Digital Realty Trust, Inc. (DLR), a real estate investment trust (REIT), through its controlling interest in Digital Realty Trust, L.P., engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate. It focuses on strategically located properties containing applications and operations critical to the day-to-day operations of technology industry tenants and corporate enterprise data center users, including the information technology departments of Fortune 1000 companies, and financial services companies. I recently initiated a position in Digital Realty Trust, after selling my position in United Healthcare Realty Trust (UHT).
Digital Realty Trust went public in 2004 and has been increasing dividends for eight consecutive years. In less than two years, the company will be able to join the list of dividend achievers.
One key metric for real estate investment trusts is their occupancy ratio. An asset that is not leased is not generating any money and is costing capital and maintenance. Generally, it is important that companies are as close to maximum occupancy as possible. Digital Realty has managed to maintain occupancy between 94 and 95% over the past five years, which is impressive because it made a large amount of property acquisitions over the period, without sacrificing quality. In addition, the company has been able to renew 82% to 90% of leases that expired in 2012.
Digital Realty Trust has managed to increase FFO from $1.37/share in 2005 to $4.46/share by 2012.
At the same time, distributions have grown from $1/share in 2005 to $2.92 in 2012.
The company’s policy is to pay at least 100% of taxable income but no more than 90% of FFO. I find that there is adequate margin of safety in distributions, as seen through the trends in the FFO/payout ratio.
Future FFO growth would be fueled by acquisitions made at attractive cap rates, while maintaining portfolio occupancy levels. The trust tends to obtain capital mostly through common share offerings. The low interest rates could offer a cheaper way to obtain capital for further expansion, that could be more beneficial to current shareholders. Given the current conservative capital structure, I see room for increasing leverage at fixed rates.
Currently I find Digital Realty Trust to be attractively priced an 15 times FFO and yielding a very safe 4.70%.
Full Disclosure: Long DLR
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