DIGITAL REALTY TRUST, INC. quarterly report, Q3 FY2023

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Digital Realty Trust, Inc. — Q3 2023 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2023. Digital Realty is a global data-center, colocation and interconnection provider operating as a REIT; its Operating Partnership owns substantially all assets and conducts operations. Financial figures below are in U.S. dollars.

Financial performance and position

  • Q3 revenue: $1.402 billion, up 17.6% from $1.192 billion a year earlier. Rental and other services revenue was $1.395 billion.
  • Q3 earnings: Operating income was $58.2 million, versus $157.4 million; net income was $745.9 million, versus $238.8 million. Net income available to common stockholders was $723.4 million, or $2.40 basic and $2.33 diluted per share.
  • Non-GAAP FFO: Diluted FFO per share and unit was $1.55, unchanged from Q3 2022. For the first nine months, diluted FFO per share and unit was $4.68, versus $4.61.
  • Cash flow: Nine-month operating cash flow was $1.172 billion, compared with $1.203 billion. Investing cash outflow was $98.7 million, versus $3.728 billion; financing cash outflow was $108.3 million, versus $2.568 billion of inflow. Cash, cash equivalents and restricted cash totaled $1.072 billion at period-end.
  • Debt and liquidity: Consolidated debt was $16.988 billion, with a 2.89% weighted-average interest rate and 4.3-year weighted-average term to initial maturity. 85.5% was fixed-rate or hedged; 14.5% was variable-rate. The company reported covenant compliance. It had approximately $1.8 billion available under its revolving credit facilities as of November 3, 2023.
  • Balance sheet: Total assets were $41.933 billion and total liabilities $21.896 billion at September 30. Cash and cash equivalents were $1.062 billion; restricted cash was $10.4 million.
  • Dividends: The annual common-stock dividend rate was $4.88 per share. Preferred-stock annual rates were $1.3125 (Series J), $1.4625 (Series K) and $1.30 (Series L).

Material changes versus the prior comparable period

  • Revenue grew 17.6% in Q3 and 18.8% over nine months. Management attributed growth to utility reimbursements, leasing and renewals, development completions and lease-up, and the Teraco acquisition. International markets contributed 48.1% of Q3 revenue, up from 40.7%.
  • Q3 operating expenses increased 29.9% to $1.344 billion. Property-level expenses rose 31.2%, including higher utility costs and property taxes; depreciation and amortization also increased.
  • Operating income fell to $58.2 million from $157.4 million, despite higher revenue. Interest expense rose to $110.8 million from $76.5 million. The operating margin, calculated from reported figures, was approximately 4.2%, versus 13.2%.
  • Net income increased substantially, but was boosted by $810.7 million of Q3 property-disposition gains, compared with $174.0 million a year earlier. Nine-month disposition gains were $900.6 million, versus $176.8 million.
  • Q3 included a $113 million impairment provision; the filing identifies $95 million related to the Digital Core REIT investment. No impairment was recorded in the 2022 comparable period.
  • Total portfolio occupancy was 82.8% at September 30, down from 84.7% at December 31, 2022. Consolidated occupancy was 80.9%, versus 83.5%. These are different comparison dates, not year-over-year figures.
  • Debt increased to $16.988 billion from $16.724 billion at year-end 2022. The weighted-average interest rate increased to 2.89% from 2.68%.

Outlook, commentary and risks

  • Management reported strong data-center demand in most key metropolitan areas and expected positive aggregate rental-rate changes on renewals for leases expiring in 2023, on both GAAP and cash bases. It cautioned that renewals and re-leasing at comparable or higher rates are not assured.
  • The company expected to spend approximately $0.6–$0.8 billion on development capital expenditures in Q4 2023. This estimate may change with demand, leasing results and access to debt or equity capital. Open construction-contract commitments were approximately $2.6 billion.
  • In July, Digital Realty formed joint ventures with GI Partners and TPG Real Estate, contributing Chicago and Northern Virginia data-center assets, respectively. It retained 35% and 20% interests, received approximately $0.7 billion and $1.3 billion of gross proceeds, and recognized gains of approximately $238 million and $577 million. GI Partners also received specified purchase/call options.
  • Key risks include power and utility costs, inflation and interest rates, refinancing and capital-market access, foreign-exchange movements, customer concentration or default, development execution and leasing, joint-venture interests outside the company’s control, and cybersecurity or operational-technology disruption.
  • The SEC Division of Enforcement was investigating the adequacy of the company’s cybersecurity-risk disclosures. The company said it was cooperating, was unaware of a cybersecurity issue or event that prompted the inquiry, and did not expect potential cost to be material based on information then available; the outcome and duration were uncertain.
  • The company reported no legal proceedings it believed would materially adversely affect operations or financial position. It also reported that disclosure controls were effective at the reasonable-assurance level and that there were no material changes in internal control over financial reporting during the quarter.
  • No specific full-year earnings or FFO guidance is provided in the supplied filing text. The company’s stated long-term financial objectives include average debt-to-Adjusted EBITDA of 5.5x, fixed-charge coverage above 3x, and floating-rate debt below 20%; management noted the current debt-to-Adjusted EBITDA ratio was higher than historically experienced.

Important facts for investors to verify

  • How much of reported earnings growth reflects recurring operations versus the large property-sale gains, and how the impairment affects comparisons.
  • Whether occupancy, development lease-up and renewal pricing support sustainable revenue and FFO growth as operating costs—especially power—rise.
  • The company’s leverage and refinancing profile, including near-term maturities, borrowing costs, revolver availability and compliance with debt covenants.
  • Cash needs and funding sources for the $2.6 billion construction commitments and anticipated Q4 development spending, alongside dividends and potential further equity issuance.
  • Progress and terms of the GI Partners and TPG joint ventures, including GI Partners’ options and the impact of retained, noncontrolling interests.
  • Any developments in the SEC cybersecurity-disclosure investigation and whether cybersecurity, customer, or regulatory risks result in costs, penalties or operational impacts.