Digital Realty Trust, Inc. (NYSE:DLR) is a fast-growing real estate investment trust (REIT) that has raised its dividend every year since going public in 2004.
While the company is far from having a long enough dividend growth history to quality as a member of the dividend aristocrats list, it has numerous attractive qualities.
Digital Realty is a direct beneficiary of the rapidly growing usage of data by businesses and consumers alike. It powered through the financial crisis and also scores well for dividend safety and growth.
Digital Realty’s stock has been one of the best-performing holdings in our Top 20 Dividend Stocks and Conservative Retirees portfolios, and we remain optimistic about the company’s dividend growth trajectory.
Among some 800 funds tracked by Insider Monkey, 20 reported long positions of Digital Realty as of the end of 2015, down from 22 funds a quarter earlier, but the aggregate value of their holdings inched up to $246 million from $244.97 million during the fourth quarter. Nevertheless, the funds from the Insider Monkey database held just 2.20% of Digital Realty heading into 2016. More specifically, Jim Simons’ Renaissance Technologies boosted its position by 57% on the quarter to 776,300 shares held at the end of the last year, while Clint Carlson’s Carlson Capital raised its exposure by 7% to 695,461 shares.
Business Overview
Digital Realty is a REIT that supports the data center needs of more than 1,600 customers across industries such as financial services, information technology, manufacturing, and more. The company is the largest data center REIT in the world and has a portfolio of 139 operating properties.
Data centers provide secure, continuously available environments for companies to store and process important electronic information such as transactions and digital communications. Data centers can also serve as hubs for internet communications in major metropolitan areas.
The key components of a data center can be seen below and include servers, network equipment, cooling systems, electrical power systems, and more. Data centers consume a lot of power to keep the servers running and the room’s temperature under control.
Source: Digital Realty Fact Sheet
Approximately 61% of Digital Realty’s rent is from turn-key services, in which it provides everything but the servers. Some customers choose to provide the power components used in the data center (e.g. HVAC, battery, generator, electrical) and design it all themselves. This mix accounts for another 20% of the company’s rent.
Digital Realty generates about 80% of its rent in North America with the rest from Europe (14%) and Asia (6%). The company’s largest tenants are IBM (7.5% of rent), CenturyLink (6.1%), Equinix (4.0%), Facebook (2.3%), and AT&T (2.1%), LinkedIn (2.0%), and Oracle (2.0%).
Digital Realty is also well diversified by customer type. Approximately 33% of Digital Realty’s annualized rent is from IT Services, 24% from Telecom Network Providers, 19% from Other Corporate Enterprises, 15% from Financial Services, and 9% from Internet Enterprises.
Business Analysis
Playing in a growing industry is almost always better than competing in a shrinking market. In Digital Realty’s case, its data center operations are exposed to several long-term secular demand drivers.
Simply put, data use is exploding and driving more demand for servers and data centers. Growth of internet traffic, over-the-top-video, cloud, and mobile data traffic is expected to range from 21% to 45% per year over the next several years, according to an investor presentation by Digital Realty.
As a result, Markets and Markets expects the global data center solutions market to grow at a compound annual growth rate of 11.7% from 2015 through 2020 to nearly double in total value. As the largest data center operator in the world, Digital Realty is well positioned to ride this tailwind.
