Digital Realty Trust, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020. Digital Realty is a global data-center, colocation and interconnection REIT, operating primarily through Digital Realty Trust, L.P. It reported 284 data centers, including 43 held through unconsolidated joint ventures, with approximately 43.2 million rentable square feet, including development space. The Interxion combination closed in March 2020 and materially expanded the company’s European operations.
Key financial results
Amounts below are in U.S. dollars; income-statement and cash-flow amounts are in millions unless otherwise noted.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total operating revenue | $1,024.7 | $806.5 | $2,841.0 | $2,421.8 |
| Operating income | $144.4 | $164.8 | $397.3 | $455.3 |
| Operating margin | 14.1% | 20.4% | 14.0% | 18.8% |
| Net income (loss) | $(1.5) | $67.6 | $303.2 | $249.9 |
| Net income (loss) available to common stockholders | $(37.4) | $49.8 | $219.2 | $177.4 |
| Diluted EPS | $(0.14) | $0.24 | $0.85 | $0.85 |
| FFO per diluted share and unit | $1.19 | $1.59 | $3.64 | $5.04 |
- Revenue and operating performance: Revenue increased 27% year over year in Q3 and 17% for the nine months, largely reflecting the Interxion combination. Interxion contributed $216.5 million of Q3 revenue and $458.4 million for the nine-month period. Revenue from stabilized properties declined 2.0% in Q3 and 2.1% year to date, primarily due to expiring leases.
- Profit and unusual items: Q3 net loss included a $53.0 million early-debt-extinguishment loss. For the nine months, net income included $315.2 million of gains on property dispositions, principally the January sale of 12 data centers to Mapletree, and was affected by $53.6 million of debt-extinguishment losses and $88.7 million of equity-method losses from joint ventures. Common-stockholder results also reflect preferred dividends and redemption-related issuance costs.
- FFO: Nareit FFO available to common stockholders and unitholders was $335.5 million in Q3 versus $348.8 million, and $962.4 million for nine months versus $1,099.7 million. FFO is a supplemental, non-GAAP measure; the company cautions it does not capture capital expenditures or changes in property values.
- Cash flow and liquidity: Nine-month operating cash flow was $1,180.7 million, up from $1,111.9 million. Investing cash outflow was $1,519.5 million, including $1,376.8 million of real-estate improvements and $613.4 million of acquisitions, partly offset by $547.9 million of asset-sale proceeds. Financing provided $1,231.2 million, and cash, cash equivalents and restricted cash totaled $986.6 million at quarter-end, including $971.3 million unrestricted cash. As of November 4, 2020, cash was $241 million and approximately $2.2 billion was available under revolving credit facilities.
- Debt: Consolidated debt principal was approximately $12.985 billion at September 30, 2020, versus $10.122 billion at year-end 2019. About 92.9% was fixed-rate or hedged; the effective interest rate was 2.51%, and weighted-average term to initial maturity was approximately 6.5 years. The company reported compliance with its debt covenants. Debt to total enterprise value was approximately 23% under the company’s stated calculation.
- Margins and portfolio: The portfolio was approximately 85.9% leased, excluding active development and space held for development. Average remaining lease term was approximately five years. The company reported approximately 5.4 million square feet under active development and 2.4 million square feet held for development.
Material changes versus prior comparable period
- The Interxion combination added 62 European data centers and significantly increased revenue, operating costs, depreciation and amortization, general and administrative costs, and integration expenses. The acquisition’s total equity consideration was approximately $7.0 billion; $4.4 billion of goodwill was recorded.
- Q3 operating income fell despite higher revenue, as expenses grew faster; operating expenses rose $238.6 million year over year. Nine-month operating income declined $58.0 million.
- Nine-month FFO per diluted share and unit fell to $3.64 from $5.04. Reported GAAP net income rose, but included substantial disposition gains and was affected by other nonrecurring items.
- Cash-flow investing outflows increased, principally reflecting higher real-estate improvements and acquisitions and the absence of the prior-year Ascenty joint-venture transaction proceeds.
- Capital raised included approximately $893 million net from ATM common-share sales and approximately $1.0 billion from settlement of forward equity agreements. Common shares outstanding increased to 279.9 million from 208.9 million at December 31, 2019.
Outlook, commentary and risks
- Management said facilities remained fully operational and October base-rent collections were consistent with the prior-year period. Customers representing approximately 3% of annualized recurring rent had requested COVID-19-related relief; the company said it was assessing requests individually and had not stopped straight-line rent recognition for these customers as of the filing.
- COVID-19-related construction delays had affected some anticipated customer deliveries. Management expected to spend approximately $0.7–$1.0 billion on development capital expenditures in Q4 2020; the amount could vary with demand, leasing results and capital availability. Open construction commitments were approximately $1.3 billion, including reimbursable amounts.
- The company reported strong demand in most key markets, but noted leasing, occupancy, rental rates and returns depend on supply, competition, customer credit, and the ability to complete and lease development projects. No full-year earnings or FFO guidance is stated in the filing text provided.
- Principal disclosed risks include pandemic impacts, customer defaults or nonrenewals, construction and development delays or cost increases, competition and oversupply, acquisition integration and realization of Interxion synergies, foreign-currency and interest-rate exposure, access to debt and equity capital, and energy costs and climate regulation.
- Subsequent events: the company redeemed its Series G preferred stock on October 15, 2020; a subsidiary redeemed £300 million of 4.75% notes on October 14, expected to result in an approximately $49.8 million Q4 debt-extinguishment charge. Management reported no legal proceedings it believed would materially adversely affect financial position, results or liquidity.
Investor facts to verify
- How much of revenue growth and operating-cost growth is attributable to Interxion, and how the combined portfolio performs on a comparable basis.
- Whether stabilized-property revenue weakness and lower FFO per share/unit persist, and the contribution of property disposition gains and debt-refinancing charges to reported earnings.
- Actual occupancy, leasing spreads, customer collections and rent-relief outcomes, including any future impairment, credit-loss or lease-modification effects.
- Development spending, delivery timing, lease-up of the 5.4 million square feet under active development, and funding needs against the $1.3 billion construction commitments.
- Debt maturities, refinancing costs, foreign-currency impacts, liquidity after the preferred-stock and note redemptions, and the effects of additional equity issuance on per-share results.