Digital Realty Trust

I've been looking at good dividend plays that both guarantee a decent dividend yield, safety of principal and some upside in terms of capital gains.

As such, I've been digging through REITs. As a sector, they have been crushed by the housing downturn. Many of the REITs dealing in retail or housing are on the verge of bankruptcy. Others have gone under, eg GGP.

However, amid this rubble, I found a few gems. One of them is Digital Realty (NASDAQ: DLR). They build and lease data centers. Data centers generally serve as internet gateway centers, corporate data centers, technology manufacturing properties or offices of tech companies. The key point to note is that these centers are very hard to move once set up. This leads to a high rate of renewal and therefore stability of income.

Going through the past 10Ks, here are the salient points:

1. A key revenue driver is the rental income. That can be further broken down into on-going leases, new leases, lease expirations, renewals and property acquisitions.

2. Tenant Reimbursement is another key revenue driver. Tenants reimburse DLR for part of the real estate taxes, common area maintenance, and some other recoverable costs.

3. $53M out of $404.6M in annual rent is expiring in the next 2 years (13.1%). Depending on market conditions, we might see a dip in same store revenues over the next 2 years.

What attracts me to this company is the preferred stock. The Series B is trading at $17.82, yielding 11.9%. The common stock is yielding 3.6% dividend. Par value is $25, implying a potential capital gains upside of 28.7% upside. This is awesome considering that the dividend is cumulative, protected from cuts and must be paid before common stock.

The one significant downside is the lack of liquidity in the preferred. The 3 month trading volume is negligible. If you need to get out of the position in a pinch, you’re going to be in trouble.

Introductions

Hi

Shaun here. I'm starting a blog about value investing. I'd love to share ideas about investing and hear some of your comments.

A little bit about myself - I've been a value investor for a while now, since 2000. What really attracts me to value is that it makes sense - Value investors buy good businesses at fair prices. That has been a hallmark of my investing philosophy. I tend towards simple, easy to assess businesses selling for cheap prices. Under current market conditions, there are many of these businesses to be had.

If my investing philosophy appeals to you, do come back and check out my posts as I analyze some of my investment ideas.

Shaun