Business Context and Reporting Period
Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in owning, acquiring, developing, and managing technology-related real estate, specifically Turn-Key Datacenters and Powered Base Buildings. As of June 30, 2010, the portfolio consisted of 87 properties (excluding one unconsolidated joint venture) with approximately 15.2 million rentable square feet, 95.0% of which was leased (excluding redevelopment space). Operations are concentrated in North America and Europe.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Operating Revenues | $389.2 million | $304.1 million |
| Operating Income | $109.3 million | $82.0 million |
| Net Income | $45.5 million | $42.4 million |
| Net Income Available to Common Stockholders | $23.8 million | $20.6 million |
| Diluted EPS (Common) | $0.29 | $0.27 |
| Net Cash Provided by Operating Activities | $143.1 million | $143.5 million |
| Net Cash Used in Investing Activities | ($586.5 million) | ($261.1 million) |
| Net Cash Provided by Financing Activities | $713.7 million | $113.6 million |
| Cash and Cash Equivalents (Ending) | $342.6 million | $69.3 million |
| Total Debt (Carrying Value) | $2.12 billion | $1.78 billion |
| Debt to Total Enterprise Value | ~26% | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by $85.1 million (28%) for the six months ended June 30, 2010, compared to the prior year. This was driven by new leasing at same-store properties and the acquisition of 12 new properties during the trailing twelve months.
- Acquisitions: Significant capital deployment occurred in the first half of 2010, including the acquisition of the New England Portfolio ($375 million) and other properties totaling approximately $406 million in cash paid for acquisitions. This contrasts with only $19.1 million in acquisition spending in the same period of 2009.
- Debt Structure: Total indebtedness increased by approximately $340 million. The Company issued $500 million of 5.875% Notes due 2020 and $117 million of unsecured senior notes. Conversely, the revolving credit facility balance decreased from $205.5 million to $11.6 million as proceeds were used to repay borrowings.
- Equity Issuance: The Company raised significant capital through equity, generating net proceeds of approximately $444.7 million from the sale of common stock, compared to $83.7 million in the prior year period.
- Interest Expense: Interest expense increased by $22.6 million to $64.1 million, primarily due to higher average outstanding debt balances from new issuances.
Guidance, Outlook, Risks, and Unusual Items
- Capital Expenditures: Management expects to incur approximately $300.0 million to $335.0 million in capital expenditures for redevelopment programs during the six months ended December 31, 2010. Open construction commitments as of June 30, 2010, were approximately $62.4 million.
- Subsequent Acquisitions: On July 13, 2010, the Company completed the acquisition of the "365 Main Portfolio" (five properties) for approximately $725.0 million, funded by recent equity and debt offerings.
- Debt Redemption: On July 22, 2010, the Company issued a Notice of Redemption for all outstanding Series A Preferred Stock, scheduled for August 24, 2010.
- Unusual Items: The Company recorded a loss on early extinguishment of debt of $1.5 million related to the exchange of 2026 Exchangeable Senior Debentures for cash and common stock.
- Risks: Key risks include global economic conditions affecting tenant liquidity, the ability to refinance debt at maturity, interest rate fluctuations (though 99.5% of debt is fixed or hedged), and the success of speculative redevelopment projects. The Company relies on external capital sources to fund growth and maintain REIT distribution requirements.
Investor Verification Checklist
- Debt Maturities: Verify the schedule of debt maturities, noting that the revolving credit facility matures in August 2010 (with an extension option exercised) and significant unsecured notes mature in 2011 and 2013.
- REIT Compliance: Confirm the Company's ability to distribute 90% of taxable income to maintain REIT status, particularly given the high capital expenditure requirements for redevelopment.
- Acquisition Integration: Monitor the integration and leasing performance of the New England Portfolio and the subsequent 365 Main Portfolio to ensure projected returns are met.
- Preferred Stock Redemption: Track the funding and execution of the Series A Preferred Stock redemption in August 2010.
- Foreign Currency Exposure: Assess the impact of foreign exchange rate fluctuations on the 14 European properties, which contributed approximately 11.7% of operating revenues for the six-month period.