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Digital Realty Trust Ousts CEO As It Seeks New Scale

NEW YORK (The Deal) -- Shares of data center REIT Digital Realty Trust Inc. (DLR - Get Report) dropped Tuesday after the company announced a management shake-up.

The board said after the close on Monday that it named CFO William Stein to temporarily replace CEO Michael Foust, while it seeks a new top executive who can lead the company to "the next level and scale of operational sophistication."

Shares of the San Francisco REIT fell as low as $50.10 on Tuesday morning, a 5% decline. By the afternoon, the stock had recovered some losses, and was down 1.26 cents, or 2.4%, to $51.51. It closed at $51.91. By midday Wednesday, the stock had hit a high of $52.95.

"We find the announcement surprising as it is sudden and effective immediately-and at the same time, not surprising as the company has struggled with weak stock performance for nearly two years," Jonathan Schildkraut of Evercore Partners Inc. wrote in a report.

Digital Realty is not the only data center operator with management in flux.

Large data center REIT DuPont Fabros Technology (DFT - Get Report) is seeking a replacement for co-founder and CEO Hossein Fateh.

Rackspace Hosting (RAX - Get Report), which is not a REIT, announced unexpectedly in February that CEO Lanham Napier would retire. Chairman and founder Graham Weston is interim CEO while the company seeks a long-term top executive.

Following Tuesday's losses, Digital Realty's market cap is about $6.6 billion. The company has close to $5 billion in long-term debt. UBS analyst Gabriel Hilmoe noted that Digital Realty has been down 21% over the past 12 months, while the MSCI Inc. index of U.S. REITs, which trades as RMZ, has been essentially flat.

Digital Realty stock "has languished in the midst of declining data center fundamentals, guidance reductions, accounting mishaps and questionable execution," he added.

The board did not say whether it would consider broader strategic changes alongside the executive search.

"Could this result in some sort of M&A activity?" Hilmoe asked. "Maybe, but who has the wherewithal or cash to step in and potentially takeout a $6.6B data center REIT?"

Peer Equinix Inc., of Redwood City, Calif., has business relationships with Digital Realty and also has plans to convert to a REIT. However, Hilmoe suggested that Equinix shareholders might balk at a deal with Digital Realty because of Digital's problems.

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