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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2014

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From              to             .

 

   Commission file number 001-32336 (Digital Realty Trust, Inc.)  
                                                000-54023 (Digital Realty Trust, L.P.)  

 

 

DIGITAL REALTY TRUST, INC.

DIGITAL REALTY TRUST, L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland (Digital Realty Trust, Inc.)

Maryland (Digital Realty Trust, L.P.)

 

26-0081711

20-2402955

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification number)

Four Embarcadero Center, Suite 3200

San Francisco, CA

  94111
(Address of principal executive offices)   (Zip Code)

(415) 738-6500

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Digital Realty Trust, Inc.

   Yes  x      No   ¨

Digital Realty Trust, L.P.

   Yes  x      No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Digital Realty Trust, Inc.

   Yes  x      No   ¨

Digital Realty Trust, L.P.

   Yes  x      No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Digital Realty Trust, Inc.:

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Digital Realty Trust, L.P.:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Digital Realty Trust, Inc.

   Yes  ¨      No   x

Digital Realty Trust, L.P.

   Yes  ¨      No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Digital Realty Trust, Inc.:

 

Class

  

Outstanding at August 4, 2014

Common Stock, $.01 par value per share    135,500,587

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2014 of Digital Realty Trust, Inc., a Maryland corporation, and Digital Realty Trust, L.P., a Maryland limited partnership, of which Digital Realty Trust, Inc. is the sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our company” or “the company” refer to Digital Realty Trust, Inc. together with its consolidated subsidiaries, including Digital Realty Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to Digital Realty Trust, L.P. together with its consolidated subsidiaries.

Digital Realty Trust, Inc. is a real estate investment trust, or REIT, and the sole general partner of Digital Realty Trust, L.P. As of June 30, 2014, Digital Realty Trust, Inc. owned an approximate 97.7% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 2.3% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of Digital Realty Trust, Inc. As of June 30, 2014, Digital Realty Trust, Inc. owned all of the preferred limited partnership interests of Digital Realty Trust, L.P. As the sole general partner of Digital Realty Trust, L.P., Digital Realty Trust, Inc. has the full, exclusive and complete responsibility for the operating partnership’s day-to-day management and control.

We believe combining the quarterly reports on Form 10-Q of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. into this single report results in the following benefits:

 

   

enhancing investors’ understanding of our company and our operating partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

 

   

eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both our company and our operating partnership; and

 

   

creating time and cost efficiencies through the preparation of one combined report instead of two separate reports.

There are a few differences between our company and our operating partnership, which are reflected in the disclosure in this report. We believe it is important to understand the differences between our company and our operating partnership in the context of how we operate as an interrelated consolidated company. Digital Realty Trust, Inc. is a REIT, whose only material asset is its ownership of partnership interests of Digital Realty Trust, L.P. As a result, Digital Realty Trust, Inc. does not conduct business itself, other than acting as the sole general partner of Digital Realty Trust, L.P., issuing public equity from time to time and guaranteeing certain unsecured debt of Digital Realty Trust, L.P. and certain of its subsidiaries. Digital Realty Trust, Inc. itself does not issue any indebtedness but guarantees the unsecured debt of Digital Realty Trust, L.P. and certain of its subsidiaries, as disclosed in this report. Digital Realty Trust, L.P. holds substantially all the assets of the company and holds the ownership interests in the company’s joint ventures. Digital Realty Trust, L.P. conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity issuances by Digital Realty Trust, Inc., which are generally contributed to Digital Realty Trust, L.P. in exchange for partnership units, Digital Realty Trust, L.P. generates the capital required by the company’s business through Digital Realty Trust, L.P.’s operations, by Digital Realty Trust, L.P.’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.

The presentation of noncontrolling interests in operating partnership, stockholders’ equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of Digital Realty Trust, Inc. and those of Digital Realty Trust, L.P. The common limited partnership interests held by the limited partners in Digital Realty Trust, L.P. are presented as limited partners’ capital within partners’ capital in Digital Realty Trust, L.P.’s condensed consolidated financial statements and as noncontrolling interests in operating partnership within equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The common and preferred partnership interests held by Digital Realty Trust, Inc. in Digital Realty Trust, L.P. are presented as general partner’s capital within partners’ capital in Digital Realty Trust, L.P.’s condensed consolidated financial statements and as preferred stock, common stock, additional paid-in capital and accumulated dividends in excess of earnings within stockholders’ equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity issued at the Digital Realty Trust, Inc. and the Digital Realty Trust, L.P. levels.

To help investors understand the significant differences between the company and the operating partnership, this report presents the following separate sections for each of the company and the operating partnership:

 

   

Condensed consolidated financial statements;

 

   

the following notes to the condensed consolidated financial statements:

 

   

Debt of the company and Debt of the operating partnership;

 

   

Income per Share and Income per Unit; and

 

   

Equity and Accumulated Other Comprehensive Income, Net of the company and Capital and Accumulated Other Comprehensive Income of the operating partnership;

 

2


Table of Contents
   

Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations; and

 

   

Unregistered Sales of Equity Securities and Use of Proceeds.

This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of the company and the operating partnership in order to establish that the Interim Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the company and the operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

In order to highlight the differences between the company and the operating partnership, the separate sections in this report for the company and the operating partnership specifically refer to the company and the operating partnership. In the sections that combine disclosure of the company and the operating partnership, this report refers to actions or holdings as being actions or holdings of the company. Although the operating partnership is generally the entity that enters into contracts and joint ventures and holds assets and debt, reference to the company is appropriate because the business is one enterprise and the company operates the business through the operating partnership.

As general partner with control of the operating partnership, Digital Realty Trust, Inc. consolidates the operating partnership for financial reporting purposes, and it does not have significant assets other than its investment in the operating partnership. Therefore, the assets and liabilities of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. are the same on their respective condensed consolidated financial statements. The separate discussions of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. in this report should be read in conjunction with each other to understand the results of the company on a consolidated basis and how management operates the company.

 

3


Table of Contents

DIGITAL REALTY TRUST, INC. AND DIGITAL REALTY TRUST, L.P.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2014

TABLE OF CONTENTS

 

         Page
Number
 
PART I.  

