Business context and reporting period
Digital Realty Trust, Inc. and its operating partnership filed a combined Form 10-K for the fiscal year ended December 31, 2013. The REIT owns, develops and manages data-center and other technology-related real estate. At year-end, its portfolio included 131 properties, about 24.5 million rentable square feet (including development space), and 655 tenants; occupancy was 92.6% including unconsolidated joint ventures and excluding development space.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total operating revenue | $1.482 billion | $1.279 billion | +15.9% |
| Operating income | $381.8 million | $366.1 million | +4.3% |
| GAAP operating margin | 25.8% | 28.6% | Down 2.8 percentage points |
| Net income | $320.4 million | $216.0 million | +48.3% |
| Net income available to common stockholders | $271.6 million | $171.7 million | +58.2% |
| Diluted earnings per share | $2.12 | $1.48 | +43.2% |
| Diluted FFO per share and unit | $4.74 | $4.44 | +6.8% |
| Cash from operating activities | $656.4 million | $542.9 million | +20.9% |
Rental revenue rose 16.6% to $1.155 billion and tenant reimbursements rose 18.7% to $323.3 million. Operating expenses increased 20.5% to $1.100 billion, with higher utilities, property taxes and depreciation contributing to operating-margin compression. Interest expense increased 20.6% to $189.4 million.
Year-end cash and cash equivalents were $56.8 million, plus $40.4 million of restricted cash. Capital expenditures were $1.091 billion in the company’s capex presentation; cash-flow statements report $1.190 billion of improvements and advances for real estate. Distributions paid were $443.9 million. The filing does not present a single consolidated liquidity ratio.
Consolidated debt was $4.962 billion, up from $4.279 billion. About 76.1% was fixed-rate or hedged; the effective interest rate was 3.92%. The company reported debt equal to approximately 41% of total enterprise value and about $1.3 billion available under its $2.0 billion revolving facility, net of letters of credit. Cash dividends on common stock totaled $3.12 per share for 2013.
Material changes versus the prior comparable period
- Revenue growth reflected acquisitions, new leasing and delivery of completed development space. Same-store revenue increased $98.5 million; new properties contributed $104.7 million of growth.
- Occupancy was 92.6% at year-end versus 93.2% at December 31, 2012, as newly delivered unleased space partly offset leasing gains.
- Net income included a $115.6 million gain from contributing nine data centers to a Prudential-managed joint venture. The transaction generated approximately $328.6 million of proceeds; Digital Realty retained a 20% interest and no longer consolidates those properties.
- Digital Realty issued £400 million of 4.25% notes due 2025 and $250 million of Series G preferred stock. It also refinanced and expanded its revolving credit and term-loan facilities. It repaid several mortgages and $33 million of Prudential notes.
- 2013 acquisitions totaled approximately $188.2 million, substantially below 2012’s $1.571 billion. Development spending increased, and the company reported $1.8 million of favorable change in the fair value of Sentrum acquisition contingent consideration.
Outlook, risks and unusual items
- Management expected 2014 rents on expiring data-center leases, on average, to be higher on a GAAP basis and flat on a cash basis, subject to market supply and leasing outcomes. This is commentary, not formal earnings guidance.
- Management expected $600 million to $800 million of 2014 development capital expenditures; the amount could change materially with demand, leasing results and access to capital. Open construction commitments were $202.1 million at year-end.
- Management noted demand remained strong in many markets, including Northern Virginia, Dallas, Amsterdam and London, but identified Silicon Valley as potentially exposed to significant oversupply. Acquisitions could be a smaller near-term growth contributor as seller pricing expectations adjust to the company’s return requirements.
- Key risks include development cost, timing and lease-up; competition and data-center supply; tenant concentration and renewals; power availability and costs; interest rates and refinancing; foreign currency exposure; and service, security or infrastructure failures. The 20 largest tenants generated 46.3% of annualized rent; CenturyLink accounted for 7.8%.
- Debt maturities include $446.9 million in 2014, including $266.4 million of exchangeable debentures with a holder put date in April 2014, and approximately $1.9 billion in 2017, largely the revolving facility and term loan. The company said it was in compliance with debt covenants at year-end.
- Other notable items: a $5.6 million gain on an insurance settlement; a $10.0 million noncash straight-line rent adjustment recorded in operating expense, $7.5 million relating to prior years, which management deemed immaterial; and a capitalization-policy refinement that increased 2013 capitalized costs by approximately $9.5 million versus the prior policy.
- No material legal proceeding or recognized property impairment was reported. The company was assessing environmental cleanup needs at a Silicon Valley property; management said costs were not expected to be material, but could not estimate them clearly.
Important facts for investors to verify
- How much of 2013 earnings growth came from recurring operations versus the $115.6 million joint-venture contribution gain and other unusual items.
- Whether the development pipeline can be completed, leased and funded within the stated 2014 capex range, particularly in markets facing possible oversupply.
- The 2014 debenture put/refinancing outcome and the company’s capacity to address the 2017 facility maturities while sustaining distributions.
- Lease expirations, renewal spreads and tenant credit exposure, including the largest tenants and the 14.3% of portfolio square footage scheduled to expire through 2015.
- The effect of higher utilities, property taxes, interest rates and foreign-exchange movements on margins, cash flow and distributions.