Digital Realty Trust, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Annual report for the year ended December 31, 2019, covering Digital Realty Trust, Inc. and its operating partnership. The company is a REIT and global owner, developer and operator of data centers, colocation and interconnection facilities. At year-end, its portfolio comprised 225 data centers across 36 metropolitan areas, including joint ventures, with approximately 36.6 million rentable square feet; portfolio occupancy was 86.8%.
Financial and operating metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total operating revenue | $3.209 billion | $3.046 billion |
| Operating income | $594.2 million | $549.8 million |
| Net income | $599.2 million | $341.1 million |
| Net income available to common stockholders | $493.0 million | $249.9 million |
| Diluted EPS | $2.35 | $1.21 |
| FFO per diluted share and unit | $6.66 | $6.37 |
| Cash from operating activities | $1.514 billion | $1.385 billion |
| Capital expenditures, excluding indirect costs | $1.350 billion | $1.262 billion |
| Common dividend per share | $4.32 | $4.04 |
Operating margin was approximately 18.5% in 2019 versus 18.1% in 2018; GAAP net margin was approximately 18.7% versus 11.2%, respectively, and was significantly affected by gains described below. Year-end cash and cash equivalents were $89.8 million, excluding $7.4 million of restricted cash. Consolidated debt was approximately $10.2 billion, down from $11.1 billion; approximately 93.3% was fixed-rate or hedged, with a 3.25% effective interest rate. About $2.2 billion was available under the $2.35 billion global revolving credit facility, net of letters of credit.
Material changes versus prior year
- Revenue increased 5.3% overall. The 2019 adoption of lease accounting Topic 842 combined tenant reimbursements with rental revenue, so the separate revenue lines are not directly comparable with prior years.
- Net income increased substantially, reflecting a $267.7 million gain on disposition of properties, a $67.5 million gain on Ascenty deconsolidation and $66.0 million of interest and other income, which included an unrealized equity-investment gain. Interest expense rose 9.8% to $353.1 million.
- Operating cash flow rose 9.3%. Investing cash use fell sharply to $275.0 million from $3.036 billion, largely because 2018 included the Ascenty acquisition and 2019 included proceeds from joint-venture transactions.
- FFO per diluted share and unit increased 4.6%, a more moderate gain than reported GAAP EPS.
- In March 2019, Digital Realty formed a Brookfield joint venture for Ascenty, retained a 51% interest and deconsolidated the business. In November, it contributed three Northern Virginia data centers to a Mapletree joint venture, retained 20%, and recognized a $266 million gain.
Outlook, management commentary and risks
- Management cited continued demand for data center capacity, cloud and hybrid-cloud infrastructure, and interconnection as business drivers. It planned to develop existing inventory and expand globally, while emphasizing disciplined capital allocation and balance-sheet flexibility.
- The company had approximately 4.5 million square feet under active development and 1.8 million square feet held for future development. Management expected significant 2020 development capital spending but did not provide a clear numerical forecast.
- Leases representing 19.9% of portfolio square footage were scheduled to expire through 2021; 14.4% of net rentable space was available for lease at year-end. Management reported customer retention a little above 80% of 2019 expirations and noted that the unusually high expirations could weigh on near-term results.
- The proposed InterXion combination was expected to close in 2020, subject to conditions and approvals. The fixed exchange ratio was 0.7067 Digital Realty shares per InterXion share; the company estimated former InterXion shareholders would own approximately 20% of the combined company. InterXion debt of approximately $1.4 billion was expected to be assumed or refinanced.
- After year-end, the company completed the sale of 10 fully leased Powered Base Building properties for approximately $557 million in January 2020; the filing reports an approximately $303.3 million gain. This was not a 2019 operating result.
- Key risks include customer concentration and nonrenewals, competition and new supply, power availability and cost, data-center outages and cybersecurity, development delays or cost overruns, foreign-currency and international exposure, leverage and refinancing, and environmental, climate and water risks. The filing also identified the emerging COVID-19 outbreak as a potential economic and operational risk; it did not quantify an impact on 2019 results.
- The company reported no legal proceeding it believed would materially adversely affect its financial position or operations. Management and the auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Separate recurring operating performance from 2019 disposition and deconsolidation gains, and review FFO alongside GAAP earnings.
- Confirm the comparable revenue trend after accounting for Topic 842’s presentation change and assess stabilized-property revenue, which declined 1.4% in 2019.
- Track lease expirations, available space, occupancy, customer retention and the renewal rates achieved on expiring leases.
- Review development commitments, expected 2020 capital needs, cash generation after capital spending, and the timing and economics of the post-year-end property sale.
- Verify InterXion closing status, integration costs, expected synergies, dilution and additional debt, along with leverage and debt-maturity plans.
- Monitor liquidity and covenant headroom, including revolver availability, interest-rate exposure, refinancing needs and dividend coverage.