FINANCIAL INFORMATION

  
ITEM 1.  

Condensed Consolidated Financial Statements of Digital Realty Trust, Inc.:

  
 

Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013

     5   
 

Condensed Consolidated Income Statements for the three and six months ended June 30, 2014 and 2013 (unaudited)

     6   
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013 (unaudited)

     7   
 

Condensed Consolidated Statement of Equity for the six months ended June 30, 2014 (unaudited)

     8   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)

     9   
 

Condensed Consolidated Financial Statements of Digital Realty Trust, L.P.:

  
 

Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013

     12   
 

Condensed Consolidated Income Statements for the three and six months ended June 30, 2014 and 2013 (unaudited)

     13   
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013 (unaudited)

     14   
 

Condensed Consolidated Statement of Capital for the six months ended June 30, 2014 (unaudited)

     15   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)

     16   
 

Notes to Condensed Consolidated Financial Statements of Digital Realty Trust, Inc. and Digital Realty Trust, L.P.

     19   
ITEM 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     53   
ITEM 3.  

Quantitative and Qualitative Disclosures About Market Risk

     84   
ITEM 4.  

Controls and Procedures (Digital Realty Trust, Inc.)

     86   
 

Controls and Procedures (Digital Realty Trust, L.P.)

     86   
PART II.  

OTHER INFORMATION

     87   
ITEM 1.  

Legal Proceedings

     87   
ITEM 1A.   

Risk Factors

     87   
ITEM 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     87   
ITEM 3.  

Defaults Upon Senior Securities

     87   
ITEM 4.  

Mine Safety Disclosures

     87   
ITEM 5.  

Other Information

     87   
ITEM 6.  

Exhibits

     88   
 

Signatures

     89   

 

4


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

     June 30,
2014
    December 31,
2013
 
     (unaudited)        

ASSETS

    

Investments in real estate:

    

Properties:

    

Land

   $ 688,664      $ 693,791   

Acquired ground leases

     14,868        14,618   

Buildings and improvements

     9,056,305        8,680,677   

Tenant improvements

     500,392        490,492   
  

 

 

   

 

 

 

Total investments in properties

     10,260,229        9,879,578   

Accumulated depreciation and amortization

     (1,778,768     (1,565,996
  

 

 

   

 

 

 

Net investments in properties

     8,481,461        8,313,582   

Investment in unconsolidated joint ventures

     92,619        70,504   
  

 

 

   

 

 

 

Net investments in real estate

     8,574,080        8,384,086   

Cash and cash equivalents

     80,926        56,808   

Accounts and other receivables, net of allowance for doubtful accounts of $6,530 and $5,576 as of June 30, 2014 and December 31, 2013, respectively

     161,495        181,163   

Deferred rent

     436,443        393,504   

Acquired above-market leases, net

     47,181        52,264   

Acquired in-place lease value and deferred leasing costs, net

     470,620        489,456   

Deferred financing costs, net

     36,914        36,475   

Restricted cash

     39,778        40,362   

Other assets

     62,794        51,627   
  

 

 

   

 

 

 

Total assets

   $ 9,910,231      $ 9,685,745   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Global revolving credit facility

   $ 374,641      $ 724,668   

Unsecured term loan

     1,034,830        1,020,984   

Unsecured senior notes, net of discount

     2,897,068        2,364,232   

Exchangeable senior debentures

     —          266,400   

Mortgage loans, net of premiums

     552,696        585,608   

Accounts payable and other accrued liabilities

     636,783        662,687   

Accrued dividends and distributions

     —          102,509   

Acquired below-market leases, net

     118,432        130,269   

Security deposits and prepaid rents

     161,500        181,876   
  

 

 

   

 

 

 

Total liabilities

     5,775,950        6,039,233   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Stockholders’ Equity:

    

Preferred Stock: $0.01 par value per share, 70,000,000 shares authorized:

    

Series E Cumulative Redeemable Preferred Stock, 7.000%, $287,500 and $287,500 liquidation preference, respectively ($25.00 per share), 11,500,000 and 11,500,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     277,172        277,172   

Series F Cumulative Redeemable Preferred Stock, 6.625%, $182,500 and $182,500 liquidation preference, respectively ($25.00 per share), 7,300,000 and 7,300,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     176,191        176,191   

Series G Cumulative Redeemable Preferred Stock, 5.875%, $250,000 and $250,000 liquidation preference, respectively ($25.00 per share), 10,000,000 and 10,000,000 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     241,468        241,468   

Series H Cumulative Redeemable Preferred Stock, 7.375%, $365,000 and $0 liquidation preference, respectively ($25.00 per share), 14,600,000 and 0 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     353,378        —     

Common Stock: $0.01 par value, 215,000,000 shares authorized, 135,370,016 and 128,455,350 shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     1,347        1,279   

Additional paid-in capital

     3,955,830        3,688,937   

Accumulated dividends in excess of earnings

     (928,626     (785,222

Accumulated other comprehensive income, net

     14,962        10,691   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,091,722        3,610,516   
  

 

 

   

 

 

 

Noncontrolling Interests:

    

Noncontrolling interests in operating partnership

     35,632        29,027   

Noncontrolling interests in consolidated joint ventures

     6,927        6,969   
  

 

 

   

 

 

 

Total noncontrolling interests

     42,559        35,996   
  

 

 

   

 

 

 

Total equity

     4,134,281        3,646,512   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 9,910,231      $ 9,685,745   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

(unaudited, in thousands, except share and per share data)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014     2013     2014     2013  

Operating Revenues:

        

Rental

   $ 313,420      $ 285,953      $ 619,206      $ 567,352   

Tenant reimbursements

     85,687        76,681        169,308        152,598   

Fee income

     1,466        728        2,649        1,534   

Other

     873        140        873        388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     401,446        363,502        792,036        721,872   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

        

