This month's REIT Focus is on Digital Realty Trust, Inc. (DLR). DLR is a self-administered and self managed Maryland real estate investment trust that is the 95.6% owner of the general partner interest in Digital Realty Trust, L.P., the UpReit partnership that owns the assets of DLR. DLR 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 datacenter users, including the information technology departments of Fortune 1000 companies, and financial services companies. As of 12/31/11, DLR owned 101 properties, with 84 in the U.S., 15 in Europe, 1 Asia and 1in Canada. These properties contain approximately 18.3 million square feet of data center space including 2.4 million square feet in development. DLR owns its properties in various markets with Silicon Valley, CA containing the largest amount at 13.3% (by percent of total rent), 10.4% in Northern Virginia and 9.8% in San Francisco, CA. The two largest tenants are Century Link, Inc. with 33 locations, 2.7 million square feet of space, representing 16.9% of total square feet and Equinix Operating Co., Inc., with 9 locations, 878 thousand square feet and 5.5% of total square feet. DLR was incorporated in the State of Maryland in 2004 and is based in San Francisco, CA.
As of 12/31/11, the average occupancy and monthly rental rate were, 94.8% and $52 per square foot, respectively. As of 3/15/12, DLR had 107.1 million shares outstanding, a stock price of $72/sh. and a market capitalization of approximately $7.7 billion.
Select financial data for DLR as of the 12/31/11 10K and for the year period 1/1-12/31/11 is as follows (in thousands where applicable):
|Real Estate Assets, Gross||$6,119,000|
|Mortgages, Senior Debentures & Credit Facilities||$2,940,000|
|Earnings Per Share||$1.32|
|Cash Flow from Operations||$401,000|
|Global Credit Facility ($1.2 billion available)||$1,500,000|
|Market Capitalization (equity value only)||39%|
|Real Estate Assets Per Square Foot||$334|
|Dividend Yield ($2.92/sh)||4.10%|
|NOI and Value Calculation:|
|Revenues Per Above||$1,063,000|
|Less: Rental and Operating Expenses||($440,000)|
|Net Operating Income Annualized||$623,000|
|Projected Inflation Rate||103.5%|
|Projected NOI for 2012||$645,000|
|Projected Cap Rate||8%|
|Projected Value of Portfolio||$8,062,000|
|Less: Total Debt & Preferred Stock||($3,510,000)|
|Projected Value of Company Equity||$4,552,000|
|Projected Value Per Share||$42|
|Market Price Per Share (3/14/12)||$72|
As shown above, our value for DLR is $42 per share versus the market price of $72 per share. A portion of the value difference can be attributed to projecting a forward one year net operating income. The market however, is valuing the company at a cap rate of approximately 5.8% which we believe is too rich for a data center owner and developer. Our cap rate of 8% is in line with the average cap rate for industrial type properties per a CBRE 2011 cap rate survey.
DLR has been in a high growth mode with net income increasing over 178% and the stock price up 44% since 2009. DLR is considered a well managed REIT, in a hot sector with a solid portfolio of data center type properties. However, we believe that the market price of the company's stock at $72/sh. is too overpriced for investment even though it currently yields a solid 4.1%. We do recommend acquiring the stock on any type of price pullback.
REIT Focus reviews in prior issues of VOM are as follows:
1. BRE Properties, Inc., June 15, 2011
2. Boston Properties, Inc., July 15, 2011
3. Simon Properties Group, Inc., August 15, 2011
4. First Industrial Realty Trust, September 15, 2011
5. Public Storage, October 15, 2011
6. Ashford Hospitality Trust, Inc., November 15, 2011
7. AvalonBay Communities, Inc., December 15, 2011
8. Alexandria Real Estate Equities, Inc., January 15, 2012
9. Federal Realty Investment Trust, Inc., February 15, 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.