A REIT at the Intersection of Technology and Real Estate

NEW YORK ( TheStreet) -- A recent announcement by a publicly traded real estate investment trust made me curious because the company said it specialized in "technology-related real estate."

What, I wondered aloud, was that?

Well, according to the company, that's property that contains "... applications and operations critical to the day-to-day operations of technology industry tenants and corporate enterprise datacenter users."

This includes the information technology departments of companies across a wide range of industries including Internet companies, manufacturers and financial-services firms.

The company is the aptly named Digital Realty Trust Inc. ( DLR), and on Tuesday evening it announced the pricing of a secondary offering of 10 million shares of common stock.

They were priced at $72.25 per share, for net proceeds of approximately $692.8 million after underwriting discounts and commissions and estimated offering expenses (or approximately $796.8 million if the underwriters' option to purchase additional shares is exercised in full).

Digital Realty said it granted the underwriters the option to purchase up to an additional 1,500,000 shares of common stock. The offering is expected to close on or about July 2, 2012.

DLR intends to contribute the net proceeds from the offering to its operating partnership, Digital Realty Trust, L.P., which said it intends to use the net proceeds from the offering to make a number of possible financial transactions and choices.

One possible use of the proceeds would be to fund part of the acquisition of a three-property data center portfolio located in the greater London area.

According to the company, the acquisition is called the Sentrum Portfolio.

Digital Realty Trust agreed to buy the three properties near London for around $1.1 billion, adding to its already existing portfolio of 102 properties.

"The Sentrum Portfolio will be purchased with cash, debt and a bridge loan", the San Francisco-based company said in a statement today.

Moody's Investor Service affirmed DLR's senior unsecured debt rating at Baa2 and said the rating outlook is "stable."

That's good news because it means the big London purchase isn't affecting the REIT's credit rating.

From an investor's standpoint, DLR, which has data centers in 31 countries, has seen its share price rise almost 10% in 2012. No doubt that's partly due to its remarkable rate of acquisitions.

The company announced on June 21 that it had also acquired a 269,000-square-foot data center in Dallas, Texas.

The one-year chart below of DLR underscores how well its shares, which currently yield around 4%, have performed.

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Since its Sept. 22, 2011 low of $51.75, it has soared as high as $76.04. It closed Tuesday at $72.84.

DLR has grown and skillfully managed its business to the point where it reported a profit margin (trailing 12 months) of 15% and an operating margin of 30% as of March 31, 2012.

As of the same date, its quarterly earnings growth (year over year) was an impressive 28%. Quarterly revenue growth increased by nearly 13% in comparison to last year's revenue numbers.

There are two obvious red flags. First is the payout ratio, which is more than 200%. Second is the debt the company has incurred. After the latest offering, it will total nearly $4 billion.

There aren't any directly comparable publicly traded REITs. But you could look at the numbers of office REIT Liberty Property Trust ( LRY) for an indirect comparison.

Liberty Property pays a 5.3% yield from its funds-from-operation (FFO). It has a payout ratio of 114% as of the first quarter 2012. It also reported total debt as of that quarter of $2.37 billion.

Its forward estimated price-to-earnings ratio is 13.29, vs. DLR's 14.54.

When you look at a one-year chart of shares of LRY and DLR, you'll see they've pretty much moved in tandem.

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My crystal ball is quite foggy on the near-term future for REITS like DLR.

If the European financial malaise continues to cause some deep hiccups in the U.S. stock market, you may have a chance to pick up shares at lower prices.

Back on May 21, DLR traded as low as $67.84. There's a decent chance of seeing that price or lower before too long.

At the time of publication, Courtenay had no positions in any securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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