Digital Realty Reports Second Quarter 2018 Results

SAN FRANCISCO, July 26, 2018 /PRNewswire/ — Digital Realty (NYSE:DLR, news, filings), a leading global provider of data center, colocation and interconnection solutions, announced today financial results for the second quarter of 2018.  All per-share results are presented on a fully-diluted share and unit basis.

Highlights

• Reported net income available to common stockholders of $0.32 per share in 2Q18, compared to $0.36 in 2Q17
• Reported FFO per share of $1.64 in 2Q18, compared to $1.44 in 2Q17
• Reported core FFO per share of $1.66 in 2Q18, compared to $1.54 in 2Q17
• Signed total bookings during 2Q18 expected to generate $94 million of annualized GAAP rental revenue, including an $8 million contribution from interconnection
• Raised 2018 core FFO per share outlook from $6.50 – $6.60 to $6.55 – $6.65

Financial Results

Digital Realty reported revenues for the second quarter of 2018 of $755 million, a 1% increase from the previous quarter and a 33% increase from the same quarter last year.

The company delivered second quarter of 2018 net income of $88 million, and net income available to common stockholders of $65 million, or $0.32 per diluted share, compared to $0.42 per diluted share in the previous quarter and $0.36 per diluted share in the same quarter last year.

Digital Realty generated second quarter of 2018 adjusted EBITDA of $458 million, a 2% increase from the previous quarter and a 39% increase over the same quarter last year.

The company reported second quarter of 2018 funds from operations of $353 million, or $1.64 per share, compared to $1.61 per share in the previous quarter and $1.44 per share in the same quarter last year.

Excluding certain items that do not represent core expenses or revenue streams, Digital Realty delivered second quarter of 2018 core FFO of $1.66 per share, a 2% increase from $1.63 per share in the previous quarter, and an 8% increase from $1.54 per share in the same quarter last year.

Leasing Activity

“In the second quarter, we signed total bookings expected to generate $94 million of annualized GAAP rental revenue, including an $8 million contribution from interconnection,” said Chief Executive Officer A. William Stein.  “Data center demand has picked up appreciably in 2018, and we are particularly encouraged by the broad-based activity across regions as well as the depth of demand by customer vertical.  Our efforts to strengthen connections with our customers are bearing fruit, and we will continue to work diligently to extend our global platform and deliver sustainable growth for our customers, shareholders and employees.”

The weighted-average lag between leases signed during the second quarter of 2018 and the contractual commencement date was five months.

In addition to new leases signed, Digital Realty also signed renewal leases representing $76 million of annualized GAAP rental revenue during the quarter.  Rental rates on renewal leases signed during the second quarter of 2018 rolled up 3.4% on a cash basis and up 5.8% on a GAAP basis.

New leases signed during the second quarter of 2018 by region and product type are summarized as follows:

Investment Activity

During the second quarter of 2018, Digital Realty closed on the sale of a 378,000 square foot portfolio comprised of three mixed-use properties in Austin, Texas for $48 million.  The properties were expected to generate cash net operating income of approximately $3 million in 2018, representing an exit cap rate of 6.3%.  The sale generated net proceeds of $46 million, and Digital Realty recognized a gain on the sale of approximately $12 million in the second quarter of 2018.

Digital Realty also closed on the sale of 1125 Energy Park Drive, a substantially vacant, 78,100 square foot suburban office redevelopment project in St. Paul, Minnesota for $7 million.  The sale generated net proceeds of $7 million, and Digital Realty recognized a gain on the sale of approximately $3 million in the second quarter of 2018.

Likewise during the second quarter of 2018, Digital Realty closed on the sale of 2010 E. Centennial Circle, a vacant 113,400 square foot office redevelopment project in Tempe, Arizona for $6 million.  The sale generated net proceeds of $5 million, and Digital Realty recognized a loss on the sale of approximately $1 million in the second quarter of 2018.

During the second quarter of 2018, Digital Realty acquired a 13-acre site adjacent to one of its existing data centers in Santa Clara, California for a purchase price of $56 million.  The parcel contains two fully leased office buildings with less than one year of remaining lease term.  The existing structures will be razed upon expiration of the in-place leases.  The site is expected to support the development of 403,000 square feet and the build-out of approximately 48 megawatts of critical load.

Digital Realty also acquired a 62-acre land parcel in Manassas, Virginia during the second quarter for a purchase price of $17 million.  The site is expected to support the development of 1,700,000 square feet and the build-out of approximately 192 megawatts of critical power.  Commencement of development will be subject to market demand and delivery will be phased to facilitate customer expansion requirements upon completion of the company’s existing campus in Ashburn, Virginia.

