Data center REIT Digital Realty Trust (DLR -1.16%) reported first-quarter earnings (core FFO) that handily beat analyst expectations. In addition to strong headline numbers, Digital Realty's report was full of positive news for shareholders. Here's a quick rundown of Digital Realty's first quarter, and where the company could go from here.
A strong first quarter, and increased 2017 guidance
Digital Realty reported core funds from operations (core FFO), the REIT equivalent of "earnings," of $1.52 per share, $0.05 above analysts' expectations and a 7% increase over last year. In addition, the company slightly raised its full-year core FFO outlook from $5.90-$6.10 to $5.95-$6.10, which was welcome news to investors.
Revenue increased 9% year over year, and the company signed leases totaling $50 million in annual rental income, in addition to $46 million in lease renewals representing a 3.1% rent increase. And the company is confident that the strong results will continue. "We are encouraged by the favorable intermediate-term outlook, given healthy market fundamentals, a supportive macro environment, and secular demand tailwinds," said CEO A. William Stein.
Balance sheet improvements
One of the reasons I own Digital Realty in my own portfolio is for its excellent financial condition. For starters, the company has virtually no debt maturities until 2020.
In addition, Digital Realty has a debt-to-capitalization ratio of just 25.3% (29.6% including preferred stock). This is down 4.4% from last year and quite low for a REIT, and the vast majority of Digital Realty's debt is fixed-rate, which mitigates the company's interest rate risk. During the quarter, Digital Realty continued to retire its higher-interest debts, redeeming debt and preferred stock with interest rates of 5.73% and 6.625%, respectively, and the company anticipates a debt issuance between $400 million and $600 million at a rate of 3.5% to 4.25% to occur later in 2017.
Strong performance for over a decade -- will it continue?
Digital Realty has produced impressive growth for some time now. In fact, the company's core FFO has grown at a 14% annualized rate since 2005, and the dividend has been increased every year since then. The stock has generated a 1,530% total return over that 12-year period (26% annualized), a remarkable level of performance, especially when you consider that it includes one of the worst recessions in history. Just look at Digital Realty's performance compared to the S&P 500:
Additionally, there's no reason to believe the strong growth cannot continue going forward. Demand for data centers is still growing rapidly, and is even outpacing supply in several key markets. Cloud data traffic is expected to grow at an annual pace of over 30% per year through 2020, according to Cisco. To name a few examples, in the major data center markets of Northern Virginia, Dallas, and Chicago, the market is absorbing new data centers at twice the rate of current construction pipelines.
The bottom line is that there should be no shortage of growth opportunities in the coming years for Digital Realty, and with its lean balance sheet and financial flexibility, it will have the cash it needs to grow along with the market.