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Digital Realty Is a Blue-Chip REIT on Sale

NEW YORK ( TheStreet) -- The recent dividend selloff has created some good entry points for real estate investment trust investors, but true bargains -- with a wide margin of safety -- are harder to find. Still there's one blue chip that is becoming noticeably undervalued and the tailwinds are being driven by more than the whispers of Uncle Ben (Bernanke).

Digital Realty (DRL) -- a dominating global data storage REIT with 123 properties and over 23.1 million square feet -- has been the target of a Highfields Capital Management short squeeze. Since May 8, Digital has been under the microscope as the hedge fund contends that Digital's shares are worth only around $20, much less than the $59.89 pricing today.

The short thesis is essentially centered around a silly argument that Digital's earnings (or FFO in REIT-dom) aren't sustainable and that the San Francisco-based REIT is not accounting for certain cap ex-related expenses. It's not common for a blue-chip REIT to become the subject of a short play and I find Highfield's arguments to be extraordinarily stupid. Why?

Digital's growing revenue stream consists of over 2,000 leases with over 600 tenants. The diverse revenue includes many recognizable names such as CenturyLink (CTL), Equinix (EQIX), Facebook (FB), AT&T (T), Amazon (AMZN), Yahoo! (YHOO) and Morgan Stanley (MS).

As a pioneer of data storage, Digital was effectively able to build a wide moat first, ahead of the competition. That enabled the company to scale and create a fortress brand that is now over three times the size of all other competitors: CoreSite (COR), DuPont Fabros (DFT) and CyrusOne (CONE).

Digital's dividend policy of increasing its dividends paid by over 17% from 2005 through 2012 is amazingly sound and given the more recent drop in price ($59.89) I find Digital's dividend yield of 5.24% to be incredibly enticing.

In addition, a REIT with similar dividend characteristics would be trading at a much higher multiple and I find the data center king's valuation of 12.5 times earnings (P/FFO) to be a REAL DEAL. The short squeezer (Highfields) has made an openly stupid pitch that has created a buyer's dream.
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