Rental property operating and maintenance

     126,796        106,706        244,692        212,186   

Property taxes

     20,595        19,374        42,720        40,416   

Insurance

     1,896        2,238        4,318        4,443   

Construction management

     121        294        285        678   

Change in fair value of contingent consideration

     766        (370     (2,637     930   

Depreciation and amortization

     137,092        115,867        267,712        227,490   

General and administrative

     20,321        17,891        50,999        33,842   

Transactions

     755        1,491        836        3,254   

Other

     651        17        651        53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     308,993        263,508        609,576        523,292   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     92,453        99,994        182,460        198,580   

Other Income (Expenses):

        

Equity in earnings of unconsolidated joint ventures

     3,477        2,330        6,058        4,665   

Gain on insurance settlement

     —          5,597        —          5,597   

Gain on sale of property

     15,945        —          15,945        —     

Gain on contribution of property to unconsolidated joint venture

     —          —          1,906        —     

Interest and other income

     (83     (6     1,644        35   

Interest expense

     (49,146     (47,583     (96,520     (95,661

Tax expense

     (1,021     (210     (2,859     (1,413

Loss from early extinguishment of debt

     (293     (501     (585     (501
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     61,332        59,621        108,049        111,302   

Net income attributable to noncontrolling interests

     (993     (1,145     (1,798     (2,115
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Digital Realty Trust, Inc.

     60,339        58,476        106,251        109,187   

Preferred stock dividends

     (18,829     (11,399     (30,555     (19,453
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 41,510      $ 47,077      $ 75,696      $ 89,734   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share available to common stockholders:

        

Basic

   $ 0.31      $ 0.37      $ 0.58      $ 0.70   

Diluted

   $ 0.31      $ 0.37      $ 0.58      $ 0.70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     133,802,622        128,419,745        131,183,857        127,437,970   

Diluted

     133,977,885        128,623,076        131,320,547        127,627,496   

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014     2013     2014     2013  

Net income

   $ 61,332      $ 59,621      $ 108,049      $ 111,302   

Other comprehensive income:

        

Foreign currency translation adjustments

     4,921        308        8,740        (62,755

(Decrease) increase in fair value of interest rate swaps

     (4,739     6,623        (6,082     6,499   

Reclassification to interest expense from interest rate swaps

     854        1,700        1,700        3,441   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     62,368        68,252        112,407        58,487   

Comprehensive income attributable to noncontrolling interests

     (1,014     (1,313     (1,885     (1,119
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Digital Realty Trust, Inc.

   $ 61,354      $ 66,939      $ 110,522      $ 57,368   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(unaudited, in thousands, except share data)

 

    Preferred
Stock
    Number of
Common
Shares
    Common
Stock
    Additional
Paid-in
Capital
    Accumulated
Dividends in
Excess of
Earnings
    Accumulated
Other
Comprehensive
Income, net
    Total
Stockholders’
Equity
    Noncontrolling
Interests in
Operating
Partnership
    Noncontrolling
Interests in
Consolidated
Joint Ventures
    Total
Noncontrolling
Interests
    Total Equity  

Balance as of December 31, 2013

  $ 694,831       128,455,350      $  1,279     $  3,688,937     $ (785,222)      $  10,691     $  3,610,516     $  29,027     $  6,969     $  35,996     $  3,646,512  

Conversion of units to common stock

    —          14,941       —          191       —          —          191       (191     —          (191     —     

Issuance of unvested restricted stock, net of forfeitures

    —          148,653       —          —          —          —          —          —          —          —          —     

Common stock offering costs

    —          —          —          (93     —          —          (93     —          —          —          (93

Exercise of stock options

    —          16,134       —          237       —          —          237       —          —          —          237  

Issuance of common stock in exchange for debentures

    —          6,734,938       68       261,098       —          —          261,166       —          —          —          261,166  

Issuance of series H preferred stock, net of offering costs

    353,378       —          —          —          —          —          353,378       —          —          —          353,378  

Amortization of unearned compensation regarding share-based awards

    —          —          —          15,766       —          —          15,766       —          —          —          15,766  

Reclassification of vested share-based awards

    —          —          —          (10,306     —          —          (10,306     10,306       —          10,306       —     

Dividends declared on preferred stock

    —          —          —          —          (30,555     —          (30,555     —          —          —          (30,555

Dividends and distributions on common stock and common and incentive units

    —          —          —          —          (219,100     —          (219,100     (5,163     —          (5,163     (224,263

Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

    —          —          —          —          —          —          —          —          (274     (274     (274

Net income

    —          —          —          —          106,251       —          106,251       1,566       232       1,798       108,049  

Other comprehensive income—foreign currency translation adjustments

    —          —          —          —          —          8,563       8,563       177       —          177       8,740  

Other comprehensive loss—fair value of interest rate swaps

    —          —          —          —          —          (5,957     (5,957     (125     —          (125     (6,082

Other comprehensive income—reclassification of accumulated other comprehensive loss to interest expense

    —          —          —          —          —          1,665       1,665       35       —          35       1,700  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2014

  $ 1,048,209       135,370,016     $ 1,347     $ 3,955,830     $ (928,626   $ 14,962     $ 4,091,722     $ 35,632     $ 6,927     $ 42,559     $ 4,134,281  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

     Six Months Ended June 30,  
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 108,049      $ 111,302   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Gain on sale of property

     (15,945     —     

Gain on contribution of investment properties to unconsolidated joint venture

     (1,906     —     

Gain on insurance settlement

     —          (5,597

Equity in earnings of unconsolidated joint ventures

     (6,058     (4,665

Change in fair value of accrued contingent consideration

     (2,637     930   

Distributions from unconsolidated joint ventures

     4,603        2,875   

Write-off of net assets due to early lease terminations

     651        (53

Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases

     225,025        189,997   

Amortization of share-based unearned compensation

     12,640        6,468   

Allowance for doubtful accounts

     954        (6

Amortization of deferred financing costs

     4,487        4,902   

Loss on early extinguishment of debt

     585        501   

Amortization of debt discount/premium

     864        340   

Amortization of acquired in-place lease value and deferred leasing costs

     42,687        37,494   

Amortization of acquired above-market leases and acquired below-market leases

     (5,340     (6,085

Changes in assets and liabilities:

    

