DLR

Business Context and Reporting Period

Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2005
Business Overview: The Company owns, acquires, repositions, and manages technology-related real estate, including data centers and telecommunications infrastructure. As of March 31, 2005, the portfolio consisted of 26 properties (25 in the U.S., 1 in London) totaling approximately 6.3 million net rentable square feet. The Company completed its IPO in November 2004 and intends to qualify as a REIT.

Key Financial Metrics

Note: Q1 2004 figures represent the "Predecessor" combined operations prior to the IPO. Q1 2005 includes the Company's post-IPO operations.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 110.6% to $39.6 million, driven primarily by the acquisition of 12 properties over the preceding 12 months and full-quarter revenue recognition for properties acquired in late 2004.
• Expense Increases: Total expenses rose 126.8% to $34.7 million. Significant increases were seen in interest expense (+113.2%), depreciation and amortization (+120.0%), and general and administrative expenses (+2,300% due to internalization of asset management and public company compliance costs).
• Net Income Decline: Despite revenue growth, Net Income decreased to $2.7 million from $3.5 million. This was largely due to the issuance of 8.50% Series A Preferred Stock in February 2005, resulting in $1.3 million in preferred dividends, and increased operating costs associated with the expanded portfolio and public company status.
• Capital Structure: The Company issued $103.5 million in Series A Preferred Stock in February 2005. Proceeds were used to reduce credit facility borrowings and fund property acquisitions.

Guidance, Outlook, and Risks

• Acquisition Strategy: The Company is under contract to acquire two additional properties in Chicago (Printers' Square and Lakeside Technology Center) for approximately $180 million combined. Funding is expected via the unsecured credit facility or new secured debt.
• Liquidity: The Company maintains a $200 million unsecured revolving credit facility (amended in May 2005 to allow expansion to $350 million). As of March 31, 2005, $36 million was drawn with approximately $85 million available.
• Dividends: To maintain REIT status, the Company intends to distribute 90% of taxable income. Quarterly dividends declared were $0.24375 per common share/unit and $0.30694 per preferred share.
• Risks: Key risks include the failure to maintain REIT status, adverse economic conditions in the technology sector, tenant defaults (noting VarTec Telecom and Universal Access Inc. filed for Chapter 11 but remain current on rent), and interest rate fluctuations on variable-rate debt (19.8% of total debt is unhedged).

Investor Verification Checklist

• REIT Qualification: Verify the Company's continued compliance with REIT distribution and asset tests to avoid corporate taxation.
• Debt Maturities: Review the schedule of debt maturities, noting significant payments due in 2006 and 2007, and the reliance on the credit facility for refinancing or acquisitions.
• Acquisition Funding: Confirm the execution of financing for the pending Chicago acquisitions and the impact on leverage ratios.
• Tenant Concentration: Assess the impact of the technology sector downturn on lease renewals and the financial stability of major tenants.
• Preferred Stock Impact: Monitor the fixed obligation of preferred dividends ($2.125 annual rate per share) and its effect on cash flow available to common shareholders.