Business context and reporting period
Digital Realty Trust, Inc. and Digital Realty Trust, L.P. filed a combined unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company is a REIT focused on owning, developing and managing data-center and other technology-related real estate; substantially all operations and debt are held by the Operating Partnership.
At quarter-end, the portfolio included 130 properties and approximately 24.5 million rentable square feet, including space under development and properties in unconsolidated joint ventures. Portfolio occupancy was 92.8%, excluding development space. Average remaining lease term was approximately seven years.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $401.4 | $363.5 | $792.0 | $721.9 |
| Operating income | $92.5 | $100.0 | $182.5 | $198.6 |
| Net income | $61.3 | $59.6 | $108.0 | $111.3 |
| Net income available to common stockholders | $41.5 | $47.1 | $75.7 | $89.7 |
| Diluted earnings per share | $0.31 | $0.37 | $0.58 | $0.70 |
| Diluted FFO per share and unit | $1.20 | $1.22 | $2.41 | $2.37 |
- Q2 revenue grew 10.4%; operating income fell 7.5%. Operating margin was approximately 23.0%, compared with 27.5% in Q2 2013.
- Q2 net income increased 2.9%, supported in part by a $15.9 million gain on a property sale. Common-stockholder income declined 11.8%, reflecting higher preferred dividends and a larger common share base.
- For the first six months, cash from operations was $315.3 million, versus $275.5 million. Investing used $403.8 million, versus $712.2 million; financing provided $112.7 million, versus $404.7 million. Cash and equivalents ended the period at $80.9 million.
- Cash-basis capital expenditures, excluding indirect costs, were $410.1 million for the first half, down from $546.0 million. Cash paid for interest, including capitalized amounts, was $98.2 million.
- At June 30, total debt was approximately $4.86 billion, down from $4.96 billion at year-end 2013. Debt to enterprise value was approximately 35%; 82.6% of debt was fixed-rate or hedged, and weighted-average term to initial maturity was 5.2 years.
- Cash and equivalents were $80.9 million and restricted cash was $39.8 million. The $2.0 billion revolver had $374.6 million drawn and $24.8 million of letters of credit, leaving approximately $1.6 billion available. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Revenue growth mainly reflected same-store leasing, including completed development space. Same-store rental revenue increased $34.0 million in Q2; tenant reimbursements also rose. Management cited delivery of approximately 690,000 square feet of leased data-center space over the prior 12 months.
- Operating expenses rose $45.5 million in Q2, notably property operating and maintenance costs and depreciation. Management attributed higher utility expense to rates, consumption and development projects placed into service. First-half G&A included $12.7 million in severance related to the former CEO’s departure.
- The company sold 6 Braham Street in April for net proceeds of approximately $37.5 million and recognized a $15.9 million gain. It acquired no real estate in the first half of 2014.
- In April, a subsidiary issued £300 million of 4.75% notes due 2023, with net proceeds of approximately $495.9 million used initially to repay revolver borrowings. The Operating Partnership’s 2029 exchangeable debentures were retired: approximately $261.2 million was exchanged for 6.7 million common shares, and approximately $5.2 million was redeemed for cash. The company also issued $365 million of 7.375% Series H preferred stock, net proceeds of approximately $353.4 million.
- Common dividends were at an annualized rate of $3.32 per share. Series H preferred stock carries a 7.375% cumulative dividend and is generally not redeemable before March 2019.
Outlook, commentary and risks
- No specific earnings or FFO guidance is provided. Management estimated $425 million to $500 million of development capital expenditures for the second half of 2014; actual spending could vary materially with demand, leasing and capital availability. Construction-contract commitments were approximately $214.3 million at quarter-end.
- Management reported strong demand in most key markets and expected aggregate rental rates on 2014 expirations to be generally higher on a GAAP basis and flat on a cash basis. It also warned that Northern Virginia and Silicon Valley could face significant oversupply, while unleased development space weighs on returns until leased.
- Management expects near-term acquisitions to be a smaller contributor to growth while seller pricing expectations remain above the company’s return requirements. It intends to pursue development, leasing and selective acquisitions, subject to financing and returns.
- Principal risks include tenant defaults or non-renewals, data-center supply and demand shifts, development delays and cost overruns, higher utility costs, interest-rate and refinancing exposure, foreign-exchange movements, reliance on debt and equity markets, and the ability to maintain REIT status. Approximately 24.2% of first-half revenue came from outside the U.S.; London represented 11.8% of annualized rent.
- Other disclosed items include a $62.7 million fair value accrual for Sentrum Portfolio contingent consideration, subject to quarterly remeasurement, and a potential Singapore acquisition earnout capped at approximately $40.1 million, for which no amount was accrued. The filing reported no material legal proceedings.
- Management stated that disclosure controls were effective at the reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether occupancy, leasing spreads and development-space lease-up support continued same-store revenue growth, particularly in Northern Virginia and Silicon Valley.
- Whether operating-cost increases—especially power and depreciation—continue to outpace revenue and pressure operating margins.
- How the $425–$500 million second-half development spend is funded and whether construction commitments translate into leased, income-producing space on schedule.
- Debt maturities and refinancing needs, floating-rate exposure, covenant headroom and the continued availability of revolver capacity.
- The effect of new common shares and preferred dividends on common-stockholder earnings and per-share FFO, as well as the sustainability and funding of distributions.
- Quarterly valuation changes and potential payments for Sentrum contingent consideration, and any eventual obligation under the Singapore earnout.