DLR

Business Context and Reporting Period

Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: The Company owns, acquires, develops, and manages technology-related real estate, primarily Turn-Key Datacenters and Powered Base Buildings. As of March 31, 2009, the portfolio consisted of 75 properties (62 in North America, 13 in Europe) with approximately 13.0 million rentable square feet, of which 1.2 million square feet were held for redevelopment. The portfolio was approximately 95.1% leased excluding redevelopment space.

Key Financial Metrics

Liquidity: As of March 31, 2009, the Company had $78.9 million in cash and cash equivalents and $407.5 million available under its $675.0 million revolving credit facility (with $254.0 million drawn).

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by $34.6 million (30.2%) year-over-year. This was driven by new leasing at same-store properties and the acquisition of four new properties in the prior 12 months. Rental revenue increased by $25.3 million, and tenant reimbursements increased by $9.2 million.
• Profitability: Net income attributable to Digital Realty Trust, Inc. more than doubled to $20.4 million from $10.6 million. Net income available to common stockholders increased to $10.3 million from $2.3 million.
• Expense Increases: Total operating expenses rose by $20.7 million, primarily due to higher utility and maintenance costs at same-store properties, increased depreciation from new development projects, and higher general and administrative expenses.
• Debt Activity: Total indebtedness increased by approximately $54.6 million. The Company repaid a $96.6 million mortgage on 350 East Cermak Road using the revolving credit facility and issued $25.0 million in unsecured senior notes.
• Accounting Changes: The Company adopted FSP APB 14-1 and SFAS 160 effective January 1, 2009. These changes resulted in the reclassification of noncontrolling interests to equity and the recognition of a debt discount on exchangeable senior debentures, which increased interest expense and reduced net income for comparative periods.

Outlook, Risks, and Management Commentary

• Capital Expenditures: Management expects to incur approximately $230.0 million to $250.0 million in capital expenditures for redevelopment during the nine months ended December 31, 2009. Total acquisitions for the full year are expected to be approximately $20.0 million.
• Subsequent Events:
  • On April 20, 2009, the Operating Partnership issued $266.4 million of 5.50% Exchangeable Senior Debentures due 2029.
  • On April 28, 2009, the revolving credit facility commitment was increased by $45.0 million to $720.0 million.
  • Dividends were declared on April 28, 2009, payable June 30, 2009.
• Risks and Contingencies:
  • Global Economic Conditions: Management notes unprecedented challenges in global markets, including tighter credit conditions and recession, which may impact liquidity and tenant financial conditions.
  • Tenant Concentration: Savvis Communications comprised 10.4% of total operating revenues for the quarter. Lyondell Chemical Company was in bankruptcy but remained current on obligations.
  • Interest Rate Risk: Approximately 10.9% of total debt is variable rate and unhedged. The Company uses interest rate swaps to hedge approximately $288.8 million of variable rate debt.
  • REIT Status: The Company must distribute 90% of taxable income to maintain REIT status. It has distributed 100% of taxable income since inception.

Investor Verification Checklist

• Debt Maturities: Verify the schedule of mortgage loan maturities, noting that several loans have prepayment lock-out periods extending into 2009 and 2010.
• Revolving Credit Facility: Confirm the availability of the $407.5 million undrawn portion of the credit facility and the impact of the subsequent $45 million increase announced in April 2009.
• Accounting Adjustments: Review the impact of the FSP APB 14-1 adoption on interest expense and the reclassification of noncontrolling interests under SFAS 160 to ensure accurate year-over-year comparisons.
• Capital Expenditure Commitments: Assess the $74.0 million in open construction contract commitments and the projected $230-$250 million redevelopment spend against current cash flow and financing capacity.
• Tenant Concentration: Monitor the financial health of major tenants, specifically Savvis Communications (10.4% of revenue) and the status of Lyondell Chemical Company.