Restricted cash

     1,922        5,138   

Accounts and other receivables

     20,583        4,183   

Deferred rent

     (41,283     (41,141

Deferred leasing costs

     (7,663     (9,014

Other assets

     (13,328     (10,065

Accounts payable and other accrued liabilities

     3,718        (10,614

Security deposits and prepaid rents

     (17,344     (1,383
  

 

 

   

 

 

 

Net cash provided by operating activities

     315,264        275,507   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of real estate

     —          (117,289

Proceeds from sale of property, net

     37,945        —     

Proceeds from contribution of investment properties to unconsolidated joint venture

     11,408        —     

Investment in unconsolidated joint ventures

     (20,627     (5,654

Investment in equity securities

     (3     (17,100

Deposits paid for acquisitions of real estate

     —          (2,250

Receipt of value added tax refund

     4,956        4,740   

Refundable value added tax paid

     (3,816     (5,002

Change in restricted cash

     (1,340     (862

Improvements to and advances for investments in real estate

     (431,217     (577,075

Improvement advances to tenants

     (7,091     (1,758

Collection of advances from tenants for improvements

     5,969        1,377   

Proceeds from insurance settlement

     —          8,625   
  

 

 

   

 

 

 

Net cash used in investing activities

     (403,816     (712,248
  

 

 

   

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

9


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)

 

     Six Months Ended June 30,  
     2014     2013  

Cash flows from financing activities:

    

Borrowings on revolving credit facility

   $ 677,264      $ 845,592   

Repayments on revolving credit facility

     (1,033,838     (932,225

Borrowings on 4.250% unsecured senior notes due 2025

     —          630,026   

Borrowings on 4.750% unsecured senior notes due 2023

     495,872        —     

Principal payments on mortgage loans

     (6,349     (46,700

Principal repayments on exchangeable senior debentures

     (5,234     —     

Earnout payment related to the acquisition of the Sentrum Portfolio

     (5,706     (10,009

Change in restricted cash

     51        406   

Payment of loan fees and costs

     (5,311     (6,720

Capital (distributions paid to) contributions received from noncontrolling interests in consolidated joint ventures, net

     (274     925   

Gross proceeds from the issuance of preferred stock

     365,000        250,000   

Common stock offering costs paid

     (93     (290

Preferred stock offering costs paid

     (11,622     (8,435

Proceeds from exercise of stock options

     237        50   

Payment of dividends to preferred stockholders

     (30,555     (19,453

Payment of dividends to common stockholders and distributions to noncontrolling interests in operating partnership

     (326,772     (298,447
  

 

 

   

 

 

 

Net cash provided by financing activities

     112,670        404,720   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     24,118        (32,021

Cash and cash equivalents at beginning of period

     56,808        56,281   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 80,926      $ 24,260   
  

 

 

   

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

10


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)

 

     Six Months Ended June 30,  
     2014     2013  

Supplemental disclosure of cash flow information:

    

Cash paid for interest, including amounts capitalized

   $ 98,240      $ 91,726   

Cash paid for income taxes

     2,800        1,649   

Supplementary disclosure of noncash investing and financing activities:

    

Change in net assets related to foreign currency translation adjustments

   $ 8,740      $ (62,755

(Decrease) increase in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps

     (6,082     6,499   

Noncontrolling interests in operating partnership redeemed for or converted to shares of common stock

     191        284   

Preferred stock converted to shares of common stock

     —          119,348   

Accrual for additions to investments in real estate and tenant improvement advances included in accounts payable and accrued expenses

     191,148        237,933   

Additional accrual of contingent purchase price for investments in real estate

     —          5,840   

Issuance of common units associated with exchange of exchangeable senior debentures

     261,166        —     

Allocation of purchase price of real estate/investment in partnership to:

    

Investments in real estate

     —          105,521   

Acquired above-market leases

     —          203   

Acquired below-market leases

     —          (4,136

Acquired in-place lease value and deferred leasing costs

     —          15,701   
  

 

 

   

 

 

 

Cash paid for acquisition of real estate

   $  —        $ 117,289   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except unit and per unit data)

 

     June 30,
2014
    December 31,
2013
 
     (unaudited)        

ASSETS

    

Investments in real estate:

    

Properties:

    

Land

   $ 688,664      $ 693,791   

Acquired ground leases

     14,868        14,618   

Buildings and improvements

     9,056,305        8,680,677   

Tenant improvements

     500,392        490,492   
  

 

 

   

 

 

 

Total investments in properties

     10,260,229        9,879,578   

Accumulated depreciation and amortization

     (1,778,768     (1,565,996
  

 

 

   

 

 

 

Net investments in properties

     8,481,461        8,313,582   

Investment in unconsolidated joint ventures

     92,619        70,504   
  

 

 

   

 

 

 

Net investments in real estate

     8,574,080        8,384,086   

Cash and cash equivalents

     80,926        56,808   

Accounts and other receivables, net of allowance for doubtful accounts of $6,530 and $5,576 as of June 30, 2014 and December 31, 2013, respectively

     161,495        181,163   

Deferred rent

     436,443        393,504   

Acquired above-market leases, net

     47,181        52,264   

Acquired in-place lease value and deferred leasing costs, net

     470,620        489,456   

Deferred financing costs, net

     36,914        36,475   

Restricted cash

     39,778        40,362   

Other assets

     62,794        51,627   
  

 

 

   

 

 

 

Total assets

   $ 9,910,231      $ 9,685,745   
  

 

 

   

 

 

 

LIABILITIES AND CAPITAL

    

Global revolving credit facility

   $ 374,641      $ 724,668   

Unsecured term loan

     1,034,830        1,020,984   

Unsecured senior notes, net of discount

     2,897,068        2,364,232   

Exchangeable senior debentures

     —          266,400   

Mortgage loans, net of premiums

     552,696        585,608   

Accounts payable and other accrued liabilities

     636,783        662,687   

Accrued dividends and distributions

     —          102,509   

Acquired below-market leases, net

     118,432        130,269   

Security deposits and prepaid rents

     161,500        181,876   
  

 

 

   

 

 

 

