Digital Realty Offers a Full Menu of Tenants’ Data Center Needs After Enhancing Connectivity Feature

Equity Analyst

Matthew Dolgin

Revenue segments as reported by the company.

Rental revenues

Tenant reimbursements - Utilities

Tenant reimbursements - Other

Interconnection & other

Fee income

Other

Revenue Segments

Gross Profit, Operating Income, and Net Income as a percentage of Revenue

Operating Margin

Profit Margin

Margins

An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

Utilities

Rental property operating

Property taxes

Insurance

Depreciation & amortization

General & administration

Severance, equity acceleration, and legal expenses

Transaction and integration expenses

Impairment of investments in real estate

Other expenses

Operating Expenses

Year over year growth in Revenue and Operating Expenses.

Revenue Y/Y

OpEx Y/Y

Growth

Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

Outstanding Shares

Market Cap

Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

Revenue Multiple

Digital Realty has transformed its business from one that merely provided large companies vast amounts of space and power (a typical wholesale data center that houses few tenants) to one that can offer customers of all sizes the full spectrum of space, power, and connection needs (historically called a co-location data center that has space for many tenants). We think this evolution—largely through acquisitions that focused on network-dense data centers—was critical for success in a modern environment where enterprises rely more on third-party cloud providers, and the constant use of data makes quick and easy access vital. With a sizable presence across nearly every continent, Digital also offers more value for multinational companies that want a fluid solution across their data center footprint. Along with Equinix, we think these qualities make Digital Realty one of only two data center providers that can offer this breadth and set itself apart from the rest of the pack in an industry with secular tailwinds stemming from the creation and use of more and more data.

We think Digital Realty’s ability to provide enough real estate for wholesale storage and computing needs along with a network-dense presence that facilitates interconnection in most of its geographies can make it a one-stop shop. Huge cloud providers drive the data center industry and need massive amounts of space and power, but they also need to connect to their customers, which happens via cloud on-ramps. Cloud providers locate on-ramps in data centers that have many networks connecting—allowing secure and convenient access for cloud customers that need to link their premises to the data center that houses the on-ramp. Digital Realty still trails Equinix by a wide margin in housing on-ramps of major cloud providers and the level of network density in its data center portfolio, but it has the more unique feature of being able to offer wholesale space and power across nearly its entire footprint. The shifting quality of Digital’s properties should translate to better returns on capital than a wholesale data center operator can generally provide and therefore a higher valuation multiple in the market.

Business Strategy & Outlook

We assign Digital Realty a narrow economic moat. Digital Realty’s roots are as a wholesale data center provider, meaning that it leased very large amounts of space and power to relatively few tenants per facility. Although its wholesale nature left it as a simple real estate operator in our view, the size of the portfolio it amassed has given it cost advantages, and its mature portfolio also benefits from switching costs. We think the firm’s acquisitions and resulting portfolio transformation in recent years have made its properties less commodity-like, but we don’t credit the firm as benefiting from a network effect—like we do for rival Equinix—because network-dense data centers don’t dominate Digital’s property portfolio like they do for Equinix.

We think switching costs provide Digital Realty's biggest competitive advantage, as there are numerous reasons tenants are unlikely to churn to a competitor, namely the significant monetary costs to deploy equipment and the risk in moving critical equipment. Digital Realty, citing statistics from Align Communications, estimates that a client deploying equipment to use 1.125 megawatts of power—a fairly large customer, but the type Digital Realty traditionally caters to—would spend $15 million-$30 million to set up its equipment. Migration of equipment from one facility to another would cost an additional $10 million-$20 million and bring with it a host of other challenges. Migrating to a new data center often requires the services of a company like Align, which specializes in it, and typically includes extensive planning, a multistep process, and involvement of many people within an organization. Migration risks include down time, which can be extremely harmful and expensive. Migrations thus typically include equipment mirroring, which is costly, to guard against down time. Given the monetary costs and business risks, we don't expect that tenants take a decision to move lightly, and we think they are effectively precluded from price-shopping once they are in a data center. Digital Realty claims most churn results from tenants merging or no longer needing a data center presence because of company-specific issues, such as their own business struggles.

Based on the number of data centers, square footage, and power, Digital Realty is the largest owner of data center space globally, and we think its cost advantages stem from its scale and property ownership. Digital Realty has said it is one of the largest consumers of generators and air conditioning equipment in the world, and it receives modest discounts on them as a result. It also has recently begun negotiating power needs on an aggregated basis within given metropolitan areas rather than for each campus individually, leading to even more favorable deals with electric utility companies. For example, the company has previously locked in power rates in Chicago at a 20% discount to the market and secured lower-than-market rates in Texas. 

