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Morningstar | Digital Realty Closes 2018 With Lackluster Quarter; Maintaining $112 FVE

Narrow-moat Digital Realty Trust missed consensus on the top and bottom lines and reported weaker bookings in the fourth quarter than we're accustomed to seeing. However, in a business that lends itself to lumpy booking quarters, we don't assume one quarter makes a trend. Results were consistent with the weaker-than-expected 2019 outlook the firm issued last month, and we'd already modeled some softness in 2019. We expect Digital's business will be affected if macroeconomic concerns persist, but we see the long-term trend as intact. We are making only minor adjustments to our projections and maintaining our $112 fair value estimate.

Apart from the quarter's revenue and EBITDA misses, weak bookings and revenue per square foot metrics were notable. New lease bookings ($37 million) fell below $50 million for the first time since 2017, and the firm now has less than a $100 million backlog (versus close to $150 million through most of 2018). North America, which accounts for about 80% of annualized revenue, was especially weak, contributing only 3.6 of the 16.6 megawatts Digital signed in the quarter. Still, we don't think it's wise to read too much into a single quarter, as a single signing can swing bookings dramatically. We don't expect outsize growth in North America, where we think numerous providers will maintain adequate supply, and Digital doesn't benefit from a network effect like we believe Equinix and CoreSite do. Bookings were strong in Singapore and Japan, which contributed to the 8.3 megawatts Digital booked in Asia, and with capacity available in a new Japanese data center coming on line this year, we expect strength will continue.

Cash rental rates on renewal leases fell 3% in the quarter and were flat for the year. Although it was worse than we expected, the drop is not surprising, given the numerous above-market leases the 2017 acquisition of DuPont Fabros brought. Renewal rates will be down again in 2019, but we think that will mark the trough.

Revenue growth in the quarter was 1% sequentially and 6% year over year in the first full quarter since Digital lapped its September 2017 DuPont Fabros acquisition. The quarter's 53% EBITDA margin was far lower than recent quarters but was affected by high transaction costs following the Ascenty acquisition and an uptick in property operating expenses. On an adjusted basis, EBITDA margin was 59% for both the quarter and full year. We expect a similar margin in 2019.