Business Context and Reporting Period
Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in owning, acquiring, repositioning, and managing technology-related real estate, including data centers and corporate headquarters. As of September 30, 2006, the portfolio consisted of 53 properties (48 in North America, 5 in Europe) totaling approximately 10.4 million rentable square feet, with an occupancy rate of 94.7% excluding redevelopment space.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2006 |
Nine Months Ended Sep 30, 2006 |
Nine Months Ended Sep 30, 2005 |
|---|---|---|---|
| Total Operating Revenues | $73,189 | $197,389 | $140,848 |
| Operating Income | $19,192 | $55,896 | $45,733 |
| Net Income | $14,787 | $24,969 | $11,499 |
| Net Income Available to Common Stockholders | $11,342 | $14,634 | $4,930 |
| Diluted EPS (Common) | $0.30 | $0.43 | $0.21 |
| Net Cash Provided by Operating Activities | N/A | $62,067 | $64,302 |
| Total Assets | $1,971,762 | N/A | N/A |
| Total Liabilities | $1,247,351 | N/A | N/A |
| Total Debt Outstanding | $1,074,757 | N/A | N/A |
| Cash and Cash Equivalents | $27,650 | N/A | N/A |
Note: Figures are in thousands except per share data. Net income includes a significant gain from discontinued operations.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased by 33.5% ($18.4 million) for the three months and 40.1% ($56.5 million) for the nine months ended September 30, 2006, compared to the prior year periods. This growth is primarily attributed to the acquisition of 16 new properties in the last 12 months.
- Discontinued Operations: Net income for the three and nine months ended September 30, 2006, was significantly boosted by a $18.0 million gain on the sale of the 7979 East Tufts Avenue property, classified as discontinued operations. Excluding this gain, income from continuing operations was relatively flat or slightly lower than the prior year.
- Expense Increases: Total operating expenses increased by 40.6% for the nine-month period, driven by higher depreciation and amortization ($20.2 million increase) and property operating costs associated with the expanded portfolio.
- Debt Expansion: Total indebtedness increased from $749.1 million at December 31, 2005, to $1,074.8 million at September 30, 2006. This includes the issuance of $172.5 million in Exchangeable Senior Debentures in August 2006 and increased utilization of the unsecured credit facility.
Guidance, Outlook, and Risks
- Capital Strategy: The Company intends to limit indebtedness to 60% of total market capitalization. As of September 30, 2006, the debt-to-market-cap ratio was approximately 33%.
- Liquidity: The Company maintains a $500 million unsecured revolving credit facility, with $233.8 million drawn and $160.0 million available as of the reporting date. The facility matures in October 2008 with a one-year extension option.
- Future Acquisitions: Subsequent to the reporting period, the Company acquired additional properties totaling approximately $80.1 million and had agreements to acquire a property in Paris, France, for approximately $48.5 million (subject to due diligence).
- Risks: Key risks include the Company's ability to maintain REIT status, exposure to variable interest rates (though 78.2% of debt is fixed or hedged), tenant concentration (Savvis and Qwest each comprised over 10% of revenue), and the ability to lease redevelopment space (1.2 million sq. ft. currently held for redevelopment).
- Dividends: The Company declared quarterly dividends on common stock and preferred stock. The annualized dividend rate on common stock was $1.060 per share for the first three quarters of 2006.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by analyzing Net Income from Continuing Operations ($4.4 million for the quarter) versus the one-time gain on sale of assets ($18.0 million).
- Debt Maturity Profile: Review the schedule of debt maturities, noting that $345.8 million of principal payments are due in 2007-2008, including the $233.8 million credit facility maturing in October 2008.
- Acquisition Integration: Assess the occupancy and lease-up rates of the 16 properties acquired in the last 12 months, which drove the majority of revenue growth.
- REIT Compliance: Confirm the Company's ability to distribute 90% of taxable income to maintain REIT status, particularly given the high capital expenditure requirements for redevelopment space.
- Interest Rate Exposure: Evaluate the effectiveness of the $207.3 million in interest rate swaps hedging variable-rate debt against potential rate hikes.