Digital Realty Trust, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Digital Realty Trust, Inc. is a REIT and the general partner of Digital Realty Trust, L.P., which holds substantially all assets and conducts operations. Unless noted, financial amounts below are in millions of dollars.
Business context
The company owns, acquires, develops and manages technology-related real estate, principally data centers. At quarter-end, its portfolio comprised 122 properties and approximately 22.7 million rentable square feet, including 2.6 million square feet held for development. Occupancy was 94.0%, excluding development space. The filing reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $358.4 | $283.1 | +26.6% |
| Operating income | $98.6 | $85.9 | +14.7% |
| Net income | $51.7 | $49.3 | +4.9% |
| Net income available to common stockholders | $42.7 | $39.2 | +8.8% |
| Basic / diluted EPS | $0.34 / $0.34 | $0.37 / $0.36 | Lower per share |
| FFO per diluted share and unit | $1.16 | $1.06 | +9.4% |
| Cash from operations | $89.0 | $70.5 | +$18.5 |
Operating margin was approximately 27.5%, compared with 30.3% a year earlier; net margin was approximately 14.4%, versus 17.4%. Revenue growth reflected acquisitions, new leasing and completed development space. Operating expenses rose 31.7% to $259.8 million, including higher property operating costs and depreciation; interest expense increased to $48.1 million from $38.0 million. Weighted-average basic shares increased to 126.4 million from 107.1 million, contributing to lower EPS despite higher total earnings.
Net cash used in investing was $355.6 million, including $258.7 million for improvements and advances to real estate and $77.9 million for acquisitions. Financing provided $252.4 million. Cash and equivalents were $42.1 million at quarter-end, plus $43.9 million of restricted cash. The $1.8 billion revolving facility had $546.6 million drawn and approximately $1.2 billion available, net of letters of credit.
Total debt was $4.68 billion, up from $4.28 billion at December 31, 2012. Approximately 84.4% was fixed-rate or hedged; the effective interest rate was 4.33%. Management reported debt at approximately 34% of enterprise value and covenant compliance. Total assets were $8.97 billion and total equity was $3.38 billion at March 31.
Material changes and notable items
- Revenue increased $75.2 million year over year; same-store revenue rose $30.6 million and new-property revenue contributed $44.6 million of growth. New-property revenue growth was concentrated in the Sentrum Portfolio, 400 S. Akard and Convergence Business Park.
- Foreign-currency translation produced a $63.1 million other comprehensive loss, versus $19.3 million of income in Q1 2012. Comprehensive loss attributable to Digital Realty Trust, Inc. was $9.6 million, despite positive net income.
- In January, a subsidiary issued £400 million of 4.25% guaranteed notes due 2025, generating approximately $624.2 million in net proceeds, used temporarily to repay revolver borrowings. Debt maturities include $218.7 million for the remainder of 2013 and $480.5 million in 2014, including the exchangeable debentures’ first put date.
- In February, all outstanding Series D convertible preferred stock converted into common stock. The common dividend rate was $3.12 annualized per share; Series E and F preferred rates were $1.75 and $1.656 annualized.
- After quarter-end, the company issued 10 million Series G preferred shares for $241.5 million net proceeds. It also increased authorized common shares to 215 million and preferred shares to 70 million.
Outlook, risks and contingencies
No specific earnings or FFO guidance is provided. Management expected to spend approximately $650–$750 million on development programs during the remaining nine months of 2013, subject to demand, leasing, capital availability and other factors. Approximately 1.39 million square feet was under construction; expected total cost for identified projects, including related acquisition and capitalized costs, was approximately $1.6 billion. Open construction-contract commitments were $261.4 million.
Management cited continued demand in many key data-center markets and expected aggregate rents on new or renewed space for 2013 expirations generally to exceed current rates, but cautioned that renewals and rental levels are not assured. Q1 renewal rates varied by product: Turn-Key Flex rents declined 12.5% on a GAAP basis, while Powered Base Building rents increased 24.5%.
Key risks include tenant concentration and defaults, lease renewals and vacancy, data-center supply and technology shifts, development delays and funding needs, higher interest rates and refinancing, foreign-exchange movements, utility and energy costs, and REIT qualification. The filing notes that distributions may require revolver borrowings if operating cash flow is insufficient. Sentrum contingent consideration was valued at approximately $91.9 million and reduced Q1 operating income by $1.3 million; the amount is subject to quarterly remeasurement. A separate Singapore acquisition earnout could reach approximately $40.3 million. Environmental cleanup work is underway at two properties; cost, recovery prospects and financial impact were not estimable. No material legal proceedings were reported.
Important facts for investors to verify
- Whether operating cash flow can support dividends, debt service and the planned development program, given substantial capital spending and the possibility of additional borrowing.
- Progress, leasing and final costs for the development pipeline, including the $650–$750 million 2013 spending estimate and $1.6 billion expected project cost.
- Portfolio occupancy, tenant concentration and renewal economics, particularly the mixed Q1 rent changes across Turn-Key Flex and Powered Base Building space.
- Debt maturities and refinancing exposure, especially the 2013–2015 maturities, variable-rate exposure and compliance with facility covenants.
- Effects of foreign exchange and contingent consideration on reported equity, comprehensive income and future earnings; assess the post-quarter Series G financing and its use of proceeds.