NEW YORK ( TheStreet) -- Digital Realty ( DLR) saw Funds From Operations (or FFO) come in at $147.4 million ($1.10 per share), down slightly from $148.9 million ($1.13 per share) in the year-ago quarter. The company said the third-quarter results included a non-cash, straight-line rent expense adjustment of 7 cents per share related to the company's leasehold interest at 111 Eighth Ave. in New York City.This onetime adjustment was related to accounting for a ground lease and Digital states that the change (in accounting) should have been made at the time of a lease extension in fall 2010 (three years ago). Effectively, the straight-line adjustment should have resulted in greater accounting charges for the past three years. Clearly, Digital was transparent by admitting the mistake. However, the impact to credibility hit the shares hard as this is not the first time that Digital has gotten clobbered by an earnings miss. More important than the severity of the earnings hiccup is the shattering of investors' erstwhile growth dreams -- the more enticing the dream reflected by the lower valuation (P/FFO) ... the larger the disappointment the greater the wake-up call. But considering the earnings miss this week, should Digital Realty still be a Buy? The volatility has rocked the boat and the big question is will Digital return to the glory days when the "first mover" in data storage held a glamorous lead noted for robust tenant demand, low supply, and compelling capital allocation. We all know that Digital enjoyed a virtuous cycle of strong earnings performance and total returns with an enviable dividend record:
In closing, truthfulness is the bedrock of all social and economic arrangements. I believe in Digital Realty and although the accounting changes were poorly timed, I am standing behind the company. The fundamentals remain sound (although I am concerned with the rising costs of capital) and the dividend appears safe. Remember, I own a diversified REIT portfolio and my allocation with Digital Realty is around 5% -- diversification is a must. After discussing the latest results with Digital management (later today), I may consider buying into the weakness. Digital is trading at $46.70 -- down almost 15% in two days. There is no question that two consecutive quarterly earnings hiccups is upsetting and I believe that the only way to win over investors is to provide consistent and honest earnings guidance. I'm giving Digital Realty another chance to prove itself.
At the time of publication, Brad Thomas was long DLR. Follow @swan_investor This article was written by an independent contributor, separate from TheStreet's regular news coverage.