Business context and reporting period
Digital Realty Trust, Inc. and its operating partnership own, develop and operate data centers, colocation and interconnection facilities globally. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; financial amounts below are in U.S. dollars unless stated otherwise.
On August 1, the company acquired a controlling interest in South African data center provider Teraco for approximately $1.7 billion. The filing reports a 61.1% indirect controlling interest, while describing an approximately 55% ownership interest after accounting for the consolidated empowerment trust structure.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,192.1m | $1,133.1m | $3,458.7m | $3,316.7m |
| Operating income | $157.4m | $184.4m | $469.0m | $562.5m |
| Net income | $238.8m | $136.5m | $379.6m | $657.0m |
| Net income available to common stockholders | $226.9m | $124.1m | $343.2m | $623.9m |
| Diluted EPS | $0.75 | $0.44 | $1.15 | $2.21 |
| FFO per share/unit, diluted | $1.55 | $1.54 | $4.61 | $4.82 |
Revenue increased 5.2% year over year in Q3 and 4.3% for the nine-month period. Operating income margin was approximately 13.2% in Q3 versus 16.3% a year earlier, and 13.6% for nine months versus 17.0%. Operating expenses rose faster than revenue, driven notably by utility costs and growth in recently completed facilities.
Q3 net income included a $174.0 million gain on a Dallas property sale; the gain helped lift net income despite lower operating income. Nine-month 2021 results included a much larger gain from European property sales, contributing to the year-over-year decline in 2022 net income. Q3 diluted EPS also reflects the Teraco redeemable noncontrolling interest.
- Cash flow: Nine-month operating cash flow was $1,203.0m, compared with $1,250.3m. Investing used $3,727.9m, including $1,877.1m for acquisitions and $1,753.5m for real estate improvements. Financing provided $2,567.5m; cash, cash equivalents and restricted cash ended at $185.9m.
- Debt: Debt totaled $15,876.2m at September 30, up from $13,562.2m at year-end 2021. Weighted-average interest rate was 2.33%, versus 2.23%; 80.3% was fixed-rate or hedged. Debt-to-total-enterprise-value was approximately 35%, and weighted-average term to initial maturity was 5.2 years. The company reported compliance with senior-note financial covenants.
- Liquidity: Cash and cash equivalents were $177.0m, excluding $9.0m restricted cash. Approximately $1.1bn was available under revolving facilities as of November 2. The company also had an ATM equity program with $1.5bn available and approximately $0.6bn of potential proceeds remaining under forward equity sales, subject to settlement.
- Portfolio and distributions: Consolidated portfolio occupancy was 83.4%, compared with 82.5% at year-end 2021; total portfolio occupancy was 84.7%, compared with 83.6%. The annual common dividend rate was $4.88 per share.
Material changes versus prior comparable periods
- Q3 rental and other services revenue rose 6.6%; non-stabilized portfolio revenue grew 38.7%, while stabilized revenue declined 1.6%. Nine-month total revenue growth was supported by development completions and lease-up, partly offset by foreign exchange translation and prior property sales.
- Q3 operating expenses increased 9.1% and nine-month expenses increased 8.6%. Property-level expenses rose 11.7% and 12.7%, respectively; utilities increased 29.7% in Q3 and 29.1% for nine months.
- Foreign currency translation reduced stabilized rental revenue by approximately $36.1m in Q3 and $85.5m for nine months. Nine-month foreign-currency translation adjustments were a loss of $843.0m, contributing to accumulated other comprehensive loss of $862.8m at September 30.
- Debt rose following Teraco funding and other financing activity. Revolving credit facility borrowings were $2,273.2m at quarter-end versus $415.1m at year-end; term loans were $735.2m versus none. The company issued $550m of 5.55% notes due 2028 and completed Euro term-loan borrowings.
Outlook, commentary, risks and unusual items
- Management reported strong demand in most key markets and expected average aggregate rental rates on renewed leases expiring in 2022 to be slightly positive on both GAAP and cash bases. These expectations are not guarantees; renewal and re-leasing rates depend on local supply, demand and competition.
- The company expected to spend approximately $0.6bn–$0.8bn on development capital expenditures in the fourth quarter of 2022. Open construction-contract commitments were approximately $2.6bn, including about $35.5m expected to be reimbursable by customers.
- Management targets debt-to-Adjusted EBITDA of 5.5x or less, fixed-charge coverage above 3x and floating-rate debt below 20% of total debt. The filing does not provide a specific earnings or FFO forecast for the period ahead.
- Key risks include higher energy and operating costs that may not be fully passed through to customers; inflation and supply-chain disruption; foreign-exchange and interest-rate movements; customer concentration, lease renewals and occupancy; development execution and capital availability; and integration and valuation risks from acquisitions. Teraco’s purchase-price allocation remained provisional and could change materially.
- The $174m Dallas sale gain was a notable Q3 item. The $51.1m nine-month loss on early debt extinguishment primarily related to redemption of 4.75% notes due 2025. The $294m 0.125% notes due 2022 were repaid at maturity on October 17.
- Management stated that no legal proceedings were expected to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable-assurance level; no material quarterly change in internal control over financial reporting was reported.
Important facts for investors to verify
- How Teraco’s operating results, provisional purchase accounting, redeemable noncontrolling interest and future put/call rights affect earnings, dilution and funding needs.
- Whether revenue growth and occupancy gains translate into improved operating margins as utility costs and other expenses rise.
- How the company funds its development commitments, acquisition strategy and dividends while managing higher debt and refinancing exposure.
- Whether lease renewals achieve management’s slightly positive rental-rate expectation, and whether foreign-exchange movements continue to pressure reported results.
- How much of the forward equity proceeds and revolving-credit availability is ultimately used, and at what cost of capital.