Digital Realty Trust, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Digital Realty owns, develops and operates global data centers and related facilities as a REIT through Digital Realty Trust, L.P. This combined, unaudited filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. At quarter-end, the portfolio comprised 220 data centers, including 36 held through unconsolidated joint ventures, and was approximately 87.8% leased, excluding development space.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $800.8 million | $754.9 million | $1,615.3 million | $1,499.3 million |
| Operating income | $149.0 million | $144.1 million | $290.5 million | $287.9 million |
| Net income | $61.3 million | $88.2 million | $182.3 million | $198.3 million |
| Net income available to common stockholders | $31.7 million | $65.1 million | $127.6 million | $151.4 million |
| Basic earnings per share | $0.15 | $0.32 | $0.61 | $0.74 |
| Diluted FFO per share and unit | $1.53 | $1.64 | $3.44 | $3.25 |
Operating margin was approximately 18.6% in Q2 2019 versus 19.1% a year earlier, and 18.0% for the first half versus 19.2%. Total operating revenue increased about 6.1% in Q2 and 7.7% in the first half. Comparisons are affected by the January 2019 adoption of lease accounting guidance: tenant recoveries are now included in rental and other services rather than separately reported. On a combined revenue basis, growth was driven largely by newer and pre-stabilized properties; stabilized revenue was slightly lower.
- Cash flow: First-half operating cash flow was $827.3 million, up from $673.1 million. Investing used $386.5 million, including $780.6 million of real estate improvements, partly offset by $702.4 million of proceeds from the Ascenty joint venture transaction. Financing used $522.9 million. Cash, cash equivalents and restricted cash ended at $41.1 million; balance-sheet cash and cash equivalents were $33.5 million.
- Debt and liquidity: Consolidated debt was approximately $10.9 billion at June 30, 2019, excluding deferred financing costs. Fixed-rate debt, including swaps, was 85.7% of total debt; the effective interest rate was 3.27%, and weighted-average term to initial maturity was about 6.2 years. The company reported compliance with debt covenants. It had $1.4 billion drawn on revolving facilities and stated that operating cash flow and available facilities were expected to meet short-term needs.
- Balance sheet: Total assets were $23.4 billion and total equity was $10.5 billion. Real estate investments, net, were $15.8 billion. Operating lease right-of-use assets and liabilities were recognized following adoption of lease accounting guidance.
Material changes versus prior period
- Q2 net income fell to $61.3 million from $88.2 million; first-half net income declined to $182.3 million from $198.3 million. Interest expense increased by $7.2 million in Q2 and $31.8 million in the first half, reflecting debt issued to fund acquisitions and other capital needs.
- Early debt extinguishment charges were $20.9 million in Q2 and $33.8 million in the first half, associated with tender offers and redemptions. The first half also included an $11.8 million charge related to redeeming Series H preferred stock when calculating income available to common shareholders.
- In March, Brookfield invested approximately $702 million for about 49% of the Ascenty joint venture. Shared control led Digital Realty to deconsolidate Ascenty and recognize a $67.5 million gain. The company retained an approximately 51% equity-method interest.
- First-half FFO available to common stockholders and unitholders rose to $750.9 million from $698.8 million, while diluted FFO per share and unit increased to $3.44 from $3.25. Q2 diluted FFO per share and unit declined to $1.53 from $1.64.
Outlook, commentary and risks
- Management expected to spend approximately $0.6 billion to $0.8 billion on development capital expenditures in the second half of 2019; this estimate could change materially with demand, leasing and capital availability. No specific earnings or revenue guidance is provided in the filing text.
- Management reported strong demand in most key markets. For 2019 lease expirations, it expected aggregate renewal/re-leasing rates generally to be higher on a GAAP basis but slightly lower on a cash basis. First-half renewals showed a 4.2% GAAP rent decline for Turn-Key Flex space and an 11.1% increase for Powered Base Building space.
- Development execution, lease-up timing, occupancy and renewal rents are important uncertainties. About 3.3 million square feet was under active development and 2.0 million square feet held for development. Construction commitments were approximately $425.2 million.
- Risks include data-center demand and competition, power availability and cost, customer concentration or default, development cost overruns and delays, access to capital and refinancing, interest rates, foreign exchange, joint-venture control, and potential climate or energy regulation. The filing reports no legal proceeding believed to have a material adverse effect and no material change to previously disclosed risk factors.
Investor facts to verify
- Reconcile revenue growth across the 2019 tenant-recovery presentation change and assess underlying stabilized-property trends.
- Evaluate recurring operating performance separately from the Ascenty deconsolidation gain and debt-extinguishment and preferred-redemption charges.
- Review development spending, lease-up and delivery schedules, tenant commitments, and the expected funding of the second-half capital program.
- Track debt maturities, revolving-facility usage, interest-rate exposure, covenant headroom and the forward equity sale expected to settle by September 27, 2019, with approximately $1.1 billion in anticipated net proceeds.
- Assess the Ascenty joint venture’s performance and risks, including the company’s limited control, and monitor occupancy, renewal economics and market-level concentration.