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Wait For A Drop Before Buying This 3.8%-Yielding Data Center REIT

May 01, 2018 3:11 PM ETDigital Realty Trust, Inc. (DLR)4 Comments
Achilles Research profile picture
Achilles Research


  • Digital Realty Trust is a fast-growing data center REIT.
  • The REIT has international exposure, a strong customer base and operates in an attractive growth industry.
  • Digital Realty Trust has seen strong FFO/share growth in recent years as its data center business took off, yet has maintained a conservative FFO payout ratio.
  • Shares are on the expensive side, though, reflecting investor expectations of above-average FFO/share growth going forward. I'd wait for a drop before buying.
  • An investment in DLR yields 3.7 percent.

Digital Realty Trust, Inc. (NYSE:NYSE:DLR) is a promising data center REIT set to profit from strong growth in emerging tech sub-sectors such as machine learning and virtual reality, but I believe shares are a little bit on the expensive side now. Investors already price in a good amount of FFO/share growth going forward. Though the REIT operates in a growth industry and has grown FFO/share at good rates in the past, I think income investors may want to wait for a drop before buying. An investment in Digital Realty Trust yields 3.7 percent.

Like most real estate investment trusts, Digital Realty Trust's share price has trended down in the last several months as investors digested yet another interest rate hike on the part of the Federal Reserve and rotated out of the high-yield sector. Higher interest rates tend to be viewed as a negative for REITs as their yields become less competitive in a rising rate environment.

Digital Realty Trust's share price has dropped 5.4 percent this year. That being said, though, I still think the REIT's shares are on the expensive side.

Source: StockCharts

Digital Realty Trust - Business Overview

When investors read about real estate investment trusts, they tend to think about residential or traditional commercial REITs, companies that invest in brick-and-mortar properties such as offices, hospitals, skilled-nursing facilities, shopping centers, retail space and industrial real estate. However, the REIT universe also includes other properties that produce recurring cash flow, for example data center REITs.

Data center REITs like Digital Realty Trust provide space for computer servers and network equipment that are at the heart of today's technology-driven economy. Data center REITs play a crucial part in hosting and maintaining IT-infrastructure that many other businesses in turn rely on.

Data center REITs typically consist of four elements: A building

This article was written by

Achilles Research profile picture
I am a dividend investor and look for undervalued investments in the stock market. I identify misunderstood and undervalued equity investments and hold those securities until their price approximates my estimate of intrinsic value. I am a long-term investor only. I am building a $100,000 high-yield income portfolio. I am running this portfolio as an experiment to see if long-term sustainable income can be generated from a diversified pool of high-risk, high-yield securities. I am willing to accept high risk in order to meet my performance goals.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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