Balance Sheet

Digital Realty had approximately $9.1 billion of total debt outstanding as of June 30, 2018, comprised of $9.0 billion of unsecured debt and approximately $0.1 billion of secured debt.  At the end of the second quarter of 2018, net debt-to-adjusted EBITDA was 5.2x, debt-plus-preferred-to-total enterprise value was 30.2% and fixed charge coverage was 4.3x.

2018 Outlook

Digital Realty raised its 2018 core FFO per share outlook from $6.50 – $6.60 to $6.55 – $6.65.  The assumptions underlying this guidance are summarized in the following table.

Non-GAAP Financial Measures

This press release contains non-GAAP financial measures, including FFO, core FFO, and Adjusted EBITDA.  A reconciliation from U.S. GAAP net income available to common stockholders to FFO, a reconciliation from FFO to core FFO, and definitions of FFO, and core FFO are included as an attachment to this document.  A reconciliation from U.S. GAAP net income available to common stockholders to Adjusted EBITDA, a definition of Adjusted EBITDA and definitions of net debt-to-Adjusted EBITDA, debt-plus-preferred-to-total enterprise value, cash NOI, and fixed charge coverage ratio are included as an attachment to this document.

Investor Conference Call

Prior to Digital Realty’s investor conference call at 5:30 p.m. EDT / 2:30 p.m. PDT on July 26, 2018, a presentation will be posted to the Investors section of the company’s website at http://investor.digitalrealty.com.  The presentation is designed to accompany the discussion of the company’s second quarter 2018 financial results and operating performance.  The conference call will feature Chief Executive Officer A. William Stein and Chief Financial Officer Andrew P. Power.

To participate in the live call, investors are invited to dial (888) 317-6003 (for domestic callers) or (412) 317-6061 (for international callers) and reference the conference ID# 3366836 at least five minutes prior to start time.  A live webcast of the call will be available via the Investors section of Digital Realty’s website at http://investor.digitalrealty.com.

Telephone and webcast replays will be available after the call until August 27, 2018.  The telephone replay can be accessed by dialing (877) 344-7529 (for domestic callers) or (412) 317-0088 (for international callers) and providing the conference ID# 10121533.  The webcast replay can be accessed on Digital Realty’s website.

About Digital Realty

Digital Realty supports the data center, colocation and interconnection strategies of more than 2,300 firms across its secure, network-rich portfolio of data centers located throughout North America, Europe, Asia and Australia.  Digital Realty’s clients include domestic and international companies of all sizes, ranging from cloud and information technology services, communications and social networking to financial services, manufacturing, energy, healthcare, and consumer products.

Contact Information

Andrew P. Power
Chief Financial Officer
Digital Realty
(415) 738-6500

John J. Stewart / Maria S. Lukens
Investor Relations
Digital Realty
(415) 738-6500

Definitions

Funds From Operations (FFO) :
We calculate funds from operations, or FFO, in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT.  FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from real estate transactions, non-controlling interests share of gain on sale of property, impairment of investment in real estate, real estate related depreciation and amortization (excluding amortization of deferred financing costs), unconsolidated JV real estate related depreciation & amortization, non-controlling interests in operating partnership and after adjustments for unconsolidated partnerships and joint ventures.  Management uses FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions and after adjustments for unconsolidated partnerships and joint ventures, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs.  We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.  However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our data centers that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our data centers, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited.  Other REITs may not calculate FFO in accordance with the NAREIT definition and, accordingly, our FFO may not be comparable to other REITs’ FFO. FFO should be considered only as a supplement to net income computed in accordance with GAAP as a measure of our performance.

Core Funds from Operations (Core FFO) :
We present core funds from operations, or core FFO, as a supplemental operating measure because, in excluding certain items that do not reflect core revenue or expense streams, it provides a performance measure that, when compared year over year, captures trends in our core business operating performance. We calculate core FFO by adding to or subtracting from FFO (i) termination fees and other non-core revenues, (ii) transaction and integration expenses, (iii) gain from early extinguishment of debt, (iv) issuance costs associated with redeemed preferred stock, (v) equity in earnings adjustment for non-core items, (vi) severance, equity acceleration, and legal expenses, (vii) bridge facility fees and (viii) other non-core expense adjustments. Because certain of these adjustments have a real economic impact on our financial condition and results from operations, the utility of core FFO as a measure of our performance is limited. Other REITs may calculate core FFO differently than we do and accordingly, our core FFO may not be comparable to other REITs’ core FFO. Core FFO should be considered only as a supplement to net income computed in accordance with GAAP as a measure of our performance.

