Digital Realty Trust (NYSE: DLR) has an exceptional track record of creating shareholder value. Since its initial public offering in late 2004, the data center real estate investment trust (REIT) has generated a roughly 2,400% total return, absolutely crushing the S&P 500's nearly 440% total return during that period. Put another way, the company turned a $10,000 investment at its IPO into more than $250,000. That's about $200,000 more than the S&P 500.
The company's ability to enrich investors has it well on its way to turning its early investors into millionaires. Here's a closer look at whether it can do that for those who invest today.
The math to $1 million
Thanks to the magic of compound interest, any investment has the potential of growing into $1 million given enough time and return. For example, $10,000 invested in the S&P 500 has historically grown into $1 million in about 46 years, assuming the market maintains its historical rate of return of around 10%.
Meanwhile, at Digital Realty's current return pace of more than 21% per year, a $10,000 investment is on track to grow into $1 million in only 22 years.
A look at Digital Realty's millionaire-making potential
The key to Digital Realty's success in generating such high shareholder returns over the years has been its ability to grow its earnings and dividends at above-average rates. Since 2005, the REIT has expanded its core funds from operations (FFO) per share at a 10% compound annual rate, supporting a similar growth rate in its dividend.
Powering that value-creating growth has been the company's ability to steadily expand its portfolio via acquisitions and development projects. The REIT has made several notable strategic acquisitions over the years, including:
- The Sentrum portfolio: Three assets in London for $1.1 billion in 2012.
- Telx: 20 assets in 13 metro areas across the U.S. for $1.9 billion in 2015.
- European acquisition portfolio: Eight assets in Europe for $875 million in 2016.
- DuPont Fabros Technology: 12 assets and six development projects across the U.S. for $7.6 billion in 2017.
- Ascenty: Eight assets and six development projects in Brazil as part of a $1.8 billion acquisition and joint venture with Brookfield Infrastructure in 2018.
- Interxion: 54 assets and several more under construction across 11 European countries for $8.4 billion in 2019.
The REIT primarily made those accretive deals using its stock so that it didn't put its balance sheet at risk. That gave it the financial flexibility to invest in development projects sourced internally and those acquired along with operating assets.
Digital Realty should have no problem continuing to expand its portfolio in the future. For starters, the company has a strong investment-grade balance sheet and a reasonably conservative dividend payout ratio. Those factors give it the financial flexibility to continue expanding its portfolio via additional acquisitions and development projects.
Meanwhile, it should have no shortage of investment opportunities given the steady growth in data usage. In the view of its Ascenty joint venture partner Brookfield Infrastructure, there's an investment opportunity ahead for data infrastructure, such as data centers. Driving that outlook is the expectation that the digital economy will need to continue building out the capacity to transmit and store an increasing amount of digital information. As one of the leaders in operating data centers, Digital Realty is well-positioned to capture a meaningful portion of those future opportunities.
An enriching investment opportunity
Digital Realty might not maintain its current blistering pace of generating 20%+ total annual returns in the decades ahead. However, the data center REIT has the financial flexibility and opportunity to continue growing at an above-average clip for many years. Because of that, it has the potential of being an enriching investment, with the possibility of one day turning ultra-long-term investors into millionaires.