DLR

Business Context and Reporting Period

Company: Digital Realty Trust, Inc. (DLR)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Digital Realty Trust is a Real Estate Investment Trust (REIT) focused on owning, acquiring, developing, and managing technology-related real estate, including data centers, internet gateways, and technology manufacturing properties. As of December 31, 2007, the company owned 70 properties (excluding one unconsolidated joint venture) totaling approximately 12.3 million net rentable square feet, with 1.8 million square feet held for redevelopment. The portfolio is geographically diversified across North America and Europe, with a 94.7% occupancy rate excluding redevelopment space.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 45.3% to $395.2 million, driven primarily by the acquisition of 13 new properties and increased leasing activity in same-store properties.
• Expense Increases: Total operating expenses rose 56.1% to $308.4 million, and interest expense increased 29.9% to $64.4 million, reflecting the larger portfolio size and higher debt balances.
• Portfolio Expansion: The company acquired 13 properties in 2007, including significant assets in Northern Virginia, London, and Amsterdam, adding 920,000 square feet of net rentable space (excluding redevelopment).
• Discontinued Operations: The company sold three properties in 2007 (100 Technology Center Drive, 4055 Valley View Lane, and 7979 East Tufts Avenue), resulting in a gain on sale of $18.0 million, which is reported in discontinued operations.
• Capital Structure: The company completed a $150.4 million common stock offering and a $169.1 million Series C preferred stock offering in 2007 to fund acquisitions and repay debt.

Guidance, Outlook, and Risks

Management Outlook: Management intends to continue acquiring properties, redeveloping existing space, and accessing capital markets to fund growth. The company targets a debt-to-total-market-capitalization ratio of 60% or less. Future growth is expected to be driven by the development of 1.8 million square feet of redevelopment space and new acquisitions.

Key Risks and Contingencies:

• Tenant Concentration: The 15 largest tenants represented 51% of total annualized rent. Savvis Communications (11.8%) and Qwest Communications (8.2%) are the largest tenants.
• Interest Rate Risk: Approximately 22.3% of total debt is variable rate and unhedged. Rising interest rates could increase interest expense.
• Development Risk: Significant capital is required to redevelop 1.8 million square feet of space. Delays or cost overruns could impact financial performance.
• Foreign Currency: Operations in Europe expose the company to exchange rate fluctuations between the U.S. dollar, Euro, and British Pound.
• REIT Status: The company must distribute at least 90% of taxable income to maintain REIT status and avoid corporate income tax.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the revolving credit facility covenants, particularly regarding leverage ratios and unencumbered asset pools.
• Tenant Leases: Review lease expiration schedules; 8.1% of net rentable square feet (excluding redevelopment) is scheduled to expire through 2009.
• Redevelopment Progress: Monitor the status of the 1.8 million square feet held for redevelopment and associated capital commitments ($74.8 million).
• Dividend Sustainability: Confirm that operating cash flow remains sufficient to cover the required 90% REIT distribution and declared dividends ($1.24 annualized rate on common stock).
• Convertible Securities: Assess the dilutive impact of the $172.5 million exchangeable debentures and Series C/D convertible preferred stock if stock prices exceed conversion thresholds.