Business Context and Reporting Period
Company: Digital Realty Trust, Inc. and Digital Realty Trust, L.P.
Filing Type: Form 8-K (Current Report)
Date of Report: June 26, 2012
Event: Entry into a Material Definitive Agreement to acquire the "Sentrum Portfolio," a three-property data center portfolio located in the United Kingdom (Croydon, Woking, and Watford).
Key Financial Metrics and Transaction Details
Acquisition Overview:
- Portfolio Size: Approximately 761,000 square feet across three data centers.
- Ownership Structure: Freehold interests in Woking and Croydon; 125-year leasehold interest in Watford (expiring 2108).
- Purchase Price: Approximately £715.9 million (approx. $1.1 billion based on June 25, 2012 exchange rate of £1.00 = $1.5563).
- Indebtedness Assumed/Repaid: Approximately £340 million (approx. $529.1 million).
- Additional Consideration: Potential earn-out payments based on net operating income from lease-up of vacant space over the next three years.
Lease and Occupancy Metrics (as of March 31, 2012):
- Tenants: 21 diverse tenants under long-term leases plus seven license agreements.
- Occupancy: Estimated at approximately 80% of total available square footage.
- Weighted Average Remaining Lease Term: Approximately 8 years.
- Annualized Rent: Approximately $92.2 million (excluding license fees).
- Future Leasing: Approximately 55,000 square feet signed but not yet commenced, representing ~$9.1 million in expected annualized rent.
Transaction Costs: One-time transaction expenses and early termination fees estimated between $10 million and $35 million.
Material Changes and Outlook
Financial Impact: Management expects the acquisition to be accretive to 2012 Funds From Operations (FFO), excluding transaction expenses and non-core items. The purchase price implies a going-in capitalization rate below the company's previously targeted range, reflecting the portfolio's attractiveness and potential upside.
Funding Strategy: The transaction is expected to be funded through borrowings under the global revolving credit facility, a bridge loan facility, proceeds from debt and equity financings, and/or available cash.
Closing Conditions: The acquisition is subject to various closing conditions. If not satisfied by July 31, 2012, the company may terminate the agreement without liability. Closing is expected on or about July 31, 2012.
Risks, Contingencies, and Management Commentary
- Closing Risk: No assurance that the acquisition will be consummated on the anticipated schedule or at all.
- Forward-Looking Statements: Expectations regarding net operating income (NOI) are based on diligence data and assumptions about leasing vacant space. Actual NOI may differ due to tenant bankruptcies, collection difficulties, property tax reassessments, or unanticipated expenses.
- Tax Considerations: The filing includes supplemental U.S. federal income tax considerations regarding REIT qualification, built-in gains tax on asset dispositions, and proposed Treasury Regulations.
- General Risks: Risks include global economic deterioration, foreign currency exchange rate fluctuations, inability to secure financing, and regulatory changes in the U.K.
Investor Verification Checklist
- Verify the final closing date and whether all conditions precedent were satisfied by July 31, 2012.
- Confirm the final purchase price and the actual amount of indebtedness assumed or repaid, noting any adjustments from the initial estimate.
- Monitor the actual occupancy rate and lease-up progress of the currently vacant space to validate the earn-out potential.
- Review the company's subsequent 10-Q filing for the full text of the Purchase Agreement and detailed pro forma financial impacts.
- Assess the impact of foreign currency exchange rate fluctuations on the reported value of the portfolio and future cash flows.