Adjusted Funds from Operations (AFFO) :
We present adjusted funds from operations, or AFFO, as a supplemental operating measure because, when compared year over year, it assesses our ability to fund dividend and distribution requirements from our operating activities. We also believe that, as a widely recognized measure of the operations of REITs, AFFO will be used by investors as a basis to assess our ability to fund dividend payments in comparison to other REITs, including on a per share and unit basis. We calculate AFFO by adding to or subtracting from core FFO (i) non-real estate depreciation, (ii) amortization of deferred financing costs, (iii) amortization of debt discount/premium, (iv) non-cash stock-based compensation expense, (v) straight-line rental revenue, (vi) straight-line rental expense, (vii) above- and below-market rent amortization, (viii) deferred non-cash tax expense, (ix) capitalized leasing compensation, (x) recurring capital expenditures and (xi) capitalized internal leasing commissions. Other REITs may calculate AFFO differently than we do and accordingly, our AFFO may not be comparable to other REITs’ AFFO. AFFO should be considered only as a supplement to net income computed in accordance with GAAP as a measure of our performance.

EBITDA and Adjusted EBITDA :
We believe that earnings before interest, loss from early extinguishment of debt, income taxes, depreciation and amortization, and impairment of investments in real estate, or EBITDA, and Adjusted EBITDA (as defined below), are useful supplemental performance measures because they allow investors to view our performance without the impact of non-cash depreciation and amortization or the cost of debt and, with respect to Adjusted EBITDA, severance, equity acceleration, and legal expenses, transaction and integration expenses, (gain) loss on real estate transactions, equity in earnings adjustment for non-core items, other non-core adjustments, net, noncontrolling interests, preferred stock dividends, including undeclared dividends, and issuance costs associated with redeemed preferred stock. Adjusted EBITDA is EBITDA excluding severance, equity acceleration, and legal expenses, transaction and integration expenses, (gain) loss on real estate transactions, equity in earnings adjustment for non-core items, other non-core adjustments, net, non-controlling interests, preferred stock dividends, including undeclared dividends, and issuance costs associated with redeemed preferred stock. In addition, we believe EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. Because EBITDA and Adjusted EBITDA are calculated before recurring cash charges including interest expense and income taxes, exclude capitalized costs, such as leasing commissions, and are not adjusted for capital expenditures or other recurring cash requirements of our business, their utility as a measure of our performance is limited.  Other REITs may calculate EBITDA and Adjusted EBITDA differently than we do and accordingly, our EBITDA and Adjusted EBITDA may not be comparable to other REITs’ EBITDA and Adjusted EBITDA.  Accordingly, EBITDA and Adjusted EBITDA should be considered only as supplements to net income computed in accordance with GAAP as a measure of our financial performance.

Net Operating Income (NOI) and Cash NOI :
Net operating income, or NOI, represents rental revenue, tenant reimbursement revenue and interconnection revenue less utilities expense, rental property operating expenses, property taxes and insurance expenses (as reflected in the statement of operations). NOI is commonly used by stockholders, company management and industry analysts as a measurement of operating performance of the company’s rental portfolio. Cash NOI is NOI less straight-line rents and above- and below-market rent amortization. Cash NOI is commonly used by stockholders, company management and industry analysts as a measure of property operating performance on a cash basis. However, because NOI and cash NOI exclude depreciation and amortization and capture neither the changes in the value of our data centers that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our data centers, all of which have real economic effect and could materially impact our results from operations, the utility of NOI and cash NOI as measures of our performance is limited. Other REITs may calculate NOI and cash NOI differently than we do and, accordingly, our NOI and cash NOI may not be comparable to other REITs’ NOI and cash NOI. NOI and cash NOI should be considered only as supplements to net income computed in accordance with GAAP as measures of our performance.

Additional Definitions
Net debt-to-Adjusted EBITDA ratio is calculated using total debt at balance sheet carrying value, plus capital lease obligations, plus our share of JV debt, less unrestricted cash and cash equivalents divided by the product of Adjusted EBITDA (inclusive of our share of JV EBITDA) multiplied by four.

