Digital Realty Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Digital Realty Trust, Inc. is a REIT and operates primarily through Digital Realty Trust, L.P.; the entities report substantially the same consolidated assets and liabilities. Financial amounts below are in U.S. dollars unless noted.
Business context and operating performance
The company owns, develops and operates global data centers, colocation and interconnection facilities. At quarter-end its portfolio comprised 223 data centers, including 38 in unconsolidated joint ventures, with approximately 36.0 million rentable square feet. Portfolio occupancy was approximately 87.4%, excluding development space. Average remaining lease term was about five years.
Revenue is predominantly lease-related. 2019 tenant reimbursements are presented together with rental revenue following adoption of lease accounting guidance, so the rental-revenue line is not directly comparable with prior periods; total operating revenue is more comparable.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total operating revenue | $806.5 million | $768.9 million | $2,421.8 million | $2,268.2 million |
| Operating income | $164.8 million | $139.1 million | $455.3 million | $426.9 million |
| Net income | $67.6 million | $90.3 million | $249.9 million | $288.5 million |
| Net income available to common stockholders | $49.8 million | $67.3 million | $177.4 million | $218.7 million |
| Diluted EPS | $0.24 | $0.33 | $0.85 | $1.06 |
| Diluted FFO per share and unit | $1.59 | $1.57 | $5.04 | $4.83 |
| Cash provided by operating activities | Not separately provided for quarter | Not separately provided for quarter | $1,111.9 million | $1,033.8 million |
Operating margin was approximately 20.4% for Q3 versus 18.1% a year earlier, and 18.8% for the nine-month period versus 18.8%. Net margin declined to approximately 8.4% from 11.7% in Q3 and to 10.3% from 12.7% for nine months.
At September 30, 2019, total assets were $23.2 billion and total liabilities $12.9 billion. Cash and cash equivalents were $7.2 million, excluding $8.2 million of restricted cash. Outstanding consolidated debt principal was approximately $11.0 billion; 82.1% was fixed-rate or fixed through swaps, the effective interest rate was 3.20%, and weighted-average time to initial maturity was approximately six years. The company reported compliance with its financial debt covenants. Debt-to-total-enterprise-value was approximately 27%.
Nine-month investing cash outflow was $708.1 million and financing cash outflow was $512.2 million. Cash and restricted cash declined by $108.3 million before the foreign-exchange impact. Cash capital expenditures, excluding indirect costs, were $1,060.8 million, versus $866.1 million a year earlier.
Material changes versus prior period
- Total revenue increased 4.9% in Q3 and 6.8% for nine months; operating income rose 18.5% and 6.6%, respectively. Management attributed growth in pre-stabilized properties partly to leasing and development activity and the Ascenty acquisition, which was consolidated only through March 29, 2019.
- Net income declined 25.1% in Q3 and 13.4% for nine months; diluted EPS fell to $0.24 and $0.85, respectively. Interest expense increased $3.7 million in Q3 and $35.5 million for nine months. Early debt-extinguishment losses were $5.4 million in Q3 and $39.2 million year to date.
- FFO per diluted share and unit increased modestly despite the decline in GAAP EPS. Q3 FFO was $1.59 versus $1.57; nine-month FFO was $5.04 versus $4.83.
- Stabilized-property revenue decreased 1.5% in Q3 and 0.9% for nine months, which management attributed to foreign-exchange translation, lease expirations at certain properties and higher bad-debt expense. Stabilized revenue figures reflect the changed reimbursement presentation.
- In March, the company formed the Ascenty joint venture with Brookfield, received approximately $702 million and retained a 51% equity interest, while surrendering control and deconsolidating Ascenty. It recognized a $67.5 million gain; Q3 equity in losses of unconsolidated joint ventures was $19.3 million.
Outlook, risks and unusual items
- Management expected to spend approximately $0.3–$0.5 billion on development capital expenditures in Q4 2019; the amount could change with demand, leasing and capital availability. Construction-contract commitments were approximately $452.9 million at quarter-end.
- Management reported strong demand in most key markets, but cautioned that data-center supply, competition and the pace of leasing may affect occupancy, rents and returns. The company had 3.6 million square feet under active development and 2.3 million square feet held for development, requiring substantial capital.
- Other stated risks include customer concentration or defaults, power availability and cost, interest rates and refinancing, foreign-currency movements, development delays, joint-venture risks, regulatory and climate-related energy costs, and maintaining REIT status.
- In leasing activity for the first nine months, renewal rents increased on a GAAP basis by 2.0% for Turn-Key Flex and 14.1% for Powered Base Building. Management expected rents on 2019 renewals, in aggregate, to be generally higher on a GAAP basis but slightly lower on a cash basis; it cautioned that future results could differ.
- After quarter-end, the company closed a Mapletree joint venture transaction involving three data centers, retaining 20% and receiving approximately $0.8 billion for the 80% interest. A separate sale of 10 Powered Base Building properties for approximately $557 million was expected to close in early 2020.
- On October 29, 2019, the company agreed to pursue an all-stock tender offer for InterXion at a fixed exchange ratio of 0.7067 Digital Realty shares per InterXion share. The proposed transaction was subject to approvals and other conditions; the filing highlighted execution, integration, dilution and increased-debt risks. The combined company could assume or refinance approximately $1.4 billion of InterXion debt.
- Subsequent financing included an October 2019 €500 million 1.125% note issuance due 2028 and a $334.6 million net-proceeds issuance of Series L preferred stock. The filing reported no legal proceeding expected to have a material adverse effect and stated that disclosure controls were effective.
Important facts for investors to verify
- Underlying comparable revenue and occupancy trends, accounting for the 2019 change in presentation of tenant reimbursements and the Ascenty deconsolidation.
- Leasing progress, renewal cash rents, and the timing and cost of converting development space into income-producing capacity.
- Debt maturities, refinancing needs, liquidity and distributions relative to operating cash flow, capital spending and the very low unrestricted cash balance.
- Completion and financial terms of the remaining Mapletree property sale and the InterXion transaction, including approvals, dilution, integration costs and debt effects.
- The contribution of one-time or market-sensitive items—including the Ascenty gain, investment valuation changes, and debt-extinguishment costs—to reported earnings and cash flows.