DLR

Business Context and Reporting Period

Company: Digital Realty Trust, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: The Company is a Real Estate Investment Trust (REIT) engaged in owning, acquiring, developing, and managing technology-related real estate, specifically Turn-Key Datacenter and Powered Base Building solutions. As of June 30, 2008, the portfolio consisted of 74 properties (61 in North America, 13 in Europe) with approximately 12.9 million rentable square feet, of which 1.9 million square feet were held for redevelopment. The portfolio was approximately 95.2% leased excluding redevelopment space.

Key Financial Metrics

Material Changes vs. Prior Comparable Period

• Revenue Growth: Total operating revenues increased by 29.5% for the three months ended June 30, 2008, compared to the same period in 2007 ($123.8M vs. $95.6M). For the six months, revenue increased by 29.2% ($238.3M vs. $184.6M). Growth was driven by new leasing at same-store properties and the acquisition of 12 properties in the preceding 12 months.
• Operating Expenses: Total operating expenses increased by 31.0% for the three months ($95.6M vs. $73.0M) and 32.1% for the six months ($185.0M vs. $140.0M). Increases were primarily due to higher utility costs, increased depreciation from new development projects, and general administrative growth.
• Net Income: Net income increased significantly year-over-year. For the six months ended June 30, 2008, net income was $24.9 million compared to $29.8 million in 2007. However, the 2007 figure included $16.2 million of income from discontinued operations (gains on property sales), which were absent in 2008.
• Debt Structure: Total indebtedness remained relatively stable at approximately $1.36 billion. The Company issued $334.7 million in Series D preferred stock in February 2008, proceeds of which were used to repay revolving credit facility borrowings.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects to incur approximately $600 million in capital expenditures for the redevelopment program during the year ended December 31, 2008. This amount is subject to change based on demand and capital availability.
• Acquisitions: The Company expects total acquisitions for the full year 2008 to range between $115 million and $180 million. Year-to-date acquisitions totaled $70.0 million.
• Liquidity: As of June 30, 2008, the Company had $352.0 million available under its $650.0 million revolving credit facility. Subsequent to the period end, the facility was increased to $675.0 million, and a new $200.0 million Prudential Shelf Facility was established.
• Risks: Key risks include dependence on significant tenants (Savvis Communications represented 11.5% of revenue), exposure to variable interest rates (approximately 28.7% of debt is variable, though hedged), potential inability to lease redevelopment space, and general economic downturns affecting the technology sector.
• Subsequent Events: In July 2008, the Company completed a common stock offering raising $211.6 million and refinanced a property in Piscataway, NJ with an $80.0 million loan.

Investor Verification Checklist

• Debt Covenants: Verify compliance with financial coverage ratios and unencumbered asset pool requirements under the revolving credit facility and mortgage loans.
• Redevelopment Progress: Monitor the leasing status and capital expenditure burn rate for the 1.9 million square feet of space held for redevelopment.
• Interest Rate Exposure: Assess the effectiveness of interest rate swaps and caps in mitigating the risk of rising LIBOR/EURIBOR rates on the $390.8 million of variable rate debt.
• Tenant Concentration: Review the lease expiration schedule and creditworthiness of major tenants, particularly Savvis Communications.
• Preferred Stock Dilution: Evaluate the impact of the Series C and Series D convertible preferred stock on future common share dilution, especially given the dividend adjustment triggers.