Digital Realty Trust, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The combined filing covers Digital Realty Trust, Inc. and its operating partnership for the three months ended March 31, 2017, compared with Q1 2016. The REIT owns, develops and operates data centers, colocation and interconnection facilities. At quarter-end, its portfolio comprised 145 properties, including 14 held through unconsolidated joint ventures; occupancy was 89.4%, excluding development and future-development space.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Operating revenue | $550.6 million | $504.2 million; up 9.2% |
| Operating income | $137.3 million | $118.1 million; up 16.2% |
| Operating margin | 24.9% | 23.4% |
| Net income | $84.6 million | $62.3 million |
| Net income available to common stockholders | $66.1 million; diluted EPS $0.41 | $39.1 million; diluted EPS $0.27 |
| FFO per diluted share and unit | $1.50 | $1.39 |
| Operating cash flow | $219.1 million | $180.6 million |
| Cash and restricted cash | $25.4 million total; $15.0 million unrestricted | $22.0 million total at Dec. 31, 2016 |
| Total debt | $6.26 billion | $5.84 billion at Dec. 31, 2016 |
Revenue gains reflected the European Portfolio Acquisition and new leases, including completed development space. Stabilized rental revenue was essentially flat, while interconnection revenue increased. Interest expense declined to $55.5 million from $57.3 million. Operating cash flow was more than offset by investing cash outflows of $215.6 million; real-estate improvements were $254.4 million in the cash flow statement. Financing cash outflow was $2.9 million, with net borrowing proceeds of $307.0 million and dividends and distributions paid of $312.5 million.
Debt was approximately 84.8% fixed-rate, including swapped variable-rate debt; the effective interest rate was 3.46%. Debt represented approximately 25% of enterprise value. About $1.4 billion remained available under the $2.0 billion revolving facility after borrowings and letters of credit. The weighted-average term to initial debt maturity was about 5.1 years. Total assets were $12.33 billion and total liabilities $7.26 billion at March 31, 2017.
Material changes versus the prior period
- Revenue increased $46.4 million. The European Portfolio Acquisition contributed approximately $22.5 million to rental revenue growth and $3.3 million to interconnection revenue growth.
- Operating expenses rose $27.2 million, principally from higher property operating costs, depreciation, general and administrative expense, and transaction costs. Acquisition integration costs contributed to the increase.
- Net income and diluted EPS rose year over year; FFO per diluted share and unit increased to $1.50 from $1.39.
- Operating cash flow increased $38.5 million, while investing outflows increased $61.4 million, mainly reflecting greater capital spending.
- Debt increased from year-end, particularly revolving-credit borrowings. The company’s common shares outstanding also increased year over year.
Outlook, commentary and risks
- Management reported strong demand in most key markets. It expected rents on 2017 expirations, in aggregate, to be higher on a GAAP basis and up slightly on a cash basis, subject to local supply and demand.
- Management expected $600 million to $800 million of development capital expenditures during the remaining nine months of 2017. The estimate could change materially with demand, leasing outcomes and capital availability. Construction-contract commitments were approximately $352 million, including about $22.8 million reimbursable.
- Management said near-term single-asset acquisitions could be a smaller contributor to growth while lower market capitalization rates persist. No specific full-year earnings or FFO guidance is provided in the supplied filing text.
- Key risks include development and leasing execution, vacancies and lease renewals, data-center supply and competition, customer concentration or defaults, access to debt and equity financing, interest-rate and foreign-exchange exposure, and power costs or energy regulation. Foreign properties generated 22.1% of Q1 revenue.
- A subsidiary was involved in litigation over release of a sublease guarantee, with estimated maximum exposure of approximately £20 million. The company said it could not reliably estimate the outcome and believed it had defenses and potential reimbursement claims. Management reported no other legal proceedings believed likely to have a material adverse effect.
- After quarter-end, on April 5, 2017, the company redeemed all 7.3 million Series F preferred shares for $25.01840 per share, funding the redemption with revolving-credit borrowings.
- The company and operating partnership reported compliance with applicable credit-facility covenants and effective disclosure controls and procedures.
Important facts for investors to verify
- How much of revenue and cash-flow growth is recurring, given the European acquisition’s contribution and flat stabilized rental revenue.
- Leasing, occupancy and rental-rate progress, especially as 3.5% of portfolio rentable area was scheduled to expire in the remainder of 2017 and 10.4% in 2018.
- Whether development spending, construction commitments and project delivery translate into leased, income-producing capacity on schedule and within budget.
- Debt maturities and refinancing capacity, including approximately $1.58 billion due in 2020 and $1.61 billion in 2021, as well as the effect of additional revolver borrowing.
- The outcome and potential financial impact of the £20 million sublease-guarantee litigation, and the post-quarter Series F redemption’s effects on interest expense and common-stockholder earnings.