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WIKI ANALYSIS
Digital Realty Trust (NYSE: DLR) is a San Francisco based data center REIT with a total of ~ 13 million net rentable square feet.[1] DLR leases data center and office space to the large technology and financial corporations. As of June 30, 2009, DLR's portfolio consisted of 75 properties, including 62 located in North America and 13 located in Europe.[2]
Over 80% of DLR's revenues come from the properties' rent, the remaining 20% come from tenant reimbursements of maintenance and improvement fees.[3] Tenant reimbursements of certain fees and maintenance expenses are standard for the real estate industry. Terms of reimbursements are specified by the lease agreements.
DLR's lease periods are longer then lease periods of traditional residential and hotel REITs, such as Host Hotels & Resorts and Apartment Investment and Management Company. Because of the longer lease periods and need for sophisticated technology space DLR enjoys low vacancy rate. The company's Rental Revenue per Square Foot was not severely affected by recent decline in the real estate industry. As of June 30, 2009, 94.8%[3] of the DLR properties were leased at average annualized rent per leased square foot of $36.09.[4] DLR's operating revenues have grown consistently in the past 3 years: from $272 million in 2006 to $395 million in 2007 and $527 million in 2008. Net income was $29 million or 5.5% of operating revenues in 2008.[5]
In February 2009, to repay a portion of debt under revolving credit facility and finance redevelopment projects DLR placed a secondary offering of 2,500,000 shares for a total proceeds of $96 million.[6]
Company Overview
Digital Realty Trust through its controlling interest in Digital Realty Trust, L.P. (the Operating Partnership) is engaged in the business of owning, acquiring, developing, redeveloping and managing technology-related real estate.[7] DLR's portfolio consist of internet gateways (hubs for data communication between metropolitan cities), corporate data centers, technology manufacturing properties that contain specialty equipment and regional or national headquarters of technology companies. It competes with numerous developers, owners and operators of real estate and data centers, including DuPont Fabros Technology, Inc., Terremark Worldwide, and Global Switch.[8]
Properties at DLR portfolio are highly sophisticated with a state-of-the art technology suited for the large technology enterprise needs. DLR is capable of designing and building customized data centers. Based on the construction costs DLR portfolio will cost a fortune to replicate.[9] With no one region representing more than 16% of the property portfolio, DLR is well diversified geographically.[10] DLR's is capable of securing global purchasing agreements with a large discounts from its equipment suppliers. DLR customers in turn have the advantage of applying these discounts to their equipment sourced by DLR.
REITs do not pay federal income tax and only liable for paying state income taxes in the state where they incorporated. To qualify as a REIT in the United States, the company has to be in the business of owning real estate and distribute 90% of its taxable income (excluding capital gains) in the form of dividends. As a result, REITs and in this case DLR, taps into public capital markets to support its growth through acquisitions and developments of properties. After its initial public offering in 2004, the company has raised over $3.4 billion of capital through common, preferred and convertible equity offerings, an exchangeable debt offering, revolving credit facility, secured mortgage financing and refinancing, and sales of non-core assets.[11] DLR uses different capital raising strategy to suit market needs at certain times. When financing was cheap and easy to obtain as in 2005 - 2006 DLR issued bonds and placed term loans, recently as stock market was recovering it issued equity.
Business and Financial Metrics
Because of the high cost of debt and difficulty of refinancing, DLR recenty established a guideline for its debt level as 60% of the total market capitalization.[3]
Most of the commercial leases have terms of 2 to 5 years. As of June 30, 2009, DLR's original average lease term was in excess of 13 years, with an average of 8 years remaining. As a result, DLR is able to achieve low vacancy rate. DLR's lease expirations through December 31, 2010 are 8.7% of net rentable square feet.[3]
DLR's property portfolio has experienced consistent and significant growth since initial acquisition of 5 properties in Miami, Dallas, London, New York and Silicon Valley in 2002.[12] In the past three years operating revenues grew at 45.3% from 2006 to 2007 and 33.4% from 2007 to 2008.[13]
Since its inception DLR invested $2.7 billion in the new properties and redevelopment of the existing properties.[10]
Percentage of total amount invested by Property Type[10]
Geographic Distribution
DLR properties portfolio is diversified in major markets where corporate data center and technology tenants are concentrated, including the Chicago, Dallas, Los Angeles, New York/New Jersey, Northern Virginia, Phoenix, San Francisco and Silicon Valley metropolitan areas in the U.S. and the London, Dublin, Paris and Amsterdam markets in Europe.[2] No one market represents more than 16% of total annualized rent.
