Data Center REIT Digital Realty Trust (NYSE: DLR) reported its 2016 year-end earnings, and the numbers show that the company is still growing impressively. With an outstanding track record of delivering strong returns for investors, the question is, can Digital Realty keep it up?
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First, the numbers
For 2016, Digital Realty's revenue was 21% higher than a year ago, and core FFO per share (the "earnings" of REITs) grew by 9%, from $5.26 to $5.72. According to CEO A. William Stein, "We capped off a very successful year in 2016. Data center demand remains robust, driven by a diverse set of customers across the digital economy."
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It's also worth noting that although these results were strong, currency headwinds make them look worse than they were. In fact, on a constant-currency basis, Digital Realty's FFO growth would have been more than 10%.
The fourth quarter was good, but quiet. Revenue, FFO, and net income were all significantly higher than a year ago. However, the company did not buy or sell any properties during the quarter after some significant activity earlier in the year. However, for 2017, the company expects to spend up to $1 billion on development, so don't assume the inactivity will last long. Expansion is planned for a total of eight new or existing markets in 2017, including large projects in Chicago and Atlanta.
Impressive growth, but what's next?
Digital Realty has grown tremendously since its launch a little over a decade ago. The original 43 data centers in eight North American markets have grown to 61 data centers in 17 markets, including five international ones. Investors have reaped the rewards of this growth, with annualized returns in excess of 22% since 2004. In a recent article, I referred to Digital Realty as a "millionaire maker" stock, and for good reason.
Despite the strong performance, data center demand growth could still be in its early innings. Demand is outpacing supply in some of the most critical data center markets. For example, the Northern Virginia data center market is 96% occupied and is absorbing new inventory at twice the rate it's being constructed.
Through 2020, global data center IP traffic is projected to grow at a 32% annualized rate, according to Cisco. In 2017 alone, worldwide server shipments are expected to grow 6.4%, and IT spending is expected to rise by nearly 3%, which should continue to drive demand and give data center operators pricing power.
In addition to the continually growing market, Digital Realty plans to diversify its product offerings and improve its efficiency over the next several years to continue its record of superior returns. For example, there is room to lease-up the current portfolio of properties -- in addition to the vacancies it inherited through its Telx acquisition, Digital Realty's same-store occupancy is at 92.6%, on the low end historically.
To sum it up, not only is the market for data centers growing, but there are other opportunities to increase profitability as well.
Is Digital Realty still a good buy?
For 2017, Digital Realty expects core FFO in the range of $5.90-$6.10 per share, which would represent year-over-year growth of 3%-7%, a bit of a slowdown from 2016, but still a solid growth rate.
As I write this, Digital Realty trades for just over $105 per share, which translates to a forward price/FFO ratio of 17.5 based on the midpoint of its guidance. This is surprisingly low in comparison to many leading REITs, and it seems especially low when you take the company's track record and its future growth potential into account. In a nutshell, I'd still call Digital Realty an attractive long-term investment at the current share price.
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