Digital Realty (DLR) to Report Q3 Earnings: What's in Store?

Digital Realty Trust DLR is set to report third-quarter 2022 earnings on Oct 26 after market close. The company’s quarterly results are expected to reflect year-over-year growth in revenues and funds from operations (FFO) per share.

This data center real estate investment trust (REIT) reported funds from operations (FFO) per share of $1.55 in the previous quarter, which lagged the Zacks Consensus Estimate of $1.64. The quarterly results reflected lower-than-expected revenues.

Over the last four quarters, Digital Realty outpaced the Zacks Consensus Estimate on one occasion, matched once and missed the same in the remaining two quarters, the average negative surprise being 1.06%. This is depicted in the chart below:

Digital Realty Trust, Inc. Price and EPS Surprise

Digital Realty Trust, Inc. price-eps-surprise | Digital Realty Trust, Inc. Quote

Factors to Consider

The demand in top-tier data center markets has been robust despite a high occupancy level. This has led to faster absorption of new construction and increased the demand for data centers, benefiting data center REITs like Digital Realty.

The growing reliance on technology and acceleration in digital transformation strategies by enterprises are likely to have benefited Digital Realty’s (DLR) portfolio of data centers located all over North America, Europe, South America, Asia, Australia and Africa during the third quarter of 2022.

Moreover, DLR has a high-quality, diversified customer base comprising tenants from cloud, content, information technology, network, other enterprise and financial industries. Most of the company’s tenants are investment grade, and numerous customers use multiple locations across the portfolio. This is anticipated to have aided stable revenue generation for the company during the to-be-reported quarter, driving its top line.

The Zacks Consensus Estimate for quarterly rental revenues is pegged at $822 million, up from $773 million reported in the year-ago quarter. However, the consensus mark for revenues from tenant reimbursement utilities is pegged at $209 million, down from $218 million reported in the prior quarter.

Also, Digital Realty’s interconnection solutions are expected to have gained pace amid solid demand in the quarter under discussion. The Zacks Consensus Estimate for interconnection & other revenues currently stands at $98 million, indicating a 7.7% increase from the year-ago quarter reported figure.

The consensus estimate for quarterly total revenues is pegged at $1.19 billion, indicating a 5.02% year-over-year jump.

Digital Realty has been focusing on expanding its portfolio through acquisitions to meet the data center demand. In August 2022, it acquired a 55% majority interest in one of South Africa’s leading carrier-neutral data center and interconnection services providers, Teraco, for $1.7 billion in cash. Given the recent and ongoing implementation of subsea cable networks encircling Africa, the acquisition seems a strategic fit for DLR.

However, Digital Realty faces intense competition from existing and new players in the space, given the strong growth potential of the industry. The competition could have prompted competitors to resort to aggressive pricing policies, adversely impacting DLR’s pricing power.

Further, Digital Realty is exposed to adverse foreign currency fluctuations, given its extensive international presence. With the strengthening of the U.S. dollar, the company is expected to have witnessed a drag in its revenue and core FFO per share growth in the quarter to be reported. Also, higher interest rates might have been a deterrent.   

DLR’s activities during the third quarter were not adequate to secure analyst confidence. The Zacks Consensus Estimate for third-quarter FFO per share has been revised marginally downward over the past week to $1.67. Nonetheless, it indicates year-over-year growth of 1.2%.

What Our Quantitative Model Predicts

Digital Realty does not have the right combination of two key elements — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of a beat.

Earnings ESP: Digital Realty has an Earnings ESP of -2.05%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Digital Realty currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

Here are some stocks that are worth considering from the REIT sector, as our model shows that these have the right combination of elements to deliver a surprise this reporting cycle:

Highwoods Properties HIW is slated to report quarterly numbers on Oct 25. HIW has an Earnings ESP of +1.45% and carries a Zacks Rank #3 presently.

Cousins Properties CUZ is slated to release third-quarter earnings on Oct 27. CUZ has an Earnings ESP of +1.01% and a Zacks Rank #3 at present.

Public Storage PSA is scheduled to report quarterly figures on Nov 1. PSA has an Earnings ESP of +1.34% and a Zacks Rank of 3 currently.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Public Storage (PSA) : Free Stock Analysis Report
 
Highwoods Properties, Inc. (HIW) : Free Stock Analysis Report
 
Cousins Properties Incorporated (CUZ) : Free Stock Analysis Report
 
Digital Realty Trust, Inc. (DLR) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research