DLR

Business Context and Reporting Period

Digital Realty Trust, Inc. (DLR) is a Maryland corporation operating as a Real Estate Investment Trust (REIT) focused on owning, acquiring, and managing technology-related real estate. The reporting period covers the fiscal year ended December 31, 2004. The company completed its Initial Public Offering (IPO) on November 3, 2004, and commenced operations as a public entity on that date. As of year-end, the portfolio consisted of 24 properties totaling approximately 5.7 million net rentable square feet, with an occupancy rate of 88.4%.

Key Financial Metrics

The following metrics reflect the combined results of the Company and its Predecessor for the full year ended December 31, 2004, as the Company had limited corporate activity prior to the IPO.

Debt Profile: Approximately 77.3% of total indebtedness was subject to fixed interest rates via swap agreements. The debt-to-total market capitalization ratio was approximately 42.1% as of December 31, 2004.

Material Changes vs. Prior Period

• Portfolio Expansion: The portfolio grew from 13 properties (2.8 million sq. ft.) in 2003 to 24 properties (5.7 million sq. ft.) in 2004, driven by the acquisition of 11 new properties.
• Revenue Growth: Total revenues increased 69.7% to $107.1 million, primarily due to new acquisitions and a full year of revenue from 2003 acquisitions.
• Expense Increase: Total expenses rose 143.6% to $112.8 million. This was driven by operating costs for new properties and a significant one-time increase in General and Administrative expenses ($20.7 million) related to IPO completion, including $17.9 million in compensation expense for fully-vested long-term incentive units.
• Net Loss: Despite revenue growth, the company reported a net loss of $6.2 million for the period following the IPO (Nov 3 - Dec 31, 2004) due to IPO-related charges and minority interest allocations, contrasting with a net income of $10.7 million for the Predecessor period (Jan 1 - Nov 2, 2004).

Guidance, Outlook, and Risks

Outlook and Strategy: Management intends to maximize long-term growth in earnings and Funds From Operations (FFO) by continuing to acquire technology-related real estate. The company plans to convert approximately 197,310 square feet of data center space to multi-tenant colocation use to generate higher rental rates. Subsequent to year-end, the company completed a $99.3 million Series A Preferred Stock offering and acquired two additional properties in March 2005.

Risks and Contingencies:

• Tenant Concentration: The 15 largest tenants represented 66.1% of total annualized rent. Two tenants (VarTec Telecom and Universal Access Inc.) were in bankruptcy proceedings as of year-end, though current on rent.
• REIT Status: Failure to qualify as a REIT would subject the company to regular corporate income taxes, significantly reducing cash available for distribution.
• Interest Rate Risk: While 77.3% of debt is hedged, the remaining 22.7% is variable rate, exposing the company to interest rate fluctuations.
• Geographic Concentration: Significant exposure to specific markets, with Silicon Valley representing 28.2% of annualized rent.

Investor Verification Checklist

• REIT Qualification: Verify the company's ability to meet the 90% distribution requirement to maintain tax-advantaged REIT status.
• Tenant Solvency: Monitor the financial health of the top 15 tenants, particularly those in bankruptcy (VarTec, Universal Access), as they represent a significant portion of revenue.
• Debt Maturities: Review the schedule of debt maturities, noting that $141.8 million in principal payments are due in 2006.
• Acquisition Pipeline: Assess the status of pending acquisitions (Lakeside Technology Center, Printers' Square) and their impact on leverage ratios.
• Occupancy Trends: Track the lease-up of the 11.6% of space currently available and the conversion of shell space to colocation use.