Business context and reporting period
Digital Realty Trust, Inc. and Digital Realty Trust, L.P. filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The company is a global owner, developer and operator of data centers, colocation and interconnection facilities. The REIT parent owns approximately 97.8% of the operating partnership, which holds substantially all operating assets. Unless noted, financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $1.339 billion | $1.127 billion; up 18.8% |
| Operating income | $177.3 million | $141.2 million; up 25.5% |
| Operating margin | 13.2% | 12.5% |
| Net income | $68.8 million | $76.9 million; down 10.5% |
| Net income available to common stockholders | $58.5 million | $63.1 million |
| GAAP diluted EPS | $0.20 | $0.22 |
| Diluted FFO per share/unit | $1.60 | $1.60 |
| Cash from operations | $349.7 million | $277.7 million |
| Cash used in investing activities | $749.0 million | $719.1 million |
| Cash, cash equivalents and restricted cash at quarter-end | $141.6 million | $150.7 million at December 31, 2022 |
| Gross consolidated debt | $18.0 billion | $16.7 billion at December 31, 2022 |
| Weighted-average debt interest rate | 2.85% | 2.68% at December 31, 2022 |
Property operating and maintenance expense increased 31.1% to $571.2 million, mainly reflecting higher power costs and greater consumption; the filing notes that customer utility reimbursements also contributed to revenue growth. Total operating expenses rose 17.8%. The company reported $738.7 million of real estate improvements in investing cash flows; separately, cash-basis capital expenditures excluding indirect costs were $688.2 million, versus $483.1 million in Q1 2022. Dividends and distributions paid were $738.0 million.
At March 31, 2023, total assets were $42.0 billion and total liabilities were $22.8 billion. Approximately 81.1% of debt was fixed-rate or effectively fixed through swaps; unhedged variable-rate debt was $3.4 billion, or 18.9% of total debt. The debt-to-total-enterprise-value ratio was approximately 37%. The company reported compliance with senior-note financial covenants.
Material changes versus the prior comparable period
- Revenue growth reflected $108.5 million of additional stabilized rental and service revenue and $100.0 million of additional non-stabilized revenue. Drivers included utility reimbursements, leasing and renewals, completed development projects and the Teraco acquisition.
- Operating income increased, but net income declined. Interest expense rose $35.5 million, primarily due to new term loans, higher revolving-credit balances and rates, and notes issued in 2022. Equity-method earnings fell $46.1 million, with foreign-exchange remeasurement of Ascenty debt cited as the main source of volatility.
- Q1 2022 net income included a $51.1 million loss on early debt extinguishment; there was no comparable charge in Q1 2023.
- Operating cash flow improved by $72.0 million, while investing outflows increased. Cash and restricted cash declined $8.4 million during Q1 2023, compared with an increase of $36.9 million in Q1 2022.
- Total portfolio occupancy decreased to 83.5% from 84.7% at December 31, 2022; consolidated portfolio occupancy was 82.3%, down from 83.5%. Occupancy figures include management estimates and portfolio classifications described in the filing.
Outlook, commentary, risks and unusual items
- Management reported strong demand in most key markets and expects average aggregate rental rates on renewals of leases expiring in 2023 to be positive versus current rates, on both GAAP and cash bases. It cautioned that renewals and achieved rents are not assured. No formal earnings or EPS guidance is stated in the provided filing text.
- The company expects $1.7 billion to $1.9 billion of development capital expenditures during the remaining nine months of 2023, subject to changes in demand, leasing, and access to capital. Open construction-contract commitments were approximately $2.6 billion, including approximately $30.6 million expected to be reimbursed by customers.
- As of May 1, 2023, approximately $1.1 billion was available under global revolving credit facilities. The company cites operating cash flow, debt and equity issuance, and revolving facilities as sources for liquidity and planned investment. Access to capital and the cost of refinancing remain important risks.
- Management’s long-run capital structure objectives include average debt-to-Adjusted EBITDA of 5.5x, fixed-charge coverage above 3x and floating-rate debt below 20% of total debt. It states current debt-to-Adjusted EBITDA is higher than historically experienced; the filing text does not provide a clear current ratio in this discussion.
- Principal risks include weaker data-center demand, competition and supply, power availability and energy costs, inflation and interest rates, customer concentration or defaults, development delays and cost overruns, cybersecurity and service disruptions, foreign-exchange movements, and acquisition, joint-venture and refinancing risks.
- The Teraco acquisition included a put/call arrangement over the remaining minority interest. Rollover shareholders may exercise a put beginning February 1, 2026; settlement may be in cash, shares or a combination. The company recorded the interest as redeemable noncontrolling interest.
- During Q1, the company deconsolidated a joint venture after its development phase ended and recognized an equity-method investment. It also reported a material foreign-currency translation loss in other comprehensive income. Management said no pending legal proceeding was expected to materially adversely affect operations or financial position; construction commitments and other ordinary-course contingencies remain.
Important facts for investors to verify
- Whether occupancy stabilizes and leasing and renewal rates support management’s positive rent outlook.
- Whether utility revenue reimbursements keep pace with rising power costs and other operating expenses.
- Development spending, project delivery and leasing progress against the $1.7–$1.9 billion remaining-2023 capital expenditure expectation and $2.6 billion of open commitments.
- Debt maturities, refinancing terms, variable-rate exposure and the effect of higher rates on interest expense and liquidity.
- Cash flow available after development investment and distributions, and reliance on external capital to fund growth and REIT distributions.
- Teraco minority-interest redemption terms and the impact of foreign exchange on consolidated results and equity-method earnings.