Operating revenues from properties outside the United States were $19.9 million or 13% of the total for the three months ended June 30, 2009.[3]
Percentage of total rent by Metropolitan Market[14]
To continue with its grows and diversification strategy in May 2009, DLR acquired four parcels of land totaling 34.2 acres located next to its existing data center facilities in Ashburn, Virginia.[15]
Tenant Composition
As of December 31, 2008, DLR portfolio was leased to 350 companies, including Savvis Communications, Qwest Communications, Amazon and AT&T.[5] 20 largest tenants are responsible for 57% of the total annualized rent generated by properties. Savvis Communications leases 1.7 million square feet or 11.1% of the total. Qwest Communications International leases 638,000 square feet or 5.1% of the total. In addition, 35 of 75 DLR properties are occupied by single tenants.[16]
Leases for 20 largest tenants[17]
| Tenant | Locations | Occupied Sq. Ft. | Percentage of Total | Annualized Rent | Percentage of Total | Remaining Lease Terms (month) |
| SAVVIS (SVVS) | 17 | 1,700,523 | 14.9% | $43.3 M | 11.1% | 122 |
| Qwest Communications International (Q) | 13 | 637,712 | 5.6% | $19.8 M | 5.1% | 82 |
| Equinix (EQIX) | 4 | 565,297 | 5.0% | $17.6 M | 4.5% | 104 |
| TelX Group, Inc. | 10 | 101,581 | 0.9% | $13.5 M | 3.5% | 215 |
| NTT Communications Company | 3 | 272,194 | 2.4% | $12.1 M | 3.1% | 47 |
| AT&T (T) | 12 | 389,311 | 3.4% | $11.6 M | 3.0% | 64 |
| 2 | 114,168 | 1.0% | $10.7 M | 2.7% | 64 | |
| Morgan Stanley (MS) | 2 | 65,037 | 0.6% | $8.9 M | 2.3% | 58 |
| eircom Limited | 1 | 124,500 | 1.1% | $8.9 M | 2.3% | 127 |
| T-Systems North America, Inc. | 3 | 86,610 | 0.7% | $8.8 M | 2.3% | 60 |
| J P Morgan Chase (JPM) | 2 | 27,377 | 0.2% | $8.7 M | 2.2% | 93 |
| Microsoft (MSFT) | 2 | 313,485 | 2.8% | $8.0 M | 2.0% | 79 |
| Comverse Technology, Inc. | 1 | 367,033 | 3.2% | $7.1 M | 1.8% | 25 |
| AboveNet Inc (ABVT) | 12 | 150,661 | 1.3% | $6.5 M | 1.7% | 113 |
| Yahoo! (YHOO) | 2 | 110,847 | 1.0% | $6.3 M | 1.6% | 106 |
| Level 3 Communications (LVLT) | 15 | 289,788 | 2.5% | $6.3 M | 1.6% | 41 |
| Amgen (AMGN) | 1 | 131,386 | 1.2% | $5.8 M | 1.5% | 77 |
| BT Americas, Inc. | 3 | 28,840 | 0.3% | $5.7 M | 1.5% | 87 |
| Carpathia Hosting | 2 | 36,263 | 0.3% | $5.5 M | 1.4% | 120 |
| Amazon.com (AMZN) | 3 | 164,698 | 1.4% | $5.3 M | 1.4% | 129 |
| Total / Weighted Average | 5,673,311 | 49.8% | $220.4 M | 56.6% | 93 |
In Q2 2009 DLR signed new leases with Equinix[18] in Chicago, Capgemini[19] in France and ServeCentric[20] in Ireland.
Trends and Forces
Global economic downturn has moderate effect on DLR's performance
As for every REIT, economic or regional downturns adversely affect DLR ability to maintain or increase rental rates at properties. DLR focuses on the technology-related real estate that is still in demand as more companies increase their reliance on digital data storage. Data center rents held up better than has been the case in most other property types. Broad base of DLR customers and geography also minimizes their exposure to tenant defaults.
