DLR

Business Context and Reporting Period

Digital Realty Trust, Inc. (DLR) is a Real Estate Investment Trust (REIT) focused on owning, acquiring, and managing technology-related real estate, including data centers, internet gateways, and technology manufacturing properties. The reporting period covers the fiscal year ended December 31, 2006. As of year-end, the company owned 59 properties (excluding one unconsolidated joint venture) with approximately 9.4 million net rentable square feet, primarily located in North America with seven properties in Europe. The portfolio was 95.0% leased.

Key Financial Metrics

Note: The filing does not explicitly state a "profit margin" percentage; however, operating income was $77.6 million on $281.9 million in revenue.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 40.0% year-over-year, driven primarily by the acquisition of 16 new properties in 2006 and organic growth in same-store properties.
• Portfolio Expansion: The company acquired 16 properties in 2006, including significant international assets in Dublin, Paris, and Amsterdam, and a 49% interest in a Seattle data center. Total net rentable square feet grew from 8.1 million in 2005 to 9.4 million in 2006.
• Debt Levels: Total indebtedness increased significantly from $749.1 million to $1,122.6 million to finance acquisitions and development. This included the issuance of $172.5 million in 4.125% Exchangeable Senior Debentures in August 2006.
• Discontinued Operations: The company sold the 7979 East Tufts Avenue property in July 2006, resulting in a gain of $18.1 million, which is reported as discontinued operations.

Guidance, Outlook, and Risks

Management Commentary & Strategy: Management continues to focus on acquiring high-quality technology real estate and maximizing cash flow through lease-ups and redevelopment. The company intends to maintain its REIT status by distributing at least 90% of taxable income. In 2006, the company raised capital through equity offerings (May and October) and debt issuances to fund growth and reduce reliance on its unsecured credit facility.

Risks and Contingencies:

• Tenant Concentration: The 15 largest tenants represented approximately 50% of gross annualized rent. Savvis Communications (11.9%) and Qwest Communications (7.7%) are the two largest tenants.
• Interest Rate Risk: While 87% of debt is fixed or hedged via swaps, the company has $145.5 million in variable-rate debt under its unsecured credit facility, exposing it to rising rates.
• Foreign Currency: International operations expose the company to exchange rate fluctuations (Euro, British Pound).
• REIT Qualification: Failure to maintain REIT status would subject the company to corporate income taxes, significantly reducing cash available for distribution.

Investor Verification Checklist

• Debt Covenants: Verify compliance with the unsecured credit facility covenants, particularly regarding leverage ratios and unencumbered asset pools.
• Tenant Creditworthiness: Monitor the financial health of top tenants (Savvis, Qwest) given their significant contribution to revenue.
• Redevelopment Progress: Assess the timeline and capital requirements for the 1.6 million square feet of space held for redevelopment.
• Dividend Sustainability: Confirm that Funds From Operations (FFO) continue to support the quarterly dividend rate of $0.28625 per common share (annualized $1.145).
• Exchangeable Debentures: Review the dilution impact of the $172.5 million exchangeable debentures if the stock price exceeds the exchange price of approximately $32.59.