Digital Realty Trust, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2015. Digital Realty owns, develops and manages data-center and other technology-related real estate through Digital Realty Trust, L.P. At quarter-end, the portfolio comprised 132 properties, including eight held for sale and 14 held through unconsolidated joint ventures; occupancy was 93.5%, excluding active and future development space.
Financial performance and position
- Q2 revenue was $420.3 million, up 4.7% from $401.4 million; rental revenue rose to $330.7 million from $313.4 million. First-half revenue was $826.9 million, up 4.4% year over year.
- Q2 operating income was $107.1 million versus $92.5 million; operating margin was approximately 25.5% versus 23.0%. First-half operating income was $256.4 million versus $182.5 million, with margin approximately 31.0% versus 23.0%.
- Net income available to common stockholders was $117.1 million, or $0.86 per diluted share, in Q2, compared with $41.5 million, or $0.31, a year earlier. First-half amounts were $218.8 million, or $1.61 per diluted share, versus $75.7 million, or $0.58.
- FFO available to common stockholders and unitholders was $176.1 million in Q2 ($1.26 diluted per share/unit) and $392.5 million for the first half ($2.82 diluted), compared with $164.2 million ($1.20) and $328.3 million ($2.41), respectively.
- First-half operating cash flow was $355.2 million, up from $315.3 million. Investing cash outflow was $241.9 million, versus $403.8 million; financing cash outflow was $95.5 million, compared with $112.7 million provided in the prior-year period. Cash and equivalents were $59.2 million at June 30.
- Total debt was $4.97 billion; debt to total enterprise value was approximately 33%. Fixed-rate debt, including swapped variable debt, was 74.6% of total, and the effective interest rate was 3.78%. Approximately $1.1 billion remained available under the $2.0 billion revolving facility. The company reported compliance with debt covenants.
- Total assets were $9.59 billion and total equity was $3.89 billion. The common dividend rate was $3.40 annually per share.
Changes versus prior comparable period
- Revenue growth reflected higher income from completed and leased development space; stabilized-property revenue declined, primarily due to weaker sterling and euro exchange rates. Management also cited leasing gains in the pre-stabilized portfolio.
- First-half net income and operating income comparisons were materially affected by a $94.5 million gain on property sales and a $42.7 million reduction in contingent-consideration expense. Q2 included a $76.7 million property-sale gain. These items make reported earnings growth less representative of recurring operations; FFO excludes property-sale gains.
- Interest expense declined $4.9 million in the first half, principally reflecting debt redemptions. First-half capital expenditures were $311.1 million, down from $410.1 million.
- Foreign currency translation reduced first-half comprehensive income; the company reported a $22.4 million foreign-currency translation loss in other comprehensive income.
Outlook, risks and unusual items
- Management cited strong demand in most key markets and expected 2015 expirations, on average, to re-lease at higher GAAP rents and flat cash rents, subject to market supply. No full-year earnings or FFO guidance is stated in the provided filing text.
- The company expected $475 million to $575 million of development capital expenditures in the second half of 2015, subject to demand, leasing results and capital availability. It expected near-term acquisitions to be a smaller part of growth while seller pricing remained above its return requirements.
- On July 13, 2015, after quarter-end, the company agreed to acquire Telx for approximately $1.886 billion in cash, subject to closing conditions. It arranged a $1.85 billion bridge commitment and expected approximately $686.4 million in net proceeds from a forward equity sale to fund part of the purchase.
- Other material risks include tenant concentration and nonrenewals, data-center supply and demand, development execution and funding, refinancing and interest-rate exposure, foreign exchange, energy costs, and the possibility that Telx does not close or deliver expected benefits. The filing added a risk concerning tax liabilities and attributes inherited in acquisitions; Telx is a C corporation.
- A July 22, 2015 settlement with former CEO Michael Foust provided for an $8.0 million payment and cancellation of incentive units; the company expected to reverse approximately $4.7 million of previously recorded severance expense in Q3.
- Other unusual items include a $12.4 million accrued acquisition earnout and $113.4 million of construction-contract commitments. Management said no pending legal proceeding was expected to have a material adverse effect.
Important facts for investors to verify
- How much reported earnings growth came from asset-sale gains and contingent-consideration remeasurement, versus ongoing leasing and operating performance.
- Whether development spending converts into leased, income-producing space on schedule and within the stated cost outlook.
- Telx closing conditions, final funding mix, potential dilution, inherited tax exposure and integration prospects.
- Debt maturities, variable-rate exposure, covenant headroom and continued access to revolving credit and capital markets.
- Lease renewals and occupancy trends, especially in key metropolitan areas and as near-term expirations approach.