Business Context and Reporting Period
Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: The Company is a Real Estate Investment Trust (REIT) focused on owning, acquiring, repositioning, and managing technology-related real estate, specifically Turn-Key Datacenter and Powered Base Building solutions. As of September 30, 2007, the portfolio consisted of 67 properties (excluding one unconsolidated joint venture) with approximately 12.0 million rentable square feet, including 1.7 million square feet held for redevelopment. Properties are located in major U.S. markets and Europe.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 | As of Sep 30, 2007 |
|---|---|---|---|
| Total Operating Revenues | $104.8 million | $289.3 million | - |
| Operating Income | $21.4 million | $65.9 million | - |
| Net Income | $5.1 million | $35.0 million | - |
| Net Income Available to Common Stockholders | $(0.2) million | $21.0 million | - |
| Net Cash Provided by Operating Activities | - | $77.6 million | - |
| Total Assets | - | - | $2.58 billion |
| Total Liabilities | - | - | $1.58 billion |
| Total Stockholders' Equity | - | - | $921.4 million |
| Total Indebtedness | - | - | $1.34 billion |
| Cash and Cash Equivalents | - | - | $49.2 million |
Note: Net income available to common stockholders for the three months ended September 30, 2007, was negative due to preferred stock dividends exceeding income from continuing operations.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by 48% ($34.1 million) for the three months and 52% ($99.3 million) for the nine months ended September 30, 2007, compared to the same periods in 2006. This growth is primarily attributed to the acquisition of 15 new properties and new leasing activities at existing properties.
- Operating Expenses: Total operating expenses increased by 60% ($31.1 million) for the three months and 64% ($87.0 million) for the nine months. Increases were driven by higher depreciation and amortization, property operating costs, and general and administrative expenses associated with portfolio expansion.
- Discontinued Operations: The Company sold three properties in 2007 and 2006 (100 Technology Center Drive, 4055 Valley View Lane, and 7979 East Tufts Avenue). Gains on these sales were significant in the prior year ($18.0 million in Q3 2006) but minimal in Q3 2007, as the sales occurred earlier in the year or in the prior year.
- Debt Levels: Total indebtedness increased from $1.12 billion at December 31, 2006, to $1.34 billion at September 30, 2007. This includes an increase in the unsecured revolving credit facility draw from $145.5 million to $266.7 million to fund acquisitions.
Guidance, Outlook, and Risks
- Capital Resources: The Company expanded its unsecured revolving credit facility from $500 million to $650 million in August 2007, maturing in August 2010. As of September 30, 2007, $372 million remained available. On October 22, 2007 (subsequent to period end), the Company completed a common stock offering raising $150.5 million to repay credit facility borrowings.
- Dividends: The Company declared a quarterly common stock dividend of $0.286250 per share for the third quarter. On November 1, 2007, a dividend of $0.310000 per share was declared for the fourth quarter.
- Development Pipeline: Approximately 1.7 million square feet of space is held for redevelopment. The Company expects to incur significant capital expenditures to build out this space, with commitments of $24.1 million for redevelopment and tenant improvements as of September 30, 2007.
- Risks: Key risks include the ability to successfully develop and lease redevelopment space, competition in the datacenter market, interest rate fluctuations (approx. 20% of debt is variable and unhedged), and the impact of foreign currency exchange rates on European operations. The Company also faces risks related to maintaining its REIT status.
Investor Verification Checklist
- Acquisition Integration: Verify the occupancy rates and lease-up timelines for the 15 properties acquired in the last 12 months, which drove revenue growth.
- Debt Maturity Profile: Review the maturity schedule of the $1.34 billion debt portfolio, noting that the unsecured credit facility matures in August 2010.
- Redevelopment Costs: Assess the $24.1 million in committed capital expenditures for redevelopment and the potential for cost overruns or delays in leasing the 1.7 million square feet of redevelopment space.
- Minority Interest Reduction: Confirm the impact of the redemption of GI Partners' Operating Partnership units on future minority interest expenses and common share dilution.
- Interest Rate Exposure: Evaluate the sensitivity of net income to interest rate changes, given the $272.2 million of unhedged variable-rate debt.