DLR

Business Context and Reporting Period

Digital Realty Trust, Inc. (Digital Realty) is a Real Estate Investment Trust (REIT) engaged in owning, acquiring, repositioning, and managing technology-related real estate, including data centers and corporate headquarters. As of March 31, 2006, the portfolio consisted of 46 properties (42 in the U.S., 4 in Europe) totaling approximately 8.1 million net rentable square feet, with an occupancy rate of 93.3% excluding redevelopment space. This filing covers the quarterly period ended March 31, 2006.

Key Financial Metrics

Liquidity: The company maintains a $350 million unsecured revolving credit facility. As of March 31, 2006, $204.4 million was drawn, leaving $76.3 million available. The company intends to limit indebtedness to 60% of total market capitalization; the ratio was approximately 31% as of the reporting date.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 54.3% year-over-year, driven primarily by the acquisition of 20 properties in the preceding 12 months. Rental revenue grew 50.6% and tenant reimbursements grew 77.5%.
• Expense Increases: Total operating expenses rose 56.3% to $54.3 million. Depreciation and amortization increased 50.3% due to new assets. Interest expense increased 40.2% to $11.4 million, reflecting higher debt levels to fund acquisitions.
• Portfolio Expansion: During Q1 2006, the company acquired two properties (4025 Midway Road in Dallas and Clonshaugh Industrial Estate in Dublin) for approximately $22.5 million. Subsequent to the quarter, four additional properties were acquired in April 2006.
• Dividends: Total dividends declared in Q1 2006 were $19.1 million, compared to $12.5 million in Q1 2005, reflecting the issuance of Series A and Series B preferred stock in 2005.

Outlook, Risks, and Contingencies

• Guidance and Strategy: Management intends to continue acquiring assets and aggressively managing leases to increase cash flow. The company expects to incur significant capital expenditures for tenant improvements, with $21.5 million committed for 2006.
• Tenant Risk (VarTec): A significant tenant, VarTec Telecom, Inc., is in bankruptcy and leases approximately 158,000 square feet across three properties. VarTec has rejected one lease and is considering rejecting another. The carrying value of assets related to VarTec is approximately $1.8 million.
• Interest Rate Risk: Approximately 25.1% of total debt is variable rate and unhedged. The company uses interest rate swaps to hedge $192.8 million of variable debt. A 10% increase in interest rates would increase annual interest expense on unhedged debt by approximately $1.0 million.
• Contingencies: The company has contingent purchase price obligations related to the 350 East Cermak Road property (up to $20 million) and Paul van Vlissingenstraat 16, dependent on future leasing activity or tax classification changes.

Investor Verification Checklist

• VarTec Bankruptcy Impact: Verify the status of VarTec's lease rejections and the potential for asset write-downs or vacancy at 2440 Marsh Lane and 350 East Cermak Road.
• Debt Maturities: Review the schedule of debt maturities, noting that $57.3 million in principal is due in 2006 and $319.9 million is due in 2007-2008, including the $204.4 million credit facility maturing in October 2008.
• Acquisition Pipeline: Confirm the closing of the four properties acquired in April 2006 (Toronto, Atlanta, Houston, Boston) and their financing terms.
• REIT Compliance: Monitor distribution levels to ensure compliance with the 90% taxable income distribution requirement to maintain REIT status.
• Redevelopment Progress: Assess the timeline and capital requirements for the 1.2 million square feet of space held for redevelopment, which is currently unoccupied.