DLR

Business Context and Reporting Period

Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2005
Business Overview: The Company owns, acquires, repositions, and manages technology-related real estate, including data centers and internet gateway properties. As of June 30, 2005, the portfolio consisted of 33 properties (32 in the U.S., 1 in London) totaling approximately 7.8 million net rentable square feet. The Company completed its IPO in November 2004 and intends to qualify as a Real Estate Investment Trust (REIT).

Key Financial Metrics

Note: Comparisons to 2004 are against the "Predecessor" entity (GI Partners real estate activities) prior to the IPO reorganization.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 118% ($26.9 million) for the three months ended June 30, 2005, compared to the same period in 2004. This was driven by the acquisition of 15 properties over the last 12 months, adding approximately 3.5 million square feet to the portfolio.
• Expense Increases: Total expenses rose 113% to $42.2 million for the quarter. Increases were primarily due to new property operating costs, higher interest expense from new mortgage debt, and increased general and administrative expenses associated with public company compliance (Sarbanes-Oxley, SEC reporting).
• Acquisitions: During the six months ended June 30, 2005, the Company acquired nine properties, including Lakeside Technology Center (Chicago) for $141.6 million and a portfolio of Savvis Data Centers for $92.5 million.
• Capital Structure: In February 2005, the Company issued 4.14 million shares of Series A Preferred Stock, raising $99.3 million in net proceeds. This was used to reduce credit facility borrowings and fund acquisitions.

Guidance, Outlook, and Risks

• Outlook: Management intends to continue acquiring technology-related real estate to drive growth in cash flows and earnings per share. The Company targets high-quality properties in concentrated technology markets.
• Dividends: To maintain REIT status, the Company must distribute at least 90% of taxable income. Quarterly dividends were declared for Series A Preferred Stock ($0.53125/share) and Common Stock ($0.24375/share) for the second quarter.
• Subsequent Events: Following the reporting period, on July 26, 2005, the Company completed a follow-on offering of common stock and Series B Preferred Stock, raising approximately $159.6 million in net proceeds. Additional acquisitions were executed in August 2005 in Geneva and Amsterdam.
• Risks: Key risks include the ability to maintain REIT qualification, interest rate fluctuations (mitigated by hedging $238.9 million of variable debt), tenant bankruptcies (e.g., VarTec Telecom), and the ability to successfully lease vacant space held for redevelopment.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the unsecured credit facility covenants, specifically the limitation on distributions to 95% of Funds From Operations (FFO).
• Contingent Liabilities: Review the Lakeside Technology Center acquisition terms, which include a potential $20.0 million contingent fee to the seller based on tax classification changes and a revenue-sharing agreement.
• REIT Status: Confirm the Company's continued qualification as a REIT to avoid corporate income taxation.
• Occupancy Rates: Monitor the leasing progress of the 290,000 square feet of shell space at Lakeside Technology Center and 107,563 square feet at 833 Chestnut Street, which are currently vacant.
• Interest Rate Exposure: Assess the impact of rising interest rates on the remaining $253.6 million of unhedged variable rate debt.