Digital Realty Trust, Inc. — Q1 2018 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2018. Digital Realty is a global data-center, colocation and interconnection REIT operating through Digital Realty Trust, L.P. The portfolio comprised 203 data centers, including joint-venture and held-for-sale properties. The September 2017 DuPont Fabros Technology (DFT) merger materially expanded the portfolio and affects year-over-year comparisons.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $744.4 million | $550.6 million |
| Operating income | $143.8 million | $137.3 million |
| Net income | $110.1 million | $84.6 million |
| Net income available to common stockholders | $86.3 million | $66.1 million |
| Diluted EPS | $0.42 | $0.41 |
| FFO available to common stockholders and unitholders | $345.7 million | $243.8 million |
| Diluted FFO per share and unit | $1.61 | $1.50 |
| Cash from operations | $237.0 million | $219.1 million |
- Revenue increased 35.2%, largely reflecting DFT merger properties. Stabilized-property revenue grew 1.7%; pre-stabilized and other revenue increased substantially, principally from DFT.
- Operating margin was approximately 19.3%, versus 24.9% a year earlier. Depreciation and amortization rose $118.3 million, primarily due to acquired DFT properties; operating income increased only $6.5 million despite revenue growth.
- Interest expense rose $21.5 million to $77.0 million, mainly reflecting debt issued in 2017. Q1 property sales generated a reported net gain of approximately $39.3 million.
- Investing cash outflow was $177.3 million and financing cash outflow was $43.2 million. Cash capital expenditures were $264.7 million; operating cash flow was therefore below cash capital expenditures for the quarter.
- At March 31, total debt was approximately $9.2 billion, compared with $8.6 billion at December 31, 2017. Debt-to-total-enterprise-value was approximately 28%; the weighted-average term to initial maturity was 5.1 years. Fixed-rate debt, including debt hedged with swaps, was 82.4% of total debt, with an effective interest rate of 3.44%.
- Cash and cash equivalents were $22.4 million, plus $7.3 million restricted cash. Approximately $1.1 billion remained available on the $2.0 billion revolving facility after borrowings and letters of credit. The company reported compliance with debt covenants.
Material changes and management commentary
- The DFT merger drove much of the increase in revenue, operating expenses, depreciation and debt. DFT-acquired properties contributed approximately $102.9 million to rental and other services revenue and $54.1 million to tenant reimbursements.
- Portfolio occupancy was approximately 89.2%, excluding space under active development and held for development. Approximately 3.6 million square feet was under active development and 1.5 million square feet held for future development. New leases signed covered about 0.8 million square feet and renewals about 1.7 million square feet.
- Management reported strong demand in most key markets and expected rents on 2018 expirations, in aggregate, to be generally higher on a GAAP basis but slightly lower on a cash basis. Q1 renewal rents increased 4.1% for Turn-Key Flex and 4.0% for Powered Base Building, on a GAAP basis.
- Management expects approximately $0.7–$0.9 billion of development capital expenditures during the remaining nine months of 2018, subject to changes in demand, leasing results and capital availability. Construction-contract commitments were approximately $467.8 million.
- No real estate acquisitions occurred in Q1. The company sold properties for gross proceeds of $139.3 million. A three-property Austin portfolio sale closed April 19 for approximately $48 million; management expected to recognize an approximately $12 million gain in Q2.
- The common dividend annual rate was $4.04 per share. Management said operating cash flow has generally funded distributions, but borrowings may be needed to fund some distributions. No specific earnings or FFO guidance is provided in the supplied filing text.
Risks, contingencies and unusual items
- Key risks include weaker data-center demand, increased supply and competition, customer defaults or non-renewals, development delays or cost overruns, dependence on external capital, refinancing and interest-rate exposure, and foreign-currency movements.
- Geographic concentration is significant: Northern Virginia represented 21.9% of annualized rent. Foreign operations generated 18.9% of Q1 revenue.
- About $1.6 billion of debt was unhedged variable-rate debt; management estimated that a 10% increase in rates would raise annual interest expense on that debt by approximately $3.2 million.
- Construction commitments, REIT distribution requirements and possible need for additional debt or equity capital could constrain liquidity. The company noted that power costs and evolving energy and climate regulation may increase operating costs.
- Legal proceedings were described as arising in the ordinary course; the company reported no proceedings it believed would materially adversely affect its financial position, results or liquidity. No material control changes were reported.
- Topic 606 adoption had no material effect. The company was assessing the impact of the new lease accounting standard, expected to require recognition of lease liabilities and right-of-use assets, particularly for leases where it is a lessee.
Important facts for investors to verify
- How much of revenue, FFO and debt growth reflects the DFT merger versus same-property performance, and whether integration produces expected benefits.
- Whether occupancy, leasing spreads and cash rents support returns on the 3.6 million square feet under active development and the planned 2018 development spend.
- Debt maturity and refinancing needs, borrowing costs, revolving-facility availability, covenant headroom and exposure to unhedged rates and currencies.
- Whether operating cash flow can sustainably cover development investment and dividends; Q1 cash capital expenditures exceeded operating cash flow.
- The realized gain and proceeds from the subsequent Austin sale, and the timing and economics of remaining held-for-sale properties.
- Potential balance-sheet and expense effects of adopting the new lease accounting standard, and any material changes in demand, competition, customer concentration or power costs.