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Digital Realty (DLR) Q3 FFO Beats Estimates, View Lifted

Digital Realty Trust, Inc.’s DLR third-quarter 2017 core funds from operations (FFO) per share of $1.51 exceeded the Zacks Consensus Estimate of $1.49. The core FFO per share also came in higher than the year-ago quarter tally of $1.44. Results were supported by growth in revenues.

The company reported revenues of $609.9 million for the third quarter, which also surpassed the Zacks Consensus Estimate of $593.2 million. The revenue figure also marked 11.6% year-over-year growth. Further, the company raised its 2017 core FFO per share outlook.

Signed total bookings during the reported quarter are estimated to generate $58 million of annualized GAAP rental revenues. This would include an $8-million contribution from interconnection. Notably, the weighted-average lag between leases signed during the third quarter and the contractual commencement date was four months.

Moreover, the company signed renewal leases, marking $66 million of annualized GAAP rental revenues. Rental rates on renewal leases signed during the reported quarter rolled down 3.8% on a cash basis and ascended 1.5% on a GAAP basis.

Digital Realty Trust, Inc. Price, Consensus and EPS Surprise

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share.

Portfolio Activity

During the reported quarter, Digital Realty completed the previously-announced acquisition of DuPont Fabros. This was done in an all-stock transaction valued at $7.9 billion in enterprise value. The company also purchased land parcels neighboring its existing holdings in Osaka, Japan and Garland, TX, for roughly $10 million.

Balance Sheet

Digital Realty exited the third quarter with cash and cash equivalents of around $192.6 million, up from $22.4 million recorded at the prior-quarter end.

Additionally, as of Sep 30, 2017, the company had around $8.5 billion of total debt outstanding, substantially all of which was unsecured. Also, as of the same date, its net debt-to-adjusted EBITDA was 6.0x, while fixed charge coverage was 3.9x.

Outlook Raised

Digital Realty raised its 2017 core FFO per share outlook to $6.00-$6.10 from the prior guidance of $5.95-$6.10. The Zacks Consensus Estimate for the same is currently pegged at $6.08.

The full-year outlook provided by the company is backed by revenue expectations of $2.4-$2.5 billion (prior projection being $2.2-$2.3 billion), year-end portfolio occupancy growth of +/- 50 bps (unchanged) and "same-capital" cash NOI growth of 3.0-3.5% (previously guided 2.0-3.0%).

Our Take

Digital Realty’s better-than-expected performance in the third quarter is impressive. The company is poised to ride on the growth curve backed by robust fundamentals of the data-center market. The company’s business has significantly grown since its launch. Additionally, its accretive acquisitions and development efforts augur well for long-term growth. Nevertheless, exposure of earnings to foreign currency translation, cut-throat competition in the industry and a substantial debt burden remain concerns.

Digital Realty currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

The stock has rallied 25.1% year to date, substantially outperforming 2.0% growth registered by the industry.

We now look forward to the earnings releases of AvalonBay Communities, Inc. AVB, Alexandria Real Estate Equities, Inc. ARE and Extra Space Storage Inc. EXR, all of which are expected to report their numbers next week.

Note: FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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