Digital Realty Trust, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2015. Digital Realty is a REIT focused on owning, developing and managing data-center and other technology-related real estate. Its portfolio comprised 132 properties, including joint-venture properties and assets held for sale; occupancy was approximately 93%, excluding development and future-development space. The filing combines Digital Realty Trust, Inc. and its operating partnership, which holds substantially all operating assets and debt.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total operating revenue | $436.0 | $412.2 | $1,262.9 | $1,204.2 |
| Operating income | $104.1 | $82.4 | $360.5 | $264.8 |
| Net income attributable to company | $57.0 | $127.8 | $312.7 | $234.0 |
| Net income available to common stockholders | $38.5 | $109.3 | $257.3 | $185.0 |
| Basic earnings per share | $0.28 | $0.81 | $1.89 | $1.39 |
| FFO per share and unit, diluted | $1.28 | $1.22 | $4.10 | $3.63 |
| Cash provided by operations | Not provided quarterly | Not provided quarterly | $539.2 | $472.6 |
Margins and cash flow. Operating margin, calculated as operating income divided by revenue, was approximately 23.9% in Q3 2015 versus 20.0% in Q3 2014, and 28.5% for the first nine months versus 22.0%. These comparisons include significant fair-value changes in contingent consideration. Nine-month investing cash outflow was $425.2 million, mainly reflecting $535.1 million of real-estate improvements, partly offset by property-sale proceeds. Financing cash outflow was $125.8 million; cash and equivalents ended the period at $23.0 million, plus $12.5 million restricted cash.
Debt and liquidity. Consolidated debt was $4.75 billion at September 30, 2015, compared with $4.67 billion at December 31, 2014. Debt to total enterprise value was approximately 31%; 75.6% of debt was fixed-rate or hedged, and the reported effective interest rate was 3.80%. The company had $1.2 billion available under its $2.0 billion revolving facility, after $689.0 million drawn and letters of credit. It reported compliance with applicable debt covenants. Debt due in 2016 was $217.0 million and in 2017 was $1.79 billion, including the revolving facility and term loan, both with extension options.
Material changes versus prior comparable periods
- Revenue increased 5.8% in Q3 and 4.9% for the first nine months. Rental revenue growth was partly offset by vacancies and weaker sterling and euro exchange rates in the stabilized portfolio; growth in pre-stabilized properties reflected new leases, including completed development space.
- Q3 common-stockholder income fell to $38.5 million from $109.3 million. The prior-year quarter included a $93.5 million gain on contributing a property to a joint venture; 2015 also had higher transaction costs. Nine-month common-stockholder income rose to $257.3 million from $185.0 million, aided by $94.3 million in property-sale gains and a $44.3 million reduction in contingent-consideration expense.
- FFO per share and unit increased 4.9% in Q3 and 13.0% for the first nine months. FFO is a supplemental, non-GAAP REIT measure and does not capture capital expenditures or changes in property values.
- Nine-month operating cash flow rose $66.6 million year over year. Investing outflow decreased as capital expenditures declined and property-sale proceeds increased. Financing outflow increased, with different timing of equity and debt offerings, repayments and distributions.
- Capital expenditures, excluding indirect costs, were $451.4 million for the first nine months, down from $597.0 million. Common dividends were at an annual rate of $3.40 per share; the filing reports no change to that rate during the period.
Outlook, management commentary, risks and unusual items
- Management reported strong demand in most key markets and expected rents on 2015 lease expirations, in aggregate, to be higher on a GAAP basis and flat on a cash basis. Nine-month renewal rents increased 3.2% for Turn-Key Flex and 23.7% for Powered Base Building space, on a GAAP basis. These expectations are not guaranteed.
- Management estimated $150 million to $200 million of development-program capital expenditures for Q4 2015. It said near-term acquisitions could represent a smaller share of growth because investor demand had compressed capitalization rates and seller pricing did not always meet the company’s return requirements. No earnings or FFO guidance is provided in the supplied filing text.
- On October 9, 2015, after quarter-end, the company completed its approximately $1.886 billion Telx acquisition. Funding included $674.1 million net proceeds from settlement of forward common-stock sales, approximately $241.7 million net proceeds from Series I preferred stock, and $950 million of notes issued October 1. Telx integration, realization of expected benefits and potential inherited tax liabilities are material follow-up considerations.
- Other notable items include $11.0 million of Q3 transaction expense; settlement of former CEO Michael Foust’s employment-related claims for $8.0 million, with a $4.6 million reversal of previously recorded severance expense; and $135.6 million in open construction-contract commitments. The company reported no legal proceedings believed likely to have a material adverse effect.
- Risks include interest-rate and foreign-exchange exposure, refinancing and capital-market access, reliance on demand for specialized data-center space, lease renewals and tenant credit, development execution and costs, geographic concentration, utility and energy regulation, and Telx integration. Foreign-currency translation reduced comprehensive income, and the company identified sterling, euro and Singapore dollar as primary exposures.
Important facts for investors to verify
- Telx’s post-acquisition operating contribution, integration costs, realized synergies and any acquired tax liabilities.
- Whether occupancy and leasing demand support the expected lease commencements, renewal rates and development returns, particularly for 1.4 million square feet under active development.
- Debt maturities and refinancing plans, especially the $1.79 billion scheduled in 2017, available revolver capacity and covenant headroom.
- Cash available after development spending, distributions and debt service; reported operating cash flow should be considered alongside substantial property investment needs.
- The extent to which reported earnings benefited from property disposals and contingent-consideration remeasurement, and how recurring property operations compare using FFO and other appropriate supplemental measures.