Digital Realty (NYSE: DLR), the largest global provider of cloud- and carrier-neutral data center, colocation and interconnection solutions, announced financial results for the third quarter of 2022. All per share results are presented on a fully diluted basis.
Highlights
- Reported net income available to common stockholders of $0.75 per share in 3Q22, compared to $0.44 in 3Q21
- Reported FFO per share of $1.55 in 3Q22, compared to $1.54 in 3Q21
- Reported Core FFO per share of $1.67 in 3Q22, compared to $1.65 in 3Q21
- Reported Constant-Currency Core FFO per share of $1.75 in 3Q22 and $5.24 per share for the nine months ended September 30, 2022
- Signed total bookings during 3Q22 expected to generate $176 million of annualized GAAP rental revenue, including a $13 million contribution from interconnection, excluding Teraco
- Updated 2022 Core FFO per share outlook to $6.70 – $6.75; Updated Constant-Currency Core FFO per share outlook of $6.95 – $7.00
Financial Results
Digital Realty reported revenues for the third quarter of 2022 of $1.2 billion, a 5% increase from the previous quarter and a 5% increase from the same quarter last year.
The company delivered third quarter of 2022 net income of $239 million, and net income available to common stockholders of $227 million, or $0.75 per diluted share, compared to $0.19 per diluted share in the previous quarter and $0.44 per diluted share in the same quarter last year.
Digital Realty generated third quarter of 2022 Adjusted EBITDA of $620 million, a 1% increase from the previous quarter and a 2% increase over the same quarter last year.
The company reported third quarter of 2022 funds from operations of $462 million, or $1.55 per share, compared to $1.55 per share in the previous quarter and $1.54 per share in the same quarter last year.
Excluding certain items that do not represent core expenses or revenue streams, Digital Realty delivered third quarter of 2022 Core FFO per share of $1.67, compared to $1.72 per share in the previous quarter, and $1.65 per share in the same quarter last year. Digital Realty delivered Constant-Currency Core FFO per share of $1.75 for the third quarter of 2022 and $5.24 per share for the nine-month period ended September 30, 2022.
Leasing Activity
In the third quarter, Digital Realty signed total bookings expected to generate $176 million of annualized GAAP rental revenue, including a $13 million contribution from interconnection, but excluding any contribution from Teraco.
“Digital Realty again delivered record quarterly bookings in the third quarter, our third record in the past four quarters, reflecting the strong global demand for data center solutions,” said Digital Realty Chief Executive Officer Bill Stein. “With a rapidly changing global environment, we are making the necessary adjustments in order to maximize the significant market opportunity that lies ahead.”
The weighted-average lag between new leases signed during the third quarter of 2022 and the contractual commencement date was seventeen months.
In addition to new leases signed, Digital Realty also signed renewal leases representing $156 million of annualized GAAP rental revenue during the quarter, excluding any contribution from Teraco. Rental rates on renewal leases signed during the third quarter of 2022 rolled down 0.5% on a cash basis and up 2.3% on a GAAP basis.
New leases signed during the third quarter of 2022 are summarized by region as follows:
| Annualized GAAP | ||||||||||||||
| Base Rent | GAAP Base Rent | GAAP Base Rent | ||||||||||||
| The Americas | (in thousands) | Square Feet | per Square Foot | Megawatts | per Kilowatt | |||||||||
| 0-1 MW | $14,693 | 56,340 | $261 | 5.2 | $236 | |||||||||
| > 1 MW | 99,046 | 834,530 | 119 | 73.6 | 112 | |||||||||
| Other (1) | 15,652 | 291,993 | 54 | — | — | |||||||||
| Total | $129,392 | 1,182,863 | $109 | 78.8 | $120 | |||||||||
| EMEA (2) | ||||||||||||||
| 0-1 MW | $12,318 | 42,762 | $288 | 4.0 | $255 | |||||||||
| > 1 MW | 16,826 | 126,407 | 133 | 15.4 | 91 | |||||||||
| Other (1) | 204 | — | — | — | — | |||||||||
| Total | $29,348 | 169,169 | $173 | 19.4 | $125 | |||||||||
| Asia Pacific (2) | ||||||||||||||
| 0-1 MW | $2,212 | 10,302 | $215 | 0.7 | $256 | |||||||||
| > 1 MW | 2,161 | 14,968 | 144 | 1.8 | 103 | |||||||||
| Other (1) | 84 | 948 | 88 | — | — | |||||||||
| Total | $4,457 | 26,217 | $170 | 2.5 | $147 | |||||||||
| All Regions (2) | ||||||||||||||
| 0-1 MW | $29,223 | 109,404 | $267 | 9.9 | $245 | |||||||||
| > 1 MW | 118,032 | 975,905 | 121 | 90.7 | 108 | |||||||||
| Other (1) | 15,940 | 292,941 | 54 | — | — | |||||||||
| Total | $163,196 | 1,378,249 | $118 | 100.7 | $122 | |||||||||
| Interconnection | $12,981 | N/A | N/A | N/A | N/A | |||||||||
| Grand Total | $176,177 | 1,378,249 | $118 | 100.7 | $122 | |||||||||
| Note: Totals may not foot due to rounding differences. This table excludes any contribution from Teraco during the quarter. | ||||||||||||||
| (1) | Other includes Powered Base Building® shell capacity as well as storage and office space within fully improved data center facilities. | |||||||||||||
| (2) | Based on quarterly average exchange rates during the three months ended September 30, 2022. | |||||||||||||
Investment Activity
During the third quarter, Digital Realty completed its previously announced acquisition of a majority interest in Teraco, a leading carrier-neutral data center and interconnection services provider in South Africa, for approximately $1.7 billion.
