Digital Realty Trust (DLR 0.95%) offers investors an intriguing way to invest in artificial intelligence (AI) and other exciting technologies while remaining firmly in the real estate sector. The company owns and operates data centers worldwide, many of which are at the heart of today's technological innovations.
The real estate investment trust (REIT) achieved solid growth over the last decade and rewarded investors nicely in the process. Read on to see how much a $5,000 investment a decade ago would be worth today and whether the company's future could be as bright as its past.
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Digital Realty provides crucial services to companies globally
Digital Realty provides companies with colocation, interconnection, cloud services, and other solutions. The REIT has 316 data centers spread across 25 countries, focusing on major metropolitan areas to serve as hubs for internet and data communications. The company is the largest provider of data center services globally, and some of its major customers include IBM, Oracle, Meta Platforms, JPMorgan Chase, and Verizon Communications. Most of Digital Realty's revenue is from rental income.
Digital Realty's growth over the years has been solid. The company benefits from robust demand for data centers due to the growing digital economy. As the amount of data grows exponentially and as AI grows in use, companies need solutions to keep up.
You can see this strong demand when reviewing Digital Realty's earnings over the years. Funds from operations (FFO) is a metric REITs use to give investors an accurate picture of their operating performance. In 2012, the company generated $558 million in FFO. Last year, its FFO was $1.8 billion, representing a 12.6% annual growth rate in this crucial financial metric.
Here's what a $5,000 investment a decade ago would be worth today
Digital Realty's growth is consistent, and the stock price increased by 129% over the last decade. That return doesn't include its dividend, which has averaged a 3.8% annual yield over the past 10 years. When you factor in the effect of reinvesting dividends, Digital Realty's total return in the past decade is 242% -- which would've turned your $5,000 investment into $17,080, outpacing the S&P 500 index during the same period.
DLR Total Return Level data by YCharts
Digital Realty's recent struggles
While Digital Realty has been a strong performer over the last decade, the past couple of years have been somewhat volatile. That $5,000 initial investment would've reached its peak value of $22,790 at the start of 2022 before dropping to $12,000 at one point earlier this year.
Digital Realty's volatility stems from several factors impacting its business in the past year. For one, demand for cloud computing slowed down last year, and Digital Realty's FFO fell by 1.3%. Second, interest rates have risen rapidly since March 2022 with the the federal funds rate going from near-zero to 5.5%. The changes in this rate have a ripple effect across the economy. For Digital Realty, it means an increase in debt payment costs as it refinances its loans and/or initiates new ones.
What's next for the REIT?
One fear investors had was that Digital Realty's 3.9% dividend, which has increased annually for 18 consecutive years, could be at risk of getting cut. However, the company had some recent success with a capital recycling strategy, raising $2 billion in asset sales and joint venture deals. These funds help it pay down debt, meaningfully reduce its leverage, and dramatically reduce the risk of cutting its dividend to fund future growth.
McKinsey projects that demand for data centers will grow 10% annually through 2030, leaving Digital Realty well positioned to capitalize on this growing industry. However, the company will continue to face headwinds from higher interest rates and their economic effects. Digital Realty's stock price reflects this uncertainty and trades at 18 times FFO, cheaper than its competitor Equinix, which trades at 26 times FFO.
Digital Realty is in an excellent position to capitalize on the growing demand for data centers long-term. The REIT faces near-term challenges from high interest rates, which could contribute to more volatility in the stock in the near term. If you don't mind this risk, Digital Realty has the potential to be a stellar performer.
