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Digital Realty: Jim Chanos Will Be Right, Stick To The Preferred Shares


  • Digital Realty has continued its aggressive growth and capex plans.
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It is no fun to take the opposite of a popular trade. You generally get cat calls from the crowd and almost inevitably you never pick the exact top of the trend. Take for example the bearish and ultimately accurate call on

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Comments (34)

Was checking DLR out and saw your article. Not sure Mr. Chanos understands that DLR/EQIX is the cloud. He should pull up the customer list of EQIX. It's all about outsourcing these days. Those servers got to go somewhere. Bricks and Mortar doesn't apply in this case.
Trapping Value profile picture
@lookg4leisure 83% occupancy. Check out when WPG and CBL filed.
Rob G. in Vegas profile picture
@lookg4leisure You really think Chanos does not understand DLR's business?

At least DLR doesn't seem to have any problem raising more capital via the debt markets:

Trapping Value profile picture
@Rob G. in Vegas 5.7% cost of debt. They couldn't make accretive capex at 2%. Will be fun to watch.
any thots on dlr-L
Rob G. in Vegas profile picture
Foolish of DLR to continue to raise their common dividend by 3-5% every March. With this massive level of cap-ex, it really should be cut. Free cash flow negative (again) for first 6 months of 2022.

Refinancing that $4B in Euro debt maturing over the next 4 years could end up being a very unpleasant experience, but you have to hand it to them for truly locking in some rock-bottom rates that don't mature until 2027-32.
Trapping Value profile picture
@Rob G. in Vegas The whole jig is to maintain "everything is normal". If they could not grow their FFO when they got a FFO multiple of 25. they sure as heck won't in a recession with a 15X multiple. So the "dividend growth" crowd needs to be kept in there, unpanicked.
So is it falling occupancy or is it unneeded CAPEX? Are they losing customers? They don’t have Google and Microsoft as customers so is management completely inept? Sounds like you should steer away from the preferreds as well.
Trapping Value profile picture
@CPAtracker Falling occupancy. Capex at 2% interest cost and real returns of 4% has mitigated the impact.
Throwing Ketchup profile picture
@CPAtracker Agreed. With the scenario presented, I wouldn't touch even the preferreds.
I've owned DLR for awhile now. Done OK but contemplating moving on. Just looking at what price. This stock gets multiple view points. I'm trying to separate the wheat from the chaff. DRIP and Ride!
I bought a few pfd stock cefs - all rated 5 stars by Morningstar. One star would have been appropriate, & I bought them after they had taken a pretty good drop. Down about 25% since I bought them & dividends all cut.
Trapping Value profile picture
@SarasotaTrader If you bought anything in 2021 in that space you got your posterior handed to you.
We were fortunate to stay out of all of these and just recently started tip toeing here.
DLR prefs are still not a buy for us but they likely will outperform the common. Hence suggested.
The DC business is evolving rapidly with hyperscale and edge. The core data centers will always be needed but Chanos may be overlooking the whole picture as workloads move to the suburbs and tertiary markets.
Just to play devils advocate…perhaps buying at trough occupancy is wise? Both dlr and eqix have expressed that demand has been strong and if memory serves me correct, leasing spreads have been encouraging. Also, DC demand is growing internationally, especially Africa which is a massive market. This has been corroborated by AMD and others.

DLR has also made investments in several new DCs that will be accretive and yielding close to 10% returns. (Going off memory from past research so could be off a bit, but not by much)

And I don’t see how big tech will be building their own capital intensive DCs when they immediately lean into laying off staff at the first hint of economic slowdown. Their cloud businesses are high margin, don’t see how it would be beneficial to volunteer to take on the capex necessary to just maintain DCs, nevermind the cost and barrier to entry obstacles to build their own.
Trapping Value profile picture
@Humble_Modesty DLR has mentioned double digit yields for last 6 years of capex. If that were remotely accurate FFO would be past $10 by now
Thanks TV, I am long DLR 88/share and may trim part of position and switch to the preferred. Occupancy rate is very concerning.
Appreciate the cautionary outlook. For me the statistic that is most worrisome is the occupancy rate. However one should note that there have been numerous counter arguments about the big cloud companies taking over the data sector, and in fact they employ DLR and Equinix to house data as well as building their own centers.

Since I long ago sold my initial stake in DLR after an easy double in its go-Go growth days, I am viewing it as primarily an income vehicle now and looking for a replacement with more yield and less debate on its prospects. Had not considered the preferreds, an interesting idea. Thanks.
Long $DLR with cost basis of $112 and $DLR.J around $23 dating back to 2018.

Might be a good idea to pull out of the common and wait to see how this pans out.

$SAFE analogy is deeply concerning. Thank you for your analysis.
Trapping Value profile picture
@dgiinvestor If you extrapolate their interest having gone from 3.6% to 4.2% instead of down to near 2%, FFO per share would be flat over the last 6 years.
I purchased both the Series J (1250 Shs) & K (500 Shs) Preferred back in April, 2019. Good yield hopefully without a lot of risk casused by there credit overreach.
Index Investing Fan profile picture
Thanks for the article. You definitely gave some food for thought.
Thanks for the "numbers don't lie" presentation. What we are observing is the transition of DLR from a go-go growth company to a mature, slow growth company. The most troubling number is the 83% "occupancy" rate. If this were a mall REIT, it would be a penny stock now. The prospects are not as dire as Chanos would have you believe. DLR has "big tech" as customers and picks up other businesses that do not want to do data/cloud in-house. Thus, my slow growth thesis. Remember that servers like DLRs are the "cloud". I am waiting for the yield to jump from current 4.13% to ~5%, which translates to a $95 -100 price tag. This would be in line with other mature REITs.
Trapping Value profile picture
@DBKforDivs I agree that prospects are not as dire and hence I think the 5.8% prefs give you a decent bang for your buck.
Pablo profile picture
Meh. DLR is a bargain right now.
ComputerBlue profile picture
Way better shorts out there if you have time on your side..dlr fading w other reits, 115 may come here soon but who cares, about fair value here..ok buy
r Negoro profile picture
Chanos shorted this ?
"this is not financial advice"

This is the best piece of advice in the article.
Stock Market Mike profile picture
Thanks, TV. I don't like when fundamentals are sliding out from below. Eventually the market *can* wake up. Seen it on plenty of stocks - when it does, waterfall. But on many, it doesn't, and they trundle along. I agree with not shorting at these prices - although if they were blowing billions on buybacks too, then it'd be an obvious short, as that'd accelerate the balance sheet weakening. (It has some parallels to how GE was blowing money before it collapsed from $30+ (or I guess $250+ thanks to reverse splits) back in 2016/2017.)

This is a worthy stock to watch from a distance.

@Stock Market Mike it really doesn’t make sense to compare a REIT in the data business to GE, an industrial conglomerate. What TV does point out is the concerning Capex and occupancy rate. One should also note that DLR has obtained very cheap financing in Europe that is not going to be affected by interest rate hikes. Still, a worthy debate on the future for DLR in this complex sector.
Trapping Value profile picture
@RealRural We are seeing some impact in Europe. Nothing like US where Fed is raising plus credit spreads are widening. There, it is only the latter but I sense it might be enough to stop DLR.
bazooooka profile picture
likely easier bets then fading what Chanos does
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