We are convinced that the current environment results in a durable competitive advantage that makes it likely Digital Realty will earn excess returns over the next decade, but the evolving nature of technology keeps us from labeling Digital Realty a wide-moat firm. On balance, the advent of the cloud has been good for data center businesses, as the number of firms reducing their own data center needs has been much more than offset by those that increasingly move off-site for interconnection with cloud service providers for their hybrid cloud needs—the most common model for large enterprises. However, the speed with which technology changes and data centers' close connection to it leave us wary about making a 20-year assumption with any confidence. 

While we see the possibility that enterprises will have less need for data centers if they use infrastructure as a service to a greater extent, our bigger concern is that companies will be able to satisfy their data center needs with less space and power. Hardware with more capacity in a smaller physical size and virtualization could each reduce the need for space over the long term even as enterprises use data centers for an increasing amount of data. Also, as cloud service providers become even more dominant, we expect they will have increasing control over data centers' fortunes. While they seem to be great customers now, we will not bank on that considering the leverage that they hold.

Narrow

Economic Moat

Digital Realty Trust

Digital Realty Trust, Inc. operates as a real estate investment trust, which engages in the provision of data center, colocation and interconnection solutions. It serves the following industries: artificial intelligence (AI), networks, cloud, digital media, mobile, financial services, healthcare, and gaming. The company was founded on March 9, 2004, and is headquartered in Austin, TX.

Earnings data Q1 2024

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

American Tower

REITs have performed remarkably well after periods of downturns. REITs have performed remarkably well when rate-hiking cycles have ended. REITs have historically produced returns above 15% over the six months following the end of a Fed hiking cycle.

The REIT Mousetrap: Where's The Cheese?

Armada Hoffler Properties

Apartment Income REIT Corp

American Homes 4 Rent

AvalonBay Communities

Boston Properties

Americold Realty

Camden Property

Centerspace REIT

CTO Realty Growth

EastGroup Properties

Equinix

Equity Residential

Empire State Realty Trust

Essex Property Trust

Extra Space Storage

Federal Realty Investment Trust

Highwoods Properties

Healthcare Realty Trust Inc

Invitation Homes

Independence Realty Trust

InvenTrust Properties Corp

Kimco Realty

Life Storage

Mid-America Apartment Communities

The Chilton REIT Team attended the REITWeek annual conference in New York City, participating in 39 meetings and gaining insights into potential new ideas and the diverse landscape of REIT properties. Amid rising interest rates and a sluggish debt/transaction market, the importance of robust balance sheets was a central theme. Participants noted sustained demand despite potential economic downturn and escalating construction and financing costs.

Equity REITs: Takeaways From NAREIT REITWeek 2023

AUSTIN, Texas , July 5, 2023 /PRNewswire/ -- Digital Realty (NYSE: DLR), the largest global provider of cloud- and carrier-neutral data center, colocation, and interconnection solutions, announced today that it will release financial results for the second quarter of 2023 after the market closes on Thursday, July 27, 2023.  The company will host a conference call to discuss these results at 5:00 p.m.

Digital Realty Schedules Second Quarter 2023 Earnings Release and Conference Call

Arlington Asset Investment

Agree Realty

AGNC Investment

AGNC Investment Corp - FXDFR PRF PERPETUAL USD 25 - Ser D 1/1000th int

AGNC Investment Corp. Deposit Shs Repr 1/1000th Cum Conv Red Pfd Registered Shs Series C

Alexandria Real Estate Equities

Alpine Global Premier Properties Fund

Cambria Global Real Estate ETF

Blackstone Group

Blackstone Mortgage Trust

Crown Castle International

CubeSmart

Diversified Healthcare Trust

Ellington Financial

EPR Properties

U.S. equity markets closed-out a volatile first-half at their highest-levels of the year as investors cheered data showing continued resilience in economic activity alongside further signs of cooling inflationary pressure. Rebounding from its worst week since March, the S&P 500 advanced 2.3% to close at its highest-levels since April 2022. The Mid-Cap 400 and Small-Cap 600 each rallied over 4%. Lifted by a recovery in the most beaten-down property sectors, real estate equities led the rally on the week. The Equity REIT Index advanced 4.3% while Mortgage REITs surged 6%.

REITs Lead Quarter-End Rally

Ares Capital

Ares Capital and Digital Realty Trust are leaders within their respective industries. The two companies' payouts are each arguably well-supported.

Want $500 in Annual Dividend Income? Invest $6,700 in These 2 High-Yielding Stocks

American Software

Cogent Communications Holdings

FAT Brands

Kaman Corporation

Telephone and Data Systems

Xerox

When it comes to overvalued dividend stocks to sell, it's best to think of them as a “picking up pennies in front of a steamroller” type of investment. That is, in exchange for relatively modest steady gains from dividend payouts, you are assuming a big risk.

Time's Ticking: Dump These 7 Overvalued Dividend Stocks

The data center giant has flown some major red flags lately.

Digital Realty Trust: Bargain or Trap?

