Digital Realty: Technology and real estate

REITs should be on the radar of every income investor. Don't overlook them.

By TheStockAdvisors Mar 14, 2012 1:39PM
By Stephen Leeb, editor Income Performance Letter

Digital Realty Trust (DLR), which owns and manages technology-related real estate, ended 2011 on a high note; it remains a safe income play with one of the best growth profiles in the REIT space.

The key for Digital last year was its foray into the Asian Pacific markets (34% of new leases in terms of footage, notably Singapore and Australia), where rates are substantially higher.

For example, the average rate per square foot for turnkey data centers leased during the quarter was $178 in the U.S., but $232 in Asia.

Demand for data center space in the Asia-Pacific region is estimated to be three to four times supply (hence the stronger pricing). Digital's current presence there is still relatively small, but it expects to increase investments in the region.

The company also provided per share funds from operations (FFO) guidance of $4.34 to $4.48 for 2012; the midpoint represents an increase of approximately 9% over 2011 figures.

For income-oriented investments like real-estate investment trusts (REITs), growing cash flow is a good thing. Digital tends to be conservative when it comes to guidance, so we expect actual results to be in the upper end of its stated range.

Overall, REITs should be on the radar of every income investor. Don't overlook them; they deserve a place in most portfolios.

Low borrowing costs are a big positive. Second, new construction is still limited. REITs find the competitive landscape different from what it was a few years ago: no overbuilding, and the number of new entrants to the industry is relatively limited.

Third, if there is a sector that stands to benefit greatly from an improving economy, real estate is it. By extension, the REITs -- companies that own and operate income-generating real estate -- will be natural beneficiaries of the trend as well.

We look for the REIT sector to remain among the leaders in terms of dividend generation and continue to recommend the group as part of our total return strategy.

Meanwhile Digital Realty has easily outperformed its REIT peers. Investors are currently rewarded with $2.72 per share in dividends annually.

Digital boasts a three-year dividend growth rate of 29%, and already hiked its payout 7.4% in mid-February. The REIT currently provides a yield of over 4%.

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