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Is a Beat in Store for Digital Realty (DLR) in Q1 Earnings?

Digital Realty Trust DLR is slated to report first-quarter 2023 earnings on Apr 27 after market close. While the quarterly results are expected to reflect year-over-year growth in revenues, funds from operations (FFO) per share might exhibit a decline.

This data center real estate investment trust (REIT) reported funds from operations (FFO) per share of $1.65 in the previous quarter, which lagged the Zacks Consensus Estimate of $1.68. Although the quarterly results reflected growth in operating revenues, rising rental property operating expenses acted as a dampener.

Over the last four quarters, Digital Realty matched the Zacks Consensus Estimate on two occasions and missed the same in the remaining two quarters, the average negative surprise being 1.82%. 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

Data center infrastructure demand has remained robust amid growth in cloud computing, the Internet of Things and Big Data, and elevated demand for third-party IT infrastructure. Moreover, the growth in the AI, autonomous vehicles and virtual/augmented reality markets has created a solid base for data centers.

Amid this, Digital Realty is expected to have capitalized on enterprises’ growing reliance on technology and acceleration in digital transformation strategies, benefiting its first-quarter 2023 earnings.

DLR has a diversified customer base, and majority of its tenants are investment-grade. In addition, several of its customers use multiple locations across the portfolio. This is likely to have aided stable revenue generation during the to-be-reported quarter, boosting its top line.

The Zacks Consensus Estimate for quarterly rental revenues is pegged at $847.2 million, up from $751.9 million reported in the year-ago quarter. We project the same to increase 16.9% year over year. The consensus mark for revenues from tenant reimbursement utilities is pegged at $316.5 million, up from $224.6 million reported in the prior-year quarter. Our estimate suggests growth of 17.3% from the prior-year period.

Moreover, Digital Realty’s interconnection solutions are expected to have gained from solid demand in the first quarter. The Zacks Consensus Estimate for interconnection & other revenues currently stands at $102.6 million, indicating a 9.7% increase from the year-ago quarter’s reported tally. We expect the same to improve 13.6% year over year.

The consensus estimate for quarterly total revenues is pegged at $1.34 billion, indicating a 19.1% year-over-year jump. Our estimate for the same stands at $1.31 billion, suggesting an increase of 16.4%.

Further, to boost its data-center business, in February 2023, Digital Realty introduced a new Amazon Web Services (AWS) Direct Connect on-ramp region at its Ashburn Campus. As a result, enterprise customers will benefit from low-latency, high-performance, secure and cost-efficient connectivity to AWS.

Additionally, in the same month, DLR announced that it will enable connectivity to an Oracle Cloud Infrastructure FastConnect point-of-presence in the newly launched Oracle Cloud Chicago Region. The new connectivity deployment in DLR’s 350 E. Cermak Road data center will benefit customers by offering a low-latency route into the Oracle Cloud Chicago Region.

We expect Digital Realty to have maintained a robust balance sheet position during the to-be-reported quarter, which is expected to have supported its acquisitions and development activities.

However, higher interest expenses and adverse foreign currency fluctuations are expected to have cast a pall on its quarterly performance. We expect interest expense to flare up 27.1% year over year in first-quarter 2023.

DLR’s activities during the to-be-reported quarter were not adequate to secure analyst confidence. The Zacks Consensus Estimate for the quarterly FFO per share has been unchanged over the past month at $1.64. Also, the figure indicates a year-over-year fall of 1.8%.

What Our Quantitative Model Predicts

Our proven model predicts a surprise in terms of FFO per share for Digital Realty this season. The right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — increases the odds of a beat. This is the case here.

Earnings ESP: Digital Realty has an Earnings ESP of +0.52%. 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 #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Stocks That Warrant a Look

Here are some other 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:

American Tower AMT is slated to report quarterly numbers on Apr 27. AMT has an Earnings ESP of +0.63% and carries a Zacks Rank #3 presently.

Welltower WELL is scheduled to report first-quarter earnings on May 2. WELL has an Earnings ESP of +0.35% and a Zacks Rank #3 currently.

Equinix EQIX is scheduled to report first-quarter earnings on May 3. EQIX has an Earnings ESP of +0.44% and a Zacks Rank #2 currently.

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

Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.

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