Digital Realty Reports Fourth Quarter And Full-Year 2017 Results

SAN FRANCISCO, Feb. 15, 2018 /PRNewswire/ -- Digital Realty DLR, a leading global provider of data center, colocation and interconnection solutions, announced today financial results for the fourth quarter and full-year 2017.  All per-share results are presented on a fully-diluted share and unit basis. 

Highlights

• Reported net income available to common stockholders of $0.26 per share in 4Q17, compared to $0.49 in 4Q16
• Reported net income available to common stockholders of $0.99 per share for the full year of 2017, compared to $2.20 in 2016
• Reported FFO per share of $1.48 in 4Q17, compared to $1.58 in 4Q16
• Reported FFO per share of $5.65 for the full year of 2017, compared to $5.67 in 2016
• Reported core FFO per share of $1.55 in 4Q17, compared to $1.43 in 4Q16
• Reported core FFO per share of $6.14 for the full year of 2017, compared to $5.72 in 2016
• Signed total bookings during 4Q17 expected to generate $56 million of annualized GAAP rental revenue, including a $6 million contribution from interconnection, bringing the full-year 2017 total bookings to $199 million
• Reiterated 2018 core FFO per share outlook of $6.45 - $6.60

Financial Results

Digital Realty reported revenues for the fourth quarter of 2017 of $731 million, a 20% increase from the previous quarter and a 27% increase from the same quarter last year.  For the full-year 2017, the company reported revenues of $2.5 billion, a 15% increase over 2016.

The company delivered fourth quarter of 2017 net income of $80 million, and net income available to common stockholders of $53 million, or $0.26 per diluted share, compared to a net loss available to common stockholders of ($0.02) per diluted share in the previous quarter and net income available to common stockholders of $0.49 per diluted share in the same quarter last year.  For the full-year 2017, Digital Realty delivered net income of $256 million and net income available to common stockholders of $173 million, or $0.99 per diluted share, compared to $2.20 per diluted share for 2016.

Digital Realty generated fourth quarter of 2017 adjusted EBITDA of $428 million, a 22% increase from the previous quarter and a 37% increase over the same quarter last year.  For the full-year 2017, the company generated adjusted EBITDA of $1.4 billion, an 18% increase over 2016.

The company reported fourth quarter of 2017 funds from operations ("FFO") of $317 million, or $1.48 per share, compared to $1.23 per share in the previous quarter and $1.58 per share in the same quarter last year.  For the full-year 2017, Digital Realty reported FFO per share of $5.65 compared to $5.67 in 2016. 

Excluding certain items that do not represent core expenses or revenue streams, Digital Realty delivered fourth quarter of 2017 core FFO of $1.55 per share, a 3% increase from $1.51 per share in the previous quarter, and an 8% increase from $1.43 per share in the same quarter last year.  For the full-year 2017, the company delivered core FFO per share of $6.14, a 7% increase from $5.72 per share in 2016.

Leasing Activity

"We closed the year on solid footing, with total bookings of $56 million of annualized GAAP rental revenue in the fourth quarter of 2017, including a $6 million contribution from interconnection," said Chief Executive Officer A. William Stein.  "We delivered consistent results throughout 2017, while strategically expanding our global platform to ensure we are uniquely well-positioned to capture a growing share of customer demand.  Looking ahead to 2018, we see robust global demand driven by the second wave of cloud, particularly in our core major metropolitan areas around the world.  The strength of our global, connected platform provides the framework for our expectation of delivering sustainable growth for our customers, shareholders and employees in 2018 and beyond." 

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

In addition to new leases signed, Digital Realty also signed renewal leases representing $64 million of annualized GAAP rental revenue during the quarter.  Rental rates on renewal leases signed during the fourth quarter of 2017 rolled up 2.3% on a cash basis and up 5.7% on a GAAP basis. 

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

 

Investment Activity

During the fourth quarter of 2017, Digital Realty entered into a 50/50 joint venture with Mitsubishi Corporation to provide data center solutions in Japan.  Mitsubishi Corporation contributed two existing data center facilities in the western Tokyo suburb of Mitaka, while Digital Realty contributed its recently completed data center development project in Osaka.  The three seed assets were collectively valued at approximately 40 billion Japanese Yen, or approximately $350 million. 

