Business Context and Reporting Period
Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in owning, acquiring, repositioning, and managing technology-related real estate. As of September 30, 2005, the portfolio consisted of 38 properties (36 in the U.S., one in London, one in Amsterdam) totaling approximately 7.9 million net rentable square feet. The Company completed its IPO in November 2004 and has since aggressively expanded its portfolio through acquisitions and equity offerings.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2005 |
Nine Months Ended Sep 30, 2005 |
Nine Months Ended Sep 30, 2004 |
|---|---|---|---|
| Total Revenues | $56,556 | $145,862 | $70,916 |
| Net Income | $4,425 | $11,499 | $9,916 |
| Net Income Available to Common Stockholders | $1,326 | $4,930 | $9,916 |
| Diluted EPS (Common) | $0.05 | $0.21 | N/A |
| Net Cash Provided by Operating Activities | N/A | $64,302 | $31,551 |
| Net Cash Used in Investing Activities | N/A | ($408,772) | ($321,737) |
| Net Cash Provided by Financing Activities | N/A | $346,983 | $287,641 |
| Total Assets (Sep 30, 2005) | $1,454,222 | ||
| Total Indebtedness (Sep 30, 2005) | $686,909 | ||
| Cash and Cash Equivalents (Sep 30, 2005) | $7,070 |
Note: Comparisons to 2004 are complicated by the Company's IPO in November 2004 and the combination of the Company with its Predecessor (GI Partners) for reporting purposes.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 93.2% for the three months and 105.8% for the nine months ended September 30, 2005, compared to the prior year periods. This growth is primarily driven by the acquisition of 18 new properties added to the portfolio in the preceding 12 months.
- Expense Increases: Total expenses rose 94.2% (three months) and 108.9% (nine months) due to the expanded portfolio, increased interest expense from new debt, and higher general and administrative costs associated with public company compliance (Sarbanes-Ox Act, SEC reporting).
- Net Income to Common: While total net income increased, net income available to common stockholders decreased significantly on a year-to-date basis ($4.9M vs $9.9M in 2004) due to the issuance of Series A and Series B Preferred Stock, which incurred $6.6 million in preferred dividends for the nine months ended September 30, 2005.
- Balance Sheet Expansion: Total assets grew from $1.01 billion (Dec 31, 2004) to $1.45 billion (Sep 30, 2005), driven by real estate acquisitions funded by debt and equity.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management intends to continue an aggressive acquisition strategy to maximize long-term growth in cash flows and earnings per share. The Company plans to maintain its REIT status by distributing at least 90% of taxable income. Liquidity is expected to be met through operating cash flows, restricted cash, and an unsecured credit facility.
Recent Capital Activities and Subsequent Events
- Equity Offerings: In 2005, the Company raised approximately $166.8 million from Series A Preferred Stock and $60.5 million from Series B Preferred Stock, plus $98.1 million from common stock offerings.
- Debt Facility: On October 31, 2005, the unsecured revolving credit facility was amended to increase commitments to $350 million (expandable to $500 million) and extend the maturity to October 2008.
- Acquisitions: Subsequent to September 30, 2005, the Company signed agreements to acquire properties in Austin, Texas; Mainz, Germany (IBM Technology Park); Geneva, Switzerland; Piscataway, New Jersey; and Waltham, Massachusetts.
Risks and Contingencies
- Tenant Concentration and Bankruptcy: One tenant, VarTec Telecom, Inc., filed for Chapter 11 bankruptcy in 2004 but was sold to Comtel in July 2005. Another tenant, Universal Access Inc., also filed for bankruptcy but was acquired by Vanco plc.
- Contingent Purchase Prices: The purchase price for the Lakeside Technology Center may increase by up to $20.0 million if a change in real estate tax classification occurs by December 31, 2006. The Charlotte Internet Gateway and Amsterdam property acquisitions also have contingent price increases based on future leasing activity.
- Market Risk: The Company is exposed to interest rate risk (mitigated by hedging $238.3 million of variable debt) and foreign currency risk (hedged for the London property).
Investor Verification Checklist
- Preferred Dividend Impact: Verify the impact of the new Series A and Series B preferred dividends on future cash flow available for common shareholders.
- Contingent Liabilities: Review the specific conditions for the potential $20 million additional payment on the Lakeside Technology Center acquisition and the revenue-sharing agreement.
- Debt Maturities: Confirm the schedule of debt maturities, noting that $278.9 million is due in 2006-2007, and assess refinancing risks.
- Occupancy Rates: Monitor the occupancy rate of the 732,000 square feet of redevelopment space and the 260,000 square feet of data center space held for multi-tenant use.
- REIT Compliance: Ensure the Company maintains the 90% distribution requirement to preserve its tax-advantaged REIT status.