Business Context and Reporting Period
Company: Digital Realty Trust, Inc. (and Digital Realty Trust, L.P.)
Filing Type: Form 10-K
Period Ended: December 31, 2010
Business Overview: Digital Realty Trust is a Real Estate Investment Trust (REIT) that owns, acquires, develops, and manages technology-related real estate, primarily data centers and Internet gateway facilities. As of December 31, 2010, the company owned 96 properties totaling approximately 16.8 million net rentable square feet across the U.S., Europe, Asia, and Canada. The portfolio was 94.6% leased, excluding 2.2 million square feet held for redevelopment.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Operating Revenues | $865.4 million | $637.1 million |
| Net Income | $105.4 million | $91.2 million |
| Net Income Available to Common Stockholders | $58.3 million | $47.3 million |
| Diluted EPS (Common) | $0.68 | $0.61 |
| Cash Flow from Operating Activities | $359.0 million | $283.8 million |
| Total Consolidated Debt | $2.8 billion | $2.1 billion |
| Debt to Total Enterprise Value | 34% | N/A |
| Dividends Declared (Common) | $2.02 per share | $1.47 per share |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 35.8% to $865.4 million, driven by the acquisition of 15 new properties and strong leasing activity at same-store properties.
- Expense Increases: Total operating expenses rose 35.6% to $623.1 million, primarily due to higher utility costs, increased depreciation from new developments, and transaction costs related to acquisitions.
- Interest Expense: Interest expense increased 55.3% to $137.4 million, reflecting higher average debt balances from new issuances (2020 Notes, 2015 Notes) and draws on the revolving credit facility.
- Portfolio Expansion: The company acquired significant assets in 2010, including the New England Portfolio ($375 million), the 365 Main Portfolio ($725 million), and a data center in Singapore ($132.7 million).
- Preferred Stock Redemptions: The company redeemed all outstanding Series A and Series B preferred stock during 2010, funded by borrowings under its revolving credit facility.
Guidance, Outlook, and Risks
Outlook and Strategy: Management intends to continue acquiring properties and redeveloping existing space to maximize cash flow. The company expects to incur approximately $450 million to $525 million in capital expenditures for its redevelopment program in 2011. The company maintains a policy to limit indebtedness to 60% of total enterprise value.
Key Risks and Contingencies:
- Global Economic Conditions: Tighter credit conditions and slower economic growth could impact the company's ability to access capital and the financial stability of its tenants.
- Debt and Refinancing: With $2.8 billion in debt, the company faces refinancing risks. Approximately 88% of debt is fixed-rate (including swaps), but $333.5 million remains variable-rate under the revolving credit facility.
- Tenant Concentration: The 20 largest tenants represent 48% of total annualized rent. The largest tenant, Savvis Communications, accounts for 7.9% of annualized rent.
- Development Risks: The company holds 2.2 million square feet for redevelopment, which is subject to construction delays, cost overruns, and leasing uncertainties.
- Environmental and Regulatory: Properties are subject to environmental liabilities and potential climate change legislation that could increase operating costs.
Investor Verification Checklist
- Debt Maturities: Verify the schedule of debt maturities, specifically the $333.5 million revolving credit facility maturing in August 2011 and the exchangeable debentures subject to redemption.
- Lease Expirations: Review the lease expiration schedule; 10.7% of rentable square footage (excluding redevelopment) is scheduled to expire through 2012.
- Redevelopment Progress: Monitor the leasing status and capital expenditure requirements for the 2.2 million square feet held for redevelopment.
- Tenant Financial Health: Assess the financial stability of the top 20 tenants, particularly Savvis Communications, Equinix, and Facebook, which collectively represent over 16% of annualized rent.
- Interest Rate Exposure: Confirm the effectiveness of interest rate hedges and the impact of potential rate increases on the unhedged portion of the revolving credit facility.