Business Context and Reporting Period
Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2009
Business Overview: The Company owns, acquires, develops, and manages technology-related real estate, specifically Turn-Key Datacenter and Powered Base Building solutions. As of June 30, 2009, the portfolio consisted of 75 properties (62 in North America, 13 in Europe) with approximately 13.0 million rentable square feet, of which 1.1 million square feet were held for redevelopment. The portfolio was approximately 94.8% leased excluding redevelopment space.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Operating Revenues | $304.1 million | $238.3 million |
| Net Income | $42.4 million | $24.4 million |
| Net Income Available to Common Stockholders | $20.6 million | $5.4 million |
| Diluted EPS (Common) | $0.27 | $0.08 |
| Net Cash Provided by Operating Activities | $143.5 million | $73.4 million |
| Total Assets | $3,444.7 million | $3,281.0 million |
| Total Liabilities | $1,773.3 million | $1,706.0 million |
| Total Stockholders' Equity | $1,584.9 million | $1,503.9 million |
| Total Indebtedness (Carrying Value) | $1,519.5 million | $1,385.1 million |
| Cash and Cash Equivalents | $69.3 million | $73.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by $65.8 million (27.6%) compared to the prior year period. This was driven by new leasing at same-store properties and the acquisition of new properties. Rental revenue increased by $52.8 million, and tenant reimbursements increased by $13.1 million.
- Profitability: Net income attributable to Digital Realty Trust, Inc. increased to $40.8 million from $23.8 million. Net income available to common stockholders more than tripled to $20.6 million from $5.4 million, primarily due to increased operating income and lower preferred stock dividend impacts relative to earnings growth.
- Debt Structure: Total indebtedness increased by approximately $134.4 million. Significant financing activities included the issuance of $266.4 million in 5.50% exchangeable senior debentures due 2029 and $25.0 million in unsecured senior notes. Conversely, the Company repaid a $96.6 million mortgage loan at 350 East Cermak Road in March 2009.
- Capital Expenditures: Net cash used in investing activities decreased to $261.1 million from $322.1 million, largely due to a significant reduction in cash paid for property acquisitions ($19.1 million vs. $68.6 million in the prior year).
- Accounting Changes: The Company adopted FSP APB 14-1 and SFAS 160 effective January 1, 2009. These changes resulted in the reclassification of noncontrolling interests to equity and the recognition of a debt discount on exchangeable senior debentures, impacting historical comparability.
Guidance, Outlook, and Risks
- Capital Expenditure Outlook: Management expects to incur approximately $150.0 million to $160.0 million in capital expenditures for its redevelopment program during the six months ended December 31, 2009.
- Acquisition Outlook: The Company expects acquisitions for the six months ended December 31, 2009, to range between $120.0 million and $200.0 million.
- Liquidity: As of June 30, 2009, the Company had $69.3 million in cash and cash equivalents and approximately $673.5 million available under its $720.0 million revolving credit facility.
- Risk Factors:
- Economic Conditions: Global economic downturns and tighter credit conditions may adversely affect liquidity, tenant solvency, and the ability to refinance debt.
- Tenant Concentration: Savvis Communications accounted for approximately 10.2% of total operating revenues for the six months ended June 30, 2009.
- Interest Rate Risk: While 97.8% of debt is fixed or hedged, the remaining 2.2% is variable rate. A 10% increase in interest rates would increase annual interest expense by approximately $0.1 million on unhedged debt.
- Foreign Currency: Operations in Europe expose the Company to currency fluctuations, with foreign revenues representing 13.0% of total operating revenues for the six-month period.
Investor Verification Checklist
- Debt Maturities: Verify the repayment schedule for the $60.8 million in mortgage loans maturing in the remainder of 2009 and the $32.7 million revolving credit facility maturing in August 2010.
- Redevelopment Progress: Assess the leasing status and capital requirements for the 1.1 million square feet of space held for redevelopment, which is not currently generating revenue.
- Dividend Sustainability: Confirm that net cash provided by operating activities ($143.5 million) remains sufficient to cover the $100.4 million in dividend and distribution payments made during the period and future REIT distribution requirements.
- Accounting Adjustments: Review the impact of the FSP APB 14-1 adoption on interest expense and net income, as historical periods were adjusted for retrospective application.
- Related Party Transactions: Note that revenues from tel(x), a related party, totaled $9.2 million for the six months ended June 30, 2009.