Evaluation of Digital Realty Trust Inc.

PART A

1. Introduction
1.1. Digital Realty Trust inc.

Digital Realty Trust Inc. is real estate investment trust that leads in the provision of cloud and
carrier data centres, co-location, and interconnection solutions. The company is the world's
largest wholesale colocation services and data center solutions provider with over 130 secure
locations globally. It supports leading enterprises and service providers by providing a range
of data infrastructure including data centres, co-location, and interconnection solutions.

The company has operations in United States, Asia, Europe, Canada, and Australia. As of
December 2019, the company had 225 operating data centres which totaled 34.5 million of
rentable square feet across its operations centres.

Digital Realty Trust Inc. has membership to the Green Grid and has supported pioneer energy
efficient and conserving data center designs (Lohr, Steve, 2008).

As of 31st December 2020, the company had a total of 2,878 employees across its operational
centres. The distribution of the employees across the regions are as shown in the table below.

Region Number of Employees Contribution

North America 1,317 46%
Europe 1,426 50%
Asia Pacific 135 5%
Total 2,878 100%

Europe contributes 50% of the workforce of Digital Realty Trust Inc. with a total of 1,426
employees.
From an income perspective, Digital Realty Trust Inc. revenue has grown by approximately
82% over the past 5 years while net income, overally, reduced by 16% over the same period.

Figure 1: Digital Realty TRust Inc. revenue, net profit and

profitability margin (US$)
4,500,000,000 25.0%
4,000,000,000
3,500,000,000 20.0%
3,000,000,000
15.0%
2,500,000,000
2,000,000,000
10.0%
1,500,000,000
1,000,000,000 5.0%
500,000,000
- 0.0%
Dec-20 Dec-19 Dec-18 Dec-17 Dec-16

Total Revenue Net income Net Profit Margin

A breakdown analysis of the company’s revenue indicate that a large percentage of the
company’s revenue came from its rental and other services division which has been on
upward trend over the past 5 years, increasing 122% from US$1.746 billion in 2016.
 Figure 2: Distribution of Income by Revenue line (US$)
4,500,000,000
4,000,000,000
3,500,000,000
3,000,000,000
2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
-
Dec-20 Dec-19 Dec-18 Dec-17 Dec-16

Rental and other services Tenant reimbursements Fee income and other

The company’s total assets have grown by about 196% over the past 5 years, outweighing the
proportionate increase in the liabilities of the company which increased by about 149% over
the same period. Considering the total debt as a proportion of the total assets, it is observed
the company’s assets are largely financed through debt. The average proportion of debt to the
total assets has been about 53% over the same period.

Figure 3: Total assets, Total Liabilities & Debt to Equity ratio

40,000,000,000 70%
35,000,000,000 60%
30,000,000,000
50%
25,000,000,000
40%
20,000,000,000
30%
15,000,000,000
20%
10,000,000,000
5,000,000,000 10%

- 0%
Dec-20 Dec-19 Dec-18 Dec-17 Dec-16

Total assets Total liabilities Debt to Total assets ratio

1.2. Impact of recent news on the company’s stock performance

Date News Description Impact

17th May Interxion, a Unit of  VEXXHOST is a Canadian cloud
2021 Digital Realty Trust Inc. computing service provider
was picked by which picked Interxion to
VEXXHOST for provide support to its public and
expansion. private hybrid IT solutions
expansion across the world.
 The main objective of the
expansion was to expand its
infrastructure to meet the demand
of its rising customer base.
11th May Digital Realty Trust Inc.  The board of directors of Digital
2021 declaration of quarterly Realty Trust Inc. authorized cash
cash dividends. dividends as per the attached
schedule in table 2 below.
30 April Digital Realty Trust Inc.  The Q1 2021 core funds from
th

2021 outperforms Quarter 1 operations per share of $1.67

FFO estimates, raising outperformed Zacks Consensus
2021 view. Estimate of $1.59.
 Reported performance compares
favorably with Q1 2020 of $1.53.
 Indicates better than anticipated
revenue numbers.