Total liabilities

     5,775,950        6,039,233   

Commitments and contingencies

    

Capital:

    

Partners’ capital:

    

General Partner:

    

Series E Cumulative Redeemable Preferred Units, 7.000%, $287,500 and $287,500 liquidation preference, respectively ($25.00 per unit), 11,500,000 and 11,500,000 units issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     277,172        277,172   

Series F Cumulative Redeemable Preferred Units, 6.625%, $182,500 and $182,500 liquidation preference, respectively ($25.00 per unit), 7,300,000 and 7,300,000 units issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     176,191        176,191   

Series G Cumulative Redeemable Preferred Units, 5.875%, $250,000 and $250,000 liquidation preference, respectively ($25.00 per unit), 10,000,000 and 10,000,000 units issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     241,468        241,468   

Series H Cumulative Redeemable Preferred Units, 7.375%, $365,000 and $0 liquidation preference, respectively ($25.00 per unit), 14,600,000 and 0 units issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     353,378        —     

Common units:

     —          —     

135,370,016 and 128,455,350 units issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

     3,028,551        2,904,994   

Limited partners, 1,481,814 and 1,491,814 common units, 1,249,197 and 1,077,838 profits interest units and 397,369 and 397,369 class C units outstanding as of June 30, 2014 and December 31, 2013, respectively

     37,779        31,261   

Accumulated other comprehensive income

     12,815        8,457   
  

 

 

   

 

 

 

Total partners’ capital

     4,127,354        3,639,543   

Noncontrolling interests in consolidated joint ventures

     6,927        6,969   
  

 

 

   

 

 

 

Total capital

     4,134,281        3,646,512   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 9,910,231      $ 9,685,745   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

(unaudited, in thousands, except unit and per unit data)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014     2013     2014     2013  

Operating Revenues:

        

Rental

   $ 313,420      $ 285,953      $ 619,206      $ 567,352   

Tenant reimbursements

     85,687        76,681        169,308        152,598   

Fee income

     1,466        728        2,649        1,534   

Other

     873        140        873        388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     401,446        363,502        792,036        721,872   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

        

Rental property operating and maintenance

     126,796        106,706        244,692        212,186   

Property taxes

     20,595        19,374        42,720        40,416   

Insurance

     1,896        2,238        4,318        4,443   

Construction management

     121        294        285        678   

Change in fair value of contingent consideration

     766        (370     (2,637     930   

Depreciation and amortization

     137,092        115,867        267,712        227,490   

General and administrative

     20,321        17,891        50,999        33,842   

Transactions

     755        1,491        836        3,254   

Other

     651        17        651        53   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     308,993        263,508        609,576        523,292   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     92,453        99,994        182,460        198,580   

Other Income (Expenses):

        

Equity in earnings of unconsolidated joint ventures

     3,477        2,330        6,058        4,665   

Gain on insurance settlement

     —          5,597        —          5,597   

Gain on sale of property

     15,945        —          15,945        —     

Gain on contribution of properties to unconsolidated joint venture

     —          —          1,906        —     

Interest and other income

     (83     (6     1,644        35   

Interest expense

     (49,146     (47,583     (96,520     (95,661

Tax expense

     (1,021     (210     (2,859     (1,413

Loss from early extinguishment of debt

     (293     (501     (585     (501
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     61,332        59,621        108,049        111,302   

Net income attributable to noncontrolling interests in consolidated joint ventures

     (120     (209     (232     (355
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Digital Realty Trust, L.P.

     61,212        59,412        107,817        110,947   

Preferred units distributions

     (18,829     (11,399     (30,555     (19,453
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common unitholders

   $ 42,383      $ 48,013      $ 77,262      $ 91,494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per unit available to common unitholders:

        

Basic

   $ 0.31      $ 0.37      $ 0.58      $ 0.70   

Diluted

   $ 0.31      $ 0.37      $ 0.58      $ 0.70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common units outstanding:

        

Basic

     136,615,338        130,973,952        133,894,119        129,936,759   

Diluted

     136,790,601        131,177,283        134,030,809        130,126,285   

See accompanying notes to the condensed consolidated financial statements.

 

13


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2014     2013      2014     2013  

Net income

   $ 61,332      $ 59,621       $ 108,049      $ 111,302   

Other comprehensive income:

         

Foreign currency translation adjustments

     4,921        308         8,740        (62,755

(Decrease) increase in fair value of interest rate swaps

     (4,739     6,623         (6,082     6,499   

Reclassification to interest expense from interest rate swaps

     854        1,700         1,700        3,441   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 62,368      $ 68,252       $ 112,407      $ 58,487   
  

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

14


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CAPITAL

(unaudited, in thousands, except unit data)

 

    General Partner     Limited Partners    

Accumulated

Other

   

Noncontrolling

Interests in

       
    Preferred Units     Common Units     Common Units     Comprehensive     Consolidated Joint        
    Units     Amount     Units     Amount     Units     Amount     Income     Ventures     Total Capital  

Balance as of December 31, 2013

    28,800,000      $ 694,831        128,455,350      $ 2,904,994       2,967,021      $  31,261     $ 8,457     $  6,969     $  3,646,512  

Conversion of limited partner common units to general partner common units

    —          —          14,941        191       (14,941     (191     —          —          —     

Issuance of unvested restricted common units, net of forfeitures

    —          —          148,653        —          —          —          —          —          —     

Common unit offering costs

    —          —          —          (93     —          —          —          —          (93

Issuance of common units in connection with the exercise of stock options

    —          —          16,134        237       —          —          —          —          237  

Issuance of common units, net of forfeitures

    —          —          —          —          176,300       —          —          —          —     

Issuance of common units in connection with the exchange for debentures

    —          —          6,734,938       261,166       —          —          —          —          261,166  

Net proceeds from issuance of series H preferred units

    14,600,000       353,378       —          —          —          —          —          —          353,378  

Amortization of unearned compensation regarding share-based awards

    —          —          —          15,766       —          —          —          —          15,766  

Reclassification of vested share-based awards

    —          —          —          (10,306     —          10,306       —          —          —     

