Digital Realty Trust, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; quarterly figures are for the three months ended December 31, 2014. Digital Realty Trust, Inc. is a REIT, and substantially all operating assets and debt are held by its operating partnership, Digital Realty Trust, L.P.
Business context and portfolio
The company owns, develops and manages data-center and other technology-related real estate. At year-end it reported 131 properties, including joint-venture holdings and developable land, with approximately 24.6 million rentable square feet, including 1.3 million square feet under active development and 1.2 million held for future development. The portfolio was approximately 93.2% leased, excluding development space. It served more than 650 tenants; CenturyLink was its largest, at 7.2% of annualized rent.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total operating revenue | $1.616 billion | $1.482 billion | +9.1% |
| Operating income | $258.7 million | $381.8 million | −32.3% |
| Net income | $203.4 million | $320.4 million | −36.5% |
| Net income available to common stockholders | $132.7 million | $271.6 million | −51.1% |
| Diluted earnings per share | $0.99 | $2.12 | Lower |
| Diluted FFO per share and unit | $5.04 | $4.74 | +6.3% |
| Cash from operating activities | $655.9 million | $656.4 million | Essentially flat |
Operating margin was approximately 16.0%, compared with 25.8% in 2013. The sharp GAAP earnings decline reflects a $126.5 million impairment charge on five properties, higher depreciation and G&A, partly offset by $95.4 million of gains on joint-venture contributions, a $15.9 million property-sale gain and a $14.6 million investment-sale gain. FFO, a supplemental non-GAAP REIT measure, increased despite the fall in GAAP earnings.
Fourth-quarter revenue was $412.2 million, versus $380.9 million a year earlier. The quarter recorded a net loss of $34.8 million and a loss of $0.39 per diluted share, compared with net income of $55.7 million and diluted EPS of $0.33 in Q4 2013.
Year-end cash and cash equivalents were $41.3 million, plus $11.6 million restricted cash. Consolidated debt was $4.67 billion, down from $4.96 billion; debt to enterprise value was reported at approximately 31%. About 79.7% of debt was fixed-rate or swapped, with a reported weighted average interest rate of 3.99%. Approximately $1.4 billion remained available under the $2.0 billion revolving facility. Scheduled 2015 principal maturities were $517.5 million, including $375 million of notes due July 2015. Operating cash flow was nearly matched by $509.2 million of distributions and dividends. Capital expenditures were $804.8 million in 2014.
Material changes, outlook and management commentary
- Revenue grew through same-store leasing and completed development space; same-store occupancy rose to 93.2% from 92.6%. Renewal rents increased 12.4% on a GAAP basis across the same-store portfolio during 2014.
- Management expected 2015 development-program capital expenditures of approximately $750–$850 million, subject to demand, leasing results and access to capital. At year-end, construction-contract commitments were $156.5 million.
- Management reported strong data-center demand in most key markets, particularly Dallas, Northern Virginia and Dublin, but identified potential significant oversupply risk in Silicon Valley. It also expected acquisition activity to be a smaller near-term growth contributor until seller pricing aligned with its return requirements.
- The company contributed properties to two joint ventures in 2014, retaining 20% interests and recognizing $95.4 million in aggregate gains. It also sold 6 Braham Street and an equity investment. Five properties were classified as held for sale at year-end, with $120.5 million in assets and $5.8 million in related liabilities.
- G&A increased 41.9%, including $12.7 million of severance related to former CEO Michael Foust’s departure. A former executive disputes the company’s withholding of previously accrued severance; the matter is in arbitration/litigation and any recovery was not estimable.
- After year-end, the company sold 100 Quannapowitt for approximately $31 million, reporting approximately $29 million net proceeds and a $9 million gain. It declared a 2015 common dividend of $0.85 per quarter, or $3.40 annualized; future distributions remain subject to board discretion and REIT requirements.
Risks, contingencies and unusual items
- Key exposures include tenant concentration and lease renewals, data-center supply and technology shifts, development cost and lease-up risk, substantial debt and refinancing needs, variable rates, foreign exchange, and dependence on reliable power and connectivity.
- Net Data Centers, representing approximately $7.8 million of annualized base rent, was in bankruptcy proceedings; the filing said there were no material tenants in bankruptcy as of February 27, 2015.
- Contingent acquisition consideration included approximately $47.2 million related to the Sentrum portfolio and approximately $12.6 million accrued for a 29A International Business Park earnout. The Sentrum earnout expires in July 2015.
- The company reported compliance with debt covenants at December 31, 2014. It repaid $50 million and $17 million of Prudential notes in January and February 2015, respectively; the $375 million 2015 notes remained due in July 2015.
- Management and KPMG reported effective internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- How much of the 2014 earnings decline came from impairment and other one-time gains or charges, and whether the affected assets are ultimately sold.
- Whether occupancy, same-store rent growth and development lease-up support the planned $750–$850 million of 2015 development spending, especially in Silicon Valley.
- Funding and refinancing plans for the $375 million July 2015 notes and the larger 2017 revolver and term-loan maturities.
- Cash available for common distributions after preferred dividends, debt service, recurring capital needs and development commitments.
- Potential effects of tenant concentration, utility costs, foreign currency movements, contingent consideration and the former-executive dispute.