Digital Realty Trust, Inc. — Q2 2011 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2011; financial comparisons are with the three and six months ended June 30, 2010. Digital Realty owns, develops, redevelops and manages technology-related real estate, primarily data centers. At quarter-end it had 96 properties (excluding two unconsolidated joint-venture properties), about 17.1 million rentable square feet including redevelopment space, and 93.9% occupancy excluding space held for redevelopment. The filing combines Digital Realty Trust, Inc. and its operating partnership; the operating partnership holds substantially all assets and debt.
Financial highlights
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Operating revenue | $267.9 million | $197.5 million | $518.6 million | $389.2 million |
| Operating income | $76.7 million | $54.2 million | $151.4 million | $109.3 million |
| Net income | $38.2 million | $19.9 million | $77.2 million | $45.5 million |
| Net income available to common stockholders | $32.0 million | $9.1 million | $63.0 million | $23.8 million |
| Diluted earnings per share | $0.33 | $0.11 | $0.66 | $0.29 |
| Diluted FFO per share and unit | $1.02 | $0.76 | $2.03 | $1.57 |
| Cash provided by operating activities | — | $189.7 million | $143.1 million |
Calculated operating margin was approximately 28.6% for Q2 2011 versus 27.4% a year earlier, and 29.2% for the first half versus 28.1%. FFO is a non-GAAP supplemental measure; the company cautions that it excludes depreciation and does not capture capital expenditure needs or changes in property values.
At June 30, total assets were $5.66 billion, cash and cash equivalents $27.9 million, and restricted cash $56.9 million. Total debt was $3.07 billion, up from $2.81 billion at year-end 2010; debt to enterprise value was reported at approximately 31%. The $750 million revolving facility had $341.4 million drawn and $30.5 million of letters of credit, leaving approximately $378 million available. Cash from operations exceeded distributions paid during the first half.
Material changes versus prior period
- Q2 revenue rose about 36%; first-half revenue rose about 33%. Management attributed growth mainly to acquisitions, leasing at existing properties and construction management fees. Same-store rental revenue also increased.
- Net income available to common stockholders and diluted EPS increased substantially. Results also reflect higher depreciation, operating costs and interest expense; interest expense rose to $39.3 million in Q2 from $33.2 million.
- Operating cash flow increased by $46.7 million in the first half. Investing cash outflow was $331.0 million, principally reflecting $307.9 million of real estate improvements and advances; it was lower than 2010 because acquisition spending fell.
- The company issued $400 million of 5.25% senior notes due 2021 and raised about $176.9 million net from common-stock sales under its prior at-the-market program. Common shares outstanding rose to 98.8 million from 91.2 million at year-end.
- Capital expenditures excluding indirect costs increased to $275.7 million from $139.7 million in the first half of 2010. Redevelopment spending was $203.5 million.
Outlook, risks and unusual items
- Management expected $250 million to $375 million of development and redevelopment capital expenditures in the second half of 2011, subject to demand, leasing results and financing availability. About 944,000 square feet were under construction; open construction-contract commitments were $119.2 million.
- The company reported strong demand for data-center space and expected rents on certain 2011-expiring data-center leases to generally exceed current rents, but gave no earnings or revenue guidance. About 5.2% of portfolio square footage was scheduled to expire in the second half of 2011; 2.7% in 2012.
- The revolving facility matured August 31, 2011, with a one-year extension option. The company submitted notice to exercise the option in July and expected the extension to August 2012, subject to the facility’s conditions.
- Holders of the remaining $48.3 million principal of 4.125% exchangeable debentures due 2026 had an August 2011 repurchase right. After quarter-end, the company commenced the required repurchase offer and announced its intent to redeem the debentures on August 18, 2011. The first-half exchanges of $40.5 million principal involved approximately $52.2 million cash and 372,068 restricted shares.
- After quarter-end, the company repaid $25 million of 7% notes at maturity and acquired development and redevelopment sites in Sydney and London, funded with revolver borrowings. It also announced a new $400 million at-the-market equity program.
- Risks highlighted include economic and capital-market disruption, tenant defaults or non-renewals, concentration in specialized data-center property and certain markets, development costs and leasing delays, refinancing and interest-rate exposure, foreign currency movements, and REIT qualification. Most variable-rate debt was subject to swaps or caps; $341.4 million of revolver borrowings remained unhedged.
- Other items include a potential seller earnout of up to approximately $40.7 million for 29A International Business Park, contingent on future operating performance, and related-party rental income from tel(x) and SoftLayer. The filing reported no legal proceedings and no impairment losses recognized to date.
Important facts for investors to verify
- Confirm completion and terms of the revolving-credit extension, 2026 debenture repurchase/redemption, and repayment of the maturing Prudential notes.
- Track actual second-half development and redevelopment spending, project completion, leasing and returns against the stated spending outlook and $119.2 million construction commitments.
- Assess occupancy, renewals, rent changes and tenant concentration, including upcoming expirations and the performance of redevelopment space.
- Review debt maturities, covenant compliance, refinancing costs, unhedged revolver exposure and interest-rate hedge counterparties.
- Measure equity issuance and potential dilution from the new ATM program, exchangeable debentures, convertible preferred stock and partnership units.
- Evaluate FFO alongside GAAP earnings, operating cash flow, recurring capital needs and distributions; also review related-party lease revenue and contingent obligations.