DLR

Business Context and Reporting Period

Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company owns, acquires, develops, and manages technology-related real estate, specifically Turn-Key Datacenter and Powered Base Building solutions. As of September 30, 2008, the portfolio consisted of 74 properties (61 in North America, 13 in Europe) with approximately 12.9 million rentable square feet, of which 1.6 million square feet were held for redevelopment. The portfolio was approximately 95.2% leased excluding redevelopment space.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Preferred stock dividends totaled $10.1 million for the quarter and $28.5 million for the nine-month period.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by 35.5% ($37.2 million) for the three months ended September 30, 2008, compared to the same period in 2007. For the nine months, revenues increased by 31.5% ($91.0 million). Growth was driven by new leasing at same-store properties and the acquisition of seven new properties in the preceding 12 months.
• Profitability: Net income available to common stockholders turned positive ($8.1 million) for the quarter compared to a loss of $0.2 million in the prior year quarter. For the nine months, net income available to common stockholders decreased to $14.7 million from $21.0 million in 2007, largely due to the absence of a $18.0 million gain on sale of assets recorded in 2007 (discontinued operations).
• Operating Expenses: Total operating expenses increased by 30.1% ($25.1 million) for the quarter and 31.4% ($70.0 million) for the nine months, primarily due to higher utility costs, increased depreciation from new development projects, and higher general and administrative expenses.
• Debt Structure: Total indebtedness decreased to $1.28 billion from $1.37 billion at year-end 2007. The Company significantly reduced borrowings on its revolving credit facility (from $299.7 million to $44.0 million) using proceeds from equity offerings and new mortgage financings.

Guidance, Outlook, Risks, and Unusual Items

• Capital Markets & Liquidity: Management highlighted unprecedented global economic conditions, tighter credit markets, and volatility (citing Lehman Brothers bankruptcy and government interventions). While the Company maintains a $675 million revolving credit facility with $621 million available, there are risks regarding lender funding commitments and the cost/availability of capital for future acquisitions and redevelopment.
• Capital Expenditures: The Company expects to incur approximately $150 million in capital expenditures for redevelopment in the fourth quarter of 2008 and $325 million in 2009. Total acquisitions for the full year 2008 are expected to be approximately $110 million.
• Accounting Changes: The Company noted the upcoming adoption of FSP APB 14-1 (effective Jan 1, 2009) regarding convertible debt. This will require the recognition of an additional non-cash interest expense of $3.9 million to $4.4 million annually, reducing net income.
• Dividends: On November 3, 2008, the Company declared quarterly dividends of $0.33 per share for common stock and equivalent distributions for preferred stock classes.
• Unusual Items: The 2007 comparative period included a significant gain on the sale of assets ($18.0 million) from discontinued operations, which is not present in the 2008 results.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of debt maturities, noting that approximately $183 million of debt is variable rate (though largely hedged) and the impact of the revolving credit facility maturing in August 2010.
• Redevelopment Progress: Assess the leasing status and capital requirements for the 1.6 million square feet of space held for redevelopment, which is critical for future revenue growth.
• Interest Rate Exposure: Review the effectiveness of interest rate swaps and caps in mitigating the risk of rising rates on the $335 million of variable rate debt.
• Accounting Impact: Confirm the projected impact of the FSP APB 14-1 adoption on 2009 earnings and the restatement of prior periods.
• Tenant Concentration: Note that Savvis Communications comprised approximately 11.1% of operating revenues for the quarter; verify the stability of this and other major tenants in the current economic climate.