Digital Realty Trust, Inc. — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2011, compared with Q1 2010. Digital Realty owns, develops, redevelops and manages technology-related real estate, principally data centers. At quarter-end it held 96 properties (excluding two unconsolidated joint-venture properties), with 16.9 million rentable square feet including 2.2 million square feet held for redevelopment; occupancy was 93.5% excluding redevelopment space. Digital Realty Trust, Inc. is the REIT parent and owns approximately 94.4% of the operating partnership, which holds substantially all assets and debt.
Financial performance and condition
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Operating revenue | $250.7 million | $191.8 million; up 30.7% |
| Operating income | $74.7 million | $55.2 million; up 35.3% |
| Operating margin | 29.8% | 28.8% |
| Net income | $39.0 million | $25.6 million |
| Net income available to common stockholders | $31.0 million | $14.7 million |
| Basic / diluted EPS | $0.34 / $0.33 | $0.19 / $0.18 |
| Cash from operations | $64.5 million | $57.2 million |
| Cash used in investing | $137.6 million | $442.8 million |
| Cash from financing | $105.7 million | $364.0 million |
Revenue growth reflected both new leasing at existing properties and acquisitions completed during the prior twelve months. Same-store revenue increased $14.0 million, while new-property revenue increased $45.0 million. Operating expenses rose $39.5 million to $176.1 million, reflecting property additions, higher utilities and maintenance, depreciation from redevelopment projects placed in service, and company growth. Interest expense increased $5.2 million to $36.1 million, mainly due to higher average debt.
At March 31, total assets were $5.54 billion, cash and cash equivalents $44.4 million, and restricted cash $59.8 million. Total debt was $3.06 billion, up from $2.81 billion at December 31, 2010; total equity was $2.04 billion. Management reported debt at approximately 33% of total enterprise value. Of debt, 93.1% was fixed-rate or hedged; the effective interest rate was 5.32%. The $750 million revolving facility had $209.7 million drawn and $29.9 million of letters of credit, leaving approximately $510 million available. The company reported compliance with debt covenants.
Material changes and notable transactions
- Q1 2011 issued $400 million of 5.25% unsecured notes due 2021, for approximately $395.5 million net proceeds. The proceeds were used for revolver repayment, acquisitions, development and redevelopment, and general purposes.
- Holders exchanged $35.9 million principal amount of 2026 exchangeable debentures for approximately $47.6 million cash and 303,073 restricted common shares. The company recognized a $0.6 million early-extinguishment loss; $52.9 million principal remained outstanding at quarter-end.
- Real-estate improvements consumed $135.1 million of cash, compared with $66.9 million in Q1 2010; no property acquisitions were completed in Q1 2011. Subsequent to quarter-end, the company acquired an Ashburn, Virginia development site for $17.3 million, funded with revolver borrowings.
- Common dividends were declared at an annualized rate of $2.72 per share; preferred annualized rates were $1.094 for Series C and $1.375 for Series D. Cash from operations funded distributions during the quarter.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided. Management expected to spend approximately $325 million to $400 million on redevelopment capital expenditures during the remaining nine months of 2011; the estimate could change with leasing demand, results and access to capital. Approximately 346,000 square feet of redevelopment space was under construction. Open construction-contract commitments were approximately $102.2 million.
Key risks include tenant concentration and creditworthiness, demand and supply for specialized data-center space, leasing and redevelopment execution, substantial capital needs, refinancing and interest-rate exposure, foreign currency movements, and access to debt and equity markets. The revolving facility matures in August 2011, subject to an extension option; other debt scheduled in the remainder of 2011 includes $25 million of notes, the 2026 debentures’ first holder put and mortgage maturities. The maturity schedule assumes the debentures are repaid at their first put dates. A potential Singapore property earnout could reach approximately $39.7 million but was not accrued because payment was not probable. The filing reports no legal proceedings and no material control changes; management concluded disclosure controls were effective.
Investor verification points
- Review the August 2011 revolver extension and refinancing status, along with the 2026 debentures’ holder put and other 2011 maturities.
- Track execution, leasing and returns on the planned $325–$400 million redevelopment program and the $102.2 million construction commitments.
- Assess whether occupancy, rental growth and operating cash flow support distributions as property and interest costs rise.
- Examine the dilution and cash implications of exchangeable debentures, convertible preferred securities and partnership units.
- Monitor tenant exposure, foreign currency and interest-rate hedges, and potential contingent payments, including the Singapore earnout.