Digital Realty acquired three assets for data center development during the third quarter. Digital Realty acquired a 38-acre parcel, which can support approximately 80 megawatts of IT load, in Paris for $10 million. Digital Realty also acquired an income producing mixed-used building on a nine-acre parcel, which can support up to 10 megawatts of IT load in Stockholm $39 million. Lastly, Digital Realty acquired a one-acre parcel, which can support up to 6.5 megawatts of IT load in Crete, Greece for $2 million.
During the third quarter, Digital Realty disposed of a non-core, mixed-use data center property in Dallas for $207 million.
During the third quarter, Digital Realty signed a definitive agreement with Digital Core REIT Management Pte. Ltd., Manager of Digital Core REIT (SGX: DCRU), and related parties (collectively, “Core REIT”), to sell a 25% indirect interest in an institutional quality freehold data center property in Frankfurt valued at approximately $547 million (at 100% share). The transaction is dependent upon the occurrence of certain closing conditions, including a unitholder vote that is expected to take place mid-November, and is expected to generate approximately $137 million of proceeds for Digital Realty. In addition, the agreement provides Core REIT with the option to acquire additional indirect interests in the Frankfurt data center property up to a total interest of 89.9% as well as a 90% indirect interest in an institutional quality freehold data center property in Dallas valued at $199 million (at 100% share). If Core REIT exercises its options to purchase all property interests under the Contribution Agreement, the transaction would generate approximately $671 million of proceeds for Digital Realty.
Subsequent to the close of the third quarter, Digital Realty acquired a four-acre parcel, which could support 24 megawatts of IT load, immediately adjacent to its campus in Dallas for $24 million.
Balance Sheet
Digital Realty had approximately $15.8 billion of total debt outstanding as of September 30, 2022, comprised of $15.3 billion of unsecured debt and approximately $0.5 billion of secured debt and other. At the end of the third quarter of 2022, net debt-to-Adjusted EBITDA was 6.7x, debt-plus-preferred-to-total enterprise value was 36.2% and fixed charge coverage was 5.5x. Pro forma for the physical settlement of $0.5 billion of forward equity outstanding and reflecting the full quarter’s run-rate adjusted EBITDA contribution from Teraco, net debt-to-adjusted EBITDA was 6.4x and fixed charge coverage was 5.7x.
During the third quarter of 2022, Digital Realty completed the following financing transactions.
- In mid-August, closed a €750 million term loan due 2025, with €375 million subject to two maturity extension options of one year each.
- In mid-September, executed a $1 billion U.S. Dollar to Euro fixed-rate cross currency swap at 2.485%, which matures coterminously with our 3.70% notes due 2027 in the principal amount of $1 billion.
- In late September, closed an offering of $550 million of 5.550% notes due 2028.
- In conjunction with this offering, the Company executed $550 million of fixed rate cross currency swaps consisting of $275 million of U.S. Dollar to Euro at 4.585% and $275 million of U.S. Dollar to Japanese Yen at 1.430%, resulting in an effective overall annual yield to maturity of approximately 3.0%. The cross currency swaps mature coterminously with the 5.550% notes in 2028.
Subsequent to quarter end, Digital Realty received over $650 million in commitments for a new two-year US dollar term loan with a one-year extension option.
2022 Outlook
Digital Realty updated its 2022 Core FFO per share outlook of $6.70-$6.75 and updated its 2022 constant-currency Core FFO per share outlook of $6.95 – $7.00. The assumptions underlying the outlook are summarized in the following table.
