Tuesday, KeyBanc Capital downgraded Digital Realty Trust Inc. (DLR) shares to Hold from Buy. The brokerage increased its 2009 FFO per share estimate by $0.03 to $2.91, while maintaining its 2010 estimate of $3.20.
Analyst Jordan Sadler attributed the downgrade based on valuation, as the stock has exceeded his former price target of $40 and near-term upside appears priced in. Digital Realty has been a hallmark favorite stock of the analyst's, since launching coverage in October 2006, and will likely remain an outperformer within the REIT space this year.
However, the stock has reached a near-term peak. While the analyst expects the company to continue to meet or exceed Street estimates and achieve industry leading growth, upside to the current valuation has become more difficult to justify.
The analyst expects that the stock will take a breather at current levels until leasing activity re-accelerates or acquisitions significantly exceed current expectations. Alternatively, the analyst could consider becoming more constructive on valuation toward the mid-$30s range.
The analyst raised its 2009 FFO estimate by $0.03 to $2.91/share to reflect the second quarter of 2009 beat relative to his estimate and the assumption of $200 million of acquisitions at 11% cap rates, partially offset by a reduction in second half of 2009 redevelopment spending to $150 million.
Importantly, the analyst continues to view DLR as attractively valued on a relative basis, as the stock trades at roughly 13x his 2010 FFO or at an 11% discount to the REIT sector on a leverage neutral basis. The analyst is tweaking his net asset value per share estimate to $37.35 from $37.67 to reflect 2009 second quarter results.
Currently, DLR is up $1.08 or 2.61% and trading at $42.43.
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