Digital Realty Trust, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Digital Realty is a global data-center, colocation and interconnection provider organized as a REIT. This unaudited quarterly report covers the three and six months ended June 30, 2021; comparisons are with 2020. Digital Realty Trust, Inc. owns approximately 97.6% of its Operating Partnership, which holds substantially all operating assets.
Key financial metrics
Unless noted otherwise, amounts are U.S. dollars. Income-statement and cash-flow amounts below are in millions; balance-sheet debt figures are also shown in millions.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total operating revenue | $1,093.2 | $993.0 | $2,183.6 | $1,816.3 |
| Operating income | $185.6 | $152.8 | $378.1 | $252.9 |
| Net income | $125.8 | $76.0 | $520.5 | $304.7 |
| Net income available to common stockholders | $127.4 | $53.7 | $499.8 | $256.5 |
| Diluted earnings per share | $0.45 | $0.20 | $1.77 | $1.04 |
| Diluted FFO per share and unit | $1.78 | $1.49 | $3.27 | $2.45 |
- Q2 revenue grew 10.1%; operating income grew 21.5%. The reported operating margin was approximately 17.0%, versus 15.4% a year earlier. Revenue growth reflects the Interxion combination and development leasing; higher property expenses and depreciation partly offset growth.
- Six-month operating cash flow was $849.9 million, versus $712.4 million. Investing activities used $558.6 million, including $1,081.4 million of real-estate improvements, partly offset by $703.9 million of property-sale proceeds. Financing activities used $275.3 million; dividends and distributions paid were $1,021.9 million.
- At June 30, cash and cash equivalents were $120.5 million, plus $8.0 million restricted cash. Total assets were $36.2 billion and total liabilities $17.9 billion. Outstanding consolidated debt was $14.0 billion, at a weighted-average interest rate of 2.24%; 90.1% was fixed-rate or swapped, and weighted-average term to initial maturity was 6.2 years. The company reported compliance with debt covenants.
- Portfolio occupancy was 84.7%, compared with 86.3% at December 31, 2020. The reported portfolio included 291 data-center buildings and 7.3 million square feet under active development. The common-stock annual dividend rate was $4.64 per share.
Material changes versus the prior comparable period
- Interxion, acquired in March 2020, contributed $50.1 million of the Q2 year-over-year revenue increase and $238.9 million of the six-month increase. Interxion contributed $244.6 million of Q2 2021 revenue.
- Q2 rental and other services revenue rose 10.3%; property operating and maintenance expense rose 15.2%. Management attributed higher expenses in part to Interxion and increased utility costs. Stabilized rental revenue increased 1.3% for the quarter.
- Six-month net income included a $334.4 million gain on property dispositions, primarily the March 2021 sale of 11 European data centers for approximately $680 million. The comparable 2020 period included a $304.8 million gain on the sale of 12 North American data centers. These gains materially affect reported net income comparisons.
- Q2 common-stockholder income included an $18.0 million gain from redeeming all Series C preferred stock. The redemption involved $201.3 million of cash consideration and was completed May 17, 2021.
- Debt increased from $13.4 billion at year-end 2020 to $14.0 billion at June 30, 2021; the company repaid its unsecured term loans and increased revolving-credit borrowings. Six-month capital expenditures were $1.02 billion, up from $807.1 million.
Outlook, commentary and risks
- Management reported strong demand in most key metropolitan markets and expected aggregate rental rates on 2021 expirations to be generally consistent with current rates, on both GAAP and cash bases. This is an expectation, not a guarantee; actual leasing depends on local supply, demand and other market conditions.
- Management expected $1.1 billion to $1.4 billion of development-program capital expenditures in the second half of 2021. Construction-contract commitments were approximately $1.5 billion, including reimbursable amounts. The company reported approximately $2.1 billion available under its global revolving credit facilities as of August 4, 2021.
- The company targets debt-to-Adjusted EBITDA of no more than 5.5x, fixed-charge coverage above 3x, and floating-rate debt below 20% of total debt. Actual debt-to-Adjusted EBITDA and fixed-charge coverage values are not provided in the supplied filing text.
- On July 15, 2021, a subsidiary issued CHF 545 million of guaranteed notes due 2026 and 2029, with net proceeds of approximately CHF 542.3 million. Management intended to allocate equivalent proceeds to eligible green projects; meanwhile, proceeds could be used to repay revolving borrowings and for general corporate purposes.
- Management reported no significant COVID-19 disruptions through the reporting date but said future effects remain uncertain. Key risks include demand and leasing changes, competition and supply, development costs and delays, power and utility availability and costs, customer concentration or default, cybersecurity, foreign-exchange movements, access to capital, debt refinancing and interest rates, and acquisition integration. The filing reported no legal proceedings believed to have a material adverse effect.
Important facts for investors to verify
- How much reported earnings growth reflects recurring operations versus property-disposition gains and the preferred-stock redemption gain; also compare FFO with GAAP earnings.
- Whether occupancy and leasing trends improve, and whether renewal and new-lease rates support future revenue growth as space is delivered.
- Development spending, project delivery and leasing progress, including the expected second-half 2021 capital-expenditure range and construction commitments.
- Debt maturity, refinancing and covenant capacity, and the effect of foreign currencies, interest rates and further borrowing on liquidity and distributions.
- The effect of the United Kingdom corporate tax-rate increase from 19% to 25%, which management identified as a principal driver of higher income tax expense.