Digital Realty Trust, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Digital Realty owns and operates data centers, colocation and interconnection facilities. The filing combines Digital Realty Trust, Inc. and its operating partnership; the operating partnership holds substantially all assets and debt. Figures below are consolidated and in U.S. dollars unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $514.9M | $420.3M | $1,019.1M | $826.9M |
| Operating income | $112.3M | $107.1M | $230.4M | $256.4M |
| Net income | $50.9M | $138.0M | $113.3M | $260.3M |
| Net income available to common stockholders | $28.0M | $117.1M | $67.1M | $218.8M |
| Diluted EPS | $0.19 | $0.86 | $0.46 | $1.61 |
| Diluted FFO per share and unit | $1.36 | $1.26 | $2.75 | $2.82 |
- Q2 revenue rose 22.5%, while operating income increased 4.9%; operating margin was approximately 21.8%, versus 25.5% a year earlier. Revenue growth included Telx and increased interconnection revenue. Telx contributed about $45.7M to Q2 rental-revenue growth and $46.6M to interconnection-revenue growth.
- Q2 net income and EPS fell sharply year over year, primarily reflecting the absence of the prior-year $76.7M property-sale gain. For the first half, the comparison also reflects the absence of the 2015 $94.5M property-sale gains and $42.7M contingent-consideration benefit. First-half 2016 property-sale gain was $1.1M.
- Q2 diluted FFO per share/unit improved 7.9%; first-half diluted FFO declined 2.5%. FFO is a supplemental REIT measure, not a substitute for GAAP earnings or cash flow.
Cash flow, balance sheet and capital
- For the six months, operating cash flow was $395.6M (up from $355.2M); investing cash outflow was $299.1M, including $332.4M of real-estate improvements; financing cash outflow was $119.1M. Cash declined $22.6M to $33.2M. Restricted cash was $18.3M.
- At June 30, total debt principal was approximately $6.2B, versus $5.9B at year-end 2015. Debt to total enterprise value was approximately 26%; weighted-average term to initial maturity was 5.8 years. Effective interest rate was 3.73%; 91.9% of debt was fixed-rate or hedged. Approximately $500.1M remained variable-rate and unhedged.
- The refinanced $2.0B revolving credit facility had about $101M drawn and $18.9M in letters of credit, leaving approximately $1.9B available. The company reported compliance with debt covenants. The $1.55B multi-currency term-loan facility matures in 2021 and 2023.
- On April 15, Digital Euro Finco issued €600M of 2.625% guaranteed notes due 2024. A May 2016 forward equity offering covered 14.375M shares; the company expected approximately $1.3B net proceeds upon physical settlement, anticipated by May 19, 2017. No proceeds had been received by quarter-end.
- Common dividends were at an annual rate of $3.52 per share. First-half dividends and distributions paid totaled $434.9M. Construction-contract commitments were approximately $248.8M; management expected $500M–$650M of development capital expenditures in the second half of 2016.
Operating trends, outlook and risks
- The portfolio comprised 140 operating properties, including eight Telx properties and 14 properties held through unconsolidated joint ventures. Portfolio occupancy was approximately 90.4%, excluding active development and future-development space. Average lease term at signing was about 11 years, with about five years remaining.
- Management reported strong demand in most key metropolitan areas. For 2016 expirations, it expected average aggregate renewal and re-leasing rents generally above current GAAP rents and slightly higher on a cash basis, subject to available supply. First-half renewal rents increased 14.1% for Turn-Key Flex and 18.6% for Powered Base Building, on a GAAP basis.
- On July 5, 2016, the company acquired eight European data centers from Equinix in a transaction valued at approximately $874M. The Paris facility sale to Equinix closed August 1 for about €190M; management expected a roughly $142M gain in Q3. A four-property U.S. portfolio sale closed July 11 for about $115M, with approximately $113M expected net proceeds and a roughly $27M Q3 gain. These are subsequent events, not Q2 results.
- Management cited Brexit-related uncertainty, foreign-exchange movements, interest-rate and refinancing exposure, tenant concentration/defaults, data-center supply and demand, development costs and leasing delays, power costs and regulation, and integration of Telx as risks. Foreign operations generated 19.6% of first-half revenue; the British pound, euro and Singapore dollar were primary currency exposures.
- The company reported no material legal proceedings and no material adverse-effect litigation known to it. Disclosure controls were deemed effective; a general-ledger system upgrade was completed in Q2. No specific full-year earnings or FFO guidance was provided in the supplied filing text.
Key investor verification points
- Reconcile reported revenue and FFO growth with Telx’s contribution, and distinguish recurring operations from prior-period asset-sale gains and contingent-consideration effects.
- Confirm the forward equity settlement timing and proceeds, and assess dilution alongside the expected funding needs of the Equinix acquisition and development program.
- Track occupancy, leasing spreads, development completion and lease commencements, particularly against the planned second-half capital spending.
- Review debt maturities, unhedged variable-rate exposure, foreign-currency hedges and covenant headroom; compare the $6.2B debt figure with balance-sheet carrying amounts, which are net of financing costs and discounts.
- Monitor execution and realized proceeds/gains from the announced property sales, and the impact of Brexit and currency changes on European operations.