Digital Realty Trust (DLR) is a fast-growing real estate investment trust (REIT) that has raised its dividend every year since going public in 2004.
While the company is still far from having a long enough dividend growth history to qualify as a member of the dividend aristocrats list, it has numerous attractive qualities for investors seeking income and growth.
Digital Realty is a direct beneficiary of the rapidly growing use of data by businesses and consumers alike. As the data center business continues booming, the company is positioned to continue rewarding investors with rising dividends.
Let’s take a closer look at Digital Realty to see if this quality REIT can keep pace with the evolving technology landscape and whether or not its stock looks attractive today.
Business Overview
Digital Realty is a REIT that supports the data center needs of more than 2,300 customers across industries such as financial services, information technology, manufacturing, and more.
The company is one of the largest REITs in the world and has a portfolio of 157 operating properties located across 33 metro areas.
Data centers provide secure, continuously available environments for companies to store and process important electronic information such as transactions and digital communications. Data centers can also serve as hubs for internet communications in major metropolitan areas.
The key components of a data center can be seen below and include servers, network equipment, cooling systems, electrical power systems, and more. Data centers consume a lot of power to keep the servers running and the room’s temperature under control.
Source:Â Digital Realty Investor Presentation
Digital Realty’s total rent is comprised of both rent from turn-key services, in which it provides everything but the servers, as well as a powered base building where customers choose to provide the power components used in the data center (e.g. HVAC, battery, generator, electrical) and design it all themselves.
For the year 2016, rents on renewed space increased by over 10% for turn-key flex space and 23% on powered base building space.
Digital Realty generates about 76% of its rent in North America with the rest from Europe (17%) and Asia (7%).
The company’s largest tenants are IBM (6.2% of rent), Facebook (5.9%), CenturyLink (4.6%), Rackspace (2.7%), Equinix (2.7%), Oracle (2.6%), LinkedIn (2.0%), and AT&T (2.0%). Approximately half of its customers have an investment grade or equivalent credit rating.
Digital Realty is also well diversified by customer type. Approximately 26% of Digital Realty’s annualized rent is from cloud players, 21% from IT services companies, 16% from content providers, 14% from network providers, 13% from financial services organizations, and 10% from other enterprises.
Business Analysis
Playing in a growing industry is almost always better than competing in a shrinking market. In Digital Realty’s case, its data center operations are exposed to several long-term secular demand drivers.
Simply put, data use is exploding and driving more demand for servers and data centers. Growth of internet traffic, over-the-top-video, cloud, and mobile data traffic is expected to range from 21% to 45% per year over the next several years, according to Digital Realty.
While e-commerce is hurting the long-term prospects for many retail REITs, it actually benefits Digital Realty because it further adds to overall data traffic growth and the need for more data centers.
The “Internet of Things†(IoT) is yet another growth catalyst, with more than 24 billion IoT devices expected to exist worldwide by 2020, generating up to 44 trillion gigabytes of data, according to Digital Realty. All of that information will require more data center capacity.
As a result, Markets and Markets expects the global data center solutions market to grow at a compound annual growth rate of 11.7% from 2015 through 2020 to nearly double in total value. As a leading data center operator in the world, Digital Realty is well positioned to ride this tailwind.
In fact, nearly 80% of Digital Realty’s 2014-2016 leasing activity is supported by growth in the global digital economy.
Data center REITs are also attractive businesses because their services are non-discretionary expenses for companies – the data being stored and processed in data centers is needed to run their operations. As a result, Digital Realty enjoys high utilization rates in most economic environments.
