Digital Realty Trust, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing covers Digital Realty Trust, Inc. and its operating partnership, Digital Realty Trust, L.P.; it is not a standalone quarterly report.
Business context
Digital Realty is a global data-center REIT providing data-center space, power, colocation and interconnection services. At year-end, its portfolio included 214 data centers, including 18 in unconsolidated joint ventures, across 35 metropolitan areas. Approximately 89.0% of portfolio space was leased, excluding development and future-development space. Northern Virginia and Chicago were the largest revenue markets.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Total operating revenue | $3.046 billion | $2.458 billion |
| Operating income | $549.8 million | $451.3 million |
| Net income | $341.1 million | $256.3 million |
| Net income available to common stockholders | $249.9 million | $173.1 million |
| Diluted earnings per share | $1.21 | $0.99 |
| FFO per diluted share and unit | $6.37 | $5.65 |
| Cash provided by operating activities | $1.385 billion | $1.023 billion |
| Cash used in investing activities | $3.036 billion | $1.357 billion |
| Common dividend per share | $4.04 | $3.72 |
Revenue increased 23.9%, reflecting acquired properties—especially the 2017 DuPont Fabros Technology (DFT) merger—and higher tenant reimbursements. Operating income rose 21.8%; operating margin was approximately 18.1%, compared with 18.4% in 2017. FFO per diluted share and unit increased approximately 12.7%. The filing cautions that FFO is a supplemental, non-GAAP measure and does not capture all capital spending or changes in property values.
At year-end, cash and cash equivalents were $126.7 million, with a further $8.5 million of restricted cash. Consolidated debt was approximately $11.18 billion, up from $8.65 billion. About 74% of debt was fixed-rate or covered by swaps; the weighted-average interest rate was 3.68%. Approximately $0.8 billion was available under the global revolving facility and $158.7 million under the Yen facility. The company reported compliance with debt covenants. Debt principal maturities included approximately $519 million in 2019 and $3.50 billion in 2023.
Material changes and unusual items
- Ascenty acquisition: Completed December 20, 2018, expanding the platform into Brazil with 16 data centers. Cash and equity consideration was approximately $1.8 billion net of cash acquired. The acquired business contributed only about $3 million of 2018 revenue because of the late closing date.
- The Ascenty purchase-price allocation was provisional, including approximately $983 million of goodwill, and expected to be finalized by March 31, 2019. Brookfield had committed approximately $700 million for a 49% interest in a planned Ascenty joint venture, subject to closing conditions and expected in Q1 2019.
- 2018 revenue also reflected DFT properties acquired in 2017. Stabilized-property revenue grew only 0.6%, highlighting the importance of acquisitions and development to reported growth.
- Depreciation and amortization increased 40.9%, principally due to DFT-related intangible amortization. Interest expense rose 24.3%, reflecting debt issued to finance growth.
- Property sales generated $291.7 million in gross proceeds and an $80.4 million gain. There were no real-estate impairment charges in 2018; 2017 included $29.0 million.
- Fourth-quarter revenue was $778.3 million versus $731.4 million a year earlier. Net income available to common stockholders was $31.2 million, or $0.15 per diluted share, versus $53.3 million, or $0.26, in Q4 2017.
Outlook, management commentary and risks
Management emphasized long-term demand drivers including cloud adoption, growth in data and connectivity needs, and IT outsourcing. It targets debt-to-adjusted EBITDA of no more than 5.5x, fixed-charge coverage above 3x, and floating-rate debt below 20% of total debt. These are targets; the filing text does not provide a clear year-end value for actual debt-to-adjusted EBITDA or fixed-charge coverage.
The company expected approximately $1.2 billion to $1.4 billion of development capital expenditures in 2019, subject to demand, leasing results and access to capital. It had approximately 3.4 million square feet under active development and 2.1 million square feet held for future development. Management reported strong demand in most key markets, but noted that lease-up timing, supply and financing availability could affect returns.
Key risks include high customer and market concentration; competition and new data-center supply; lease expirations and re-leasing costs; dependence on reliable power, cooling and connectivity; cybersecurity or service interruptions; development execution and cost overruns; substantial debt and refinancing or interest-rate exposure; foreign-currency and international-market risks, particularly Brazil; and environmental, climate, water and natural-disaster exposures. The top 20 customers represented 53.5% of annualized rent, while Northern Virginia accounted for 23.2%. Leases covering 22.1% of rentable square feet were scheduled to expire through 2020, excluding specified categories.
Subsequent to year-end, the company issued €850 million of 2.50% notes due 2026. It used proceeds to tender for and redeem its remaining 5.875% notes due 2020. A forward equity sale from a 2018 offering was expected to provide approximately $1.1 billion upon settlement by September 2019. The company also adopted new bylaws providing proxy access in February 2019. Management and the auditor reported effective internal control over financial reporting; Ascenty was excluded from the control assessment following its recent acquisition.
Most important facts for investors to verify
- Whether the Brookfield-Ascenty joint venture closed as planned, the final purchase-price allocation, and resulting ownership, debt and earnings contribution.
- 2019 development spending, construction delivery, leasing and occupancy trends, particularly in markets with significant projects or supply.
- Actual leverage and fixed-charge coverage against management’s stated targets, liquidity after acquisition funding, and refinancing of near-term maturities.
- Customer renewals, rent changes and vacancy outcomes for leases expiring in 2019–2020, given customer and geographic concentration.
- Settlement of the forward equity sale and its proceeds, share dilution and use of capital.