Digital Realty, a leading data center operator, has made significant progress in its efforts to bolster its financial position. The company has been focusing on expanding its data center operations to take advantage of the growing demand driven by digital transformation and artificial intelligence. However, due to its stretched financial profile, accessing capital for growth has become increasingly challenging. This has raised concerns about the sustainability of its dividend.
To address these concerns, Digital Realty has been executing a comprehensive capital recycling strategy worth around $2 billion. The company recently achieved a major milestone in this plan, making its 4.2% dividend yield more secure.
As part of its expansion efforts, Digital Realty is set to invest between $2.3 billion and $2.5 billion this year to develop new data center facilities. The company has been working on a capital plan to fund this expansion without further deteriorating its financial profile.
Compared to its peers in the digital infrastructure REIT sector, Digital Realty has a higher dividend payout ratio and an elevated leverage ratio. This has limited its flexibility to borrow money for development projects, especially with rising interest rates making debt more expensive. Furthermore, the company’s stock price has faced significant downward pressure, making stock sales less viable.
To overcome these challenges, Digital Realty has pursued a capital recycling plan with the aim of raising between $1.5 billion and $2.5 billion through asset sales or joint ventures. By doing so, the company can limit its need to issue new debt to a range of $1 billion to $1.5 billion.
The successful execution of this capital plan is vital to maintaining the company’s dividend. A failure to do so could have prompted a dividend cut, allowing Digital Realty to retain more cash for capital projects and strengthen its balance sheet.
Fortunately, Digital Realty has recently made significant progress in its capital plan. The company has announced several joint ventures and asset sales, garnering proceeds of more than $2 billion. One notable joint venture is with alternative asset manager TPG, whereby TPG Real Estate will acquire an 80% interest in three data center properties in Northern Virginia. This deal values the portfolio at $1.5 billion and will provide Digital Realty with $1.3 billion in gross proceeds to repay debt.
In addition to the TPG joint venture, Digital Realty has formed partnerships with GI Partners and Brookfield Infrastructure and Reliance Industries. These joint ventures involve the sale of interests in data center properties and the development of data centers in India, respectively.
Digital Realty’s success in executing its capital recycling strategy has significantly improved its financial position. The company now expects to receive proceeds ranging from $2.2 billion to $3 billion from joint ventures and asset sales this year, while issuing only $740 million of new long-term debt. Combined with equity raised through stock sales, this will bring its net leverage ratio to a more comfortable level of 6.3.
Although there is still work to be done, Digital Realty’s progress in its capital recycling strategy has alleviated concerns about a potential dividend cut. The company’s high-yielding dividend appears much safer, offering stability to investors. With a strengthened balance sheet and reduced leverage, Digital Realty is well-positioned to pursue further growth opportunities in the rapidly expanding data center market.
