Our search for value-oriented stocks led us to the Real Estate Investment Trust (REIT) sector and Digital Realty Trust (tkr: DLR). The company manages 210+ data centers in 14 countries for 2,300+ customers globally while bringing in over $3 billion of annual revenue. They provide a turnkey solution to enable the deployment of offsite IT infrastructure that can scale with company growth. Digital Realty owns the buildings and provides multiple power and cooling systems, which are critical components to the reliability of data centers, and is able to execute on a customized data center solution for medium to large deployments in a matter of weeks.

Digital Realty’s three core offerings include wholesale data centers (77% of revenues), colocation data centers (13% of revenues) and connectivity (10% of revenues). Wholesale data centers are vast spaces (either a suite within a larger building or the entire building itself) leased to companies with only the space and power provided. Colocation or retail data centers rent out space in increments as small as a cage or cabinet and can scale up from there. The benefit of colocation is that multiple tenants can be hosted within the same building and there is an opportunity for connectivity.

Interconnection is an IT strategy that enables companies to exchange data directly, privately and securely. This strategy is often used to minimize bandwidth costs, increase security, reduce latency and help companies operate more efficiently. Colocation and connectivity services offer upside opportunities for Digital Realty, generating revenue growth and higher margins.

Wholesale data center providers in particular are seeing pricing pressures from large companies as these companies push towards more favorable contracts, though it is unlikely these large companies could easily switch data center providers due to extremely high switching costs. Despite this, recent strategic international expansions and land acquisitions have helped Digital Realty to diversify away from slower North American wholesale data center markets. These acquisitions have expanded Digital Realty into new markets around the world and broadened the company’s product offerings.

Digital Realty is poised to benefit from an increase in demand for colocation and connectivity around the world. Their contracts average at least five years, which provides more stable and predictable revenues, while also realizing cost advantages from scale and property ownership. Digital Realty’s focus on sustainability and efforts to create more energy efficient data centers benefit both their customers and the environment. The company pays a solid dividend of 3.5% and management expects positive momentum and acceleration to carry on through the remainder of the year. REITs have proven to be more resilient late in the economic cycle and during recessions, outperforming the S&P 500 by 7% since 1991, which is yet another reason why we anticipate Digital Realty will be a solid holding as we begin to see warnings signs of a potential economic downturn.

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