Digital Realty Trust, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Digital Realty is a global data-center REIT operating through Digital Realty Trust, L.P. Unless stated otherwise, financial amounts below are in U.S. dollars; income-statement and cash-flow figures are for the quarter.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Operating revenue | $814.5 million | $744.4 million | +$70.1 million |
| Operating income | $141.5 million | $143.8 million | -$2.3 million |
| Net income | $121.0 million | $110.1 million | +$10.9 million |
| Net income available to common stockholders | $95.9 million | $86.3 million | +$9.6 million |
| Diluted earnings per share | $0.46 | $0.42 | +$0.04 |
| FFO per diluted share and unit | $1.92 | $1.61 | +$0.31 |
| Net cash from operating activities | $350.7 million | $237.0 million | +$113.7 million |
Revenue increased about 9%, while operating income declined. Operating margin was approximately 17.4%, versus 19.3% in Q1 2018. Net income included a $67.5 million gain from the Ascenty transaction and a $12.9 million loss on early debt extinguishment; these unusual items affect comparison of reported earnings.
Balance sheet, debt and liquidity
- At March 31, 2019, total assets were $23.3 billion and total liabilities were $12.3 billion. Cash and cash equivalents were $123.9 million; restricted cash was an additional $10.1 million.
- Consolidated debt principal was approximately $10.4 billion, down from approximately $11.1 billion at December 31, 2018. Debt was 88.9% fixed-rate or hedged and 11.1% variable-rate; the effective interest rate was 3.32%, and weighted average term to initial maturity was 5.9 years.
- The company reported a debt-to-total-enterprise-value ratio of approximately 27% and compliance with its debt covenants at quarter-end. It targets debt to Adjusted EBITDA of no more than 5.5x, fixed-charge coverage above 3x, and floating-rate debt below 20% of total debt.
- Operating cash flow increased, but cash used in financing was $503.6 million, including dividends and distributions. Cash from the Ascenty transaction helped drive investing cash flow positive at $165.7 million.
Material changes and operating trends
- In March, Brookfield invested approximately $700 million for about 49% of the Ascenty joint venture. Digital Realty retained about 51%, but shared control led it to deconsolidate Ascenty and account for the investment under the equity method. The transaction generated a $67.5 million gain, net of the reclassification of accumulated foreign-currency losses.
- Revenue presentation changed with adoption of lease accounting Topic 842 on January 1, 2019: tenant recoveries are combined with rental revenue where applicable. Therefore, the separate revenue lines are not directly comparable with 2018. On an aggregate basis, stabilized-portfolio revenue decreased $4.2 million, while pre-stabilized and other revenue increased $73.8 million, mainly reflecting acquisition and leasing activity.
- Interest expense rose $24.6 million, primarily due to debt issued in 2018 and 2019 and the Ascenty loan. General and administrative expense increased $16.9 million; property operating and maintenance expense increased $29.3 million.
- Quarter-end portfolio included 215 data centers, including 35 held through unconsolidated joint ventures. The portfolio was approximately 88.6% leased, excluding space under active development and space held for development. Average remaining lease term was approximately five years.
Outlook, risks and other notable items
- Management estimated development capital expenditures of $0.9 billion to $1.1 billion for the remaining nine months of 2019; the amount could change with demand, leasing, and capital availability. No specific earnings or revenue guidance is provided in the filing text.
- Approximately 3.2 million square feet was under active development and 2.1 million square feet was held for development. Construction commitments were approximately $376.3 million, including amounts reimbursable.
- Renewal rents in Q1 rose 4.3% on Turn-Key Flex space and 11.1% on Powered Base Building space on a GAAP basis. Management cited strong demand in most key markets, while noting leasing outcomes and rents are not assured.
- Key risks include data-center demand and supply shifts, customer defaults or non-renewals, development costs and lease-up delays, access to financing, refinancing and interest-rate exposure, foreign-currency movements, energy costs and regulation, and risks from acquisitions and joint ventures where the company lacks control.
- Digital Realty issued 8.4 million Series K preferred shares at a 5.85% dividend rate for net proceeds of approximately $203.4 million. Separately, an existing forward common-stock sale is expected to provide approximately $1.1 billion upon physical settlement, anticipated by September 27, 2019; no sales had been made under the new $1.0 billion at-the-market program by quarter-end.
- Subsequent to quarter-end, on April 1, 2019, the company redeemed all 14.6 million Series H preferred shares for $25 per share plus accrued dividends, funding the redemption with revolver borrowings. Management reported no legal proceedings believed to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings and FFO growth reflects recurring operations versus the Ascenty gain, debt-extinguishment charge, acquisitions and accounting presentation changes.
- Ascenty’s contribution to equity-method earnings, cash distributions, development funding needs and exposure under shared governance with Brookfield.
- Leasing and occupancy progress, especially lease commencements, development-space absorption, renewal spreads and scheduled expirations.
- Funding plans and returns for the projected $0.9–$1.1 billion of remaining 2019 development spending, alongside the forward equity settlement and debt maturities.
- Interest-rate, foreign-exchange and energy-cost exposure, including covenant headroom and the effect of the Series H redemption on revolver borrowings.