10-QPeriod: Q1 FY2008

DIGITAL REALTY TRUST, INC. Quarterly Report for Q1 Ended Mar 31, 2008

Filed May 9, 2008For Securities:DLRDLR-PJDLR-PKDLR-PL

Summary

Digital Realty Trust, Inc. (DLR) reported strong revenue growth for the first quarter of 2008, driven by strategic property acquisitions and increased leasing activity, particularly in its specialized datacenter space. The company's portfolio expanded to 71 properties with 12.7 million rentable square feet, and occupancy remained high at 94.7% (excluding space held for redevelopment). Despite increased operating expenses related to portfolio growth and rising utility costs, DLR demonstrated solid operational performance with a 25.6% increase in total operating revenues year-over-year. The company also successfully raised capital through a preferred stock offering, strengthening its liquidity and reducing its reliance on its revolving credit facility. DLR remains focused on its REIT status by maintaining its distribution policy, though it acknowledges potential future impacts from changes in accounting for convertible debt.

Key Highlights

  • 1Total operating revenues increased by 25.6% to $114.5 million for the three months ended March 31, 2008, compared to $88.9 million in the prior year period.
  • 2The company's property portfolio expanded to 71 properties totaling 12.7 million rentable square feet, with 1.9 million square feet held for redevelopment.
  • 3Occupancy rate was strong at 94.7% of net rentable square feet, excluding space held for redevelopment.
  • 4DLR successfully issued 13.8 million shares of Series D cumulative convertible preferred stock, raising $333.6 million in net proceeds.
  • 5Operating income increased to $25.2 million, up from $22.0 million in the prior year period, driven by revenue growth.
  • 6The company maintained a healthy debt-to-market capitalization ratio of approximately 27% as of March 31, 2008.
  • 7Interest expense decreased by $2.0 million to $14.6 million, primarily due to refinancing activities.

Frequently Asked Questions

The primary drivers of revenue growth were the acquisition of 10 new properties during the twelve months leading up to March 31, 2008, and increased leasing activity across both existing and newly acquired properties, particularly in its specialized datacenter spaces.

Digital Realty Trust utilizes a mix of fixed-rate debt and interest rate swaps to mitigate exposure to interest rate fluctuations. As of March 31, 2008, approximately 89.9% of its debt was fixed-rate (including swapped debt), and it had $267.7 million of variable rate debt subject to interest rate swaps. The company also maintained a debt-to-market capitalization ratio of about 27%, indicating a conservative leverage level.

The filing emphasizes risks related to economic and technology industry downturns, tenant defaults or bankruptcies, increased interest rates, competition in the data center space, and the potential for accounting changes regarding convertible debt securities, which could materially impact reported financial results.

Digital Realty Trust views its significant 'space held for redevelopment' (1.9 million sq ft) as a key opportunity for future growth. The company plans to invest capital to develop this space into Turn-Key Datacenters™, build-to-suit datacenters, and Powered Base Buildings™ to meet the demand for specialized technology-related real estate, though this requires significant capital investment and carries risks associated with leasing such space.