Distributions

    —          (30,555     —          (219,100     —          (5,163     —          —          (254,818

Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

    —          —          —          —          —          —          —          (274     (274

Net income

    —          30,555       —          75,696       —          1,566       —          232       108,049  

Other comprehensive income—foreign currency translation adjustments

    —          —          —          —          —          —          8,740       —          8,740  

Other comprehensive loss—fair value of interest rate swaps

    —          —          —          —          —          —          (6,082     —          (6,082

Other comprehensive income—reclassification of accumulated other comprehensive loss to interest expense

    —          —          —          —          —          —          1,700       —          1,700  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2014

    43,400,000      $ 1,048,209        135,370,016      $ 3,028,551        3,128,380     $ 37,779     $ 12,815     $ 6,927     $ 4,134,281  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

15


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

     Six Months Ended June 30,  
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 108,049     $ 111,302  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Gain on sale of property

     (15,945     —     

Gain on contribution of investment properties to unconsolidated joint venture

     (1,906     —     

Gain on insurance settlement

     —          (5,597

Equity in earnings of unconsolidated joint ventures

     (6,058     (4,665

Change in fair value of accrued contingent consideration

     (2,637     930  

Distributions from unconsolidated joint ventures

     4,603       2,875  

Write-off of net assets due to early lease terminations

     651       (53

Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases

     225,025       189,997  

Amortization of share-based unearned compensation

     12,640       6,468  

Allowance for doubtful accounts

     954       (6

Amortization of deferred financing costs

     4,487       4,902  

Loss on early extinguishment of debt

     585       501  

Amortization of debt discount/premium

     864       340  

Amortization of acquired in-place lease value and deferred leasing costs

     42,687       37,494  

Amortization of acquired above-market leases and acquired below-market leases

     (5,340     (6,085

Changes in assets and liabilities:

    

Restricted cash

     1,922       5,138  

Accounts and other receivables

     20,583       4,183  

Deferred rent

     (41,283     (41,141

Deferred leasing costs

     (7,663     (9,014

Other assets

     (13,328     (10,065

Accounts payable and other accrued liabilities

     3,718       (10,614

Security deposits and prepaid rents

     (17,344     (1,383
  

 

 

   

 

 

 

Net cash provided by operating activities

     315,264       275,507  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of real estate

     —          (117,289

Proceeds from sale of property, net

     37,945       —     

Proceeds from contribution of investment properties to unconsolidated joint venture

     11,408       —     

Investment in unconsolidated joint ventures

     (20,627     (5,654

Investment in equity securities

     (3     (17,100

Deposits paid for acquisitions of real estate

     —          (2,250

Receipt of value added tax refund

     4,956       4,740  

Refundable value added tax paid

     (3,816     (5,002

Change in restricted cash

     (1,340     (862

Improvements to and advances for investments in real estate

     (431,217     (577,075

Improvement advances to tenants

     (7,091     (1,758

Collection of advances from tenants for improvements

     5,969       1,377  

Proceeds from insurance settlement

     —          8,625  
  

 

 

   

 

 

 

Net cash used in investing activities

     (403,816     (712,248
  

 

 

   

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)

 

     Six Months Ended June 30,  
     2014     2013  

Cash flows from financing activities:

    

Borrowings on revolving credit facility

   $ 677,264     $ 845,592  

Repayments on revolving credit facility

     (1,033,838     (932,225

Borrowings on 4.250% unsecured senior notes due 2025

     —          630,026  

Borrowings on 4.750% unsecured senior notes due 2023

     495,872       —     

Principal payments on mortgage loans

     (6,349     (46,700

Principal repayments on exchangeable senior debentures

     (5,234     —     

Earnout payment related to the acquisition of the Sentrum Portfolio

     (5,706     (10,009

Change in restricted cash

     51       406  

Payment of loan fees and costs

     (5,311     (6,720

Capital (distributions paid to) contributions received from noncontrolling interests in consolidated joint ventures, net

     (274     925  

General partner contributions

     353,522       241,325  

Payment of distributions to preferred unitholders

     (30,555     (19,453

Payment of distributions to common unitholders

     (326,772     (298,447
  

 

 

   

 

 

 

Net cash provided by financing activities

     112,670       404,720  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     24,118       (32,021

Cash and cash equivalents at beginning of period

     56,808       56,281  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 80,926     $ 24,260  
  

 

 

   

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)

 

     Six Months Ended June 30,  
     2014     2013  

Supplemental disclosure of cash flow information:

    

Cash paid for interest, including amounts capitalized

   $ 98,240     $ 91,726  

Cash paid for income taxes

     2,800        1,649   

Supplementary disclosure of noncash investing and financing activities:

    

Change in net assets related to foreign currency translation adjustments

     8,740       (62,755

Decrease (increase) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps

     (6,082     6,499  

Preferred units converted to common units

     —          119,348  

Accrual for additions to investments in real estate and tenant improvement advances included in accounts payable and accrued expenses

     191,148       237,933  

Additional accrual of contingent purchase price for investments in real estate

     —          5,840  

Issuance of common units associated with exchange of exchangeable senior debentures

     261,166       —     

Allocation of purchase price of real estate/investment in partnership to:

    

Investments in real estate

     —          105,521  

Acquired above-market leases

     —          203  

Acquired below-market leases

     —          (4,136

Acquired in-place lease value and deferred leasing costs

     —          15,701  
  

 

 

   

 

 

 

Cash paid for acquisition of real estate

   $  —       $ 117,289  
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2014 and 2013

1. Organization and Description of Business

Digital Realty Trust, Inc. through its controlling interest in Digital Realty Trust, L.P. (the Operating Partnership) and the subsidiaries of the Operating Partnership (collectively, we, our, us or the Company) is engaged in the business of owning, acquiring, developing and managing technology-related real estate. The Company is focused on providing customer driven datacenter solutions for domestic and international tenants across a variety of industry verticals ranging from financial services, cloud and information technology services, to manufacturing, energy, health care and consumer products. As of June 30, 2014, our portfolio consisted of 130 properties, including 13 properties held as investments in unconsolidated joint ventures and developable land, of which 104 are located throughout North America, 21 are located in Europe, three are located in Australia and two are located in Asia. We are diversified in major markets where corporate datacenter and technology tenants are concentrated, including the Boston, Chicago, Dallas, Los Angeles, New York Metro, Northern Virginia, Phoenix, San Francisco and Silicon Valley metropolitan areas in the United States, Amsterdam, Dublin, London and Paris markets in Europe and Singapore, Sydney, Melbourne, Hong Kong and Osaka markets in the Asia Pacific region. The portfolio consists of Internet gateway and corporate datacenter properties, technology manufacturing properties and regional or national headquarters of technology companies.