Likewise during the fourth quarter of 2017, Digital Realty acquired a 250,000 square foot data center on a 19-acre site in suburban Chicago, approximately four miles from the company's Franklin Park campus, for a purchase price of $315 million.  Roughly three-fourths of the building has been developed and is fully leased, and the property is expected to generate cash net operating income of approximately $22 million in 2018, representing a 7% going-in cap rate.  The remaining 65,000 square feet of shell space is available for build-out of approximately eight megawatts of critical load from a dedicated, on-site sub-station. 

Digital Realty also acquired a 132,000 square foot multi-story parking garage adjacent to the company's highly connected Sovereign House data center in London for a purchase price of £22 million, or approximately $30 million.  The parking garage is expected to generate cash net operating income of £0.8 million, or approximately $1 million, representing a 4% cap rate on in-place parking income.  Digital Realty leased space within the parking garage to house critical Sovereign House equipment.  This acquisition secures the company's position beyond the expiration of its previous parking garage lease in 2026.

Separately, Digital Realty acquired a 1.4-acre land parcel adjacent to 350 E. Cermak in Chicago, IL for a purchase price of $25 million.  The site is expected to support the development of a 12-story, 720,000 square foot data center with up to 34 megawatts of critical power.  Commencement of development will be subject to market demand, and delivery will be phased to facilitate customer expansion requirements.

During the fourth quarter of 2017, 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 recognized a gain on the sale of approximately $12 million, net of non-controlling interests, during the fourth quarter. 

Likewise during the fourth quarter of 2017, Digital Realty closed on the sale of 1 Solutions Parkway, a 156,000 square foot suburban office building in St. Louis, MO for $37 million.  The property was 100% leased to a single tenant and was expected to generate cash net operating income of approximately $3 million in 2017, representing an exit cap rate of 7%.  The sale generated net proceeds of $35 million, and Digital Realty recognized a gain on the sale of approximately $15 million. 

Subsequent to the end of the quarter, Digital Realty closed on the sale of 34551 Ardenwood Boulevard, a 323,000 square foot technology manufacturing property in Fremont, CA for $73 million.  The property was 86% leased and was expected to generate cash net operating income of approximately $5 million in 2018, representing an exit cap rate of 7%.  The sale generated net proceeds of $72 million, and Digital Realty recognized a gain on the sale of approximately $25 million in the first quarter of 2018.

Subsequent to the end of the quarter, Digital Realty also closed on the sale of 200 Quannapowitt Parkway, a substantially vacant, 211,000 square foot data center redevelopment project in Wakefield, MA for $15 million.  The sale generated net proceeds of $15 million, and Digital Realty recognized a loss on the sale of approximately $0.4 million in the first quarter of 2018.

Balance Sheet

Digital Realty had approximately $8.6 billion of total debt outstanding as of December 31, 2017, substantially all of which was unsecured.  At the end of the fourth quarter of 2017, net debt-to-adjusted EBITDA was 5.2x, debt-plus-preferred-to-total enterprise value was 28.9% and fixed charge coverage was 4.2x. 

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. EST / 2:30 p.m. PST on February 15, 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 fourth quarter and full-year 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# 6927108 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 March 16, 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# 10114216.  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

2018 Outlook

Digital Realty reiterated its 2018 core FFO per share outlook of $6.45 - $6.60.  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; our global platform; 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 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 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017, June 30, 2017 and September 30, 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.

 

 

 

 

 

 

 

 

 

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, impairment charges, real estate related depreciation and amortization (excluding amortization of deferred financing costs), 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:
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 (loss) 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, (viii) loss on currency forwards and (ix) 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 rent revenue, (vi) straight-line rent 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-related expense, equity acceleration, and legal expenses, transaction and integration expenses, (gain) loss on real estate transactions, non-cash (gain) on lease termination, equity in earnings adjustment for non-core items, other non-core expense adjustments, noncontrolling interests, preferred stock dividends, including undeclared dividends, and issuance costs associated with redeemed preferred stock. Adjusted EBITDA is EBITDA excluding severance-related expense, equity acceleration, and legal expenses, transaction and integration expenses, (gain) loss on real estate transactions, non-cash (gain) on lease termination, equity in earnings adjustment for non-core items, other non-core expense adjustments, 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 not 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 December 31, 2017, GAAP interest expense was $74 million, capitalized interest was $8 million and scheduled debt principal payments and preferred dividends was $20 million.

 

 

 

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