum seen in Digital Realty’s business of late.
Financial Considerations
During the first half of 2022, Digital Realty generated negative free cash flows and here we would like to stress that the REIT is a capital market dependent entity. It needs to retain access to debt and equity markets to refinance maturing debt, fund acquisitions, make good on its capital expenditure requirements, and to maintain its dividend. Digital Realty generates substantial net operating cash flows (including ~$1.7 billion in both 2020 and 2021), though its capital expenditure expectations are quite hefty as it continues to scale up its global footprint.
The REIT exited June 2022 with a net debt load of $14.2 billion (inclusive of short-term debt). Historically, Digital Reality has leaned on a combination of debt and equity issuances to meet its funding needs and we expect that will continue being the case going forward. Digital Realty has global revolving credit facilities that mature in June 2026 which combined have $4.05 billion in total borrowing capacity, and these facilities can be used to help the REIT meet its near term funding needs. Recent capital market activities (such as the issuance of Swiss bonds in March 2022) indicate that Digital Realty should retain access to debt and equity markets at attractive rates going forward.
Digital Realty is constantly optimizing its portfolio. In August 2022, it acquired a 55% interest in the South African data center provider Teraco for ~$1.7 billion in cash. Also in August 2022, Digital Realty announced it was selling non-core assets (a mixed-used data center property) for $0.2 billion. Going forward, Digital Realty will likely remain very active on the acquisition and divestment front.
Concluding Thoughts
We continue to like Digital Realty in the newsletter portfolios as it provides investors with exposure to an attractive space as it concerns income generation. Digital Realty last increased its per share payout by 5% on a sequential basis in March 2022, which marked its 17th consecutive year of payout increases. We appreciate the data center REIT’s commitment to income seeking investors.
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Real Estate Investment Trust Industry – DLR, FRT, O, REG, SPG, PEAK, OHI, VTR, WELL, PSA, EQIX, CUBE, EXR, IRM
Tickerized for the top 100 holdings in the VNQ.
Callum Turcan owns shares of DIS, META, GOOG, VRTX, and XLE. Digital Realty Trust Inc (DLR) shares are included in both Valuentum’s simulated Dividend Growth Newsletter and High Yield Dividend Newsletter portfolios. 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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