Declared dividends (Payable on 30th June 2021)

No Type Dividend per

share
1 Common stockholders $ 1.160000
2 5.250% Series J cumulative redeemable preferred stock $ 0.328125
3 5.850% Series K cumulative redeemable preferred stock $ 0.365625
4 5.200% Series L cumulative redeemable preferred stock $ 0.325000

1.3. Impact of COVID 19 pandemic on Digital Realty Trust Inc.

During 2020, overally, real estate sector recorded one of the worst performance. Vanguard
Real Estate EFT declined by over 8% for the year despite S&P 500 index gaining 16% over
the same period. Not all real estate stocks performed badly despite the sector generally
recording weak performance.
Real Estate Investment Trusts, especially the Data center REITS, overally, performed better.
Comparing the performance of S&P 500 index and Digital Realty Trust Inc., it is observed
that Digital Realty Trust Inc. outperformed the index.

Chart Title
180.00 4,000.00
160.00 3,500.00
140.00 3,000.00
120.00
2,500.00
100.00
2,000.00
80.00

S&P 500
1,500.00
DLR

60.00
40.00 1,000.00

20.00 500.00

- -
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202 202
0/ 4/ 7/ 1/ 7/ 2/ 5/ 0/ 5/ 0/ 4/ 9/ 3/ 8/ 1/ 6/ 1/ 3/ 9/ 4/ 8/ 1/ 5/
/3 /1 /2 /1 /2 /1 /2 /1 /2 /1 /2 7/ 6/2 6/ 5/2 5/ 4/2 4/ 3/1 3/ 2/1 1/3 1/1
12 12 11 11 10 10 9 9 8 8 7

DLR* S&P 500 index*

Descriptive statistics

  DLR* S&P 500 index*

Mean 0.107502% 0.080992%
Standard Error 0.172458% 0.136885%
Median 0.163078% 0.237533%
Standard Deviation 2.737691% 2.172976%
Sample Variance 0.074950% 0.047218%
Count 252 252

Over the period, Digital Realty Trust Incl. daily stock returns averaged 0.1075% which was
higher than that of the S&P 500 index over the same period.

When the performance was adjusted for risk, we observe that still Digital Realty Trust Inc.
outperformed the S&P 500 index. The risk adjusted performance, using Sharpe ratio, are as
shown in the table below.
 Risk-adjusted Sharpe ratio
DLR
0.0393
S&P 500 index
0.0373

Generally, during the COVID-19 period, especially over the year 2020, large proportion of
people who normally from office (commercial real estate sector) were working from home.
This trend generally benefits data centres. People working remotely heavily rely on cloud-
based infrastructure programs to enable them work from home which boosts the demand for
data center services across the world. Digital Realty Trust Inc. all data centres across the
globe remained actively operating throughout the pandemic period and this saw the
company’s revenue grow by 27% in the third quarter of 2020.

1.4. GICS sector, industry, and sub-industry

1.4.1. Digital Realty Trust Inc.

Title Description
Name of the company Digital Realty Trust Inc.
Global Industry Standard Sector Real Estate
(GICS)
Industry/ Sub-industry Specialized REITS

1.4.2. American Tower Corp.

American Tower Corporation was founded 1995 and is headquartered in Boston, US. It is
among the leading real estate investment trusts. The company is a leading independent
operator and developer of wireless and broadcast communication real estates. It has global
operations in approximately 187,000 communication sites which include over 43,000
properties in United States and Canada and the remaining properties distributed across the
globe.

The company is a specialized provider of leasing space on wireless and broadcast towers and
offer customized services and solutions through the company’s in-building systems, managed
rooftops, outdoor distributed antenna systems and other services that speed up network
deployment.

1.5. Stock information analysis

1.5.1. Digital Realty Trust Inc. and its competitor

Digital Realty Trust Inc. American Towers Corp.

