Digital Realty: Expect a Dividend Hike Soon for This Red-Hot REIT - Sure Dividend Sure Dividend

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Digital Realty: Expect a Dividend Hike Soon for This Red-Hot REIT

Published February 15th, 2017 by Bob Ciura

There is an abundance of data that comes from our devices. REITs that own properties used to store this data—like Digital Realty (DLR)—have benefited tremendously from our love of the Internet.

The stock rose 33% in the past one year alone, not including dividends.

Even better, Digital Realty has raised its dividend for 11 years in a row, each and every year since its 2004 initial public offering.

This makes it a Dividend Achiever, a group of 272 stocks with 10+ years of consecutive dividend increases.

You can see the full Dividend Achievers List here.

Digital Realty last increased its dividend on February 17, 2016.

The company is set to announce fourth-quarter and full-year financial results on February 16 this year. It is likely to announce a dividend increase at that time as well.

This article will analyze Digital Realty’s financial performance since the last dividend raise, and what investors should expect for the 2017 dividend increase.

Business Overview

Digital Realty owns a portfolio of turn-key, interconnection, and colocation properties. The company is diversified, both in terms of geographic markets, as well as industries serviced.

DLR Overview

Source: 2017 Investor Overview Presentation, page 18

Its real estate properties are located around the world. Digital Realty has 199 data centers in North America, 30 in Europe, and 7 in the Asia-Pacific region.  It services more than 2,000 customers, from multiple industries.

Digital Realty’s client base is filled with highly stable, established companies.

DLR Tenant

Source: 2017 Investor Overview Presentation, page 19

Digital Realty operates in a high-growth industry. Data storage is booming, which has resulted in consistent growth in lease signings and rental revenue for the past several years.

DLR Customer

Source: 3Q Earnings Presentation, page 9

Digital Realty’s high-quality tenant base provides the company with steady cash flow. Occupancy stood at 92.6% through the first three quarters of 2016.

Over the same nine-month period, rental revenue increased 15%. This helped Digital Realty’s funds from operation, a commonly utilized substitute for earnings-per-share, increase 10% over the first three quarters of the year.

For 2016, Digital Realty expects to generate core FFO between $5.65-$5.75 per share.

At the midpoint, this range would represent 8.3% growth from the $5.26 of core FFO-per-share earned in 2015.

Growth Prospects

Digital Realty’s strong growth in recent years is due mostly to the boom in data center demand. This trend is expected to continue moving forward.

Because of this, Digital Realty still sees an opportunity for growth up ahead.

Mostly, because the industry economies remain supportive of growth. In many top-tier U.S. markets, demand continues to exceed supply.

DLR Fundamentals

Source: 3Q Earnings Presentation, page 5

Furthermore, the main growth drivers for Digital Realty—the Internet, video, cloud, and mobile—remain intact.

DLR Growth

Source: 2017 Investor Overview Presentation, page 16

This fundamental tailwind presents a long-term growth trajectory for the company.

Aside from data centers, the interconnection and colocation businesses are growing rapidly as well. These two businesses generated 18% growth in lease signings in the U.S., last quarter.

To further its growth, Digital Realty maintains an aggressive acquisition strategy. This is typical for REITs—acquiring new properties provides new rental income. In turn, this cash flow helps pay for additional properties, which creates additional growth.

Digital Realty conducted several acquisitions in the third quarter, the biggest of which was an $874 million acquisition of eight data centers in Europe, previously owned by Equinix (EQIX).

Strategic deals like these complement Digital Realty’s existing portfolio, which allows the company to realize significant cost synergies. Digital Realty expects the Equinix acquisition to be accretive to FFO going forward.

Dividend Analysis

Another important factor to assess with REITs is their balance sheets. Since REITs rely heavily on external financing, higher interest rates pose a real threat.

The Fed has indicated its desire to raise interest rates three times in 2017. This would raise the cost of capital for Digital Realty.

Fortunately, the company has a strong balance sheet. It holds a credit rating of BBB from both Standard & Poor’s and Fitch Ratings, with a stable outlook.

Digital Realty enjoys ample liquidity, with $36 million in cash on the balance sheet, plus $1.8 billion remaining available to the company under its $2 billion credit revolver.

DLR Balance Sheet

Source: 2017 Investor Overview Presentation, page 38

Moreover, at the end of the third quarter, Digital Realty held a net debt-to-adjusted EBITDA ratio of 5.1x and a fixed charge coverage ratio of 3.4.

These are reasonable debt metrics for a REIT. Along with its positive credit ratings, the company should be able to effectively raise capital at attractive rates moving forward.

Digital Realty’s sound financial condition helps the company return excess cash flow to shareholders.

And, the boom in demand for data centers has provided the company with growth over the past year. Digital Realty generates FFO well above its dividend payment.

Digital Realty’s 2016 dividend increase was a 3.5% hike. This was below its average raise over the past several years.

DLR Dividend

Source: 2017 Investor Overview Presentation, page 30

Due to its continued growth, it is reasonable to expect Digital Realty to accelerate its dividend growth rate from 2016.

For example, a 4%-6% dividend increase would be appropriate, given the company’s strong fundamentals.

Final Thoughts

With their high dividend yields and regular dividend growth, it is easy to see why income investors like REITs. A significant portion of the Dividend Achievers list is populated by REITs, including Digital Realty.

Digital Realty has a current dividend yield of 3.3%. This is above the 2% average in the S&P 500.

However, Digital Realty’s dividend yield is below that of many other REITs, which commonly yield 4%-5% or more in some cases.

Digital Realty’s low dividend yield is the result of its rapid share price appreciation over the past two years.

Fortunately, the company is likely to announce a dividend increase on February 16. While its dividend yield has declined, it still has an above-average dividend payout in comparison to the S&P 500 Index.

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