Shares of Digital Realty DLR have gained 12.7% in the past three months against the industry’s 9.8% decline.

Amid robust demand for data centers, Digital Realty is well-poised to grow backed by a diverse tenant base, accretive acquisitions, development efforts and solid balance-sheet strength.

Analysts seem bullish on this Zacks Rank #3 (Hold) company, with the Zacks Consensus Estimate for its 2025 funds from operations (FFO) per share revised upward marginally over the past three months to $7.09.

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Factors Behind DLR Stock’s Price Surge: Will the Trend Last?

With the growth in cloud computing, the Internet of Things and Big Data; and an increasing number of companies opting for third-party IT infrastructure, data-center REITs like Digital Realty are experiencing a booming market. In the third quarter of 2024, the company signed $521 million of new leases, of which $450 million fell into the greater than one-megawatt category, $50 million in the 0-one megawatt leases category and $16 million in interconnection bookings.

Digital Realty also has a high-quality, diversified customer base comprising tenants from cloud, content, information technology, network, other enterprise and financial industries. The majority of the tenants are investment grade and numerous customers use multiple locations across the portfolio. This assures stable revenue generation for the company.

Digital Realty is expected to ride on its growth curve backed by strategic investments in land, infrastructure and acquisitions. Following the third-quarter 2024 end, Digital Realty closed on the acquisition of a 6.7-acre parcel in Richardson, TX, for approximately $15 million, which will support the development of more than 80 MW of incremental IT capacity. The value-accretive investments will yield long-term growth.

Digital Realty is making efforts to enhance its portfolio by carrying out various development and redevelopment activities. The company has a robust development pipeline, which seems encouraging. As of Sept. 30, 2024, it had 9.1 million square feet of space under active development and 4.9 million square feet of space held for future development. For 2024, the company expected to incur capital expenditures for its development activities in the range of $2.0-$2.4 billion.

Digital Realty has a solid balance sheet with ample liquidity. The company exited the third quarter of 2024 with cash and cash equivalents of $2.18 billion. Its debt maturity schedule is well-laddered, with a weighted average maturity of 4.7 years and a 2.8% weighted average coupon as of Sept. 30, 2024. The company has no debt maturities until early 2025.  Its net debt-to-adjusted EBITDA was 5.4X, while its fixed charge coverage was 4.1X as of the end of the third quarter of 2024.

Key Risks for DLR Stock

However, competition from other industry players is likely to lead to aggressive pricing pressure and weigh on Digital Realty’s prospects. A substantial debt burden and high interest rates add to its woes.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Cousins Properties CUZ and Alexander & Baldwin Holdings ALEX, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Cousins Properties’ 2024 FFO per share is $2.68, indicating an increase of 2.3% from the year-ago figure.

The Zacks Consensus Estimate for Alexander & Baldwin Holdings’ 2024 FFO per share is pinned at $1.35, implying year-over-year growth of 15.4%.

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

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