Digital Realty Trust, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2021. Digital Realty is a global data-center, colocation and interconnection provider operating through Digital Realty Trust, L.P. Figures below are in U.S. dollars; financial statements are unaudited. The comparison is with the corresponding 2020 period.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $1,133.1 million | $1,024.7 million | $3,316.7 million | $2,841.0 million |
| Operating income | $184.4 million | $144.4 million | $562.5 million | $397.3 million |
| Operating margin | 16.3% | 14.1% | 17.0% | 14.0% |
| Net income attributable to common stockholders | $124.1 million | $(37.4) million | $623.9 million | $219.2 million |
| Basic earnings per share | $0.44 | $(0.14) | $2.21 | $0.86 |
| FFO per share and unit, diluted | $1.54 | $1.19 | $4.82 | $3.64 |
- Cash flow: Nine-month operating cash flow was $1,250.3 million, versus $1,180.7 million. Investing cash outflow was $1,179.8 million, including $1,748.1 million of real-estate improvements; financing cash outflow was $77.2 million. Cash, cash equivalents and restricted cash totaled $127.1 million at period-end, including $116.0 million unrestricted cash.
- Debt and liquidity: Outstanding consolidated debt was $14.2 billion, at a 2.19% weighted-average interest rate; 91.6% was fixed-rate or hedged. Debt maturities averaged about 6.0 years. Debt equaled approximately 25% of enterprise value, and the company reported compliance with debt covenants. As of November 3, about $1.5 billion was available under revolving facilities.
- Balance sheet: Total assets were $35.8 billion and total liabilities $18.0 billion at September 30, 2021. The filing reports no debt at the parent-company level on a standalone basis; debt is held by the Operating Partnership and subsidiaries.
Material changes versus the prior comparable period
- Q3 revenue rose 10.6%; nine-month revenue rose 16.7%. Management attributed growth mainly to development completions and lease-up, expansion in EMEA and, for the nine-month comparison, the Interxion combination. Interxion contributed $276.8 million of the nine-month revenue increase.
- Operating expenses grew more slowly than revenue overall, lifting operating margin. Property-level expenses increased 16.4% in Q3 and 20.0% for nine months, reflecting higher utilities, development-related operations and property-tax reassessments. Depreciation and amortization and general and administrative costs also increased year over year.
- Common-stockholder income improved substantially, but comparisons include significant property-sale gains. The 2021 nine-month period included an approximately $333.3 million gain from a European data-center sale; the 2020 period included an approximately $304.8 million gain from a North American property sale. Q3 2021 also included a $64 million gain recognized through an unconsolidated venture and a $19 million promote fee.
- FFO, a non-GAAP supplemental measure, increased year over year. The company cautions that FFO excludes real-estate depreciation and property-sale gains or losses and does not reflect capital spending needed to maintain properties.
- Occupancy across the reported portfolio was 84.2%, down from 86.3% at December 31, 2020. Nine-month development-project capital expenditures increased about 30% year over year, to approximately $1.53 billion.
Outlook, commentary, risks and unusual items
- Management reported strong demand in most key metropolitan areas and expected aggregate rental rates on 2021 expirations to be generally consistent with current rates, on both GAAP and cash bases. It cautioned that renewals and re-leasing rates are not assured; nine-month renewal rates varied by lease category, including a 4.7% decline for renewals over 1 MW.
- The company expected to spend approximately $0.5–$0.8 billion on development capital expenditures in Q4 2021. It had approximately $1.5 billion of open construction-contract commitments, including about $47.2 million reimbursable by customers. Actual spending could vary with demand, leasing and capital availability.
- No specific earnings or revenue guidance is provided in the supplied filing text. The company’s stated capital-structure targets include debt-to-Adjusted EBITDA at or below 5.5x, fixed-charge coverage above 3x and floating-rate debt below 20% of total debt.
- In September, forward purchasers sold 6.25 million shares under forward-sale agreements. The company received no proceeds at the offering; it may receive approximately $1.0 billion upon physical settlement, due no later than March 13, 2023.
- COVID-19 had not caused significant disruption through the reporting date, but management said its future effects remained uncertain. Other identified risks include foreign-exchange movements, customer concentration and lease defaults, competition and supply, power availability, development delays and costs, financing access and interest rates, cybersecurity, and integration of acquisitions.
- Foreign-currency translation reduced other comprehensive income by $254.4 million for the first nine months of 2021. The company also recorded an $18.3 million nine-month loss on early debt extinguishment. It reported no legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- How much reported earnings growth reflects recurring leasing and operations versus property-sale and unconsolidated-venture gains.
- Whether occupancy stabilizes or improves, and how renewals and new leases affect rental rates, particularly for larger leases.
- Development spending, project delivery and leasing pace against the $1.5 billion construction commitments and Q4 spending estimate.
- Debt maturities, available revolving-credit capacity, covenant compliance and settlement timing and proceeds for the forward equity agreements.
- Exposure to currency movements, operating-cost inflation, power and supply-chain constraints, and the continuing effects of COVID-19.