Business context and reporting period
Digital Realty Trust, Inc. and its operating partnership filed this unaudited Form 10-Q for the quarter ended June 30, 2012. The company owns, develops and manages technology-related real estate, including data centers. At quarter-end, its portfolio comprised 105 properties and approximately 20.1 million rentable square feet, including 2.2 million square feet held for redevelopment; occupancy was 93.5%, excluding redevelopment space.
Financial performance and position
Unless noted otherwise, amounts are in U.S. dollars. Income statement and cash flow figures below are consolidated.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $303.7m | $267.9m | $586.9m | $518.6m |
| Operating income | $88.4m | $76.7m | $174.4m | $151.4m |
| Operating margin | 29.1% | 28.6% | 29.7% | 29.2% |
| Net income | $54.0m | $38.2m | $103.2m | $77.2m |
| Net income available to common stockholders | $42.0m | $32.0m | $81.2m | $63.0m |
| Diluted earnings per share | $0.38 | $0.33 | $0.75 | $0.66 |
| Diluted FFO per share and unit | $1.09 | $1.02 | $2.15 | $2.03 |
For the six months ended June 30, operating cash flow was $231.2m, versus $189.7m a year earlier; investing cash outflow was $646.4m, versus $331.0m; and financing cash inflow was $422.4m, versus $157.5m. Cash and cash equivalents ended the period at $47.8m, excluding $35.3m of restricted cash. Capital expenditures, excluding indirect costs, were $370.4m for the half-year.
Total assets were $6.72bn and total liabilities $3.98bn at June 30. Debt was $3.40bn, up from $2.94bn at December 31, 2011. The company reported debt equal to approximately 27% of total enterprise value. About 81.2% of debt was fixed-rate or hedged; 18.8% was unhedged variable-rate debt. The effective interest rate was 4.67%. The $1.5bn global revolver had $324.5m drawn and $22.5m of letters of credit, leaving approximately $1.2bn available. A new $750m multi-currency term facility had $520.9m outstanding at quarter-end.
Material changes versus prior comparable period
- Q2 revenue increased 13.4% year over year and net income increased 41.2%; six-month revenue rose 13.2% and net income rose 33.7%.
- Rental and tenant reimbursement revenue growth reflected leasing activity, completed development and redevelopment space, and property acquisitions. The portfolio expanded from 96 properties at June 30, 2011 to 105.
- Operating expenses rose 12.6% in Q2 and 12.3% for the half-year. Management cited higher utility consumption and rates, redevelopment projects entering service, increased depreciation, and growth-related general and administrative costs. Transaction expenses also increased.
- Interest expense was down $1.7m in Q2 but slightly higher for the half-year. Repayment of several mortgage loans offset the effects of new borrowing.
- FFO per share and unit grew more slowly than net income; the filing cautions that FFO excludes real-estate depreciation and does not capture capital spending needed to maintain properties.
Outlook, risks, contingencies and unusual items
- Management expected to spend approximately $400m–$600m on development and redevelopment in the six months ending December 31, 2012; actual spending could vary with demand, leasing and capital availability. Open construction-contract commitments were approximately $223.6m at June 30.
- Management described demand for data-center space as strong in most key markets and said renewal rents had increased on a GAAP basis by 4.4% for Turn-Key Flex space and 22.1% for Powered Base Building space during the first half. These results are not assurances of future leasing or rental rates. No full-year earnings or FFO guidance is provided in the supplied filing text.
- On July 11, 2012, the company completed the approximately $1.1bn Sentrum portfolio acquisition in greater London, partly funded by a July common-stock offering that generated approximately $796.8m net. At closing, approximately $573.2m of assumed debt was repaid; the company incurred approximately $30.6m of debt-extinguishment costs. The acquired portfolio’s results begin to be consolidated from July 11.
- Other post-quarter financing included funding approximately $222.5m of delayed term-loan draws. The company also exercised a $300m revolver accordion option, expected to close in early August.
- Key risks include tenant concentration and defaults, lease renewals and vacancies, data-center demand and competition, substantial redevelopment needs, access to financing and refinancing, interest and foreign-exchange movements, and regulatory or energy-cost changes. Foreign properties generated 12.9% of first-half revenue; the filing identifies the euro, pound and Singapore dollar as principal currency exposures.
- The company disclosed no legal proceedings or defaults on senior securities. Potential contingent items include an acquisition earnout of up to approximately $39.5m for 29A International Business Park, subject to performance conditions, and possible additional consideration tied to a qualifying lease at 800 Central Expressway; neither was accrued at June 30. Management said it was in compliance with credit-facility covenants.
- The board declared a common dividend of $0.73 per share for September 2012, equivalent to an annual rate of $2.92. Distributions remain at the board’s discretion; management noted that borrowing may be needed to support distributions.
Important facts for investors to verify
- Sentrum’s final purchase-price allocation, operating contribution, financing mix, and integration or lease-up performance.
- Whether planned second-half capital spending converts into completed, occupied space and supports expected returns.
- Debt maturities and refinancing exposure, particularly the 2029 debentures’ first holder repurchase date in April 2014 and scheduled 2015 maturities.
- Occupancy, renewal spreads, tenant concentration and the leasing progress of redevelopment space.
- Cash generation relative to capital expenditures and dividends, including the effect of common and preferred equity issuance on per-share results.
- Exposure to interest-rate, currency, construction-cost and REIT-qualification risks, along with any changes to disclosed contingencies.