Digital Realty Trust, Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2016. Digital Realty owns, develops and operates data centers, reporting as a REIT through its operating partnership. Its portfolio included 140 operating properties, including eight Telx properties, and 14 properties held through unconsolidated joint ventures. Portfolio occupancy was 90.9%, excluding active and future development space.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenue | $504.2 million | $406.6 million |
| Operating income | $118.1 million | $149.3 million |
| Net income | $62.3 million | $122.3 million |
| Net income available to common stockholders | $39.1 million; $0.27 per share | $101.7 million; $0.75 per share |
| FFO per share/unit, diluted | $1.39 | $1.56 |
| Cash from operations | $179.4 million | $138.9 million |
- Revenue rose 24.0%; operating and net income fell. Operating margin was approximately 23.4%, versus 36.7% a year earlier, and net margin was 12.4%, versus 30.1%.
- Cash capital expenditures were $153.0 million; property improvements and tenant advances in investing cash flows were $183.9 million. Cash and cash equivalents ended the quarter at $31.1 million, down $25.9 million from year-end; restricted cash was $19.6 million.
- Consolidated debt principal was approximately $6.2 billion. Debt to total enterprise value was approximately 30%; 82.4% of debt was fixed-rate or hedged. The effective interest rate was 3.60%, and weighted-average term to initial maturity was 5.6 years.
- The $2.0 billion revolving facility had $691.2 million drawn and approximately $1.3 billion available, including the effect of letters of credit. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the Telx acquisition, which contributed about $44.8 million to rental revenue growth and $45.1 million to interconnection revenue growth, as well as new leasing and completed development space.
- Interconnection and other revenue increased to $47.0 million from $1.4 million, reflecting the Telx business. Rental revenue increased to $371.1 million from $317.8 million.
- Operating expenses increased $128.8 million, including higher property costs and depreciation and amortization. Interest expense increased $11.8 million to $57.3 million.
- Q1 2015 included a $43.0 million operating expense reduction from a contingent-consideration fair-value adjustment and $17.8 million in property-sale gains; Q1 2016 had no comparable contingent-consideration benefit and $1.1 million in sale gains. These items materially affect year-over-year profit comparisons.
- Operating cash flow increased $40.4 million. Financing cash flow was a $51.1 million use, versus a $6.2 million source, reflecting lower net borrowing and higher distributions.
Outlook, commentary and risks
- Management expected to spend approximately $600–$750 million on development capital expenditures during the remaining nine months of 2016; actual spending could vary materially. The filing does not provide a specific earnings or FFO forecast.
- Management said demand remained strong in most key metropolitan areas and expected aggregate rents on new, re-leased or renewed space for 2016 expirations to be generally higher on a GAAP basis and flat on a cash basis. Q1 renewals showed mixed results: Turn-Key Flex rents rose 1.2% on a GAAP basis, while Powered Base Building rents declined 6.0%.
- Approximately 1.8 million square feet was under active development and 1.2 million square feet was held for future development. Construction-contract commitments were approximately $209.9 million. Development returns depend on leasing demand, completion timing and access to capital.
- Key stated risks include tenant concentration and defaults, data-center supply and demand, development and leasing execution, power and operating costs, interest rates and refinancing, foreign-currency exposure, access to financing, and successful integration of Telx. Foreign properties generated 19.4% of Q1 revenue.
- Seven properties were classified as held for sale, with $145.1 million of assets and $5.0 million of associated liabilities. The company reported no legal proceedings believed likely to have a material adverse effect.
- After quarter-end, a subsidiary issued €600 million of 2.625% guaranteed notes due 2024, with net proceeds of approximately $670.3 million, used to temporarily repay revolving-credit borrowings.
Important facts for investors to verify
- How much of reported revenue growth and future operating performance is attributable to Telx, and whether its integration delivers expected benefits.
- Development leasing, completion schedules and returns, particularly against the $600–$750 million remaining-2016 capital plan and outstanding construction commitments.
- Debt maturities, variable-rate exposure, hedging effectiveness and availability under credit facilities; review the subsequent euro-note issuance and repayment of revolver borrowings.
- Occupancy, lease expirations and renewal spreads by product and market, alongside the filing’s stated rent outlook.
- Cash generation relative to capital spending and distributions, and the effect of prior-year unusual items on comparisons of earnings and FFO.