Digital Realty Reports Third Quarter 2017 Results

SAN FRANCISCO, Oct. 25, 2017 /PRNewswire/ -- Digital Realty (NYSE: DLR), a leading global provider of data center, colocation and interconnection solutions, announced today financial results for the third quarter of 2017.  All per-share results are presented on a fully-diluted share and unit basis. 

Highlights

• Reported net loss available to common stockholders of ($0.02) per share in 3Q17, compared to $1.25 per share in 3Q16
• Reported FFO per share of $1.23 in 3Q17, compared to $1.31 in 3Q16
• Reported core FFO per share of $1.51 in 3Q17, compared to $1.44 in 3Q16
• Signed total bookings during 3Q17 expected to generate $58 million of annualized GAAP rental revenue, including an $8 million contribution from interconnection
• Raised 2017 core FFO per share outlook to $6.00 - $6.10 from $5.95 - $6.10

Financial Results

Digital Realty reported third quarter of 2017 revenues of $610 million, an 8% increase from the previous quarter and a 12% increase from the same quarter last year. 

The company delivered third quarter of 2017 net income of $12 million, and a net loss available to common stockholders of ($4) million, or ($0.02) per diluted share, compared to net income available to common stockholders of $0.36 per diluted share in the previous quarter and $1.25 per diluted share in the same quarter last year. 

Digital Realty generated third quarter of 2017 adjusted EBITDA of $352 million, a 7% increase from the previous quarter and a 15% increase over the same quarter last year. 

The company reported third quarter of 2017 funds from operations ("FFO") on a fully diluted basis of $215 million, or $1.23 per share, compared to $1.44 per share in the previous quarter and $1.31 per share in same quarter last year. 

Excluding certain items that do not represent core expenses or revenue streams, Digital Realty delivered third quarter of 2017 core FFO of $1.51 per share, a 2% decrease from $1.54 per share in the previous quarter, and a 5% increase from $1.44 per share in the same quarter last year. 

Leasing Activity

"During the third quarter of 2017, we signed total bookings representing $58 million of annualized GAAP rental revenue, including an $8 million contribution from interconnection," said Chief Executive Officer A. William Stein.  "Our third-quarter activity showcased the strengths of our diversified business, particularly the strategic importance of our expanded footprint in Ashburn, the largest and fastest-growing data center market in the world.  In addition, colocation and interconnection continue to provide stable and healthy revenue drivers.  Heading into the end of the year, we continue to see healthy demand across all three lines of the business, and are focused on fully integrating DuPont Fabros while executing against our goals as a combined organization." 

The weighted-average lag between leases signed during the third quarter of 2017 and the contractual commencement date was four months. 

In addition to new leases signed, Digital Realty also signed renewal leases representing $66 million of annualized GAAP rental revenue during the quarter.  Rental rates on renewal leases signed during the third quarter of 2017 rolled down 3.8% on a cash basis and up 1.5% on a GAAP basis. 

New leases signed during the third quarter of 2017 by region and product type are summarized as follows:

Investment Activity

During the third quarter of 2017, Digital Realty completed the previously announced acquisition of DuPont Fabros in an all-stock transaction valued at $7.9 billion in enterprise value.

Digital Realty also acquired land parcels adjacent to the company's existing holdings in Osaka, Japan and Garland, TX during the third quarter of 2017 for a total purchase price of approximately $10 million.  The two parcels total 20 acres, and are expected to support the development of up to 51 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 projects in Osaka and Richardson, TX.

Likewise during the third quarter of 2017, Digital Realty recognized impairment losses of approximately $29 million on assets held for sale to reduce the carrying value of three properties to their estimated fair market value at September 30, 2017.

Separately, Digital Realty closed on the sale of 8025 North Interstate 35, a 62,000 square foot Powered Base Building data center in Austin, TX for $20 million.  The property was 100% leased and was expected to generate cash net operating income of approximately $1 million in 2017, representing an exit cap rate of 5%.  The sale generated net proceeds of approximately $20 million, and Digital Realty recognized a gain on the sale of approximately $10 million in the third quarter of 2017.

Subsequent to the end of the quarter, Digital Realty closed on the sale of 44874 Moran Road, a 78,000 square foot data center in Sterling, VA for $34 million.  The property was 100% leased and was expected to generate cash net operating income of approximately $3 million in 2017, representing an exit cap rate of 7%.  The property was held in a consolidated joint venture, in which Digital Realty owned a 75% stake.  The sale generated net proceeds of $34 million, and Digital Realty expects to recognize a gain on the sale of approximately $15 million during the fourth quarter, or roughly $12 million, net of non-controlling interests.

Likewise subsequent to the end of the quarter, Digital Realty entered into a 50/50 joint venture with Mitsubishi Corporation to provide data center solutions in Japan.  Mitsubishi Corporation will contribute two existing data center facilities in the western Tokyo suburb of Mitaka, while Digital Realty will contribute its recently completed data center development project in Osaka.  The three seed assets are collectively valued at approximately 40 billion Japanese Yen, or approximately $350 million.

Also subsequent to quarter-end, Digital Realty entered into an agreement to acquire a 250,000 square foot data center on a 19-acre site in Northlake, Illinois from a non-traded, publicly registered REIT for a purchase price of $315 million.  The property is located approximately four miles from the company's Franklin Park campus.  Roughly three-fourths of the building has been developed and is fully leased, with the remaining 65,000 square feet of shell space available for build-out of approximately eight megawatts of critical load from a dedicated on-site sub-station.  The transaction remains subject to certain closing conditions, and Digital Realty cannot provide any assurances if, or when the transaction will close.

