Value in REITs: Digital Realty and Regency Centers

02/20/2020 5:00 am EST

Focus: REITS

Jason Clark

Contributing Editor, The Prudent Speculator

Jason Clark is a contributing editor to the industry-leading, value-oriented advisory service, The Prudent Speculator. Here, he looks at two recommendations in the real estate investment trust (REIT) sector.

Data center REIT Digital Realty Trust (DLR) had core FFO (funds from operations) of $1.62 per share in Q4, versus the consensus analyst estimate of $1.58. The REIT had revenue of $787.5 million, which fell a bit short of the average forecast of $791.2 million, though bookings for the period were better than expected.

The company that doesn’t provide guidance and anagement didn’t offer any forecasts for 2020, which didn’t truly surprise us given the numerous moving pieces of multiple transactions of which it is in the midst.

DLR announced in October that it will combine businesses with InterXion, a European provider of carrier and cloud-neutral colocation data center services.

While there are some InterXion investors that are reportedly not super happy with the deal, we see little reason why it won’t occur. After the transaction’s completion, the combination should be accretive to the long-term growth trajectory of the combined organization and will establish a global platform that should lend itself to long-term value creation for shareholders.

Analysts expect funds from operations (FFO) to reach almost $7.50 per share by 2022, and shares of DLR offer a current dividend yield of 3.3%. Our target price has been bumped up to $141.

Regency Centers (REG) reported Q4 financial results that were better than expected. The REIT said its Funds from Operations (FFO) for the period were $1.00 per share, versus the consensus analyst estimate of $0.98. Revenue for the quarter came in at $228.7 million, versus the average forecast of $220.7 million.

Regency introduced initial 2020 full-year FFO guidance of $3.90 to $3.93, which was largely inline with investor expectations. However, management feels like the company should get back to producing 3% same-store net operating income growth and 4% FFO growth in the near future.

We continue to like that Regency’s national portfolio of shopping centers is primarily anchored by productive grocers located in affluent and attractive more-populated metro areas.

Despite having grocery store tenants and other service tenants that drive foot traffic to its centers (fitness centers, restaurants, etc.), REG is still susceptible to tenant bankruptcies and store closings, but there is a lot to like as 95% of its properties are leased, while the company generated about $169 million of free cash flow last quarter.

We believe that brick-and-mortar retail is very much alive, especially with many retailers using their stores as local shipment centers. REG’s board also just boosted the dividend by 1.7%, and the yield is now 3.7%. Our target price for Regency shares now stands at $90.

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