Digital Realty Trust, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Digital Realty Trust, Inc. is a REIT operating through Digital Realty Trust, L.P.; figures below are consolidated and in U.S. dollars.
Business context
The company owns, develops and manages technology-related real estate, primarily data centers. At quarter-end it reported 131 properties, approximately 24.5 million rentable square feet including development space, and 93.0% leased occupancy excluding active and future development space. Its portfolio spans North America, Europe, Australia and Asia.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $412.2 million | $379.5 million | $1,204.2 million | $1,101.3 million |
| Operating income | $82.4 million | $85.2 million | $264.8 million | $283.8 million |
| Net income | $130.2 million | $153.5 million | $238.2 million | $264.8 million |
| Net income available to common stockholders | $109.3 million | $138.9 million | $185.0 million | $228.6 million |
| Diluted EPS | $0.80 | $1.06 | $1.39 | $1.79 |
| Diluted FFO per share and unit | $1.22 | $1.10 | $3.63 | $3.47 |
Revenue grew 8.6% in the quarter and 9.3% year to date, led chiefly by same-store leasing and completed development space. Operating margin was approximately 20.0% in Q3 versus 22.4% a year earlier. GAAP net income and EPS declined; results included sizable property-contribution gains in both periods. FFO, a non-GAAP supplemental measure, increased.
For the first nine months, operating cash flow was $472.6 million, investing cash outflow was $464.9 million, and financing cash outflow was $28.0 million. Cash and cash equivalents were $36.5 million at September 30, excluding $14.0 million restricted cash. Capital expenditures were $597.0 million, down from $836.6 million in the comparable period.
Total debt was $4.74 billion, down from $4.96 billion at December 31, 2013. Approximately 80.4% was fixed-rate or hedged; effective interest rate was 4.01%. Debt to total enterprise value was approximately 33%. The $2.0 billion revolving facility had $485.0 million drawn and $23.0 million of letters of credit, leaving approximately $1.5 billion available. Management reported compliance with debt covenants.
Material changes and unusual items
- Q3 included a $93.5 million gain from contributing an Ashburn, Virginia data center to a joint venture; the company retained a 20% interest. The comparable 2013 quarter included a $115.1 million contribution gain.
- Year-to-date results included a $15.9 million gain on the sale of 6 Braham Street and $95.4 million of gains on property contributions to joint ventures.
- The company recorded $12.5 million of impairment losses on two properties as part of its review of non-core assets for possible sale.
- Year-to-date general and administrative expense included $12.7 million of severance related to the former CEO’s departure. A dispute over a former executive’s severance benefits is subject to arbitration/litigation; the company could not estimate any possible recovery.
- The company issued $353.3 million net proceeds of Series H preferred stock and issued £300 million of 4.75% notes due 2023. Most of the $266.4 million of 2029 exchangeable debentures was exchanged for common shares; the remainder was redeemed, and the balance was zero at quarter-end.
- Foreign currency translation reduced other comprehensive income by $30.7 million year to date.
Outlook, risks and contingencies
No earnings or FFO guidance was provided. Management expected strong data-center demand in most key markets, particularly Dallas and London, but identified Northern Virginia and Silicon Valley as potentially exposed to oversupply. Management anticipated that near-term acquisitions would be a smaller component of growth while seller pricing expectations remained above its return requirements.
The company had approximately 1.3 million square feet under active development and estimated $225–$275 million of development capital expenditures for the fourth quarter of 2014, subject to leasing demand, results and capital availability. Construction-contract commitments were approximately $182.6 million. Five properties were classified as held for sale after quarter-end; at September 30 they had aggregate carrying value of $143.8 million in assets and $4.5 million in liabilities.
Principal risks cited include tenant concentration, lease renewals and vacancies, development and leasing execution, competing data-center supply, power and operating-cost increases, access to financing and refinancing, interest-rate and foreign-currency exposure, joint-venture risks, property impairment, and maintaining REIT status. The filing reported no legal proceedings believed likely to have a material adverse effect and no defaults on senior securities.
Investor verification priorities
- Assess how much recurring operating performance is reflected in reported earnings versus joint-venture contribution and property-sale gains, impairments and severance.
- Track occupancy, leasing spreads, renewal volumes and lease expirations, especially in Northern Virginia and Silicon Valley.
- Review development spending, committed construction costs, delivery schedules and leasing of completed space.
- Evaluate debt maturities, floating-rate exposure, covenant headroom and continued access to the revolver and capital markets.
- Monitor the held-for-sale portfolio, contingent earnouts, executive severance dispute and subsequent asset-sale proceeds.