Balance Sheet

Digital Realty had approximately $8.5 billion of total debt outstanding as of September 30, 2017, substantially all of which was unsecured.  At the end of the third quarter of 2017, net debt-to-adjusted EBITDA was 6.0x, debt-plus-preferred-to-total enterprise value was 27.8% and fixed charge coverage was 3.9x. 

During the third quarter of 2017, Digital Realty completed the following financing transactions.

• On July 21, 2017, Digital Realty issued £250 million of 2.75% Sterling-denominated notes due 2024 and £350 million of 3.30% Sterling-denominated notes due 2029, generating gross proceeds of approximately $780 million.
• On August 7, 2017, Digital Realty issued $350 million of 2.75% notes due 2023 and $1.0 billion of 3.70% notes due 2027.
• Also on August 7, 2017, Digital Realty closed an offering of eight million shares of 5.25% Series J Cumulative Redeemable Preferred Stock at a price of $25.00 per share, generating gross proceeds of $200 million.
• On September 14, 2017, Digital Realty closed the acquisition of DuPont Fabros, and exchanged approximately 43 million shares of DLR Common Stock and six million Operating Partnership Units for all of the outstanding common shares and units of DuPont Fabros, representing total consideration of approximately $6 billion.
• Likewise in conjunction with the closing of the DuPont Fabros acquisition on September 14, 2017, Digital Realty exchanged all the outstanding shares of DuPont Fabros' Series C Preferred Stock for 8.05 million shares of Digital Realty Series C Preferred Stock, with a total liquidation value of $201 million.
• Digital Realty also purchased a portion of the DuPont Fabros 5.875% notes due 2021 and redeemed the remainder in mid-September. The aggregate principal amount totaled $600 million.
• Subsequent to the end of the quarter, Digital Realty redeemed DuPont Fabros' 5.625% notes due 2023. When Digital Realty assumed the bonds, the fair market value of $266 million was recorded on the balance sheet. The aggregate principal amount totaled $250 million and was redeemed in October 2017.

Non-GAAP Financial Measures

This press release contains non-GAAP financial measures, including FFO, core FFO, constant-currency 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 constant-currency core FFO, and definitions of FFO, core FFO and constant-currency 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 October 25, 2017, 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 third quarter 2017 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# 9681339 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 November 22, 2017.  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# 10111773.  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 financial services, cloud and information technology services, to manufacturing, energy, gaming, life sciences and consumer products.

Additional information about Digital Realty is included in the Company Overview, available on the Investors page of Digital Realty's website at www.digitalrealty.com.  The Company Overview is updated periodically, and may contain material information and updates.  To receive e-mail alerts when the Company Overview is updated, please visit the Investors page of Digital Realty's website.

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

2017 Outlook

Digital Realty raised its 2017 core FFO per share outlook from $5.95 - $6.10 to $6.00 - $6.10.  The assumptions underlying this guidance are summarized in the following table. 

Safe Harbor Statement

This press release contains forward-looking statements which are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially, including statements related to the merger with DuPont Fabros Technology, Inc.; supply and demand for data center and colocation space; the expected timing, benefits and development of recent land acquisitions; impairment losses; our joint venture in Japan; acquisition and disposition activity, including transactions which are under agreement but subject to closing conditions; 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; expected capital markets activity; and the company's FFO, core FFO, constant-currency core FFO and net income outlook and underlying assumptions.  These risks and uncertainties include, among others, the following: the impact of current global economic, credit and market conditions; current local economic conditions in the metropolitan areas in which we operate; decreases in information technology spending, including as a result of economic slowdowns or recession; 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); our dependence upon significant tenants; bankruptcy or insolvency of a major tenant or a significant number of smaller tenants; defaults on or non-renewal of leases by tenants; our failure to obtain necessary debt and equity financing; 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; financial market fluctuations; changes in foreign currency exchange rates; our inability to manage our growth effectively; difficulty acquiring or operating properties in foreign jurisdictions; our failure to successfully integrate and operate acquired or developed properties or businesses; the suitability of our properties and data center infrastructure, delays or disruptions in connectivity, failure of our physical and information security infrastructure or services or availability of power; risks related to joint venture investments, including as a result of our lack of control of such investments; delays or unexpected costs in development of properties; decreased rental rates, increased operating costs or increased vacancy rates; increased competition or available supply of data center space; our inability to successfully develop and lease new properties and development space; difficulties in identifying properties to acquire and completing acquisitions; our inability to acquire off-market properties; the impact of the United Kingdom's referendum on withdrawal from the European Union on global financial markets and our business; our inability to comply with the rules and regulations applicable to reporting companies; our failure to maintain our status as a REIT; possible adverse changes to tax laws; restrictions on our ability to engage in certain business activities; environmental uncertainties and risks related to natural disasters; losses in excess of our insurance coverage; changes in foreign laws and regulations, including those related to taxation and real estate ownership and operation; and changes in local, state and federal regulatory requirements, including changes in real estate and zoning laws and increases in real property tax rates. For a further list and description of such risks and uncertainties, see the reports and other filings by the company with the U.S. Securities and Exchange Commission, including the company's Annual Report on Form 10-K for the year ended December 31, 2016, Quarterly Report on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017 and current report on Form 8-K filed July 10, 2017.  The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.