The Operating Partnership was formed on July 21, 2004 in anticipation of Digital Realty Trust, Inc.’s initial public offering (IPO) on November 3, 2004 and commenced operations on that date. As of June 30, 2014, Digital Realty Trust, Inc. owns a 97.7% common interest and a 100% preferred interest in the Operating Partnership. As sole general partner of the Operating Partnership, Digital Realty Trust, Inc. has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control. The limited partners of the Operating Partnership do not have rights to replace Digital Realty Trust, Inc. as the general partner nor do they have participating rights, although they do have certain protective rights.

2. Summary of Significant Accounting Policies

(a) Principles of Consolidation and Basis of Presentation

The accompanying interim condensed consolidated financial statements include all of the accounts of Digital Realty Trust, Inc., the Operating Partnership and the subsidiaries of the Operating Partnership. Intercompany balances and transactions have been eliminated.

The accompanying interim condensed consolidated financial statements are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and in compliance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. All such adjustments are considered to be of a normal recurring nature, except as otherwise indicated. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K, as amended, for the year ended December 31, 2013.

The notes to the condensed consolidated financial statements of Digital Realty Trust, Inc. and the Operating Partnership have been combined to provide the following benefits:

 

   

enhancing investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

 

   

eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and

 

   

creating time and cost efficiencies through the preparation of one set of notes instead of two separate sets of notes.

There are a few differences between the Company and the Operating Partnership, which are reflected in these condensed consolidated financial statements. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how we operate as an interrelated consolidated company. Digital Realty Trust, Inc.’s only material asset is its ownership of partnership interests of the Operating Partnership. As a result, Digital Realty Trust, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain unsecured debt of the Operating Partnership and certain of its subsidiaries. Digital Realty Trust, Inc. itself does not hold any indebtedness but guarantees the unsecured debt of the Operating Partnership and certain of its subsidiaries, as disclosed in these notes.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

The Operating Partnership holds substantially all the assets of the Company and holds the ownership interests in the Company’s joint ventures. The Operating Partnership conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity issuances by Digital Realty Trust, Inc., which are generally contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.

The presentation of noncontrolling interests in operating partnership, stockholders’ equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of Digital Realty Trust, Inc. and those of the Operating Partnership. The common limited partnership interests held by the limited partners in the Operating Partnership are presented as limited partners’ capital within partners’ capital in the Operating Partnership’s condensed consolidated financial statements and as noncontrolling interests in operating partnership within equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The common and preferred partnership interests held by Digital Realty Trust, Inc. in the Operating Partnership are presented as general partner’s capital within partners’ capital in the Operating Partnership’s condensed consolidated financial statements and as preferred stock, common stock, additional paid-in capital and accumulated dividends in excess of earnings within stockholders’ equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity issued at the Digital Realty Trust, Inc. and the Operating Partnership levels.

To help investors understand the significant differences between the Company and the Operating Partnership, these consolidated financial statements present the following separate sections for each of the Company and the Operating Partnership:

 

   

condensed consolidated face financial statements; and

 

   

the following notes to the condensed consolidated financial statements:

 

   

Debt of the Company and Debt of the Operating Partnership;

 

   

Income per Share and Income per Unit; and

 

   

Equity and Accumulated Other Comprehensive Income, Net of the Company and Capital and Accumulated Other Comprehensive Income of the Operating Partnership.

In the sections that combine disclosure of Digital Realty Trust, Inc. and the Operating Partnership, these notes refer to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Company operates the business through the Operating Partnership.

(b) Cash Equivalents

For the purpose of the condensed consolidated statements of cash flows, we consider short-term investments with original maturities of 90 days or less to be cash equivalents. As of June 30, 2014, cash equivalents consist of investments in money market instruments.

(c) Investment in Unconsolidated Joint Ventures

The Company’s investment in unconsolidated joint ventures is accounted for using the equity method, whereby the investment is increased for capital contributed and our share of the joint ventures’ net income and decreased by distributions we receive and our share of any losses of the joint ventures.

We amortize the difference between the cost of our investments in unconsolidated joint ventures and the book value of the underlying equity into equity in earnings from unconsolidated affiliates on a straight-line basis consistent with the lives of the underlying assets.

(d) Capitalization of Costs

Direct and indirect project costs that are clearly associated with the development of properties are capitalized as incurred. Project costs include all costs directly associated with the development of a property, including construction costs, interest, property taxes, insurance, legal fees and costs of personnel working on the project. Indirect costs that do not clearly relate to the projects under development are not capitalized and are charged to expense as incurred.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

Capitalization of costs begins when the activities necessary to get the development project ready for its intended use begins, which include costs incurred before the beginning of construction. Capitalization of costs ceases when the development project is substantially complete and ready for its intended use. Determining when a development project commences, and when it is substantially complete and ready for its intended use involves a degree of judgment. We generally consider a development project to be substantially complete and ready for its intended use upon receipt of a certificate of occupancy. If and when development of a property is suspended pursuant to a formal change in the planned use of the property, we will evaluate whether the accumulated costs exceed the estimated value of the project and write off the amount of any such excess accumulated costs. For a development project that is suspended for reasons other than a formal change in the planned use of such property, the accumulated project costs are evaluated for impairment consistent with our impairment policies for long-lived assets. Capitalized costs are allocated to the specific components of a project that are benefited.

