Digital Realty DLR is poised to gain from its unmatched global footprint of data centers with growing digital transformation, cloud computing and the proliferation of artificial intelligence. A solid tenant base assures stable revenues. It also carries out strategic investments in land, infrastructure and acquisitions, which is encouraging. The company’s healthy balance sheet position is likely to aid its growth endeavors. However, competition in its industry and concentration of assets remain concerns.

Last month, Digital Realty reported a first-quarter 2025 FFO of $1.77, beating the Zacks Consensus Estimate of $1.73. The FFO per share also increased 6% year over year. Results reflected steady leasing momentum with better rental rates amid rising demand. However, higher operating expenses undermined the performance to an extent.

What is Supporting DLR?

With the growth in cloud computing, the Internet of Things and Big Data and an increasing number of companies opting for third-party IT infrastructure, data-center REITs like Digital Realty are experiencing a booming market. In the first quarter of 2025, the company signed $242.3 million of new leases, of which $172.1 million fell into the greater than 1-megawatt category, $54.1 million of 0-1 megawatt leases and $14.6 million of interconnection bookings.

DLR has a high-quality, diversified customer base comprising tenants from cloud content, information technology, network, and other enterprise and financial industries.It has a global presence, with 308 data centers in more than 50 metros with decent occupancy. The majority of the tenants are investment grade and numerous customers use multiple locations across the portfolio. This assures stable revenue generation for the company.

Digital Realty is expected to ride on its growth curve backed by strategic investments in land, infrastructure and acquisitions. In March 2025, Digital Realty forayed into the Indonesian market through a 50-50 joint venture with Bersama Digital Infrastructure Asia. The newly formed entity, Digital Realty Bersama, will develop and operate data centers across Indonesia, enhancing the company's presence in the rapidly growing Asia-Pacific region. This expansion significantly strengthens DLR’s PlatformDIGITAL footprint, supporting Indonesia’s accelerating digital economy.

Digital Realty has a solid balance sheet with ample liquidity. The company exited the first quarter of 2025 with cash and cash equivalents of $2.32 billion. Its debt maturity schedule is well-laddered, with a 2.6% weighted average coupon as of March 31, 2025. Its net debt-to-adjusted EBITDA was 5.1X, while its fixed charge coverage was 4.9X as of the end of the first quarter of 2025.

Story Continues

Its capital-recycling efforts aimed at bolstering balance sheet strength and driving long-term growth are encouraging. For 2025, it expects to carry out dispositions/joint venture capital in the range of $0.5-$1.0 billion. With proceeds from asset sales and growth in cash flows as the signed leases commence, the company is expected to experience an improvement in net debt-to-adjusted EBITDA.

What is Affecting DLR?

Digital Realty faces intense competition in its industry. Given the solid growth potential of the data center real estate market, competition is expected to increase in the upcoming period from existing players and the entry of new players. Amid this, there is likely to be aggressive pricing pressure in the data center market.

Although the company has been focusing on expanding its global footprint, some of its assets are concentrated in certain regions. As of March 31, 2025, Northern Virginia, Chicago and Frankfurt accounted for 19.3%, 7.5% and 6%, respectively, of the company's total annualized rent. Therefore, its performance is susceptible to the economic conditions of these regions.

Shares of this Zacks Rank #3 (Hold) company have risen 0.3% over the past three months, underperforming the industry’s growth of 0.7%. However, analysts seem bullish on it, with the Zacks Consensus Estimate for 2025 FFO per share having been revised marginally northward over the past week to $7.09.Zacks Investment Research

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Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Cousins Properties CUZ and Welltower WELL, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Cousins Properties’ 2025 FFO per share is pegged at $2.79, which implies year-over-year growth of 3.7%.

The Zacks Consensus Estimate for Welltower’s 2025 FFO per share stands at $4.98, which indicates an increase of 15.3% from the year-ago period.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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This article originally published on Zacks Investment Research (zacks.com).

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