Digital Realty Trust, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The filing combines Digital Realty Trust, Inc. (a REIT and general partner) and Digital Realty Trust, L.P. (the operating entity). Digital Realty owns and operates global data centers, colocation and interconnection facilities.
Business context and operating metrics
- Following the March 2020 Interxion combination, the portfolio comprised 281 data centers, including 43 in unconsolidated joint ventures and one held for sale, with approximately 42.3 million rentable square feet. Excluding development space, the portfolio was approximately 85.7% leased.
- The combination materially expanded the European business. Average remaining lease term was approximately five years; 93% of leases by rentable area included fixed or inflation-indexed rent escalations.
Financial performance
Amounts below are in U.S. dollars; dollar figures are in millions unless noted.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $993.0 | $800.8 | $1,816.3 | $1,615.3 |
| Operating income | $152.8 | $149.0 | $252.9 | $290.5 |
| Net income | $76.0 | $61.3 | $304.7 | $182.3 |
| Net income available to common stockholders | $53.7 | $31.7 | $256.5 | $127.6 |
| Diluted EPS | $0.20 | $0.15 | $1.04 | $0.61 |
| FFO per diluted share and unit | $1.49 | $1.53 | $2.45 | $3.44 |
| Cash from operations | — | $712.4 | $827.3 |
- Q2 revenue rose 24% year over year, primarily reflecting Interxion. Pre-stabilized and other rental revenue increased $204.2 million, largely from Interxion; stabilized rental revenue declined 2.5% as expiring leases and higher bad-debt expense offset growth.
- Q2 operating margin was approximately 15.4%, versus 18.6% a year earlier. Higher property operating costs, depreciation and amortization, general and administrative expense, and transaction/integration costs weighed on operating income. Interest expense fell to $79.9 million from $86.1 million.
- Six-month net income included a $304.8 million gain on the January sale of 12 data centers. FFO, which excludes property-sale gains and real-estate depreciation, fell year over year per diluted share and unit. The six-month comparison also reflects a $67.5 million Ascenty deconsolidation gain in 2019 and $86.6 million of equity-method joint-venture losses in 2020.
- Six-month operating cash flow decreased $114.9 million year over year. Investing cash use was $678.8 million, including $854.9 million of real-estate improvements; financing provided $404.8 million, versus $522.9 million used in 2019. Cash, cash equivalents and restricted cash ended at $519.0 million.
Debt, liquidity and capital
- At June 30, 2020, consolidated debt was approximately $12.47 billion, up from $10.12 billion at December 31, 2019. Approximately 96% was fixed-rate or swapped to fixed-rate; reported effective interest rates were 2.80% overall, 2.85% fixed/hedged and 1.58% variable. Weighted-average term to initial maturity was about 6.2 years.
- Cash and cash equivalents were $505.2 million, plus $13.9 million restricted cash. The $2.35 billion global revolving facility had $74.3 million drawn at quarter-end; approximately $1.6 billion was available as of August 5, 2020. The company reported compliance with debt covenants.
- Six-month financing included euro-denominated note offerings and approximately $645.7 million net proceeds from common shares issued under the ATM program. After quarter-end, a further $247.2 million was raised under the ATM, with approximately $750.3 million remaining available. The common dividend rate was $4.48 annualized per share.
Outlook, commentary and risks
- Management expected to spend approximately $1.2–$1.5 billion on development capital expenditures in the second half of 2020; actual spending could vary materially with demand, leasing and financing availability. Construction commitments were approximately $1.1 billion at June 30.
- Management said facilities remained fully operational and July rent collections were consistent with the prior-year period. Rent-relief requests came from customers representing approximately 3% of annualized recurring rent; management was evaluating requests individually. The filing cautions that pandemic effects remain uncertain, including potential construction delays, credit losses and lease modifications.
- On August 3, 2020, the Operating Partnership redeemed $800 million of 2022 notes, primarily using revolver borrowings; an approximately $52.1 million early-extinguishment charge was expected in Q3. The company also announced redemption of its Series I preferred stock for September 8, 2020, with an approximately $8.0 million reduction to income available to common stockholders.
- Other material risks include acquisition integration and realization of Interxion synergies, foreign-exchange exposure, interest rates and refinancing, customer concentration or defaults, development execution and leasing, data-center competition, and energy costs and climate regulation. No specific earnings or FFO guidance is provided in the supplied filing text.
Investor verification priorities
- Separate recurring operating performance from the $304.8 million property-sale gain and other unusual or acquisition-related items; assess FFO and per-share effects.
- Track stabilized leasing, occupancy, rent growth, bad-debt expense and collection trends, including outcomes of COVID-19 rent-relief requests.
- Review Interxion integration progress, related costs, and the contribution and amortization of acquired goodwill and intangibles.
- Confirm development spending, project delivery timing, leasing of new capacity, and funding needs against the stated second-half capital expenditure range.
- Monitor debt maturities, revolver usage after the 2022 note redemptions, covenant headroom, foreign-currency movements and dilution from equity issuance.