Business Context and Reporting Period
Company: Digital Realty Trust, Inc. (DLR)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: Digital Realty Trust is a Real Estate Investment Trust (REIT) focused on owning, acquiring, developing, and managing technology-related real estate, including Internet gateway datacenters, corporate datacenters, and technology manufacturing properties. As of December 31, 2008, the company owned 75 properties (excluding one unconsolidated joint venture) totaling approximately 13.0 million net rentable square feet, with 1.6 million square feet held for redevelopment. The portfolio is geographically concentrated in major U.S. markets (Silicon Valley, Chicago, New York/New Jersey, Dallas, Northern Virginia) and Europe (London, Dublin, Paris, Amsterdam).
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Operating Revenues | $527.4 million | $395.2 million |
| Net Income | $67.7 million | $40.6 million |
| Net Income Available to Common Stockholders | $29.1 million | $21.3 million |
| Diluted EPS (Common) | $0.41 | $0.34 |
| Operating Cash Flow | $217.8 million | $105.7 million |
| Total Assets | $3.28 billion | $2.81 billion |
| Total Liabilities | $1.72 billion | $1.69 billion |
| Total Consolidated Indebtedness | $1.40 billion | $1.37 billion |
| Debt to Total Market Capitalization | ~30% | N/A |
| Portfolio Occupancy (Excl. Redevelopment) | 94.9% | N/A |
| Average Annualized Rent per Leased Sq. Ft. | $36.09 | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 33.4% to $527.4 million, driven by new leasing at same-store properties and the acquisition of 5 new properties in 2008. Rental revenue grew 26.6% and tenant reimbursements grew 43.3%.
- Profitability: Net income increased 66.6% to $67.7 million. Net income available to common stockholders rose 37.0% to $29.1 million, primarily due to increased operating income and the absence of significant gains from discontinued operations in 2008 (which contributed $16.2 million in 2007).
- Acquisitions: The company acquired 5 properties in 2008 for a total purchase price of approximately $101.2 million, compared to 13 properties for $363.0 million in 2007. Notable 2008 acquisitions included 365 South Randolphville Road (New York) and Manchester Technopark (England).
- Capital Structure: The company issued 13.8 million shares of Series D preferred stock in February 2008 (net proceeds $333.6 million) and 5.75 million shares of common stock in July 2008 (net proceeds $211.6 million). Total indebtedness increased slightly to $1.40 billion.
- Dividends: The quarterly common stock dividend increased to $0.33 per share in Q4 2008, resulting in an annualized rate of $1.32, up from $1.24 in 2007.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management highlighted the unprecedented challenges of the global economic recession and tighter credit conditions in late 2008. Despite these headwinds, the company maintained a 94.9% occupancy rate. The company expects to incur approximately $350 million in capital expenditures for its redevelopment program in 2009 and anticipates total acquisitions of approximately $20 million for the year, though these figures are subject to market conditions and capital availability.
Key Risks & Contingencies:
- Global Economic Conditions: The filing extensively details the risk of a prolonged recession, tighter credit markets, and potential defaults by tenants or lenders. The company notes that continued turbulence could limit its ability to refinance debt or access capital markets.
- Tenant Concentration: The 20 largest tenants represented 56.6% of annualized rent. The largest tenant, Savvis Communications, accounted for 11.1% of annualized rent. One tenant, Lyondell Chemical Company, was in bankruptcy as of year-end but remained current on obligations.
- Interest Rate Risk: Approximately 13% of total debt was variable rate and unhedged. The company uses interest rate swaps to hedge 87% of its debt.
- Accounting Changes: The company noted the upcoming adoption of FSP APB 14-1 in 2009, which will require the recognition of additional non-cash interest expense of $3.9 million to $4.4 million annually related to exchangeable senior debentures.
Investor Verification Checklist
- Debt Maturities: Verify the repayment schedule for the $138.6 million revolving credit facility maturing in August 2010 and the $96.6 million mortgage on 350 East Cermak Road maturing in June 2009 (noted as being refinanced in subsequent events).
- Tenant Solvency: Monitor the financial health of top tenants, specifically Savvis Communications (11.1% of rent) and Qwest Communications (5.1% of rent), given the economic downturn.
- Capital Expenditures: Track the $350 million redevelopment budget for 2009 against actual cash flow and financing availability in a constrained credit market.
- Dividend Sustainability: Confirm that operating cash flow remains sufficient to cover the increased dividend rate of $1.32 per share and preferred stock obligations ($38.6 million in 2008) to maintain REIT status.
- Accounting Impact: Review Q1 2009 results for the impact of the new accounting standard (FSP APB 14-1) on reported net income due to the amortization of debt discount on exchangeable debentures.