Digital Realty Trust, Inc. — Q1 2022 Form 10-Q
Business and period: Global data-center, colocation and interconnection provider operating as a REIT. This unaudited filing covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Digital Realty Trust, Inc. is the parent and general partner of Digital Realty Trust, L.P., which holds substantially all operating assets.
Key financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Operating revenue | $1.127 billion | $1.090 billion |
| Operating income | $141.2 million | $192.5 million |
| Operating margin | 12.5% | 17.7% |
| Net income | $76.9 million | $394.7 million |
| Net income attributable to common stockholders | $63.1 million; $0.22 per diluted share | $372.4 million; $1.32 per diluted share |
| Nareit FFO per diluted share/unit | $1.60 | $1.49 |
| Cash from operating activities | $277.7 million | $327.9 million |
| Cash, cash equivalents and restricted cash at quarter-end | $168.3 million | $230.7 million |
- Revenue grew 3.4%. Rental and other services revenue increased 3.1%, while fee income and other rose to $5.8 million from $2.5 million.
- Operating expenses increased 9.8% to $986.1 million. Property-level expenses rose 17.3% to $485.8 million, including a 20.4% increase in rental property operating and maintenance costs.
- At March 31, total assets were $36.7 billion and total liabilities were $18.4 billion. Consolidated debt was $14.5 billion, up from $13.6 billion at year-end 2021; weighted-average interest rate was 2.06%, and weighted-average term to initial maturity was about 6.0 years.
- Debt was 91% fixed-rate, including swapped debt, and 9% variable-rate. The company reported debt at approximately 26% of total enterprise value and compliance with senior-note financial covenants.
- Q1 cash flows included $719.1 million used in investing and $478.3 million provided by financing. Capital expenditures, excluding indirect costs, were $483.1 million.
Material changes versus Q1 2021
- GAAP net income and EPS fell sharply, principally because Q1 2021 included a $333.9 million gain on the sale of 11 European data centers; no properties were sold in Q1 2022. Q1 2022 also included a $51.1 million loss on early debt extinguishment, versus $18.3 million in Q1 2021.
- FFO per diluted share/unit increased to $1.60 from $1.49, a more favorable measure of operating performance that excludes property-sale gains and real-estate depreciation and amortization.
- Revenue growth reflected $56.9 million of higher non-stabilized rental revenue, including development completions, lease-up and a property contributing $32.3 million of additional revenue. Stabilized rental revenue declined $23.3 million, mainly from higher bad-debt and straight-line-rent reserves and lower occupancy, partly offset by utility reimbursements.
- Higher property operating costs—especially utilities at non-stabilized properties—contributed to lower operating income. Equity-method earnings improved by about $84.0 million, primarily due to foreign-exchange remeasurement of debt at Ascenty.
- Operating cash flow declined $50.2 million. Investing cash flow was $904.6 million lower year over year, largely because Q1 2021 included $685.5 million of real-estate sale proceeds and Q1 2022 included increased investment in unconsolidated entities.
- Consolidated portfolio occupancy was 82.3%, versus 82.5% at year-end 2021; total portfolio occupancy, including unconsolidated properties, was 83.3%, versus 83.6%.
Outlook, liquidity and risks
- Management reported strong demand in most key markets and expected average aggregate rental rates on renewals for 2022 expirations to be slightly positive on both GAAP and cash bases. This is an expectation, not a guarantee; results depend on local market conditions, supply, occupancy and lease renewals.
- The company expects $1.9 billion to $2.1 billion of development-program capital expenditures during the remaining nine months of 2022. It had approximately $1.4 billion of open construction-contract commitments at quarter-end, including approximately $49.1 million reimbursable by customers.
- Management targets debt-to-Adjusted EBITDA of 5.5x or less, fixed-charge coverage above 3x and floating-rate debt below 20% of total debt. These are stated capital-structure targets, not reported quarter-end actuals for each measure.
- As of May 3, approximately $2.8 billion was available under the global revolving credit facilities. An April 5 amendment increased facility capacity from $3.0 billion to $3.75 billion and provided for transition from U.S. dollar LIBOR to Term SOFR.
- In Q1, the company issued €750 million of 1.375% notes due 2032 and CHF 250 million of notes due 2023 and 2027, and redeemed $450 million of 4.750% notes due 2025. The refinancing and redemption generated the $51.1 million extinguishment loss.
- After quarter-end, the company established a new $1.5 billion at-the-market equity program. It also had forward equity sale agreements that could yield approximately $1.0 billion upon settlement no later than March 13, 2023; proceeds were not received at the offering date.
- The company had a definitive agreement to acquire approximately 55% of Teraco, an African colocation provider, in a transaction valuing Teraco at approximately $3.5 billion, subject to customary closing conditions.
- Risks highlighted include demand or rental-rate weakness, rising power and other operating costs, supply-chain disruption, development delays or cost overruns, customer concentration or defaults, foreign-exchange movements, interest rates and refinancing, access to capital, joint-venture exposure, cybersecurity and data privacy, and geopolitical or regulatory developments. Management stated that it knew of no legal proceeding expected to have a material adverse effect.
Important facts for investors to verify
- Whether occupancy and stabilized portfolio performance improve, and whether renewal-rate expectations are achieved.
- Whether utility costs, bad-debt and straight-line-rent reserves, and other property expenses affect margins and cash generation.
- Execution, timing, funding and returns for the development pipeline, the $1.9–$2.1 billion remaining-2022 development spend, and the Teraco transaction.
- Debt maturities, refinancing costs, covenant headroom, variable-rate exposure and the effect of foreign currencies on debt and equity-method earnings.
- Use and dilution implications of the new ATM program and settlement of the forward equity agreements.
- FFO is a supplemental non-GAAP measure; it does not include the full economic effect of property capital expenditures or changes in property values.