At iREIT™ we recognize that the rapid growth of data generation fueled by AI has transformed how data is stored, processed, managed, and transferred. Within the REIT sector, we see strong potential with the increasing demand for computing power across data centers. I'm piling back into Digital Realty Trust stock, recognizing that there's a tremendous opportunity to capitalize on what I consider to be one of the best business models on the planet.

Digital Realty: A Rising 'AI' Tide Lifts All Ships

Kinder Morgan

SoFi Technologies

Digital Realty Trust is poised to thrive in a world where we keep generating and storing more data. SoFi Technologies looks like it's well positioned to succeed as other financial businesses struggle.

3 Stocks I'm Planning to Hold for the Long Haul

CareTrust REIT

National Retail Properties

Realty Income Corp

Public Storage

Rexford Industrial Realty

Vici Properties

W. P. Carey

The artificial intelligence craze has taken over the markets last week.

Stay The Course: This Too Will Pass

Digital Realty has bounced off the lows with the AI hype. The company also delivered a tiny asset sale. Capex remains the Achilles heel, and the forward equity sales tell you how bad things actually are.

Digital Realty: The Equity Issuance Does Tell The Whole Story

JPMorgan BetaBuilders MSCI US REIT ETF

Cyxtera Technologies

DigitalBridge Group

Direxion Daily Real Estate Bull 3x Shares

Direxion Daily Real Estate Bear 3x Shares

Fidelity MSCI Real Estate ETF

First Trust S&P REIT Index Fund

iShares Cohen & Steers REIT ETF

Iron Mountain

iShares U.S. Real Estate ETF

Nuveen Real Estate Income Fund

Invesco KBW Premium Yield Equity REIT ETF

Neuberger Berman Real Estate Securities Income Fund Inc

US Diversified Real Estate ETF

Invesco Active US Real Estate

ALPS Active REIT ETF

ProShares Short Real Estate

Cohen And Steers Total Return Realty Fund

Cohen & Steers Reit And Preferred Income Fund Inc

Cohen & Steers Quality Income Realty Fund

Among the top-performing property sectors this year, the Data Center REIT rebound has been fueled by reports of "booming" demand for artificial intelligence ("AI") focused data center chips. Even before the Nvidia report, Data Center REITs were on the upswing in early 2023 after an impressive slate of earnings results showed improved pricing power and record-high occupancy rates. Ironically, this AI-wave comes just as Data Center REITs became a trendy “short” idea centered on a thesis of weak pricing power and competition from the "hyperscalers" - Amazon, Google, and Microsoft.

Data Center REITs: Physical Epicenter Of AI

Choosing data center REITs can come with great rewards as you support the expansion of cutting-edge connected technologies.

Investing in Data Center REITs

Digital Realty Trust, Inc. (NYSE:DLR.PK ) REITWeek - NAREIT Conference June 6, 2022 11:45 PM ET Company Participants Andrew Power - President & CEO Chris Sharp - Chief Technology Officer Conference Call Participants Jon Petersen - Jefferies Jon Petersen All right. I think we can get started.

Digital Realty Trust, Inc. (DLR) REITWeek - NAREIT Conference (Transcript)

Digital Realty (DLR) disposes of a Texas data center and sells 11 million shares under its ATM program, raising more than $1 billion of capital over the last 30 days.

Digital Realty (DLR) Raises Capital, Sells Texas Data Center

Over $1 billion of capital raised through asset sales and ATM issuance over last 30 days AUSTIN, Texas , June 5, 2023 /PRNewswire/ -- Digital Realty (NYSE: DLR), the largest global provider of cloud- and carrier-neutral data center, colocation and interconnection solutions, announced the sale of a non-core data center in Texas. Digital Realty realized approximately $150 million of net proceeds from the sale of its 100% interest in the data center, which was originally acquired in 2012 and leased as a powered shell facility.

Digital Realty Provides Funding Plan Update

AUSTIN, Texas , June 5, 2023 /PRNewswire/ -- Digital Realty (NYSE: DLR), the largest global provider of cloud- and carrier-neutral data center, colocation and interconnection solutions, has announced the appointment of Colin McLean as Chief Revenue Officer reporting to President & Chief Executive Officer Andy Power. The company's prior Chief Revenue Officer Corey Dyer will depart the company effective June 30, 2023.

Digital Realty Appoints Colin McLean as Chief Revenue Officer

Regency Centers

Urstadt Biddle Properties

My grandmother often told me about her life as a child and the adversity that her parents faced growing up on a small family farm in rural South Carolina. My great grandparents witnessed the crippling of the banking system as panicky depositors withdrew cash, and of course, unemployment soared. I can only imagine what life would have been like during the Great Depression, a period in which real estate values were in a tailspin.

Preparing And Profiting From Another Real Estate Meltdown

News for Digital Realty Trust Stock (DLR)