| As of | As of | As of | As of | ||||||
| Top-Line and Cost Structure | February 17, 2022 | April 28, 2022 | July 28, 2022 | October 26, 2022 | |||||
| Total revenue | $4.700 – $4.800 billion | $4.700 – $4.800 billion | $4.650 – $4.750 billion | $4.650 – $4.700 billion | |||||
| Net non-cash rent adjustments (1) | ($35 – $40 million) | ($45 – $50 million) | ($50 – $55 million) | ($55 – $60 million) | |||||
| Adjusted EBITDA | $2.475 – $2.525 billion | $2.475 – $2.525 billion | $2.450 – $2.500 billion | $2.450 – $2.475 billion | |||||
| G&A | $410 – $420 million | $410 – $420 million | $405 – $415 million | $395 – $400 million | |||||
| Internal Growth | |||||||||
| Rental rates on renewal leases | |||||||||
| Cash basis | Flat | Slightly Positive | Slightly Positive | Slightly Positive | |||||
| GAAP basis | Slightly positive | Up low-single-digits | Up low-single-digits | Up low-single-digits | |||||
| Year-end portfolio occupancy | 83.0% – 84.0% | 83.0% – 84.0% | 83.0% – 84.0% | 83.5% – 84.0% | |||||
| “Same-capital” cash NOI growth (2) | (2.5% – 3.5%) | (2.5% – 3.5%) | (3.5% – 4.5%) | (4.5% – 5.5%) | |||||
| Foreign Exchange Rates | |||||||||
| U.S. Dollar / Pound Sterling | $1.30 – $1.38 | $1.25 – $1.35 | $1.15 – $1.25 | $1.10 – $1.15 | |||||
| U.S. Dollar / Euro | $1.10 – $1.15 | $1.05 – $1.10 | $1.00 – $1.05 | $0.95 – $1.00 | |||||
| External Growth | |||||||||
| Dispositions | |||||||||
| Dollar volume | $0.5 – $1.0 billion | $0.5 – $1.0 billion | $0.5 – $1.0 billion | $0.5 – $1.0 billion | |||||
| Cap rate | 0.0% – 10.0% | 0.0% – 10.0% | 0.0% – 10.0% | 0.0% – 10.0% | |||||
| Development | |||||||||
| CapEx (3) | $2.3 – $2.5 billion | $2.3 – $2.5 billion | $2.2 – $2.4 billion | $2.1 – $2.3 billion | |||||
| Average stabilized yields | 9.0% – 15.0% | 9.0% – 15.0% | 9.0% – 15.0% | 9.0% – 15.0% | |||||
| Enhancements and other non-recurring CapEx (4) | $5 – $10 million | $5 – $10 million | $5 – $10 million | $5 – $10 million | |||||
| Recurring CapEx + capitalized leasing costs (5) | $210 – $220 million | $200 – $210 million | $200 – $210 million | $200 – $210 million | |||||
| Balance Sheet | |||||||||
| Long-term debt issuance | |||||||||
| Dollar amount | $1.8 – $2.0 billion | $1.8 – $2.0 billion | $1.8 – $2.0 billion | $2.3 – $2.8 billion | |||||
| Pricing | 1.5% – 2.0% | 1.5% – 2.0% | 2.0% – 2.5% | 2.0% – 3.0% | |||||
| Timing | Early & Late 2022 | Early & Late 2022 | Early & Late 2022 | Early & Late 2022 | |||||
| Net income per diluted share | $1.05 – $1.10 | $1.05 – $1.10 | $1.00 – $1.05 | $1.45 – $1.50 | |||||
| Real estate depreciation and (gain) / loss on sale | $5.35 – $5.35 | $5.35 – $5.35 | $5.35 – $5.35 | $4.85 – $4.85 | |||||
| Funds From Operations / share (NAREIT-Defined) | $6.40 – $6.45 | $6.40 – $6.45 | $6.35 – $6.40 | $6.30 – $6.35 | |||||
| Non-core expenses and revenue streams | $0.40 – $0.45 | $0.40 – $0.45 | $0.40 – $0.45 | $0.40 – $0.40 | |||||
| Core Funds From Operations / share | $6.80 – $6.90 | $6.80 – $6.90 | $6.75 – $6.85 | $6.70 – $6.75 | |||||
| Foreign currency translation adjustments | $0.10 – $0.10 | $0.15 – $0.15 | $0.20 – $0.20 | $0.25 – $0.25 | |||||
| Constant-Currency Core Funds From Operations / share | $6.90 – $7.00 | $6.95 – $7.05 | $6.95 – $7.05 | $6.95 – $7.00 | |||||
| (1) | Net non-cash rent adjustments represent the sum of straight-line rental revenue and straight-line rent expense, as well as the amortization of above- and below-market leases (i.e., ASC 805 adjustments). | ||||||||
| (2) | The “same-capital” pool includes properties owned as of December 31, 2020 with less than 5% of total rentable square feet under development. It excludes properties that were undergoing, or were expected to undergo, development activities in 2021-2022, properties classified as held for sale, and properties sold or contributed to joint ventures for all periods presented. | ||||||||
| (3) | Includes land acquisitions. | ||||||||
| (4) | Other non-recurring CapEx represents costs incurred to enhance the capacity or marketability of operating properties, such as network fiber initiatives and software development costs. | ||||||||
| (5) | Recurring CapEx represents non-incremental improvements required to maintain current revenues, including second-generation tenant improvements and leasing commissions. | ||||||||