Prediction: This Data Center REIT Could Be a Top Dividend Play in the AI Era

Digital Realty Trust (DLR), a data center REIT, offers investors a balanced exposure to AI growth and income. Following strategic divestitures and facing macro headwinds that temporarily impacted AFFO per share and paused dividend hikes, DLR projects 6-7% constant-currency core FFO growth for 2025, alongside improved occupancy. With a 2.8% dividend yield and trading at approximately 24 times this year's core FFO, DLR is positioned to benefit from declining interest rates and the secular expansion of cloud computing and AI, which are expected to drive AFFO growth and enable future dividend increases.

Analysis

Digital Realty Trust (DLR) strategically divested non-core data centers and engaged in joint ventures in 2023-2024, streamlining its portfolio from 316 data centers in 2022 to 308 in 2024. This move, aimed at focusing on higher-growth hyperscale facilities, occurred amidst macro headwinds including higher interest rates and increased operating costs. Consequently, DLR's adjusted funds from operations (AFFO) per share declined from $6.25 in 2021 to $5.84 in 2023 before recovering to $6.11 in 2024, leading to a pause in annual dividend increases.

Despite recent challenges, DLR's management projects a robust outlook for 2025, anticipating constant-currency core FFO growth of 6-7% to between $7.10 and $7.20 per share. This positive guidance is supported by an expected improvement in the year-end occupancy rate by 100-200 basis points. The company is poised to benefit from the secular expansion of cloud computing and artificial intelligence markets, which are expected to drive future AFFO per share growth.

Currently, DLR trades at approximately 24 times its estimated 2024 core FFO, offering a 2.8% dividend yield, which is lower than the 10-year U.S. Treasury's 4% yield. The AFFO payout ratio, at 79.9% in 2024, remains below 100%, indicating dividend sustainability. Anticipated declining interest rates are expected to narrow the yield gap, reduce macro headwinds, and lower expansion costs, potentially enabling renewed dividend growth.

Key Decisions for Investors

• Consider Digital Realty Trust for balanced growth and income exposure to the AI sector, given its strategic focus on hyperscale data centers and sustainable dividend payout.
• Monitor interest rate trends closely, as declining rates are a key catalyst expected to enhance DLR's dividend appeal, reduce operational headwinds, and facilitate cheaper expansion.
• Evaluate DLR's projected 6-7% constant-currency core FFO growth for 2025 as a strong indicator of improving fundamentals and potential for future dividend increases.