Business Context and Reporting Period
Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in owning, acquiring, repositioning, and managing technology-related real estate, including data centers and internet gateway properties. As of June 30, 2006, the portfolio consisted of 50 properties (45 in the U.S., 4 in Europe, 1 in Canada) with approximately 10.3 million net rentable square feet. The portfolio was approximately 94.7% leased, excluding 1.2 million square feet held for redevelopment.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2006 | Six Months Ended June 30, 2005 |
|---|---|---|
| Total Operating Revenues | $124.2 million | $86.0 million |
| Operating Income | $36.7 million | $29.3 million |
| Net Income | $10.2 million | $7.1 million |
| Net Income Available to Common Stockholders | $3.3 million | $3.6 million |
| Diluted EPS (Common) | $0.11 | $0.17 |
| Net Cash Provided by Operating Activities | $44.5 million | $34.3 million |
| Net Cash Used in Investing Activities | ($177.5 million) | ($326.6 million) |
| Net Cash Provided by Financing Activities | $136.2 million | $291.7 million |
| Total Assets | $1,713.9 million | $1,529.2 million |
| Total Liabilities | $990.4 million | $880.2 million |
| Total Debt (Principal Outstanding) | $818.4 million | $746.9 million |
| Cash and Cash Equivalents | $13.4 million | $10.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by $38.2 million (44%) compared to the prior year period. This growth was driven primarily by the acquisition of 17 properties in the twelve months ended June 30, 2006. Same-space rental revenues increased modestly due to new leases and higher utility reimbursements.
- Expense Increases: Total operating expenses rose by $30.8 million, largely due to depreciation and amortization on new assets and increased property operating costs. General and administrative expenses increased by $4.1 million due to higher employee compensation and legal/consulting costs.
- Net Income Dilution: While total net income increased, net income available to common stockholders decreased from $3.6 million to $3.3 million. This was primarily due to increased preferred stock dividends ($6.9 million vs. $3.5 million) following the issuance of Series B preferred stock in 2005 and a significant increase in the weighted average number of common shares outstanding (from ~21.4 million to ~30.5 million).
- Debt and Liquidity: Total debt increased by approximately $71.5 million. The Company utilized its unsecured credit facility (drawing $211.6 million) and secured mortgage loans to fund acquisitions. Cash flow from operations improved, while cash used for investing activities decreased significantly compared to 2005 due to lower acquisition spend in the first half of 2006.
Guidance, Outlook, and Risks
- Acquisition Strategy: Management intends to continue acquiring additional assets as a key part of its growth strategy. Subsequent to the reporting period, the Company acquired a property in Phoenix for $175.0 million and another in Amsterdam for approximately $11.3 million.
- Capital Resources: The Company increased its unsecured revolving credit facility from $350 million to $500 million on July 24, 2006. It maintains a target debt-to-total market capitalization ratio of approximately 60% (actual was ~32% as of June 30, 2006).
- Dividends: To maintain REIT status, the Company must distribute at least 90% of taxable income. Quarterly dividends were declared for Series A Preferred ($0.53125), Series B Preferred ($0.49219), and Common Stock ($0.26500).
- Risks and Contingencies:
- Tenant Concentration: Savvis Communications and Qwest Communications International each comprised over 10% of total operating revenues.
- Bankruptcy: One tenant, VarTec Telecom, Inc., was in bankruptcy, leasing approximately 149,000 square feet. The Company is monitoring potential lease rejections or modifications.
- Interest Rate Risk: Approximately 28.8% of total debt is variable rate and unhedged. The Company uses interest rate swaps to hedge approximately $241.7 million of variable rate debt.
- Redevelopment: Approximately 1.2 million square feet of space is held for redevelopment, requiring significant capital investment before it can be leased.
Investor Verification Checklist
- Acquisition Integration: Verify the occupancy rates and lease-up timelines for the 17 properties acquired in the last 12 months, particularly the 1.2 million square feet designated for redevelopment.
- Tenant Concentration: Assess the financial stability of major tenants (Savvis, Qwest) and the potential impact of VarTec's bankruptcy on future cash flows.
- Debt Maturities: Review the schedule of debt maturities, noting that $323.6 million of principal payments are due in 2007-2008, including the $211.6 million credit facility maturing in October 2008.
- Dividend Coverage: Confirm that Funds From Operations (FFO) continue to support the required 90% distribution payout to maintain REIT status, especially given the increased preferred dividend obligations.
- Subsequent Events: Review the impact of the $175 million Phoenix acquisition and the $500 million credit facility expansion on leverage ratios and liquidity.