Digital Realty Trust (NYSE:DLR), a specialized real estate investment trust (REIT) that invests in data-center properties, reported third-quarter earnings that showed strong results, meeting earnings estimates, and beating on revenue. Here's what you need to know about how the company is doing, and a few clues on what the future might hold.
The numbers look good
For the third quarter, Digital Realty generated funds from operations (FFO) of $1.28 per share, an increase of 5% over the same quarter a year ago. Core FFO, which is perhaps the most accurate picture of the company's "earnings," came in at $1.32 per share, an even better 8.2% year-over-year increase. Revenue also increased by 6%, to $436 million, handily surpassing analysts' estimates of $424.8 million.
The company also completed its $1.886 billion acquisition of Telx during the quarter, which doubled the REIT's colocation business, and is expected to create synergies and add significant earnings potential to Digital Realty's bottom line right away. In fact, the company increased its full-year FFO guidance from $5.05-$5.15 per share to $5.12-$5.18 per share, and the expected impact from Telx was among the reasons cited in the earnings release.
Not surprisingly, Digital Realty's management was happy with the results. "The Digital Realty team kept its collective eye on the ball during a very busy few months and delivered another quarter of solid results," said Chief Executive Officer A. William Stein in Digital Realty's press release.
A bright future
During the quarter, Digital Realty signed new leases that represent $33 million in annual rental revenue, and signed an additional $21 million in renewal leases, at rental rates that increased by 11% on a GAAP basis.
Also, there is significant untapped potential for Digital Realty, even within its existing business. The company estimates that, by simply leasing up the acquired Telx properties, it could add $4 in net asset value per share. When added to the lease-up potential of the company's existing properties and its 2016 backlog, Digital Realty estimates that there is a minimum of $12 to $16 in NAV per share waiting to be unlocked.
Digital Realty's share price has shot up by about 15% during the past month or so, but still trades at an incredibly cheap valuation of less than 14 times 2015's expected FFO -- far below that of most other REITs. This combination of value and potential is hard to find elsewhere. For example, popular retail REIT Realty Income Corporation (NYSE:O) trades for 18 times this year's estimated FFO, and I'm inclined to believe that the data storage industry has significantly more growth potential than freestanding retail.
The bottom line
Digital Realty has delivered impressive performance for its investors, with a 475% total return during the past decade -- a 19.1% annual average. REITs have performed well in recent decades, and many of the major REITs have delivered double-digit performance. For comparison, Realty Income has produced a 16.4% average total return throughout its 21-year history as a public REIT. Digital Realty is a unique company that I feel has tremendous potential -- a REIT that's a leader in an area of the market that is still in the early stages of explosive growth.
The company is showing no signs of slowing down, and the industry trends show that the need for data centers will continue to explode for years to come. In fact, the company projects that global IP traffic will grow at a 23% annual rate until at least 2019, and other areas, such as mobile-data traffic, will grow at an even greater 45% rate.
In short, although Digital Realty's past performance doesn't necessarily mean it will continue into the future, it certainly looks like a strong possibility. And the cheap valuation combined with the third quarter's promising results are good reasons to believe it will.