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Key Factors to Impact Digital Realty's (DLR) Q2 Earnings

Digital Realty Trust DLR is scheduled to release second-quarter results on Jul 26, after the market closes.

In the last reported quarter, this San Francisco, CA-based data-center real estate investment trust (REIT) delivered a positive surprise of 1.9% in terms of funds from operations (FFO) per share. Results were supported by growth in revenues.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate in all occasions, the average beat being 2.14%. This is depicted in the graph below:
 

Let’s see how things are shaping up for Digital Realty prior to this announcement.

Factors to Consider

Data-center REITs are expected to have continued to experience a thriving market in the second quarter with growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure.

Also, the estimated growth rates for the artificial intelligence, autonomous vehicle and virtual/augmented reality markets will remain robust over the next five-eight years. These factors, along with an improved outlook for economic growth, are anticipated to provide substantial growth impetus to data-center REITs.

Specifically, Digital Realty is expected to have gained from strong demand for data centers through accretive acquisitions and development efforts. In September 2017, Digital Realty announced the completion of a merger with DuPont Fabros, in an all-stock deal, for an enterprise value of about $7.8 billion. This move helped the company enhance hyper-scale product offering and grow its blue-chip customer base. Also, the company has fortified its presence in Europe, Australia and Asia in the recent years through strategic acquisitions and development of high-quality facilities.

Amid these, the Zacks Consensus Estimate for occupancy is 89% for the second quarter. The Zacks Consensus Estimate for total revenues is $760.9 million, indicating growth of 34.4% year over year. Moreover, the Zacks Consensus Estimate for FFO per share of $1.61 indicates an increase of nearly 4.6% from the prior-year quarter.

However, Digital Realty faces intense competition in the industry. Aggressive pricing pressure is also likely to have continued in the to-be-reported quarter. Furthermore, with a substantial debt burden, interest expense burden remains a concern.

Prior to the second-quarter earnings release, there is lack of any solid catalyst. As such, the Zacks Consensus Estimate of FFO per share for the second quarter remained unchanged at $1.61 over the past month.

Nevertheless, Digital Realty’s shares have increased 14% in the past three months, outperforming 9.6% growth registered by the industry.


 
Earnings Whispers

Our proven model does not conclusively show that Digital Realty will likely beat estimates this season. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP is -0.57%.

Zacks Rank: Digital Realty has a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a positive surprise.

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:

Ventas Inc. VTR, slated to release second-quarter results on Jul 27, has an Earnings ESP of +0.82% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Vornado Realty Trust VNO, scheduled to release earnings on Jul 30, has an Earnings ESP of +1.39% and a Zacks Rank #3.

HCP, Inc. HCP, set to release second-quarter results on Aug 2, has an Earnings ESP of +0.66% and a Zacks Rank of 3.

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

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HCP, Inc. (HCP): Free Stock Analysis Report
 
Ventas, Inc. (VTR): Free Stock Analysis Report
 
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Digital Realty Trust, Inc. (DLR): Free Stock Analysis Report
 
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