Current stock price $151.25 $250.82
Market Capitalization $42.59B $114.05B
Beta (5 Year, Monthly) 0.11 0.22
P/E ratio (TTM) 96.83 58.19
EPS (TTM) $1.56 $4.31
Forward dividend & yield $4.64 (3.09%) $4.96 (2.02%)
Ex-Dividend date 13th June 2021 11th April 2021
Source: Yahoo Finance

1.5.2. Digital Realty Trust Inc., competitor, and industry comparison

P/E ratio
Digital Realty Trust Inc. 96.83
American Towers Corp. 58.19
Industry (Reits) 37.32
Source: Yahoo Finance & Guru Focus

PART B

2. Financial data – company and competitor /9 marks

2.1. S&P 500 index stock annual returns

Geometric Arithmetic mean Standard deviation

mean
5-Year period #NUM! 13.18% 13.06%

10-Year period #NUM! 11.46% 11.67%

 20-Year period #NUM! 6.21% 16.41%

2.2. Current Government bond rates

Yield Prev. High Low Change %

Change
U.S. 1Y 0.043% 0.041% 0.043% 0.043% 0.00002 5.12%
U.S. 5Y 0.815% 0.815% 0.815% 0.815% -0.000004 -0.05%
U.S. 10Y 1.628% 1.634% 1.628% 1.628% -0.00006 -0.34%
U.S. 20Y 2.245% 2.254% 2.245% 2.245% -0.00009 -0.39%
U.S. 30Y 2.334% 2.341% 2.334% 2.334% -0.00007 -0.32%

2.3. 10 Year US Government bond rates over the past 10 years

Graph of 10Y US Government bond (yields)

4.0000

3.5000

3.0000

2.5000

2.0000

1.5000

1.0000

0.5000

-
20 20 20 19 19 18 18 18 17 17 16 16 15 15 15 14 14 13 13 13 12 12 11 11
e c- Jul- eb- ep- pr- ov- un- an- ug- ar- ct- ay- ec- Jul- eb- ep- pr- ov- un- an- ug- ar- ct- ay-
D F S A N J J A M O M D F S A N J J A M O M

Why do you think this has occurred? Do you think interest rates will go up or down in the
future? Discuss with references to appropriate academic literature.
2.4. Digital Realty Trust Inc. average annual returns and standard deviations

Geometric mean Arithmetic Standard deviation

mean
5-Year #NUM! 18.37% 12.88%
10-Year #NUM! 16.95% 19.43%

Interpret these numbers for your manager.

2.5. Digital Realty Trust Inc. beta (over the last 10 years)

Digital Realty Trust Inc. beta

Correlation between DLR and S&P 500 0.5015
index
Digital Realty Trust Inc. Std. deviation 0.1943
S&P 500 Std. deviation 0.1641
Digital Realty Trust Inc. Beta 0.5937

Pre-Covid period beta

Pre-Covid period (2011-2018)

Correlation between DLR and S&P 500 0.4402
index

Digital Realty Trust Incl Std. deviation 0.2192

S&P 500 index Std. deviation 0.1113
Beta 0.8668

Compare your calculated beta to the beta in your stock quote. Are these values the same or
different? Explain and discuss. Calculate a beta for the subperiod 2011-2018 (pre-COVID-19
pandemic). Compare and discuss the stability of your betas with references to appropriate academic
literature.

Compare the annual returns and standard deviations of your company with the market index.
Discuss and relate this to your chosen company’s beta(s) using your results from parts
2.6. Required rate of return on equity for Digital Realty Trust Inc.

The required rate of return of the stock can be calculated using the formula below

E(Ri)=Rf+Bi*(E(Rm)-Rf)

Where:

E(Ri); required rate of return on the stock

Rf; risk-free rate

Bi; beta of the stock

E(Rm); expected return on S&P 500 index (market return)

Now using the above formula and the different US Government bond rates as risk-free rates,
the required rate of return on the stock is as shown in the following tables.

i. Use of 1 Year US Government bond rate as risk-free rate

Key input/Output
Risk-free rate 0.043%
Beta 0.8668
Market return 11.46%
Required rate of return 9.93%

The required rate of return, based on the 1 Year US Government bond rate as the risk-free
rate is 9.93%

ii. Use of 5 Year US Government bond rate as risk-free rate

Key input/Output
Risk-free rate 0.815%
Beta 0.8668
Market return 11.455%
Required rate of return 10.037%
The required rate of return, based on the 5 Year US Government bond rate as the risk-free
rate is 10.037%

iii. Use of 10 Year US Government bond rate as the risk-free rate

Key input/Output
Risk-free rate 1.628%
Beta 0.8668
Market return 11.46%
Required rate of return 10.15%

