Morningstar | Muted Revenue Growth for Digital Realty in 3Q but No Change to Our View; Maintaining $112 FVE
We did not see anything in Digital Realty's third-quarter results that alters our view or forecast for the narrow-moat firm. Revenue came in a shade below consensus estimates as the firm lapped last year's DuPont Fabros acquisition, but funds from operations, or FFO, came in about as expected. More importantly to us, bookings in the quarter were good and the company's backlog remains strong, so we believe Digital's growth story is intact as it continues to expand its footprint and emphasize interconnections in addition to simple, large-scale space. We like the Digital Realty story, but we see shares fairly valued around current levels, as we are maintaining our $112 fair value estimate.The quarter's 2% sequential revenue growth included 1%-2% growth for both rental and interconnection revenue. We don't place too much emphasis on the growth metric alone, especially since last year's DuPont Fabros acquisition came at the end of the third quarter and leaves us without a good year-over-year comparison (the company did not provide organic or pro forma numbers). We think the outlook is healthy. Digital signed a firm-record $7.6 million of new interconnection revenue in the quarter and now has 77,000 cross connects, supporting our view that interconnection remains a bigger opportunity for Digital since it acquired Telx three years ago. The company also signed over $60 million of rental leases, more than any previous quarter except last quarter, leaving it with a backlog of about $150 million in new leases (for reference, about 5% of total revenue) that will almost entirely commence by the end of 2019.
The adjusted EBITDA margin of 58% came in close to 200 basis points below the last couple of quarters but keeps the firm on pace to fall within the 58%-60% range it has guided to all year. Longer term, we see room for margin expansion, because we expect a greater portion of Digital's business to shift toward higher margin interconnection revenue and colocation tenants.
Digital Realty Trust is a real estate investment trust. The company is a global provider of data center, colocation and interconnection solutions for customers across a variety of industry verticals ranging from cloud and information technology services, communications and social networking to financial services, manufacturing, energy, healthcare, and consumer products. The company's Operating Partnership, Digital Realty Trust, L.P., is the entity through which the company conducts its business of owning, acquiring, developing and operating data centers. The company's portfolio of data centers provides available environments for the exchange, processing and storage of electronic information.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.