This AI-Focused Real Estate Stock Beat the S&P 500 in the First Half of 2024. Is It Still a Buy?

Core Viewpoint - Digital Realty Trust has transformed from a struggling entity to one of the best-performing real estate investment trusts (REITs) due to the surge in demand for data centers driven by the artificial intelligence (AI) boom [1][2][8] Company Performance - In 2024, Digital Realty has achieved a total return of 20%, significantly outperforming the S&P 500 and the overall real estate sector, which only saw a 1% return [2] - The company operates over 300 data centers globally and serves more than 5,000 customers, positioning itself as one of the largest REITs in the world [5] Market Dynamics - The demand for AI applications has led to a substantial increase in the need for data center capacity, with the potential to more than double global data center capacity over time [7][8] - Nvidia reported a remarkable 262% year-over-year revenue growth in its AI chip segment, highlighting the increasing reliance on data centers for AI processing [3] Financial Health - Digital Realty has a record backlog of leases yet to commence, indicating strong future revenue potential [6] - The company expects core funds from operations (FFO) to grow by the end of 2024, despite ongoing balance-sheet deleveraging [6] - The net debt to adjusted EBITDA ratio has improved from 7.1x to 5.4x since Q1 2023, and the percentage of variable rate debt has decreased from 26% to 4% since 2018, reflecting better financial management [12] Rental Growth - The average base rental rates per kilowatt have increased from $115 in Q1 2023 to $169 in Q1 2024, demonstrating rapid growth in rental rates due to rising demand [15] - Rental renewal spreads across the portfolio are approximately 12%, indicating strong pricing power and demand for leases [15] Investment Opportunity - Digital Realty is trading at about 24x expected FFO in 2024, which may not fully reflect the embedded rent growth that will become apparent as leases expire [13] - The company offers a dividend yield of over 3%, making it an attractive option for investors looking to gain exposure to the AI sector while receiving income [13]