Barclays downgrades data center REIT stocks Digital Realty, Equinix

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Digital Realty Trust (NYSE:DLR) stock has dropped 1.6% in Friday premarket trading and Equinix (NASDAQ:EQIX) shares have slipped 1.5% after Barclays analyst Brendan Lynch downgraded both of the data center REITs.

Digital Realty (DLR) was cut to Underweight from Equal Weight as its falling organic metrics and weak return on invested capital “reflect asset obsolescence and expensive acquisitions, in our view,” Lynch wrote in a note to clients.

“The $5.5B development pipeline can help DLR reorient its portfolio towards newer, more efficient assets, but legacy assets appear to be a drag on performance,” he said. Furthermore, limited options for asset disposals could result in tight liquidity in H2 2022 and 2023.

Note that earlier this week, SA’s Quant system flagged Digital Realty (DLR) for a high risk of performing poorly due to negative earnings revisions and decelerating momentum. Lynch’s Underweight rating clashes with the average Wall Street rating of Buy and the average SA Author’s rating.

Meanwhile, Lynch downgraded Equinix (EQIX) to Equal Weight from Overweight as rising energy prices, accounting practices, and evolving cloud offerings, among other factors, could suppress its earnings trajectory. Lynch lowers his 2023 adjusted FFO per share estimate to $30.63 from his previous estimate of $31.63.

The Quant rating for EQIX and the average SA Author’s rating both agree with Lynch’s rating. That contrasts with the average Wall Street rating of Buy.

See why SA contributor On the Pulse sees significant long-term dividend growth potential for Digital Realty (DLR).

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