Digital Realty Added To Bank Of America's US1 List

Michael J. Funk of Bank of America Merrill Lynch believes Digital Realty Trust, Inc. DLR's valuation is “attractive relative to the broader REIT universe, with higher projected growth.”

Funk maintains a Buy rating on the company, with a price target of $120.

US1 List

The analyst added the stock to the US1 list of top ideas due to Digital Reality Trust’s exposure to secular growth drivers in IT outsourcing, cloud adoption and IP traffic growth, best-in-class portfolio position, attractive valuation and expectations that the company would be the main beneficiary of “incremental capital flowing into data centers from REIT investors.”

“We believe Digital Realty is positioned to return to pre-2Q16 leasing activity in 2H16, which also supports a constructive view,” Funk explained.

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Well Positioned

The analyst also believes that the company is “uniquely positioned” to capture data center demand growth, which is likely to be driven by enterprise IT outsourcing, IP traffic growth and cloud computing.

“Customers increasingly demand a consistent global data center solution and DLR’s global footprint of 140 data centers should lead to outsized share of demand for cross border solutions, in our view,” Funk stated.

Discounted Valuation

The analyst attributed Digital Reality Trust’s discounted valuation to the relative novelty of data center REITs, as well as perception of technology risk that would usually not be associated with traditional REITs.

However, greater clarity regarding cloud services could drive revenue growth, while greater customer diversity and “a more rational approach to supply” would alleviate investor concerns.

At time of publication, Digital Realty was seen up 2.74 percent at $99.50.

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