Digital Realty Trust, Inc. — Q2 2022 Form 10-Q
Business context and reporting period
Digital Realty is a global owner, developer and operator of data centers, colocation and interconnection facilities, operating as a REIT through Digital Realty Trust, L.P. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods unless noted.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,139.3 million | $1,093.2 million | $2,266.6 million | $2,183.6 million |
| Operating income | $170.4 million | $185.6 million | $311.6 million | $378.1 million |
| Net income | $63.9 million | $125.8 million | $140.8 million | $520.5 million |
| Net income available to common stockholders | $53.2 million | $127.4 million | $116.3 million | $499.8 million |
| Diluted EPS | $0.19 | $0.45 | $0.41 | $1.77 |
| Diluted FFO per share and unit | $1.55 | $1.78 | $3.16 | $3.27 |
- Q2 revenue rose 4.2%; rental and other services increased 3.9%. Growth in recently completed development and lease-up activity outweighed declines in the stabilized portfolio, where foreign exchange was a significant headwind.
- Operating expenses increased 6.8% in Q2, led by property operating costs, utilities, and general and administrative expenses. Operating margin was approximately 15.0%, compared with 17.0% a year earlier.
- Lower reported earnings chiefly reflect higher operating costs and a $34.1 million equity-method loss in Q2 2022 versus $52.1 million of equity-method earnings in Q2 2021. For the first half, prior-year net income included a $334.4 million property-disposition gain, while 2022 included a $51.1 million loss on early debt extinguishment.
- Six-month operating cash flow was $783.6 million, versus $850.5 million. Investing used $1.428 billion, including $1.067 billion for real estate improvements; financing provided $633.1 million, including net credit-facility proceeds. Cash, cash equivalents and restricted cash ended at $109.2 million.
- At June 30, total debt was $14.410 billion, with a weighted-average interest rate of 2.12% and approximately 5.7 years to initial maturity. About 87.6% was fixed-rate or hedged; unhedged variable-rate debt was 12.4%. Debt increased from $13.562 billion at year-end 2021, including revolving-facility balances rising to $1.459 billion from $415 million.
- Total assets were $35.956 billion and total liabilities $18.285 billion. Cash and cash equivalents were $99.2 million, excluding $10.0 million of restricted cash. The filing reported approximately $0.8 billion available under revolving facilities as of August 3, 2022.
- Consolidated portfolio occupancy was 82.8%, up from 82.5% at December 31, 2021; occupancy across the total portfolio, including unconsolidated properties, was 83.9%, versus 83.6%.
Material changes and notable items
- Stabilized revenue fell 2.8% in Q2, including an approximately $35.2 million adverse foreign-exchange effect, partly offset by higher tenant utility reimbursements. Non-stabilized revenue rose 33.0%, primarily from completed development and lease-up.
- Foreign currency translation produced a $293.9 million comprehensive loss in Q2 and a $307.8 million loss for the first half. Goodwill also declined, primarily due to foreign-currency movements, including euro depreciation.
- The company amended its global revolving credit agreement in April, increasing facility size from $3.0 billion to $3.75 billion and providing for U.S. dollar floating-rate borrowings to transition from LIBOR to Term SOFR. The filing states the company was in compliance with senior-note financial covenants at June 30.
- On August 1, 2022, after quarter-end, the company completed its acquisition of a 55% interest in South Africa’s Teraco for $1.7 billion cash, funded through the revolving facility and partial settlement of forward equity sale agreements.
Outlook, risks and contingencies
- Management expected average aggregate rental rates on renewals of leases expiring in 2022 to be slightly positive versus current rates, on both GAAP and cash bases. It reported strong demand in most key markets, while cautioning that leasing results are not assured.
- The company expected $1.3 billion to $1.5 billion of development-program capital expenditures in the second half of 2022. It had approximately $1.9 billion of open construction-contract commitments at June 30, including about $55.1 million reimbursable by customers.
- Inflation, higher utility and construction costs, supply-chain disruption, foreign exchange, interest rates and access to capital could pressure expenses, project returns, liquidity and distributions. Management said most utility costs are passed through to customers, but did not assure full recovery of inflation-related costs.
- Other disclosed risks include data-center demand and competition, customer concentration or defaults, development delays, acquisition and integration risks, cybersecurity and power/connectivity reliability, foreign-market exposure, debt refinancing, and REIT qualification. The company reported no legal proceedings it believed would materially adversely affect operations or financial position.
- Debt principal maturities included $629.0 million in 2022, $107.8 million in 2023 and $933.5 million in 2024. The $1.0 billion forward equity sale agreements were scheduled for settlement no later than March 13, 2023; proceeds depend on settlement.
Important facts for investors to verify
- How operating-cost growth, particularly utilities and development-site expenses, compares with rent increases and customer reimbursements.
- Whether development spending, construction commitments and the Teraco acquisition are funded without materially weakening liquidity, leverage or shareholder distributions.
- Debt maturities, revolving-credit availability, interest-rate exposure and covenant headroom, including the impact of borrowing for Teraco.
- How much of reported revenue and investment value remains exposed to foreign-exchange movements, and whether receivable and deferred-rent allowances adequately reflect collection risk.
- Whether leasing demand and the expected slightly positive renewal-rate outlook translate into occupancy and cash-flow growth.