Business Context and Reporting Period
Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: The Company is a Real Estate Investment Trust (REIT) focused on owning, acquiring, repositioning, and managing technology-related real estate, specifically Turn-Key Datacenter and Powered Base Building solutions. As of June 30, 2007, the portfolio consisted of 62 properties (54 in North America, 8 in Europe) with approximately 11.4 million rentable square feet, of which 1.7 million square feet were held for redevelopment. The portfolio was approximately 94.1% leased excluding redevelopment space.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2007 | Six Months Ended June 30, 2006 |
|---|---|---|
| Total Operating Revenues | $184,550,000 | $119,358,000 |
| Net Income | $29,844,000 | $10,182,000 |
| Net Income Available to Common Stockholders | $21,232,000 | $3,292,000 |
| Diluted EPS (Common) | $0.35 | $0.11 |
| Net Cash Provided by Operating Activities | $55,154,000 | $43,669,000 |
| Net Cash Used in Investing Activities | ($200,068,000) | ($176,723,000) |
| Net Cash Provided by Financing Activities | $170,667,000 | $136,193,000 |
| Total Assets | $2,393,476,000 | $2,186,219,000 |
| Total Liabilities | $1,384,223,000 | $1,338,031,000 |
| Total Stockholders' Equity | $936,490,000 | $709,772,000 |
| Total Indebtedness | $1,172,307,000 | $1,122,638,000 |
| Cash and Cash Equivalents | $48,014,000 | $22,261,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by 54.6% ($65.2 million) year-over-year, driven primarily by the acquisition of 15 properties in the preceding 12 months. Same-store rental revenues also increased due to new leases.
- Profitability: Net income available to common stockholders increased significantly to $21.2 million from $3.3 million. This surge was largely influenced by a $18.0 million gain on the sale of assets (discontinued operations) in the current period, compared to no such gain in the prior period.
- Acquisitions: The Company acquired six properties totaling $192.8 million during the six months ended June 30, 2007, including significant assets in Northern Virginia, Silicon Valley, New York City, and London.
- Debt and Liquidity: Total indebtedness increased to $1.17 billion. The Company issued 7.0 million shares of Series C Cumulative Convertible Preferred Stock in April 2007, raising net proceeds of $169.1 million, which were used to pay down the unsecured revolving credit facility. Cash and cash equivalents increased to $48.0 million.
- Discontinued Operations: The Company sold two properties (100 Technology Center Drive and 4055 Valley View Lane) in March 2007, recognizing a combined gain of $18.0 million.
Guidance, Outlook, and Risks
- Capital Strategy: The Company intends to limit indebtedness to 60% of total market capitalization. As of June 30, 2007, the debt-to-total market capitalization ratio was approximately 29%.
- Liquidity: The Company maintains a $500.0 million unsecured revolving credit facility, with $371.4 million available for use as of June 30, 2007. This facility is used for acquisitions, tenant improvements, and working capital.
- Development Risks: The Company faces risks related to the development of 1.7 million square feet of redevelopment space, including potential delays in construction, inability to obtain financing, and failure to lease space at anticipated rates.
- Interest Rate Risk: Approximately 9.8% of total debt is variable rate and unhedged. The Company uses interest rate swaps to hedge approximately $251.4 million of variable rate debt. A 10% increase in interest rates would increase annual interest expense on unhedged debt by approximately $0.6 million.
- Accounting Changes: The Company noted potential impacts from proposed FASB guidance regarding the accounting for convertible debt with net share settlement, which could adversely affect reported net income if adopted.
- Tenant Concentration: Savvis Communications and Qwest Communications International, Inc. each comprised over 8% of total operating revenues for the six months ended June 30, 2007.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the extent to which the reported net income growth is driven by the one-time $18.0 million gain on asset sales versus recurring operational performance.
- Debt Maturity Profile: Review the maturity dates of the $1.17 billion debt portfolio, noting that the unsecured revolving credit facility matures in October 2008 (subject to extension).
- Preferred Stock Obligations: Confirm the dividend requirements for the newly issued Series C Preferred Stock and existing Series A and B Preferred Stock, which reduce net income available to common shareholders.
- Redevelopment Progress: Monitor the leasing status and capital expenditure requirements for the 1.7 million square feet of space held for redevelopment.
- Related Party Transactions: Review the terms and volume of transactions with related parties, including CB Richard Ellis (property management) and tel(x) (tenant), which accounted for significant revenues and expenses.