INVESTMENT THESIS
Digital Realty Trust Inc. (NYSE: DLR) The coronavirus and subsequent economic contraction has led to lower demand for most industries, but we think the data storage business is a good investment, as wireless carrier tenants should see an uptick in demand from data-using customers. In addition, we expect tenants such as Facebook and Comcast to have a greater need for Digital Realty’s services.
(Colocation centers rent space to multiple tenants to house their IT hardware.) Digital Realty’s global platform serves customers in more than 36 major markets on five continents. We believe that DLR has strong opportunities in the global colocation market, and note that the company has grown both organically and through acquisitions. The company recently acquired a European data storage company, Interxion, which will boost the company’s footprint in Europe. We note that Europe – and the greater EMEA region – is the most favorable geographic region the company operates in, offering data storage players like Digital Realty healthy margins and strong growth potential.
RECENT DEVELOPMENTS
The beta on DLR is 0.18.
DLR recently reported results that exceeded estimates. Third-quarter revenue came to $1,025 million, up 27% from 3Q19, boosted by higher inorganic revenue in the EMEA region following the acquisition of Interxion. Core FFO increased 18% to $432 million, but declined 8% on a per share basis to $1.54, primarily due to the higher share count from the March 2020 acquisition of Interxion. Further weighing on core FFO was higher operations & maintenance expense in Interxion’s pre-stabilized properties portfolio. In spite of these negatives, core FFO beat the consensus estimate of $1.48 per share.
During the second quarter, the company signed total bookings that are expected to generate $89 million of annualized revenue.
Turning to investment activity during the third quarter, Digital Realty closed on the freehold land under its Hanauer Landstrabe campus in Frankfurt for USD $217 million. The acquired site includes nine Interxion data centers that were previously leased. Additionally, Digital Realty acquired Croatian-based Altus IT for roughly USD $13 million. Altus IT is the leading carrier-neutral data center provider in Croatia, providing access to more than 100 customers and 50 connectivity providers. Digital Realty also sold a property in the Netherlands for $23 million.
On March 13, Digital Realty acquired Interxion (NYSE: INXN), a European data storage company, for $8.4 billion in stock, representing a 20% premium. Shareholders of INXN received 0.71 shares of DLR stock for each INXN share. DLR shareholders own 80% of the combined company and INXN own 20%. Management expects the merger to be dilutive to 2020 earnings and accretive in 2021. The businesses are complementary and will triple DLR’s European data center locations.
EARNINGS & GROWTH ANALYSIS
Americas, EMEA, and APAC. The company does not segregate operating performance by segment, but might begin to do so in the not-so-distant future due to their acquisition of Interxion.
Turning to growth analysis, the company should get a boost from Interxion’s construction pipeline in Europe. Currently under construction are data center expansions in six metros including: Hong Kong, Seoul, Mexico City, Paris, Marseille and Frankfurt.
Management raised full-year core FFO guidance to $6.10-$6.15 from $6.00-$6.10, as third quarter results came in better than management’s internal estimates. On the top line, management also raised guidance. They now project total revenue $3.850 – $3.875 billion.
We are maintaining our 2020 and 2021 FFO estimates of $6.13 per share and $6.56 per share.
FINANCIAL STRENGTH & DIVIDEND
Standard & Poor’s, Moody’s, and Fitch rate DLR’s debt at BBB, Baa2, and BBB, respectively.
Net debt to EBITDA was 5.6, below the peer average but above the company’s long term target of 5.0.
Digital Realty Trust pays a quarterly dividend factoring in a similar hike to the one performed at the beginning of 2020.
MANAGEMENT & RISKS
William Stein became the company’s CEO in September 2014 and previously served as CFO and CIO.
DLR faces risks associated with acquisitions, expansion projects, and revenue streams that are largely concentrated in the Americas. Digital Realty is expanding globally, which we view positively, but revenue from properties inside the United States accounted for 76% of 2019 revenue. As such, any downturn in the U.S. market could significantly hurt overall results.
COMPANY DESCRIPTION
Digital Realty Trust also develops data center platforms for businesses involved in cloud software, IT, financial services, social media, and mobile services. The company operates in more than 36 metropolitan markets on five continents.
VALUATION
We note that the peer average includes smaller competitors that lack scale or don’t have a global precedence. We believe DLR shares warrant premium multiples relative to peers based on the company’s attractive dividend yield, growth prospects and healthy balance sheet. Exposure to the fast-growing EMEA region is another factor that should enable DLR to command a higher multiple.
On November 10, BUY-rated DLR closed at $135.82, down $2.40.
Source: Argus
