On Friday, Scotiabank adjusted its stance on Digital Realty Trust (NYSE:DLR), moving from a "Sector Outperform" to a "Sector Perform" rating. The firm maintained its $157 price target for the data center real estate investment trust. The revision follows a period of aggressive asset sales by the company throughout 2023 and early 2024, which are anticipated to constrain funds from operations (FFO) per share growth this year.
The analyst at Scotiabank noted that while the guidance on FFO provided by Digital Realty Trust was more optimistic than their own estimate, it fell short of the broader market consensus. The forecast for core FFO per share (FFOPS) shows an expected increase of only 1% in 2024, attributed to the recent asset sales. However, a rebound is projected for 2025, with a predicted growth rate of 10% as the effects of the asset sales cycle diminish and new developments begin to contribute.
"Due to the stock™s strong performance and the diminished upside to our unchanged target price, we are downgrading our recommendation on DLR as we now see less upside in the stock over the short term especially as the company digests the impact of significant asset dispositions," said the analyst.
Despite the downgrade, Scotiabank remains positive about the long-term prospects of the data center sector. The firm's outlook suggests that Digital Realty Trust's earnings potential will eventually align with its share price, but this alignment may take time. The analyst expects the stock to potentially be range-bound in the short term while the company adjusts to the impacts of its significant asset dispositions.
The maintained price target of $157 implies that Scotiabank sees limited short-term upside for Digital Realty Trust's shares. This outlook is based on the current performance of the stock and the anticipated slow growth in core earnings. Investors are advised to consider the company's potential for a stronger performance in the following year when new developments are set to contribute to earnings.
InvestingPro Insights
As Digital Realty Trust (NYSE:DLR) navigates through a transformative period of asset sales, real-time data and insights from InvestingPro provide a deeper understanding of the company's financial health and market position. With a market capitalization of approximately $43.01 billion, Digital Realty stands as a significant player in the Specialized REITs industry. This is underscored by the company's substantial revenue growth over the past year, with a notable increase of 17.07% as of the last twelve months ending Q1 2023.
InvestingPro Tips highlight that analysts are optimistic about sales growth in the current year for Digital Realty Trust, despite the company trading at a high earnings multiple, with a P/E ratio of 49.54. This suggests that investors are willing to pay a premium for the company's earnings, which could be due to its status as a prominent player in its sector and consistent dividend payments for 20 consecutive years. Moreover, Digital Realty's liquid assets exceed its short-term obligations, providing financial stability.
The company's earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at $2.35 billion, with a growth of 5.85% over the last twelve months as of Q1 2023. Additionally, Digital Realty Trust is trading near its 52-week high, at 99.69% of the peak price, reflecting investor confidence. The InvestingPro platform offers even more detailed analysis, with a total of 11 InvestingPro Tips available for Digital Realty Trust, which can be accessed for those seeking comprehensive investment insights. Interested investors can use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, enhancing their investment strategy with valuable data and expert analysis.
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