Business context and reporting period
Digital Realty Trust, Inc. and its operating partnership filed this unaudited Form 10-Q for the quarter ended March 31, 2012. The REIT owns, develops, redevelops and manages technology-related real estate, principally data centers. At quarter-end, its portfolio comprised 102 properties, about 19.1 million rentable square feet including 2.2 million square feet held for redevelopment, and was 94.8% leased excluding redevelopment space. The company owned approximately 95.7% of the operating partnership’s common interests.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 or prior period |
|---|---|---|
| Operating revenue | $283.1 million | $250.7 million; up 12.9% |
| Operating income | $85.9 million | $74.7 million; operating margin 30.3% versus 29.8% |
| Net income | $49.3 million | $39.0 million |
| Net income available to common stockholders; diluted EPS | $39.2 million; $0.36 | $31.0 million; $0.33 |
| FFO available to common stockholders and unitholders; diluted FFO per share and unit | $124.7 million; $1.06 | $107.0 million; $1.02 |
| Cash from operating activities | $70.5 million | $64.5 million |
| Cash used in investing activities | $316.8 million | $137.6 million |
| Cash from financing activities | $231.9 million | $105.7 million |
Revenue growth reflected leasing at existing properties and contributions from acquired properties. Expenses also rose: operating expenses increased to $197.2 million from $176.1 million, and interest expense to $38.0 million from $36.1 million. Cash investment included $119.1 million for acquisitions and $186.0 million for real estate improvements and advances. Capital expenditures, excluding indirect costs, were $174.1 million versus $123.7 million.
At March 31, total assets were $6.42 billion and total liabilities were $3.79 billion. Debt was $3.27 billion, up from $2.94 billion at December 31, 2011; cash and cash equivalents were $26.2 million, with an additional $43.8 million of restricted cash. The $1.5 billion global revolver had $678.6 million drawn and approximately $798.4 million available, after letters of credit. Management reported compliance with its covenants. Debt to total enterprise value was approximately 27%; the reported effective interest rate was 4.75%. About 20.7% of debt was variable-rate, including $678.6 million unhedged.
Material changes and management commentary
- Revenue increased $32.4 million year over year. Same-store revenue rose $22.1 million, while new-property revenue rose $10.3 million. The portfolio expanded from 96 properties at March 31, 2011 to 102 a year later.
- Operating costs increased with higher utility consumption and rates, properties placed into service, depreciation and amortization, and company growth. Average renewal rents were down 0.3% for Turn-Key Datacenter space and up 20.5% for Powered Base Building space; these figures reflect the leases signed in the quarter.
- Q1 acquisition: Convergence Business Park in Texas for approximately $123 million, funded with revolver borrowings. The company also entered a joint venture to acquire a Hong Kong property, subject to closing conditions and then expected to close in Q2 2012.
- Management cited strong demand in most key data-center markets and expects growth from leasing, acquisitions, development and redevelopment. It expected $565 million to $765 million of development and redevelopment capital expenditures during the remaining nine months of 2012; the amount could change materially with demand, leasing and capital availability. No full-year earnings or FFO guidance is stated in the provided filing text.
Outlook, risks, contingencies and subsequent events
Management expected to fund liquidity needs through operating cash flow, debt and equity issuance, and revolver capacity. The company’s strategy depends on continued access to financing and on leasing and completing substantial development and redevelopment work; open construction-contract commitments were approximately $213.1 million. The filing identifies risks from economic and credit conditions, tenant defaults or non-renewals, market concentration, competition and data-center demand, interest and foreign-exchange rates, development costs and delays, and maintaining REIT status. Approximately 9.2% of quarterly revenue came from subsidiaries of CenturyLink. Solyndra, a tenant in bankruptcy, had a pending motion to reject its lease; recovery and timing were uncertain.
The debt maturity schedule showed approximately $1.20 billion due in 2015, including the revolver balance, and $483.6 million in 2014 assuming the exchangeable debentures are put at their first redemption date. Subsequent to quarter-end, the company issued 7.3 million Series F preferred shares for net proceeds of $175.8 million, closed a $750 million multi-currency term loan facility maturing in 2017, and converted all outstanding Series C preferred shares into common shares. A common-stock dividend of $0.73 per share was declared in April for payment in June. The filing reported no legal proceedings and stated that disclosure controls were effective.
- Other contingencies include a potential earnout of up to approximately $39.8 million tied to future net operating income at 29A International Business Park, and a Convergence tenant expansion option with restrictions on development of specified space until April 2014.
- Management stated that it intended to distribute 100% of taxable income for 2012. Operating cash flow had generally covered distributions, but the company noted it might need revolver borrowings to fund them.
Most important facts for investors to verify
- Whether leasing demand, occupancy and achieved rents support continued revenue and FFO growth, particularly as leases expire and redevelopment space is brought online.
- Actual development and redevelopment spending versus the $565 million to $765 million remaining-2012 estimate, and the timing and leasing of projects under construction.
- Funding and refinancing plans for debt maturities, especially the 2015 maturity concentration; revolver availability, covenant compliance and the effect of the subsequent term loan and preferred offering.
- The status and financial impact of the Solyndra lease matter, the 29A earnout contingency, the Convergence tenant option and the expected Hong Kong joint-venture acquisition.
- How utility and other operating-cost increases, interest-rate exposure and foreign-currency movements affect margins, cash flow and distributions.