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Digital Realty (DLR) to Post Q4 Earnings: What’s in Store?

Zacks

Digital Realty Trust, Inc. DLR is scheduled to release fourth-quarter and full-year 2017 results on Feb 15, after the market closes.

Last quarter, this San Francisco, CA-based date center real estate investment trust (REIT) delivered a positive surprise of 1.34%. Results were supported by growth in revenues.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate in three occasions and met estimates in the other, with an average beat of around 1.69%. This is depicted in the graph below:

Let’s see how things are shaping up for Digital Realty prior to this announcement.

Factors to Consider

Data-center REITs are experiencing a boom market amid growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure. This has been driving demand which is outpacing supply in top-tier data center markets. Therefore, despite enjoying high occupancy, the top-tier markets are absorbing new construction at a faster pace.

Additionally, improved outlook for economic growth is anticipated to fuel demand for data centers. Amid these, Digital Realty’s focus on offering upgraded technology to entice clients is likely to bolster its revenue stream in the to-be-reported quarter.

In addition to this, strategic acquisitions are likely to aid the company’s top-line growth. Also, in September 2017, the company announced the completion of a merger with DuPont Fabros. This buyout helped the company reinforce its hyper-scale product offering and widen the blue-chip customer base.

Amid these, the Zacks Consensus Estimate for fourth-quarter revenues is currently pegged at $729.3 million, indicating projected growth of around 49.8% year over year.

However, Digital Realty faces intense competition in its industry. In fact, the company competes with several data-center developers, owners and operators, many of which enjoy ownership of similar assets in locations same as Digital Realty. Also, there are a number of local developers in the United States, and several regional operators in Europe, Asia and Australia.

Given the solid growth potential of the data-center real estate market, competition is expected to have been intense from existing players, as well as entry of new players. Amid this, aggressive pricing pressure is predicted to have been prevalent in the data-center market in the quarter-to-be reported, while robust growth in occupancy might remain elusive.

Moreover, Digital realty has a significant number of properties situated outside the United States. The company is also considering making additional international acquisition. Although a sound global footprint helps the company meet rising data-center requirements of customers around the world, the process exposes the company’s earnings to foreign currency translation. Also, the hike in interest rate is a concern as the company has a substantial debt burden.

Hence, prior to the fourth-quarter earnings release, there is lack of any solid catalyst. As such, the Zacks Consensus Estimate of funds from operations (FFO) per share for the fourth quarter remained unchanged at $1.52 over the past week. However, FFO per share denotes a projected increase of 6.3% year over year.

Also, Digital Realty’s shares have declined 12.5% in the past three months, underperforming the 10.7% loss incurred by the industry.

Earnings Whispers

Our proven model does not conclusively show that Digital Realty will likely beat estimates this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. However, that is not the case here as you will see below.

Zacks ESP: The Earnings ESP is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Digital Realty has a Zacks Rank #4 (Sell).

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a few stocks in the REIT space that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this time around:

CubeSmart CUBE, slated to release fourth-quarter results on Feb 15, has an Earnings ESP of +1.10% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Extra Space Storage Inc. EXR, scheduled to report quarterly numbers on Feb 20, has an Earnings ESP of +0.23% and a Zacks Rank of 3.

Outfront Media Inc. OUT, slated to release quarterly numbers on Feb 27, has an Earnings ESP of +0.90% and a Zacks Rank of 3.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.


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