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Key Factors to Impact Digital Realty's (DLR) Q3 Earnings

Digital Realty Trust DLR is scheduled to release third-quarter 2020 earnings on Oct 29, after the bell. While the company’s results will likely reflect year-on-year growth in revenues, funds from operations (FFO) per share might display a decline.

In the last reported quarter, this San Francisco, CA-based data-center real estate investment trust (REIT) delivered a positive surprise of 4.05% in terms of FFO per share. Decent leasing activities and strong signed total bookings aided the company.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on three occasions, and missed in the other, the average beat being 1.94%. This is depicted in the chart 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

Demand for space at data-center REITs’ properties has been shooting up on growth in cloud computing, Internet of Things, artificial intelligence and big data, and an increasing number of companies opting for third-party IT infrastructure.

The heightening reliance on technology in the wake of the pandemic has now been an added advantage, thanks to the work-from-home trend, e-retail and e-learning gaining popularity, spurring demand for data-center space. Therefore, following an impressive first-half 2020, data-centers REITs are expected to have enjoyed strong leasing in the third quarter as well.

Therefore, Digital Realty is likely to have gained from solid fundamentals of the data-center market in the to-be-reported quarter. The full spectrum of data-center solutions across a global platform is likely to have helped the company lure tenants, with several having multiple locations across the portfolio.

The data-center REIT has also been banking on acquisitions and development efforts for building a premium portfolio of high-quality facilities located across North America, Europe, Latin America, Asia and Australia. These are likely to have contributed to its performance during the quarter in review.

In August, Digital Realty announced that it completed the expansion of its One Century Place facility, also known as TOR1, in July. The expansion is anticipated to add 6,000 square feet of space and 1,500 kilowatts of colocation capacity in greater Toronto. In September, the company announced that its unit — Interxion — has acquired Altus IT, the leading carrier-neutral data center provider in Croatia and a 3.6-acre land parcel in its Madrid campus.

The Zacks Consensus Estimate for quarterly total revenues is $996.6 million, indicating a 23.6% year-over-year increase. The consensus mark for revenues from rental and other services is pegged at $703 million, suggesting an increase from the prior quarter’s $698 million. Moreover, interconnection and other revenues are currently pegged at $86 million, higher than the prior quarter’s $85 million.

Digital Realty’s activities during the soon-to-be-reported quarter were adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the third-quarter FFO per share moved up a cent to $1.48 in a week’s time. However, it indicates a decline of 11.4%, year on year.

However, given the solid growth potential in the data-center real estate market, competition has intensified in the company’s markets. This is likely to have resulted in aggressive pricing pressure in the quarter to be reported.

Here is what our quantitative model predicts:

Our proven model predicts 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 chances of a FFO beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Digital Realty carries a Zacks Rank #2 and has an Earnings ESP of +1.13%.

Other Stocks That Warrant a Look

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

National Storage Affiliates Trust NSA, scheduled to report quarterly numbers on Nov 5, currently has an Earnings ESP of +4.88% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Equinix, Inc. EQIX, slated to release results on Oct 28, has an Earnings ESP of +0.14% and carries a Zacks Rank of 3, currently.

Ventas, Inc. VTR, set to announce earnings figures numbers on Nov 6, has an Earnings ESP of +2.03% and carries a Zacks Rank of 3, at present.

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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