The required rate of return, based on the 10 Year US Government bond rate as the risk-free
rate is 10.15%

iv. Use of 20 Year US Government bond rate as the risk-free rate

Key input/Output
Risk-free rate 2.245%
Beta 0.8668
Market return 11.455%
Required rate of return 10.228%

The required rate of return, based on the 20 Year US Government bond rate as the risk-free
rate is 10.228%

v. Use of 30 Year US Government bond rate as the risk-free rate

Key input/Output
Risk-free rate 2.334%
Beta 0.8668
Market return 11.455%
Required rate of return 10.240%

The required rate of return, based on the 30 Year US Government bond rate as the risk-free
rate is 10.240%

Generally, we see that the required rate of return increases as the as the time to maturity of
the US Government bonds increase, that is, the required rate of return is higher for the 30-
Year US Government bond rate being used as the risk-free rate and lowest for the case of 1
Year US Government bond rate. This is summarized in the Figure below.

Variation of the required rate of return with risk free rate

10.30%

10.20%
Required Rate of Return

10.10%

10.00%

9.90%

9.80%

9.70%
0.000% 0.500% 1.000% 1.500% 2.000% 2.500%
Risk-Free Rate

PART C

3. Stock valuation
3.1. Average annual growth rate of dividends

Over the past 10 years, Digital Realty Trust Inc. has made dividends payouts to its
shareholders. The Figure below shows the annual dividends that the company has paid to its
shareholders between 2011 and 2020
 Dividends and annual growth
5.00 10.00%
4.50 9.00%
4.00 8.00%

Annual Growth rates

3.50 7.00%
Dividends ($)

3.00 6.00%
2.50 5.00%
2.00 4.00%
1.50 3.00%
1.00 2.00%
0.50 1.00%
- 0.00%
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011
Axis Title

Dividends ($) Growth

From the Figure above, overall, there seems to be no outlier in the distribution of the dividend
payments across the years. However, 2015 recorded the lowest dividend payment while 2018
recorded the highest level of dividend payments over our sample period. The arithmetic and
geometric average annual growth rate of dividends are as shown in the table below.

Annual Growth rate

Arithmetic mean 5.72%
Geometric mean 5.33%

3.2. The arithmetic and geometric average annual growth rate of net income
3.2.1. Net profit margin

Over the last 10 years, Digital Realty Trust Inc. has remained profitable generating an
average of net profit margin of 13.9%. over the recent 5 years as shown in the Figure below.

Net Profit Margin

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
Dec-20 Dec-19 Dec-18 Dec-17 Dec-16
In terms of annual growth of the net income, the growth rate has remained a little bit unstable
over the last 10 years. On average, the annual growth rate of the net income of the company
was 22.44% year on year. However, the standard deviations of these annual growth rates was
extremely high, at about 56%, showing the high instability in the growth of the year on year
net income of the company.

Net income & Annual Growth rates

700,000,000 100.00%
600,000,000 80.00%
500,000,000 60.00%
40.00%
400,000,000
20.00%
300,000,000
0.00%
200,000,000 -20.00%
100,000,000 -40.00%
0 -60.00%
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011

Net Income (US $) Annual Growth

3.2.2. The arithmetic and geometric average annual growth rate of net income

Annual Growth rate

Arithmetic mean 22.44%
Geometric mean #NUM!

Are there any year(s) that are anomalous? Discuss why this might have occurred

3.3. Sustainable Growth Rate (g)

3.3.1. ROE

Over the last 10 years, the ROE remained relatively stable year on year, averaging 6.03% per
annual with a standard deviation of 2.52%. Critical to note is that the ROE for Digital Realty
Trust Inc. has generally reduced over the period from a ROE of 6.8% in 2011 to 2.05% in
2020. This is illustrated in the Figure below.
 Digital Realty Trust
Return on Equity (ROE)
10.00%
8.88%
9.00% 8.47%
8.00%
7.00% 6.70%
6.07% 6.23% 6.28%
6.00% 5.25%
5.00%
4.00% 3.46%
3.00% 2.48%
2.05%
2.00%
1.00%
0.00%
Dec-20 Dec-19 Dec-18 Dec-17 Dec-16 Dec-15 Dec-14 Dec-13 Dec-12 Dec-11

3.3.2. Per Share dividend and EPS

Generally, Digital Realty Trust Inc., based on the historical performance of earnings per share
(EPS) and cash dividend per share, paid higher rates than the ESP. While noting that the
dividend payment per share have been consistently rising year on year, the EPS performance
has been unstable. For instance, in the year 2020, Digital Realty Trust Inc paid dividends of
US$4.48 per share while in the same year, the EPS was paltry US$1.01. This type of dividend
policy could be unstainable for the company in the long run.

