Digital Realty Trust Inc. (DLR), a niche real estate investment trust (REIT), has recently completed the acquisition of ‘360 Spear Street’ – a data center facility spanning 155,000 square feet of space in San Francisco, California, from an unnamed seller for $85 million.
At the same time, the company completed the purchase of a three-story data center facility in Atlanta, Georgia. This acquisition was structured as a sale leaseback transaction with the previous owner – an unnamed major U.S.-based airline provider. About 167,000 square feet of the 334,000-square-foot data center facility will continue to be occupied by the erstwhile owner under a new ten-year lease agreement with Digital Realty. The remainder of the rentable space is currently being leased on a long-term basis to a yet another unnamed company that provides critical transaction processing solutions to firms that operate in the global travel industry.
Both the acquisitions are in sync with the long-term investment objectives of the company that focuses on investing in institutional quality data center facilities in high barriers-to-entry markets with significant potential to generate attractive risk-adjusted return on investments (ROI).
Digital Realty operates datacenters and digital storage facilities, which are primarily used by telecommunication companies to maintain their Internet presence or augment their data networks. Datacenters usually incur high costs for building and maintenance, and as such supply is relatively inelastic.
Digital Realty provides flexible and cost effective datacenter facilities to a wide range of customers, including domestic and international companies across multiple industry verticals. Its portfolio includes 100 properties throughout Europe and North America, spanning approximately 17.9 million square feet of space (including 2.1 million square feet of redevelopment space).
With demand for digital storage facilities increasing in recent years, Digital Realty has benefited greatly by negotiating favorable lease terms and maintaining strong occupancy rates. The long-term lease agreements have also insulated the company from short-term volatility and unfavorable market swings experienced during the recession. This has enabled Digital Realty to continue paying out solid dividends to its shareholders.
We presently have a ‘Neutral’ recommendation for Digital Realty, which currently has a Zacks #3 Rank, translating into a short-term ‘Hold’ rating. We also have a ‘Neutral’ recommendation and a Zacks #3 Rank for MPG Office Trust Inc. (MPG), one of the competitors of Digital Realty.
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