Debt-plus-preferred-to-total enterprise value is mortgage debt and other loans plus preferred stock divided by mortgage debt and other loans plus the liquidation value of preferred stock and the market value of outstanding Digital Realty Trust, Inc. common stock and Digital Realty Trust, L.P. units, assuming the redemption of Digital Realty Trust, L.P. units for shares of Digital Realty Trust, Inc. common stock.

Fixed charge coverage ratio is Adjusted EBITDA divided by the sum of GAAP interest expense, capitalized interest, scheduled debt principal payments and preferred dividends. For the quarter ended June 30, 2018, GAAP interest expense was $79 million, capitalized interest was $8 million and scheduled debt principal payments and preferred dividends was $20 million.

Forward-Looking Statements

This document contains forward-looking statements within the meaning of the federal securities laws, which are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. Such forward-looking statements include statements relating to: our expected investment and expansion activity, supply and demand for data center and colocation space, our acquisition and disposition activity, pricing and net effective leasing economics, market dynamics and data center fundamentals, our strategic priorities, rent from leases that have been signed but have not yet commenced and other contracted rent to be received in future periods, rental rates on future leases, lag between signing and commencement, cap rates and yields, investment activity, the company’s FFO, core FFO and net income 2018 outlook and underlying assumptions, information related to trends, our strategy and plans, leasing expectations, weighted average lease terms, the exercise of lease extensions, lease expirations, debt maturities, annualized rent at expiration of leases, the effect new leases and increases in rental rates will have on our rental revenue, our credit ratings, construction and development activity and plans, projected construction costs, estimated yields on investment, expected occupancy, expected square footage and IT load capacity upon completion of development projects, 2018 backlog NOI, NAV components, and other forward-looking financial data.  Such statements are based on management’s beliefs and assumptions made based on information currently available to management.  Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance and may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.  Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, among others, the following:

• reduced demand for data centers or decreases in information technology spending;
• decreased rental rates, increased operating costs or increased vacancy rates;
• increased competition or available supply of data center space;
• the suitability of our data centers and data center infrastructure, delays or disruptions in connectivity or availability of power, or failures or breaches of our physical and information security infrastructure or services;
• our dependence upon significant customers, bankruptcy or insolvency of a major customer or a significant number of smaller customers, or defaults on or non-renewal of leases by customers;
• breaches of our obligations or restrictions under our contracts with our customers;
• our inability to successfully develop and lease new properties and development space, and delays or unexpected costs in development of properties;
• the impact of current global and local economic, credit and market conditions;
• our inability to retain data center space that we lease or sublease from third parties;
• difficulty acquiring or operating properties in foreign jurisdictions;
• our failure to realize the intended benefits from, or disruptions to our plans and operations or unknown or contingent liabilities related to, our recent acquisitions;
• our failure to successfully integrate and operate acquired or developed properties or businesses;
• difficulties in identifying properties to acquire and completing acquisitions;
• risks related to joint venture investments, including as a result of our lack of control of such investments;
• risks associated with using debt to fund our business activities, including re-financing and interest rate risks, our failure to repay debt when due, adverse changes in our credit ratings or our breach of covenants or other terms contained in our loan facilities and agreements;
• our failure to obtain necessary debt and equity financing, and our dependence on external sources of capital;
• financial market fluctuations and changes in foreign currency exchange rates;
• adverse economic or real estate developments in our industry or the industry sectors that we sell to, including risks relating to decreasing real estate valuations and impairment charges and goodwill and other intangible asset impairment charges;
• our inability to manage our growth effectively;
• losses in excess of our insurance coverage;
• environmental liabilities and risks related to natural disasters;
• our inability to comply with rules and regulations applicable to our company;
• Digital Realty Trust, Inc.’s failure to maintain its status as a REIT for federal income tax purposes;
• Digital Realty Trust, L.P.’s failure to qualify as a partnership for federal income tax purposes;
• restrictions on our ability to engage in certain business activities; and
• changes in local, state, federal and international laws and regulations, including related to taxation, real estate and zoning laws, and increases in real property tax rates.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance.  We discussed a number of additional material risks in our annual report on Form 10-K for the year ended December 31, 2017 and other filings with the Securities and Exchange Commission.  Those risks continue to be relevant to our performance and financial condition.  Moreover, we operate in a very competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise.  Digital Realty, Digital Realty Trust, the Digital Realty logo, Turn-Key Flex and Powered Base Building are registered trademarks and service marks of Digital Realty Trust, Inc. in the United States and/or other countries.

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SOURCE Digital Realty