Digital Realty Trust, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; comparative periods ended September 30, 2011. Unaudited. The filing combines Digital Realty Trust, Inc. and its operating partnership, Digital Realty Trust, L.P.; the partnership conducts substantially all operations and holds substantially all assets and debt.
Business context
The company owns, develops, redevelops and manages technology-related real estate, principally data centers. At quarter-end, it reported 110 properties and approximately 21.2 million rentable square feet, including 2.2 million square feet held for redevelopment. Occupancy was 94.2%, excluding redevelopment space. The portfolio was 96.4% owned by the public REIT at the operating-partnership level.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $342.5 million | $273.5 million | $929.3 million | $792.1 million |
| Operating income | $97.1 million | $71.6 million | $271.4 million | $223.0 million |
| Net income | $56.9 million | $37.7 million | $160.2 million | $114.9 million |
| Net income available to common stockholders | $45.6 million | $31.9 million | $126.8 million | $94.9 million |
| Diluted EPS | $0.37 | $0.31 | $1.12 | $0.97 |
| Diluted FFO per share and unit | $1.13 | $1.01 | $3.28 | $3.04 |
Q3 operating margin was approximately 28.3%, versus 26.2% a year earlier; net margin was approximately 16.6%, versus 13.8%. Nine-month operating cash flow was $356.5 million, compared with $280.1 million. Investing cash outflow was $2.085 billion, primarily reflecting acquisitions and property investment; financing cash inflow was $1.764 billion. Cash and equivalents were $76.1 million at September 30, excluding $43.2 million of restricted cash.
Total debt was $4.080 billion, up from $2.940 billion at December 31, 2011. Debt to total enterprise value was approximately 30%. The company reported an effective interest rate of 4.35%; 82.5% of debt was fixed-rate or hedged, and 17.5% was variable-rate. The $1.8 billion global revolver had $526.4 million drawn and approximately $1.3 billion available, after letters of credit. Total assets were $8.513 billion and total liabilities were $4.985 billion.
Changes versus comparable periods
- Q3 revenue increased 25% and nine-month revenue increased 17%. Management attributed growth principally to acquisitions and leasing at existing properties. Same-store revenue rose $28.6 million in Q3 and $84.9 million year to date; new properties added $40.4 million and $52.3 million, respectively.
- Q3 operating expenses rose $43.6 million, including higher property operating costs and depreciation; nine-month expenses rose $88.8 million. Management cited higher utility consumption and rates, newly operating development and redevelopment projects, and portfolio growth.
- Q3 interest expense increased $4.0 million to $41.0 million; nine-month interest expense increased $4.3 million to $116.8 million. Net income and EPS improved, while the share count also increased following equity issuance and preferred-stock conversions.
- Nine-month operating cash flow improved by $76.4 million, but acquisition cash outflow rose sharply to $1.452 billion from $86.6 million in the prior-year period.
Outlook, commentary and risks
- Management reported strong demand in most key markets and expected rents on 2012 lease renewals or re-leasing generally to exceed current rents. Nine-month renewal rates increased 5.0% for Turn-Key Flex and 21.9% for Powered Base Building space, on a GAAP basis. These results are not assurances of future leasing outcomes.
- The company expected $250 million to $350 million of development and redevelopment capital expenditures in Q4 2012. Approximately 1.7 million square feet was under construction, and construction-contract commitments were $187.3 million. No earnings or revenue guidance is stated in the supplied filing text.
- The July acquisition of the three-property, 733,000-square-foot Sentrum portfolio in greater London had consideration of approximately $1.1 billion, plus an accrued contingent consideration fair value of about $91.3 million. It contributed $28.4 million of revenue and $6.8 million of operating income in the reported periods after acquisition.
- Other potential acquisition payments include an earnout of up to approximately $40.7 million for 29A International Business Park; the filing said no amount was then accrued. A tenant at Convergence Business Park has an expansion option that could restrict development on identified space until April 2014.
- Key risks include tenant concentration and defaults, data-center demand and competition, redevelopment leasing and funding, refinancing and interest-rate exposure, foreign-currency movements, economic and credit-market conditions, energy and regulatory costs, and maintaining REIT qualification. The filing warns actual results may differ materially from forward-looking statements.
- Management stated that the company and operating partnership were in compliance with credit-facility and note covenants at quarter-end. Both entities reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No legal proceedings or defaults upon senior securities were reported.
Important facts for investors to verify
- Whether Sentrum acquisition performance, its contingent consideration and financing are consistent with underwriting expectations.
- Occupancy, leasing spreads, tenant concentration and the pace and cost of converting 2.2 million square feet of redevelopment space into income-producing area.
- Available revolver capacity, debt maturities and refinancing needs, particularly the 2014 debenture put date and 2015 maturities; confirm covenant headroom.
- Whether operating cash flow and financing access can support planned capital spending and distributions, given substantial acquisition and development outlays.
- Foreign-exchange, floating-rate and interest-rate-hedge exposures, alongside contingent payments and construction commitments.