Value Line recently initiated coverage of Digital Realty Trust, Inc. (DLR) in its flagship product, The Value Line Investment Survey. The Real Estate Investment Trust (REIT) is the sole general partner of Digital Realty Trust, L.P., and assumes the daily operational tasks of said partner organization. Based in San Francisco, with regional offices located across the nation, the company operates and develops data storage centers for a variety of customers in a wide array of industries.
As business demands grow, so too will the need for corporations and small businesses alike to securely store and organize their data. The need for the services offered by DLR and its peers was magnified last year during Hurricane Sandy, which flooded scourges of offices and left many companies without the necessary server access to operate for several days. The Huffington Post had a considerably hard time recovering to normal operating conditions in the ensuing days and weeks, while Gawker Media found itself publishing on a raw, beta platform as it emerged from the damages incurred by flooding. It is situations like this that should compel firms to hedge their bets and secure their information in data centers before it happens again. This heightened awareness in the aftermath of a superstorm, coupled with a widespread digital trend in the information sector, lends itself to the belief that data storage will grow up to 50 times its current size by 2020.
As the data industry is set to skyrocket in scope over the next several years, DLR has been subsequently vigilant in expanding its business. The company recently purchased 6 data center facilities in Texas, a state that is experiencing a growth in the number of companies operating within its borders. DLR also recently held a grand opening for its state-of-the-art data complex in Massachusetts. Located 12 miles outside of Boston city limits in Needham, the three-story facility will house five of the company’s proprietary KeyFlex data centers. It will be powered by 10 megawatts of redundant utility power and will serve some of the many tech corporations and startups located in the Greater Boston area. Additionally, the state of Arizona recently announced a tax legislation provision that would offer incentives to data storage companies like DLR to open centers. This would also allow for companies who store their data in these facilities to receive tax cuts. The move to store information digitally has firmly entrenched itself in the mainstream, and DLR is likely to benefit over the coming years.
The company is at the forefront of the movement to provide environmentally sustainable data storage. Its data center in Chicago was the first to receive LEED Gold certification, a ranking system for sustainable, green buildings. The company was also the first to receive the “Excellent” BREEAM designation, the British counterpart to LEED. On top of this, the company is a member of the esteemed Green Grid, a consortium of over 170 tech companies that promotes increased energy efficiency in the industry.
Still, and despite a slew of positive indicators for the surging popularity of data storage, DLR’s performance is directly tied to real estate valuations. This could prove to be a major problem if the company fails to fill its facilities with tenants or if rental rates decline. DLR is also somewhat exposed to the strategies of its larger clients, as the top 20 customers made up 47% of total annualized rent in 2012. Should one or more of these larger companies decide to expand its intra-company data storage capabilities, Digital Realty would need to fill the void before experiencing a material impact in its business. The company, it should be noted, is not subject to significant geographic exposure, as seven regions make up 7.5% or more of companywide rentals. What’s more, DLR is one of the best performing REIT stocks in recent years, posting a 214% return since 2007, nearly doubling the S&P 500’s 108% growth over that same period.
Subscribers interested in owning a piece of this high-performing datacenter REIT are advised to consult Value Line’s quarterly reports for Digital Realty Trust (DLR), as well as any supplementary reports and relevant articles as important news items arise.
At the time this article was written, the author did not have positions in any of the companies mentioned.