Digital Realty Trust Inc.

EPS and Dividend per share over the last 10 years
5.00
4.48 4.32
4.50
4.04
4.00 3.72
3.52 3.40
3.50 3.32
3.12
2.92
3.00 2.72
2.50 2.37 2.20 2.12
2.00 1.56 1.48 1.33
1.50 1.21
1.01 0.99 0.99
1.00
0.50
-
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011

Per Share Dividend ($) EPS (US$)

3.3.3. Sustainable Growth Rate

Sustainable growth rate generally refers to the maximum rate of growth that a corporation can
sustain with no having to require external financing to sustain the growth. The sustainable
growth rate of the company can be calculated as follows:

g=b*ROE

Where g; sustainable growth rate, b; earnings retention ratio, ROE; return on equity

Earnings retention ratio=(1-dividend payout ratio)

Based on the historical per share dividends, ROE and the dividend payout ratio, the annual
sustainable growth rates of Digital Realty Trust Inc. are as shown in the table below.

Year Per Share EPS (US$) Dividend b ROE g

Dividend ($) payout ratio
2020 4.48 1.01 4.44 - 3.44 2.05% -7.0%
2019 4.32 2.37 1.82 - 0.82 6.07% -5.0%
2018 4.04 1.21 3.34 - 2.34 3.46% -8.1%
2017 3.72 0.99 3.76 - 2.76 2.48% -6.8%
2016 3.52 2.20 1.60 - 0.60 8.47% -5.1%
2015 3.40 1.56 2.18 - 1.18 6.70% -7.9%
2014 3.32 0.99 3.35 - 2.35 5.25% -12.3%
2013 3.12 2.12 1.47 - 0.47 8.88% -4.2%
2012 2.92 1.48 1.97 - 0.97 6.23% -6.1%
2011 2.72 1.33 2.05 - 1.05 6.28% -6.6%

Dividend payout ratio refers to the total amount of dividends which are paid out to
shareholders as a proportion of the net income of the company. If the payout ratio is higher
than 1.0, then it implies that the company is paying more money to shareholders than it is
able to generate from its operations. The payout ratio is a good indicator of the money the
company is retaining to supports its growth through reinvestment.

The dividend payout ration can be used to assess the sustainability of dividends the company
is paying to its shareholders. Considering the historical performance of Digital Realty Trust
Inc., overall, the company pays higher dividends per share than its EPS. Over the past 10
years, the payout ratio of the company averaged 260% per annum which means that the
company is paying 160% per share to shareholders over the EPS that the company can
generate from its operations.
 Dividend payout ratio
500%
450%
400%
350%
300%
250%
200%
150%
100%
50%
0%
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011

Additionally, over the past 10 years, Digital Realty Trust Inc. recorded negative sustainable
growth rates which averaged -6.91% year on year. The negative sustainable growth rate
suggests that the company is ineffective in maximizing its sales efforts and may be focusing
on low-margin products and generally has not put in place adequate mechanisms to manage
its inventory, receivables, and payables accounts in an effective way.

Digital Realty Trust Inc.

Sustainable Growth Rate (g)
0.0%
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011
-2.0%

-4.0%

-6.0%

-8.0%

-10.0%

-12.0%

-14.0%

3.4. Intrinsic value of the company

3.4.1. Free Cash Flow

Based the historical performance of the company, the net free cash flow, was determined as
net income net of any non-cash flow items

(C) PVGO and sensitivity analysis /8 marks

(D) Final recommendation /15 marks

Presentation and style of report

References

Lohr, Steve (June 17, 2008). "Demand for Data Puts Engineers in Spotlight". The New York
Times