01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
Digital Realty Trust (DLR) ended 2010 as a technology-focused datacenter REIT with 96 consolidated properties (ex. two JV holdings) totaling about 16.8 million rentable square feet, including about 2.2 million square feet held for redevelopment.
The portfolio was 94.6% leased excluding redevelopment space, with about 540 tenants. Concentration is meaningful: the largest tenant, Savvis, accounted for about 7.9% of annualized rent, the top 20 tenants about 48%, and Silicon Valley alone about 13.9%. Management presents a growth-oriented story built on acquisitions (15 properties in 2010, including the $725 milliona 365 Main portfolio and the $375 million New England portfolio) and redevelopment of vacant shell space, with planned 2011 redevelopment capex of $450-525 million.
Total operating revenues rose 35.8% to $865.4 millionb, and net income attributable to common stockholders was $58.3 million, or $0.68 diluted EPS, versus $0.61 in 2009. Operating cash flow grew to $359.0 million. Growth was funded heavily with external capital: over $1.3 billion of acquisition spending, equity raises, and new unsecured notes.
Total consolidated debt reached about $2.8 billionc, with roughly 88% fixed-rate including hedges and a weighted-average term of about 4.6 years. Debt to total enterprise value was about 34%, against a board policy cap of 60%. Near-term refinancing needs are significant, including $333.5 million drawn on a revolver maturing August 2011 and about $578 million of total debt principal due in 2011.
For investors, the key trade-offs are strong operating momentum and a rising dividend (quarterly common dividend raised to $0.53d in 2010, with $0.68 declared for Q1 2011) against higher leverage, customer concentration, speculative development risk, and dependence on continued access to capital markets. Investors should also note the combined Inc./L.P. structure and the 2026 and 2029 exchangeable debentures, which can dilute common holders if the stock price rises.
02—Key points
Key Highlights
- Revenue growth: Total operating revenues rose 35.8% to $865.4 million in 2010, driven by rental growth of 34.4% and tenant reimbursements of 42.3%, largely from acquisitions and same-store leasing.
- Earnings: Diluted EPS of $0.68 for 2010, up from $0.61 in 2009; net income available to common stockholders of $58.3 million.
- Portfolio scale: 96 properties with about 16.8 million rentable square feet, 94.6% leased excluding 2.2 million square feet of redevelopment space, across 28 metro areas and 16 international properties.
- Concentration risk: Savvis (7.9% of annualized rent), Equinix (4.3%), and Facebook (4.3%) are the largest tenants; the top 20 tenants represent about 48% of annualized rent; Silicon Valley is 13.9% of rent.
- Leverage and liquidity: Total debt of about $2.8 billion, debt-to-enterprise-value of about 34%, and $386.5 million of revolver availability; $333.5 million of the revolver matures August 2011.
- Capital raising: Net proceeds of about $593.7 million from common equity in 2010, plus $486.6 million from 5.875% notes due 2020 and $370.9 million from 4.50% notes due 2015, used largely to fund the 365 Main and New England acquisitions.
- Dividends: Quarterly common dividend increased to $0.53 during 2010 and to $0.68 declared for Q1 2011 (annualized $2.72), with 2010 total dividends declared of $2.02 per share.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $865.40M$637.14M | +35.8% |
| Operating Expenses | $623.10M$459.35M | +35.6% |
| Operating Income | $242.31M$177.79M | +36.3% |
| Interest Expense | $137.38M$88.44M | +55.3% |
| Net Income | $102.29M$87.66M | +16.7% |
| EPS (Basic) | $0.69$0.62 | +11.3% |
| EPS (Diluted) | $0.68$0.61 | +11.5% |
| Shares Outstanding (Basic) | 84.28M75.95M | +11.0% |
| Shares Outstanding (Diluted) | 86.01M77.02M | +11.7% |
05—Questions
Frequently Asked Questions
How much debt does Digital Realty carry, and how risky is its refinancing schedule?
Consolidated debt was about $2.8 billion at December 31, 2010, with roughly 88% fixed-rate including swaps and caps and a weighted average term of about 4.6 years. Refinancing risk is near-term: the $333.5 million revolver matures in August 2011 (with one extension option), and about $578 million of total principal is scheduled for 2011, including the 2026 debentures assumed to be put in August 2011. Management notes that refinancing could come at higher rates or on less favorable terms given tighter credit conditions.
Is the dividend covered by cash flow?
Operating cash flow of $359.0 million in 2010 exceeded dividend and distribution payments of about $208.6 million, and management states cash from operations has funded all distributions. As a REIT, however, the company must distribute at least 90% of taxable income, so growth relies on external capital, and it may need to borrow on the revolver to meet distribution requirements.
What is the biggest concentration risk for tenants?
Savvis Communications is the largest tenant at about 7.9% of annualized rent and 13.7% of net rentable square feet, with a weighted average remaining lease term of about 101 months. The top 20 tenants make up roughly 48% of annualized rent, and 42 of 96 properties are single-tenant. A default or non-renewal by a major tenant could materially affect revenue.
Could the exchangeable debentures or convertible preferred dilute common shareholders?
Yes. The 2026 debentures ($88.8 million outstanding) and 2029 debentures ($266.4 million) can be settled partly in common shares when the stock price exceeds set exchange prices, and dividends above specified per-share thresholds raise the exchange rates. The Series C and D convertible preferred stock also convert into common shares, with approximately 3.7 million and 8.3 million potentially dilutive shares, respectively. Dividend increases above reference levels increase this dilution.
What is the strategy behind the development and redevelopment spending?
The company holds 2.2 million square feet of redevelopment space, of which about 532,000 square feet was under construction at year-end, and it intends to build much of this on a speculative basis without signed leases. Management expects to spend $450 to $525 million on redevelopment in 2011. Returns depend on leasing at attractive rates, and risks include construction delays, cost overruns, power availability, and weaker demand for datacenter space.
06—Continue