DLR

Business Context and Reporting Period

Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in owning, acquiring, repositioning, and managing technology-related real estate, including datacenters and Internet gateway properties. As of March 31, 2007, the portfolio consisted of 61 properties (excluding one unconsolidated joint venture) with approximately 11.4 million rentable square feet, 94.8% of which was leased (excluding redevelopment space).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by $31.8 million (55.7%) year-over-year, driven primarily by the acquisition of 18 properties in the preceding 12 months. Same-store rental revenues increased by $7.2 million due to new leases.
• Profitability: Net income increased significantly to $22.1 million from $5.1 million. This surge was largely attributable to a $18.0 million gain on the sale of assets (discontinued operations) in Q1 2007, compared to no such gain in Q1 2006.
• Acquisitions: The Company acquired five properties totaling $160.1 million during the quarter, including significant assets in Northern Virginia and Silicon Valley.
• Debt Levels: Total indebtedness increased by approximately $149.4 million to $1.27 billion, reflecting new mortgage loans and increased utilization of the unsecured revolving credit facility to fund acquisitions.
• Minority Interests: Minority interest in the Operating Partnership decreased significantly as GI Partners distributed its remaining common units to investors, many of which were redeemed for common stock.

Guidance, Outlook, and Risks

• Capital Strategy: The Company intends to limit indebtedness to 60% of total market capitalization. As of March 31, 2007, the debt-to-market-cap ratio was approximately 31%.
• Liquidity: The Company maintains a $500.0 million unsecured revolving credit facility. As of March 31, 2007, $214.2 million was drawn, with $271.5 million available. On April 4, 2007, the Company issued $169.1 million in Series C Preferred Stock to pay down this facility.
• Development Pipeline: Approximately 1.7 million square feet of space is held for redevelopment, requiring significant capital investment. The Company also has $41.6 million in committed tenant improvement costs.
• Risks: Key risks include interest rate fluctuations (83.2% of debt is fixed or hedged), tenant concentration (Savvis and Qwest each represented over 8% of revenue), and the ability to re-lease expiring space. A tenant in Denver requested early lease termination in April 2007.
• Dividends: To maintain REIT status, the Company must distribute at least 90% of taxable income. Quarterly dividends were declared for Series A, Series B, and Common stock.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by excluding the $18.0 million one-time gain on asset sales from Q1 2007 net income.
• Debt Maturities: Review the schedule of mortgage loan maturities, noting that the unsecured revolving credit facility matures in October 2008 (subject to extension).
• Occupancy and Leasing: Confirm the 94.8% occupancy rate excludes 1.7 million square feet of redevelopment space and assess the timeline for leasing this space.
• Related Party Transactions: Review fees paid to affiliates (CB Richard Ellis, The Linc Group) and rental revenue from tel(x), a related party ($3.1 million in Q1 2007).
• Interest Rate Exposure: Assess the impact of rising rates on the $214.2 million of unhedged variable-rate debt.