Key Factors to Impact Digital Realty's (DLR) Q1 Earnings

Digital Realty Trust DLR is scheduled to release first-quarter 2020 earnings on May 7, after market close. The company’s quarterly results might display declines in revenues and funds from operations (FFO) per share.

In the last reported quarter, this San Francisco, CA-based data-center real estate investment trust (REIT) delivered a positive surprise of 2.53% in terms of funds from operations (FFO) per share. Results were supported by growth in revenues.

The company has a decent surprise history. Over the trailing four quarters, the company beat estimates on all occasions, the average beat being 2.46%. This is depicted in the graph below:

Digital Realty Trust, Inc. Price and EPS Surprise

Digital Realty Trust, Inc. Price and EPS Surprise

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

Let’s see how things have shaped up for Digital Realty prior to this announcement.

Factors to Consider

With growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, demand for space at properties of data-center REITs has been shooting up. Moreover, the artificial intelligence, autonomous vehicle and virtual/augmented reality markets have been growing at a solid pace, fueling demand for such real estates. In addition, data-center REITs are poised to benefit from the heightening reliance on technology in the wake of the coronavirus pandemic, and work-from-home and e-learning gaining popularity.

Therefore, Digital Realty is likely to have gained from solid fundamentals of the data-center market in the to-be-reported quarter. In fact, demand is outpacing supply in top-tier data-center markets and despite enjoying high occupancy, these markets are absorbing new construction at a faster pace.

The full spectrum of data-center solutions across a global platform is likely to have helped the company register growth in customers, with several having multiple locations across the portfolio. Additionally, significant customer investment is likely to have ensured stable retention.

Digital Realty has also been banking on strategic acquisitions and development efforts for building a premium portfolio of high-quality facilities located across North America, Europe, Latin America, Asia and Australia.

In March, Digital Realty completed its previously-announced combination with InterXion. With this, Digital Realty, which is a major provider of data center, colocation and interconnection solutions, is expected to enjoy an increased presence in major European metro areas. Moreover, Digital Realty announced the launch of the Clonshaugh data center, the company’s latest facility in Dublin, Ireland. The move comes as part of the company’s efforts to capitalize on the multibillion-euro technology boom that the city is set to witness in the coming years.

However, given the solid growth potential in the data-center real estate market, competition has intensified in its markets. This is likely to have resulted in aggressive pricing pressure in the quarter under review. In addition to this, interest-expense burden is a concern, with the company having a substantial debt position.

The Zacks Consensus Estimate for quarterly total revenues is $780.2 million, indicating a 4.2% year-over-year decline.

Amid these, Digital Realty’s activities during the soon-to-be-reported quarter were inadequate to gain analysts’ confidence. The Zacks Consensus Estimate for the first-quarter FFO per share moved 1.3% downward to $1.54 in a week’s time. It also indicates a decline of 10.9% from the year-ago quarter’s reported figure.

Here is what our quantitative model predicts:

Our proven model does not conclusively predict a positive surprise in terms of FFO per share for Digital Realty this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of a FFO beat. But that’s not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Digital Realty currently carries a Zacks Rank of 3 and has an Earnings ESP of -2.72%.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Life Storage, Inc. LSI, slated to release first-quarter earnings on May 7, has an Earnings ESP of +0.36% and carries a Zacks Rank of 3 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Americold Realty Trust COLD, scheduled to announce earnings results on May 7, has an Earnings ESP of +9.74% and currently holds a Zacks Rank #3.

VEREIT, Inc. VER, set to report quarterly numbers on May 20, has an Earnings ESP of +5.15% and carries a Zacks Rank of 3 currently.

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.

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