Digital Realty Trust, Inc. and Digital Realty Trust, L.P. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. Financial figures below are consolidated and in U.S. dollars unless noted. Digital Realty Trust, Inc. is a REIT and the operating partnership conducts the business and holds substantially all assets and debt.
Business context
The company owns, develops, redevelops and manages technology-related real estate, particularly data centers. At year-end it owned 101 properties, excluding three properties in unconsolidated joint ventures, with approximately 18.3 million rentable square feet, including 2.4 million square feet held for redevelopment. The portfolio was 94.8% leased excluding redevelopment space, and served approximately 535 tenants.
Financial and operating performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Total operating revenue | $1,062.7 million | $865.4 million | +22.8% |
| Rental revenue | $820.7 million | $682.0 million | +20.3% |
| Operating income | $304.3 million | $242.3 million | +25.6% |
| Net income | $162.1 million | $105.4 million | +53.8% |
| Net income available to common stockholders | $130.9 million | $58.3 million | +124.3% |
| Diluted earnings per share | $1.32 | $0.68 | +94.1% |
| Diluted FFO per share and unit | $4.06 | $3.39 | +19.8% |
| Cash provided by operating activities | $401.0 million | $359.0 million | +11.7% |
| Cash used in investing activities | $(830.8) million | $(1,737.7) million | Lower outflow |
| Cash provided by financing activities | $458.8 million | $1,318.1 million | Lower inflow |
Operating margin was approximately 28.6%, compared with 28.0% in 2010; net margin was approximately 15.3%, compared with 12.2%. Revenue growth reflected leasing and completed redevelopment, acquisitions, and construction-management activity. Construction-management revenue rose to $29.3 million from $4.9 million, with related expense of $22.7 million. Operating expenses increased 21.7%, including higher utilities and depreciation; interest expense rose 8.7% to $149.4 million.
FY 2011 FFO available to common stockholders and unitholders was $449.3 million, versus $327.5 million in 2010. Management cautions that FFO is supplemental and does not capture property value changes or the capital spending needed to sustain operations.
In Q4 2011, revenue was $270.6 million, net income was $47.2 million, net income attributable to Digital Realty Trust, Inc. was $45.7 million, and net income available to common stockholders was $36.0 million; basic and diluted EPS were both $0.34. In Q4 2010, revenue was $238.7 million, net income was $36.3 million, common-stockholder income was $24.9 million and diluted EPS was $0.27.
Debt, liquidity and distributions
- Year-end total debt was approximately $2.94 billion, compared with $2.81 billion in 2010. Debt-to-enterprise value was approximately 27%. About 90.6% of debt was fixed-rate or hedged; the effective interest rate was 5.19%.
- Cash and cash equivalents were $40.6 million, plus $55.2 million of restricted cash. The new $1.5 billion global revolving credit facility had $275.1 million drawn and approximately $1.2 billion available, net of letters of credit; it matures in November 2015 with a one-year extension option.
- Operating cash flow increased, but investing outflows remained substantial. Cash capital expenditures were $602.4 million in 2011, including $411.8 million for redevelopment. Year-end construction commitments were $184.7 million.
- Common dividends were $2.72 per share for 2011, up from $2.02 in 2010. The board declared a $0.73-per-share common dividend for the quarter payable March 30, 2012. Future dividends remain at board discretion and depend on cash flow, financial condition and REIT requirements.
Material changes and significant events
- The portfolio grew to 101 properties from 96 at year-end 2010; net investments in real estate increased to $5.24 billion from $4.58 billion. The company acquired five properties in 2011 for approximately $242.3 million and spent substantially more on redevelopment.
- In November 2011, the company replaced its prior revolving facilities with a $1.5 billion multicurrency global facility. It also amended its Prudential shelf agreement.
- Capital raised in 2011 included approximately $455.6 million of net common equity proceeds, $277.3 million net proceeds from issuing 7.0% Series E preferred stock, and approximately $395.5 million net proceeds from $400 million of 5.25% notes due 2021. Equity issuance increased the common share count.
- After year-end, the company repaid approximately €56.7 million of secured debt in January 2012 using revolver borrowings, and acquired Convergence Business Park in Texas for approximately $123 million in February 2012, also funded with the revolver.
Outlook, risks and contingencies
- Management expected to spend approximately $700 million to $900 million on development and redevelopment in 2012, with the amount subject to change based on demand, leasing and capital availability. Approximately 1.2 million square feet was under construction at year-end. Management reported strong demand in most key markets and expected rents on 2012 data-center lease renewals or re-leasing generally to exceed current rents; this is not formal earnings guidance.
- Key risks include specialized-property demand and technology changes, competition and new data-center supply, speculative redevelopment and cost overruns, tenant concentration, refinancing and interest-rate exposure, foreign currency, and access to debt and equity capital. The 20 largest tenants represented 49.3% of annualized rent; CenturyLink subsidiaries alone represented 10.2%. Approximately 28% of annualized rent came from California properties, exposing the portfolio to correlated earthquake risk.
- Solyndra, a subtenant at one property, filed for Chapter 11 in September 2011. It became the company’s direct tenant under a new lease at approximately $345,500 monthly base rent, and its motion to reject the lease was pending at the filing date; recovery on related claims was uncertain.
- The company disclosed no legal proceedings it believed would have a material adverse effect and no material tenants in bankruptcy as of year-end. Environmental assessments did not identify a known material adverse condition, but the filing notes assessments may not uncover all liabilities. A potential seller earnout of up to S$50 million (about $38.6 million) tied to the Singapore property was not accrued because payment was not considered probable.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded disclosure controls and internal controls were effective as of December 31, 2011.
Important facts for investors to verify
- Whether redevelopment spending and the planned $700–$900 million 2012 capital program convert into leased, income-producing space on schedule and within budget.
- Revolver availability, covenant compliance and refinancing plans for the material 2012–2015 maturities, including the 2029 debenture holder put date in April 2014.
- The status and financial impact of Solyndra’s lease-rejection motion and any recovery from the bankruptcy process.
- Tenant concentration, upcoming lease expirations, and whether recent leasing spreads and occupancy can be sustained amid competing data-center supply.
- Dividend coverage after preferred distributions, common-equity issuance and planned capital investment; FFO is not a substitute for cash flow or required property capital expenditures.