Business Context and Reporting Period
Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in owning, acquiring, developing, and managing technology-related real estate, specifically Turn-Key Datacenter and Powered Base Building solutions. As of March 31, 2008, the portfolio consisted of 71 properties (59 in North America, 12 in Europe) totaling approximately 12.7 million rentable square feet, with an occupancy rate of 94.7% excluding space held for redevelopment.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Operating Revenues | $114.5 million | $89.0 million |
| Operating Income | $25.2 million | $22.0 million |
| Net Income | $11.1 million | $22.1 million |
| Net Income Available to Common Stockholders | $2.9 million | $18.6 million |
| Diluted EPS (Common) | $0.04 | $0.32 |
| Net Cash Provided by Operating Activities | $17.5 million | $26.3 million |
| Total Debt Outstanding | $1.19 billion | $1.37 billion |
| Cash and Cash Equivalents | $34.4 million | $47.0 million |
Liquidity: The Company maintains a $650 million revolving credit facility. As of March 31, 2008, $114.8 million was drawn, leaving approximately $526 million available. The Company also holds $37.4 million in restricted cash.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by $25.6 million (28.7%) compared to Q1 2007. This was driven by new leasing at same-store properties and the acquisition of 10 properties in the preceding 12 months. Rental revenue increased by $19.5 million, and tenant reimbursements increased by $6.1 million.
- Net Income Decline: Net income decreased significantly to $11.1 million from $22.1 million in Q1 2007. The prior year included $16.2 million of income from discontinued operations (gains on the sale of two properties), which were absent in the current quarter.
- Preferred Stock Issuance: In February 2008, the Company issued 13.8 million shares of Series D Cumulative Convertible Preferred Stock, generating net proceeds of approximately $333.6 million. This increased preferred dividends to $8.3 million for the quarter (compared to $3.4 million in Q1 2007), reducing net income available to common stockholders.
- Debt Reduction: Total indebtedness decreased by approximately $177 million to $1.19 billion, primarily due to the repayment of borrowings under the revolving credit facility using proceeds from the Series D preferred stock offering.
- Acquisitions: The Company acquired one property (365 South Randolphville Road in New York) for $20.4 million during the quarter.
Outlook, Risks, and Management Commentary
- Capital Expenditures: Management expects to incur approximately $550 million in capital expenditures for its redevelopment program during the year ended December 31, 2008. As of March 31, 2008, there were $65.6 million in open construction commitments.
- Dividends: To maintain REIT status, the Company must distribute at least 90% of taxable income. On May 5, 2008, the Company declared quarterly dividends, including $0.31 per share for common stock.
- Market Risks:
- Interest Rates: Approximately 10.1% of total debt is variable rate and unhedged. Rising rates could increase interest expense.
- Foreign Currency: The Company has operations in Europe and Canada. A stronger U.S. dollar could adversely affect earnings from foreign operations and increase the cost of repaying foreign-denominated debt.
- Accounting Changes: The Company highlighted potential adverse impacts on reported financial results if the FASB finalizes proposed changes to the accounting for cash-settled convertible debt securities (specifically the 4.125% exchangeable senior debentures).
- Tenant Concentration: Savvis Communications accounted for approximately 12.3% of total operating revenues for the quarter. No other single tenant exceeded 10%.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the exclusion of the $16.2 million gain from discontinued operations in Q1 2007 to accurately assess year-over-year operating performance.
- Preferred Stock Dilution: Review the terms of the newly issued Series D preferred stock and its impact on future dividends and potential conversion to common stock.
- Redevelopment Pipeline: Assess the $550 million capital expenditure plan and the timeline for leasing the 1.9 million square feet of space held for redevelopment.
- Debt Maturities: Examine the schedule of mortgage loan maturities, noting that some loans have prepayment penalties or extension options.
- Accounting Rule Changes: Monitor FASB updates regarding the accounting treatment of exchangeable senior debentures, which could materially reduce reported net income in future periods.