Digital Realty Trust Earnings Preview

| About: Digital Realty (DLR)

Digital Realty Trust (NYSE:DLR) will be reporting Q3 2011 earnings next Thursday, October 27, before market open.

In Q2 2011 the company reported FFO of $1.02 per diluted share and unit, an increase of 34.2% from $0.76 per diluted share and unit in Q2 2010, and total operating revenues of $267.9 million.

Digital Realty has a history of increasing FFO since its IPO, with a 19,9% compounded annual growth reached from 2005 to 2010, as shown in the attached spreadsheet. For 2011, the company recently guided for FFO to range between $3.99 and $4.05 per diluted share and unit, an increase of $0.02 at the mid point from the previous forecast.

Digital Realty's wholesale data center offering is structured through several different propositions, to respond to different market needs from its usually large customers.

Recently, the company updated investors about its leasing results for Q3 2011, which are interesting to try get a sense of where the wholesale data center market is heading. In addition to its Turn-Key, Power Based and Non-Technical Space offerings, Digital Realty introduced a Build-to-Suit solution that targets customers with very specific requirements.

As Michael F. Foust, Chief Executive Officer of Digital Realty Trust, commented:

Customers are continuing to outsource their data center requirements and are looking for a number of flexible alternatives to meet their long term needs. The Build-to-Suit solution provides each customer with a customized data center facility to meet their long term IT infrastructure needs.

Recent customers that signed for Build-to-Suit solutions were Equinix (NASDAQ:EQIX) and NetApp, Inc. (NASDAQ:NTAP).

If we look at DLR's recent leasing activity, we will notice how important the “Turn-Key” offering has been for the company. Especially after the credit crunch, Digital Realty's capacity to offer a solution that was immediately available to customers proved to be very successful and rewarding for the company. About 23% of DLR's total portfolio is represented by Turn-Key data centers, that represent roughly 56% of total annualized rent.

At first look, the Build-to-Suit solution seems close in pricing to the Turn-key offering, although a bit cheaper, which may partially be justified by the locations where the company signed the first leases. Historically, Turn-Key solutions ranged in the $139 to $210 per square foot, while Power Based and Non-Technical Space offerings are much cheaper, in the $20 to $50 range. The first Build-to-Suit solutions were in the $100-$110 range.

We are attaching an interactive spreadsheet that is resuming some data which might be useful for investors willing to do their own modeling about the company, or ahead of earnings. The spreadsheet reports revenues for the last few quarters, and FFO for the last few years. In addition, we have added leases signed and commenced for the last few quarters, with the average price for each different offering. (Click to view the spreadsheet.)

In recent years, there have been several comments, in the data center market, about wholesale offering getting into smaller deals, so risking to overlap with multi-tenant offerings from companies like Equinix, Interxion (NYSE:INXN) or Internap (NASDAQ:INAP).

Equinix's recent decision to start offering larger business suites to some of its customers in the Washington, D.C., metro – in a facility owned by Digital Realty, by the way – seems to indicate that price may not be the only reason behind a customer's decision where to locate, with the level of additional services required, network availability and close proximity to its partners/customers probably representing a key factor in the decision-making process.

Disclosure: I am long EQIX, INAP.