Digital Realty Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. Digital Realty Trust, Inc. is a REIT operating primarily through Digital Realty Trust, L.P. The company owned 131 properties, including joint-venture properties, across North America, Europe, Australia and Asia.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Operating revenue | $390.6 million | $358.4 million; up 9.0% |
| Operating income | $90.0 million | $98.6 million |
| Net income | $46.7 million | $51.7 million |
| Net income available to common stockholders | $34.2 million; $0.27 basic and $0.26 diluted per share | $42.7 million; $0.34 basic and diluted |
| FFO available to common stockholders and unitholders | $164.1 million; $1.25 basic and $1.22 diluted per share/unit | $155.0 million; $1.20 basic and $1.16 diluted |
| Cash from operations | $116.4 million | $89.0 million |
| Cash used in investing | $227.5 million | $355.6 million |
| Cash and cash equivalents | $70.2 million | $56.8 million at December 31, 2013 |
| Total debt | $5.007 billion | $4.962 billion at December 31, 2013 |
| Total assets / total liabilities | $9.805 billion / $5.930 billion | $9.686 billion / $6.039 billion at December 31, 2013 |
Operating margin was approximately 23.0%, compared with 27.5% a year earlier. The filing does not present a standalone cash-flow margin. At March 31, debt comprised $3.190 billion fixed-rate debt, $561.6 million variable-rate debt hedged with swaps and $1.256 billion unhedged variable-rate debt. The effective interest rate was 3.89%; debt represented approximately 38% of enterprise value. The $2.0 billion revolving facility had $790.5 million drawn and approximately $1.2 billion available, net of letters of credit. Restricted cash was $42.8 million.
Changes versus the prior-year quarter
- Revenue increased $32.2 million, with same-store revenue up $36.2 million; new-property revenue declined $4.0 million under the filing’s classification.
- Operating expenses rose $40.8 million, including higher property operating costs and depreciation and amortization. General and administrative expense increased $14.7 million, principally due to a $12.4 million severance charge relating to former CEO Michael Foust.
- Operating income declined $8.6 million and net income declined $5.0 million. Common-stockholder income fell $8.5 million, also reflecting higher preferred dividends.
- FFO increased $9.1 million. Management cautions that FFO is supplemental and does not capture capital expenditure requirements or changes in property values.
- Operating cash flow increased $27.4 million. Investing cash outflow was lower, principally because there were no real-estate acquisitions in Q1 2014 versus $77.9 million of acquisition spending in Q1 2013.
Outlook, management commentary and significant items
- Management reported strong data-center demand in most key markets and expected average rents on 2014 expirations to be higher on a GAAP basis and flat on a cash basis. It also flagged potential oversupply in Northern Virginia and Silicon Valley. Portfolio occupancy was approximately 92.1%, excluding development and future-development space; average remaining lease term was approximately seven years.
- Approximately 1.335 million square feet was under construction and 1.422 million square feet held for future development. Management estimated $400–$600 million of development capital expenditures for the nine months ending December 31, 2014. Q1 cash capital expenditures were $212.4 million.
- The company had $281.4 million of open construction-contract commitments. Management said it expected to meet liquidity needs with operating cash flow, available credit, and future debt and equity financing, but warned that reduced capital availability could constrain acquisitions and development.
- On March 26, the company issued 12 million Series H preferred shares for approximately $289.9 million net proceeds; subsequent April issuances brought the total to 14.6 million shares and approximately $353.2 million net proceeds. Series H carries a 7.375% cumulative dividend.
- After quarter-end, approximately $261.2 million principal amount of 5.50% exchangeable debentures was exchanged for 6,734,938 common shares; approximately $5.2 million was redeemed for cash. The company also issued £300 million of 4.750% guaranteed notes due 2023 on April 1.
- On April 7, the company sold 6 Braham Street for approximately $41.5 million, with an estimated $15.8 million gain expected in Q2. This sale was not considered a strategic shift.
- Other risks include interest-rate and foreign-exchange exposure, tenant defaults or nonrenewals, energy costs and regulation, development and leasing delays, market supply, and reliance on financing. The company reported covenant compliance and no legal proceeding believed likely to have a material adverse effect. No full-year earnings or FFO guidance is stated in the provided filing text.
Investor verification points
- Reconcile revenue growth with declining GAAP operating income and common earnings, including the CEO severance charge, depreciation growth and preferred dividends.
- Review FFO adjustments and distinguish FFO growth from cash available after development spending and distributions.
- Confirm post-quarter share dilution from the debenture exchange and the dividend burden and terms of Series H preferred shares.
- Track execution, leasing and funding of the development pipeline and the $400–$600 million estimated remaining-2014 development spend.
- Monitor debt maturities, variable-rate exposure, revolving-facility availability, and the company’s ability to refinance and maintain covenant compliance.
- Assess occupancy, lease renewals and rents by market, particularly potential oversupply in Northern Virginia and Silicon Valley, and the status of contingent consideration and construction commitments.