Digital Realty Trust, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Digital Realty is a global data-center, colocation and interconnection REIT; its Operating Partnership conducts substantially all operations and holds the business’s assets and debt. Unless noted, amounts below are U.S. dollars.
Business context and material developments
- Completed the Interxion combination in March 2020. The transaction included approximately 54.3 million newly issued common shares and approximately $7.0 billion of equity consideration. Interxion contributed $47.4 million of revenue and $2.5 million of net income during the period; its portfolio metrics are excluded from the company’s operating-portfolio discussion.
- Sold 12 North American data centers in January for approximately $557 million, recognizing a $304.8 million gain.
- Acquired an additional 49% interest in Seattle’s Westin Building Exchange for approximately $305 million plus assumed debt, bringing ownership to 99%.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Operating revenue | $823.3 million | $814.5 million |
| Operating income | $100.0 million | $141.5 million |
| Net income | $228.7 million | $121.0 million |
| Net income available to common stockholders | $202.9 million | $95.9 million |
| Diluted earnings per share | $0.90 | $0.46 |
| Operating cash flow | $226.7 million | $350.7 million |
| Cash used in investing activities | $137.4 million | Cash provided: $165.7 million |
| Cash provided by (used in) financing activities | $91.0 million | $(503.6) million |
| Nareit FFO available to common stockholders and unitholders | $212.3 million; $0.91 diluted per share/unit | $417.2 million; $1.92 diluted per share/unit |
- Revenue increased 1.1%, while operating expenses rose to $723.3 million from $673.0 million. Operating margin was approximately 12.1%, versus 17.4%.
- Net income benefited from the $304.8 million property-sale gain, despite a $79.0 million equity-method loss from unconsolidated joint ventures. Operating income declined, reflecting higher transaction and integration costs, including $56.8 million in Q1 2020 versus $2.5 million a year earlier.
- Operating cash flow fell by $124.0 million year over year. The company attributed the decrease primarily to properties sold or contributed to joint ventures during the preceding 12 months. Investing cash flows included $377.3 million of real-estate improvements, $313.3 million of acquisitions and $526.4 million of sale proceeds.
Debt, liquidity and capital spending
- At March 31, total consolidated debt was approximately $12.35 billion, compared with $10.12 billion at year-end 2019. Cash and cash equivalents were $246.5 million; restricted cash was an additional $12.2 million.
- Approximately 91.8% of debt was fixed-rate or hedged; the effective interest rate was 2.82%, and weighted-average term to initial maturity was approximately 6.1 years. The company reported compliance with debt covenants.
- As of May 7, 2020, cash and cash equivalents were $761.5 million and approximately $2.1 billion was available under global revolving credit facilities. These are post-quarter-end figures.
- The company expected $1.6–$1.9 billion of development-program capital expenditures during the remaining nine months of 2020, subject to demand, leasing results and financing availability. Construction-contract commitments were approximately $969.8 million at quarter-end.
- In January, the company issued €1.7 billion of guaranteed notes at 0.125%, 0.625% and 1.500%, due in 2022, 2025 and 2030, respectively. It intended to allocate proceeds from the 2025 and 2030 notes to eligible green projects.
Outlook, risks and unusual items
- Management said facilities remained operational and April rent collections were consistent with the same period last year. Rent-relief requests, primarily deferrals or discussions, came from customers representing approximately 2% of annualized base rent. Management cautioned that COVID-19’s future effects were uncertain and could result in construction delays, impairments, lease modifications or credit losses.
- The company reported construction delays in some markets and said delays were affecting certain anticipated customer deliveries. It believed it had acquired most equipment needed for its 2020 development activities.
- Management described demand as strong in most key metropolitan areas and expected, on average, 2020 renewal rents to be generally consistent with current rates. Q1 renewal rents varied by product: Turn-Key Flex rents declined 2.7% on a GAAP basis, while Powered Base Building rents increased 2.4%.
- Excluding Interxion, the portfolio was approximately 87.2% leased. Northern Virginia represented 24.5% of annualized rent, the largest disclosed metropolitan-area concentration.
- Foreign-currency translation adjustments reduced comprehensive income by $357.2 million. Interxion’s purchase-price allocation was provisional, including $4.2 billion of recorded goodwill, and remained subject to change.
- Principal risks include COVID-19 and related customer and construction impacts, access to capital, debt refinancing and interest rates, foreign-currency volatility, customer credit and lease renewals, development and leasing execution, and data-center competition and demand. The filing reported no legal proceedings believed to have a material adverse effect.
Important facts for investors to verify
- How much reported earnings and the comparison with 2019 reflect the one-time property-sale gain, acquisition costs, and joint-venture results; also reconcile GAAP earnings with FFO.
- Whether Interxion’s provisional asset, liability, goodwill and deferred-tax valuations change materially, and how integration affects recurring performance.
- Subsequent rent collections, customer relief requests, bad-debt allowances and any lease modifications or impairments as COVID-19 effects develop.
- Whether planned development spending and committed construction translate into timely deliveries, customer leasing and expected returns.
- Debt maturities, borrowing availability, covenant headroom and any additional equity issuance; the filing disclosed substantial post-quarter-end ATM equity sales.