Digital Realty: Despite Fear Mongers, Dividend, Price Will Rise

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There is a lot of fear mongering surrounding data center REIT Digital Realty (DLR). However, we believe its 3.4% dividend is safe and it will grow, and its price will increase too. This article reviews four fears circling Digital Realty, and then highlights three reasons why we currently like it.

Overview:

Digital Realty is a real estate investment trust engaged in the business of owning, acquiring, developing and operating data centers. Data centers are basically offsite server warehouses where companies store data, often accessible via “the cloud.” As shown in the following table, DLR recently owned 182 data centers across the US and internationally.

DLR owns data centers across a variety of industries ranging from financial services, cloud and information technology services, to manufacturing, energy, healthcare and consumer products.

Digital Realty has delivered strong total returns (price appreciation, plus dividends) over the last 10 years, but has been underperforming over the last year, as shown in the following charts.

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Four Fears Plaguing Digital Realty:

1. Rising interest rates are one of the market fears currently plaguing Digital Realty and contributing to its recent underperformance. As a REIT, Digital Realty relies on borrowing to fund growth, and as interest rates are expected to keep rising that makes borrowing more expensive. According to DLR’s annual report:

“We have substantial debt and face risks associated with the use of debt to fund our business activities, including refinancing and interest rate risks.”

However, this risk is offset to some extent by the company’s hedging program, and by the fact that if interest rates keep rising that means the economy is strong which will have a positive impact on DLR’s business. Regarding hedging, here's what DLR had to say in its annual report:

“Approximately 90% of our total indebtedness as of December 31, 2016, was subject to fixed interest rates or variable rates subject to interest rate swaps.”

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Disclosure: None.

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