This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Digital Realty Is a Blue-Chip REIT on Sale

Stocks in this article: DLR

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.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,677.90 +216.58 1.32%
S&P 500 1,950.82 +23.71 1.23%
NASDAQ 4,452.7920 +69.9450 1.60%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs