Business Context and Reporting Period
Company: Digital Realty Trust, Inc. (DLR) and Digital Realty Trust, L.P.
Filing Type: Form 8-K (Current Report)
Date of Report: August 2, 2017
Reporting Period: Preliminary unaudited results for the three and six months ended June 30, 2017, and balance sheet data as of June 30, 2017.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Q2 2017 | Q2 2016 | YTD 2017 | YTD 2016 |
|---|---|---|---|---|
| Total Operating Revenues | $565,989 | $514,934 | $1,116,558 | $1,019,133 |
| Operating Income | $130,657 | $112,298 | $267,940 | $230,414 |
| Net Income (Attributable to DLR) | $78,651 | $50,375 | $162,189 | $111,924 |
| Net Income Available to Common Stockholders | $57,837 | $27,951 | $123,982 | $67,076 |
| Total Assets (June 30, 2017) | $12,579,571 | |||
| Total Liabilities (June 30, 2017) | $7,548,277 | |||
| Cash and Cash Equivalents (June 30, 2017) | $22,383 |
Debt Profile (June 30, 2017):
- Global Revolving Credit Facility: $563,063
- Unsecured Term Loan: $1,520,482
- Unsecured Senior Notes: $4,351,148
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 9.9% year-over-year for Q2 2017 ($565.9M vs. $514.9M) and 9.5% for the six-month period. Rental revenue grew 9.4% in Q2.
- Profitability: Net income attributable to Digital Realty Trust, Inc. increased 56.1% in Q2 2017 compared to Q2 2016. Net income available to common stockholders more than doubled (106.9% increase) in Q2.
- Expense Increases: Transaction and integration expenses rose significantly to $14.2M in Q2 2017 from $3.6M in Q2 2016, driven by the pending DFT Merger.
- Balance Sheet: Total assets increased by approximately $387M from year-end 2016, primarily due to investments in properties and goodwill. The revolving credit facility balance increased by $363.9M from year-end 2016.
Guidance, Outlook, and Material Events
DFT Merger
On June 8, 2017, DLR entered into an agreement to merge with DuPont Fabros Technology, Inc. (DFT). The transaction involves an exchange ratio of 0.545 shares of DLR common stock for each share of DFT common stock. The merger is expected to:
- Expand hyper-scale product offerings and presence in Northern Virginia, Chicago, and Silicon Valley.
- Reduce customer concentration (top three customers would represent ~18% of annualized base rent post-merger vs. 57% for DFT standalone).
- Generate up to $18 million in annual overhead savings.
Financing for Merger: DLR has secured a $1.4 billion bridge loan facility and a $104 million mortgage loan facility to fund the transaction. Termination fees are set at $150 million (payable by DFT) and $300 million (payable by DLR) under specific conditions.
Other Recent Developments
- Preferred Stock Redemption: On April 5, 2017, DLR redeemed all 7.3 million shares of Series F preferred stock. Costs on redemption were $6.3 million in Q2 2017.
- Forward Equity Settlement: On May 19, 2017, DLR settled the remaining 2.375 million shares of forward sale agreements, generating net proceeds of approximately $211.1 million.
- Debt Issuances:
- Issued €125 million of Floating Rate Guaranteed Notes due 2019 (May 2017).
- Issued £600 million aggregate principal of GBP Notes (2.75% due 2024 and 3.30% due 2029) in July 2017. Proceeds intended to fund DFT debt repayment and transaction expenses.
- Leasing Activity: In Q2 2017, signed new leases for $34 million and renewals for $65 million of annualized GAAP rental revenue. Renewal rental rates increased 6.5% (cash basis) and 9.3% (GAAP basis).
Risks and Contingencies
- Merger Litigation: Three stockholder class actions were filed in July 2017 challenging the DFT merger disclosures. DLR intends to defend vigorously but notes uncertainty regarding outcomes and costs.
- Forward-Looking Statements: Risks include failure to obtain stockholder approvals, inability to realize synergies, integration difficulties, and regulatory changes.
Investor Verification Checklist
- Merger Approval Status: Verify the status of stockholder votes required for both DLR and DFT to consummate the merger.
- Transaction Costs: Monitor the impact of transaction and integration expenses on future earnings, which were $14.2M in Q2 2017.
- Debt Structure: Review the terms of the new €125M and £600M debt issuances and the $1.4B bridge loan facility, including interest rate resets and maturity dates.
- Legal Proceedings: Track developments in the three pending class action lawsuits regarding the DFT merger.
- Final Audited Results: Confirm that the preliminary unaudited results reported in this 8-K align with the final audited financial statements upon release.