Digital Realty Trust, Inc. — Q2 2023 Form 10-Q
Business context and period. Digital Realty is a global owner, developer and operator of data centers, colocation and interconnection facilities. The filing covers the quarter and six months ended June 30, 2023; results are unaudited. Digital Realty Trust, Inc. is a REIT and the general partner of Digital Realty Trust, L.P., which holds substantially all operating assets.
Key financial metrics
Amounts are in millions except per-share data, percentages and where noted.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $1,366.3 | $1,139.3 | $2,705.0 | $2,266.6 |
| Operating income | $154.9 | $170.4 | $332.2 | $311.6 |
| GAAP operating margin | 11.3% | 15.0% | 12.3% | 13.8% |
| Net income | $115.6 | $63.9 | $184.5 | $140.8 |
| Net income available to common stockholders | $108.0 | $53.2 | $166.5 | $116.3 |
| GAAP diluted EPS | $0.37 | $0.19 | $0.57 | $0.41 |
| Diluted FFO per share and unit (non-GAAP) | $1.52 | $1.55 | $3.13 | $3.16 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $814.1 | $783.6 |
- Revenue grew 19.9% in Q2 and 19.3% in the first half. Rental and other services revenue rose 19.3% and 19.0%, respectively.
- At June 30, debt outstanding was $17.86 billion, with a weighted-average interest rate of 2.86%. The company reported 83.2% fixed-rate debt, including debt hedged with swaps, and 16.8% variable-rate debt. Debt-to-enterprise value was approximately 33%.
- Cash and cash equivalents were $124.5 million; restricted cash was an additional $10.1 million. Total liabilities were $22.92 billion. As of August 1, approximately $2.2 billion was available under the $3.9 billion global revolving credit facilities.
- Six-month investing cash outflow was $1.28 billion, including $1.37 billion of property improvements; financing cash inflow was $484.3 million. Dividends and distributions paid were $1.12 billion.
Material changes versus prior comparable periods
- Q2 operating income fell 9.1% despite higher revenue, and the GAAP operating margin declined to 11.3% from 15.0%. Property operating and maintenance expense increased 42.3% in Q2, driven largely by utilities, whose costs rose 67.8%. Higher power costs were partly reflected in customer utility reimbursements.
- Net income increased year over year, aided by a $89.9 million net gain on a May sale of a non-core Dallas data center and a smaller equity-method loss than in Q2 2022. Common-stockholder earnings and EPS also benefited from the gain; they should not be read as equivalent to recurring operating growth.
- Interest expense increased $42.1 million in Q2 and $77.6 million in the first half, reflecting new term loans, higher revolver balances and rates, and the Teraco acquisition. The first-half 2022 comparison included a $51.1 million loss on early debt extinguishment; there was no such loss in 2023.
- Occupancy across the total portfolio was 82.9% at June 30, down from 84.7% at December 31, 2022. Consolidated portfolio occupancy was 81.7%, versus 83.5%. The filing attributes revenue growth to utility reimbursements, leasing, completed development and the 2022 Teraco acquisition.
Outlook, management commentary, risks and unusual items
- Management reported strong demand in most key markets and expected aggregate rental rates on renewals for 2023 expirations to be positive versus current rates, on both GAAP and cash bases. The filing cautions that renewals, occupancy and achievable rents are not assured and vary by market.
- Expected development capital expenditures for the six months ending December 31, 2023 were approximately $1.1 billion to $1.3 billion, subject to demand, leasing results and capital availability. Construction-contract commitments were approximately $2.7 billion, including about $47.2 million reimbursable by customers.
- After quarter-end, the company received approximately $743 million of gross proceeds from a Chicago joint venture transaction while retaining a 35% interest, and approximately $1.3 billion from a Northern Virginia joint venture while retaining a 20% interest. It also settled forward equity sales for approximately $336 million. These transactions occurred after June 30 and are not included in the quarter-end cash balance.
- A customer bankruptcy contributed to an increase in the allowance against deferred rent receivables, from $10.8 million at year-end 2022 to $38.9 million at June 30, 2023. Management also cited risks from energy costs and regulation, interest rates and refinancing, foreign exchange, development and supply-chain costs, customer defaults, competition, and joint-venture execution.
- The company stated that it was compliant with senior-note financial covenants at June 30. It reported no legal proceedings believed likely to have a material adverse effect and no material change in internal control over financial reporting. The filing provides no formal full-year revenue, earnings or FFO guidance.
Most important facts for investors to verify
- Whether occupancy stabilizes and expected positive renewal pricing translates into durable cash rental growth.
- How much utility-cost inflation is recovered from customers, and whether rising power and operating expenses continue to pressure margins.
- Debt maturity and refinancing exposure, especially the $2.78 billion of scheduled 2025 maturities and the $3.83 billion scheduled for 2026; also monitor variable-rate debt and the company’s above-historical debt-to-Adjusted EBITDA position, for which this filing does not provide a clear ratio.
- Collection and impairment developments related to the bankrupt customer and the increased deferred-rent allowance.
- Final proceeds, retained interests, financing terms and ongoing obligations from the post-quarter Chicago and Northern Virginia joint ventures, alongside the substantial development spending plan.
- Share dilution from ATM and forward equity issuance, and the sustainability of distributions relative to operating cash flow and capital needs.