10-KPeriod: FY2006

DIGITAL REALTY TRUST, INC. Annual Report, Year Ended Dec 31, 2006

Filed March 1, 2007For Securities:DLRDLR-PJDLR-PKDLR-PL

Summary

Digital Realty Trust, Inc. (DLR) demonstrated significant growth and expansion in 2006, as detailed in their 2007 10-K filing. The company significantly increased its property portfolio, acquiring 16 new properties and expanding its leased square footage. Revenue streams grew substantially due to these acquisitions and favorable leasing activity. The company also managed its debt effectively, using a mix of equity and debt financing to support its growth and operational needs. However, the report also highlights substantial risks, particularly concerning the company's reliance on a few large tenants, the concentration of properties in specific geographic markets, and the cyclical nature of the technology real estate sector. The company's limited operating history as a REIT and public entity, coupled with potential difficulties in managing rapid growth and integrating new acquisitions, also present challenges. Investors should note the potential dilutive effect of exchangeable debentures and the impact of interest rate fluctuations on profitability.

Key Highlights

  • 1Significant portfolio expansion with the acquisition of 16 properties in 2006, increasing the company's footprint.
  • 2Substantial revenue growth driven by acquisitions and increased occupancy, with total operating revenues rising to $281.9 million.
  • 3Diversified tenant base, though the top 15 tenants represented approximately 50% of gross annualized rent, highlighting some concentration risk.
  • 4Geographic concentration in key technology markets, with Silicon Valley, Dallas, and Chicago representing over 40% of gross annualized rent.
  • 5Successful debt management and capital raising, including an unsecured credit facility and the issuance of exchangeable senior debentures.
  • 6Identified 1.6 million square feet of redevelopment space, indicating future investment and leasing opportunities.
  • 7The company experienced strong stock performance from its IPO in late 2004 through the end of 2006, significantly outperforming market indices.

Frequently Asked Questions

The primary risks identified in the filing include: dependence on technology-related real estate demand, concentration of revenue from a few large tenants (like Savvis Communications and Qwest Communications), potential impacts from tenant bankruptcies, geographic concentration in key markets, potential difficulties managing rapid growth, limited operating history as a REIT, and exposure to interest rate fluctuations. Additionally, environmental liabilities and the potential for uninsured losses are mentioned.

DLR financed its growth through a combination of equity issuances (common stock and preferred stock), debt financing (mortgage loans and an unsecured credit facility), and the issuance of exchangeable senior debentures. The company also utilized proceeds from property sales and operations to fund its activities.

DLR's strategy involves investing in high-quality, strategically located technology-related real estate, often featuring advanced infrastructure like redundant power and cooling systems. They focus on corporate datacenter and technology tenants. The company also actively manages and leases its assets, with a significant portion of its portfolio held for redevelopment or being subdivided for multi-tenant datacenter use to capture premium rental rates.

As a REIT, DLR is required to distribute at least 90% of its taxable income to stockholders annually to avoid corporate-level taxation. This structure generally allows for higher dividend payouts but also means that the company relies heavily on external capital for growth. Failure to maintain REIT status would result in significant adverse tax consequences and reduced cash available for distribution.