Shares of data center real estate investment trust (REIT) Digital Realty Trust (NYSE:DLR) advanced 13% in July, according to data from S&P Global Market Intelligence. That, however, is just par for the course, with the stock up over 30% through the first seven months of 2020, compared to a 12% decline for the average REIT, using Vanguard Real Estate ETF as a proxy. COVID-19 is a key piece of the puzzle.
The efforts to slow the spread of the coronavirus resulted in the widespread shutting of non-essential businesses and the request that people stay home. Many consumers ended up shifting their buying to the internet, and a lot of people started to work from home.
Unlike most REITs, which own physical properties that people go to for shopping and work, among other things, Digital Realty owns data centers. With people working and shopping from home, its facilities were in high demand. Investors have bid the stock up accordingly, including in the month of July.
Notably, Digital Realty reported second-quarter earnings at the end of that month and they were generally good reading. The REIT increased its core funds from operations (FFO) slightly (1%) from the first quarter. It also signed leases that will add $144 million to the rent roll once the associated facilities are up and running. In fact, Digital Realty even increased its core FFO guidance for the year from $5.90-$6.10 per share to $6.00-$6.10.
Although it noted that it's faced some construction delays because of COVID-19, management stated that its business has otherwise been largely unaffected. In other words, it's doing fairly well while a lot of other REITs are struggling. No wonder the stock has been rising.
Investors are well aware of Digital Realty's strengths, so the stock isn't cheap. Moreover, it has long been something of a growth play and not so much an income investment (the yield is low by REIT standards at roughly 2.8%).
Digital Realty's resilience in the face of major global headwinds is nice to see, but investors need to understand that this story is likely to be priced into the stock already.