Virtual Realty: Digital Realty Trust (DLR)

There is no apparent end to the ever-expanding universe of digital data, and this bodes well for Digital Realty Trust. The company is a real estate investment trust (see Page 2 side bar for more about REITs) that owns and operates properties housing hi-tech services and equipment. These properties are primarily Internet and corporate-data centers, but they also include technology manufacturing and office facilities. As business and personal data moves from local computers and servers to remote switches, servers, data storage devices, applications and other equipment and software that comprise the “cloud,” host companies need additional space to house the hardware that computes and stores this information. Digital Realty got into the technology REIT game early: 2004. Its winning strategy is to buy large properties in prime locations from distressed technology and other companies and to convert the properties into energy-efficient storage spaces. DLR works with its clients to customize the space, with the client covering the cost. The costs and design of such specialty property encourages clients to stay for long lease terms. Meanwhile, clients benefit from having data stored, duplicated, and made accessible in an energy- and space-efficient way.

Digital Realty has procured approximately 100 facilities near major metropolitan areas, transforming them to a low cost and energy-use option for many technology companies. DLR now has properties in more than 30 areas throughout North America, Europe, Australia, and Singapore, leaving plenty of new markets to tap in the future. As one of the older technology REITs, the company now has a proven track record of consistent growth that continued through the latest recession. DLR’s balance sheet has a reasonable amount of leverage–a necessity for REITs–allowing plenty of room for additional acquisitions. A spike in interest rates, or a failure of one of its larger clients, does pose a risk for the company. The regular stock price has gained more than 30% since last fall; it is not a bargain but is reasonably priced given its sizable dividend and future growth prospects. In addition, we’ve been investing in the preferred DLR stock, which sports a 7% yield but no potential for capital appreciation.

Corporate Responsibility

Digital Realty emphasizes energy efficiency in the design and operation of its facilities, a sure benefit for technology companies, which are notable for significant energy costs. Almost a fifth of its facilities are LEED certified with others on the way. The company arranges for third-party auditors to check on the environmental standards of all of its new buildings and operations, but otherwise, it does not disclose its policies or systems for the energy efficiency, nor does it disclose its own employee health and safety numbers. DLR does have relatively strong corporate governance; all board members are elected annually and more than two thirds are independent directors. There are two women on the board of directors and one woman in executive management.
Revenues: $1.03 Billion
2012E $4.42
2011E $4.05
2010A $3.81
Projected Annual Growth Rate: 11%
Dividend: 3.8%
52 Week High-Low: $72.39 – $50.63
Risk: High (??)