As of June 30, 2009 one tenant, Lyondell Chemical Company was in bankruptcy. Lyondell leased approximately 15,500 square feet of net rentable space at a property in Dallas, Texas and was current on all of its rental obligations.[14]
Change in energy legislation and its price increase adversely affect DLR performance
In comparison with office and apartment properties, because of its functionality DLR buildings require significant power to support the data center operations. Data centers, which comprise most of the DLR portfolio, are highly specialized facilities designed to house racks of mission-critical computer servers and the associated infrastructure required to power and cool them 24 hours a day, 365 days a year.
In June 2009, the U.S. House of Representatives approved clean energy and climate change legislation to reduce greenhouse gas emissions in the United States through an economy-wide cap-and-trade program. This would increase DLR costs that it is not able to effectively pass on to the tenants.[21]
DLR's lease contract length and its focus on highly sophisticated technical space limit their exposure to competition
DLR's average lease terms are in excess of 13 years, with an average of 8 years remaining.[3] These longer terms lock-in customers and prevent them from switching to the space provider with more favorable lease terms. As a result, DLR can rely on the stable cash flows over the longer period and invest in the development of state-of the art properties.
Competitors looking to entering DLR’s business are faced with the following barriers:
- Large amount of capital required to build data centers
- Immense technical expertise required in sales/leasing, design, and construction
- Informational inefficiency marking an emerging real estate type
DLR’s industry-leading platform has significant value and its competitive advantage is growing.[22]
Competition
Digital Realty Trust competes with datacenter and industrial REITs and technology corporations that lease industrial space. DLR with its annual revenues of $527M and $3.4 billion market capitalization is the largest landlord in the data center space. Data center industry is the fastest growing segment in Industrial REIT space. Tier 1 Research, an independent research firm, recently proclaimed that demand will increase by 75% through ’12 compared to only 25% for supply.[23]
- Dupont Fabros Technology(DFT) has 6 properties in the United States: 5 in Virginia and one in Illinois with 0.7 million net rentable square feet.[24]
- Terremark Worldwide (TMRK) competes with DLR on its colocation services. Colocation refers to the data center where multiple customers locate network, server and storage gear and interconnect to a variety of telecommunications and other network service providers. TMRK revenues consist of colocation - 34%, managed and professional services - 56%, exchange point services - 6% and equipment resales - 4%.[25] Net loss of $10 million in 2008.[26]
- Global Switch is a privately owned company based in London, UK, that owns and leases data centre portfolio of 2.8 million sq. ft of technical space located in cities across Europe and Asia-Pacific.[27]
| Company | Total 2008 Revenue | 2008 Net Income | Net Rentable Square Feet (millions) |
| DLR | $527 M | $29 M | 13.0 |
| DFT | $174 M | $19 M | 0.7 |
| TMRK | $85 M[28] | na | na |
| Global Switch | na | na | 2.8 |
References
- ↑ DLR 10-Q 2Q09, page 4
- ↑ 2.0 2.1 DLR 10-Q 2Q09, page 8
- ↑ 3.0 3.1 3.2 3.3 3.4 3.5 DLR 10-Q 2Q09, page 32
- ↑ DLR 10-K 2008, page 1
- ↑ 5.0 5.1 DLR 10-K 2008, page 71
- ↑ DLR Press Release as of February 10, 2009
- ↑ DLR 10-K 2008, page 76
- ↑ DLR 10-K 2008, page 5
- ↑ DLR 10-K 2008, page 2
- ↑ 10.0 10.1 10.2 DLR 10-K 2008, page 85
- ↑ DLR 10-K 2008, page 4
- ↑ DLR 10-K 2008, page 110
- ↑ DLR 10-K 2008, page 49
- ↑ 14.0 14.1 DLR 10-Q 2Q09, page 34
- ↑ DLR Press Release as of May 18, 2009
- ↑ DLR 10-K 2008, page 9
- ↑ DLR 10-K 2008, page 32
- ↑ DLR Press Release as of July 15, 2009
- ↑ DLR Press Release as of June 24, 2009
- ↑ DLR Press Release as of May 28, 2009
- ↑ DLR 10-Q 2Q09, page 35
- ↑ Green Street Advisors Report. Adding Some Byte to a REIT Portfolio. January 23, 2009, page 8
- ↑ Green Street Advisors Report. Adding Some Byte to a REIT Portfolio. January 23, 2009, page 7
- ↑ DFT 10-Q 2Q09, page 20
- ↑ TRMK 10-K 2008, page 37
- ↑ TMRK 10-K 2008, page F-5
- ↑ Global Switch Website, About us
- ↑ Colocation Revenues only
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