During the three months ended June 30, 2014 and 2013, we capitalized interest of approximately $4.9 million and $6.6 million, respectively, and $10.2 million and $12.0 million during the six months ended June 30, 2014 and 2013, respectively. During the three months ended June 30, 2014 and 2013, we capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $12.5 million and $9.6 million, respectively, and $24.9 million and $19.7 million during the six months ended June 30, 2014 and 2013, respectively. Cash flows from capitalized leasing costs of $21.8 million and $21.0 million are included in improvements to and advances for investments in real estate in cash flows from investing activities in the condensed consolidated statements of cash flows for the six months ended June 30, 2014 and 2013, respectively.

(e) Share-Based Compensation

The Company measures all share-based compensation awards at fair value on the date they are granted to employees and directors, and recognizes compensation cost, net of forfeitures, over the requisite service period for awards with only a service condition. The estimated fair value of the long-term incentive units and Class D Units (discussed in note 13) granted by us is being amortized on a straight-line basis over the expected service period.

The fair value of share-based compensation awards that contain a market condition is measured using a lattice model and not adjusted based on actual achievement of the performance goals.

(f) Income Taxes

Digital Realty Trust, Inc. has elected to be treated as a real estate investment trust (a “REIT”) for federal income tax purposes. As a REIT, Digital Realty Trust, Inc. generally is not required to pay federal corporate income tax to the extent taxable income is currently distributed to its stockholders. If Digital Realty Trust, Inc. fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.

The Company is subject to foreign, state and local income taxes in the jurisdictions in which it conducts business. The Company’s U.S. consolidated taxable REIT subsidiary is subject to both federal and state income taxes to the extent there is taxable income. Accordingly, the Company recognizes current and deferred income taxes for its taxable REIT subsidiaries, certain states and non-U.S. jurisdictions, as appropriate.

We assess our significant tax positions in accordance with U.S. GAAP for all open tax years and determine whether we have any material unrecognized liabilities from uncertain tax benefits. If a tax position is not considered “more-likely-than-not” to be sustained solely on its technical merits, no benefits of the tax position are to be recognized (for financial statement purposes). As of June 30, 2014 and December 31, 2013, we have no assets or liabilities for uncertain tax positions. We classify interest and penalties from significant uncertain tax positions as interest expense and operating expense, respectively, in our condensed consolidated income statements. For the three and six months ended June 30, 2014 and 2013, we had no such interest or penalties. The tax year 2010 and thereafter remain open to examination by the major taxing jurisdictions with which the Company files tax returns.

See Note 10 for further discussion on income taxes.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

(g) Presentation of Transactional-based Taxes

We account for transactional-based taxes, such as value added tax, or VAT, for our international properties on a net basis.

(h) Fee Income

Occasionally, customers engage the company for certain services. The nature of these services historically involves property management, construction management, and assistance with financing. The proper revenue recognition of these services can be different, depending on whether the arrangements are service revenue or contractor type revenue.

Service revenues are typically recognized on an equal monthly basis based on the minimum fee to be earned. The monthly amounts could be adjusted depending on if certain performance milestones are met.

Fee income also includes management fees. These fees arise from contractual agreements with entities in which we have a noncontrolling interest. The management fees are recognized as earned under the respective agreements. Management and other fee income related to partially owned entities are recognized to the extent attributable to the unaffiliated interest.

Contractor type revenue for long-term contracts is recognized under the percentage-of-completion method of accounting. Revenues are determined by measuring the percentage of total costs incurred to date to estimated total costs for each construction management contract based on current estimates of costs to complete. Contract costs include all labor and benefits, materials, subcontracts, and an allocation of indirect costs related to contract performance. Indirect costs are allocated to projects based upon labor hours charged. Third party costs are included in construction management expense and their reimbursements are included in construction management revenue to the extent that the Company is the primary obligor for the third party costs. Otherwise, construction management revenue and expense is reflected net of third party costs. As long-term design-build projects extend over one or more years, revisions in cost and estimated earnings during the course of the work are reflected in the accounting period in which the facts which require the revision become known. At the time a loss on a design-build project becomes known, the entire amount of the estimated loss is recognized in the condensed consolidated financial statements. Change orders are recognized when they are approved by the client.

Costs and estimated earnings in excess of billings on uncompleted construction management projects are included in other assets in the condensed consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted construction management projects are included in accounts payable and other accrued liabilities in the condensed consolidated balance sheets. Customers are billed on a monthly basis at the end of each month, which can be in advance of work performed.

(i) Assets and Liabilities Measured at Fair Value

Fair value under U.S. GAAP is a market-based measurement, not an entity-specific measurement. Therefore, our fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair-value measurements, we use a fair-value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair-value measurement is based on inputs from different levels of the fair-value hierarchy, the lowest level input that is significant would be used to determine the fair-value measurement in its entirety. Our assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

(j) Transactions Expense

Transactions expense includes acquisition-related expenses and other business development expenses, which are expensed as incurred. Acquisition-related expenses include closing costs, broker commissions and other professional fees, including legal and accounting fees related to acquisitions and significant transactions.

(k) Management’s Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates made. On an on-going basis, we evaluate our estimates, including those related to the valuation of our real estate properties, contingent consideration, accounts receivable and deferred rent receivable, performance-based equity compensation plans, the completeness of accrued liabilities and Digital Realty Trust, Inc.’s qualification as a REIT. We base our estimates on historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could vary under different assumptions or conditions.

(l) Segment and Geographic Information

All of our properties generate similar revenues and expenses related to tenant rent and reimbursements and operating expenses. The delivery of our products is consistent across all properties and although services are provided to a wide range of customers, the types of real estate services provided to them are standardized throughout the portfolio. As such, the properties in our portfolio have similar economic characteristics and the nature of the products and services provided to our customers and the method to distribute such services are consistent throughout the portfolio. Consequently, our properties qualify for aggregation into one reporting segment.

Operating revenues from properties in the United States were $305.5 million and $276.9 million and outside the United States were $95.9 million and $86.6 million for the three months ended June 30, 2014 and 2013, respectively. Operating revenues from properties in the United States were $600.7 million and $550.9 million and outside the United States were $191.3 million and $171.0 million for the six months ended June 30, 2014 and 2013, respectively. We had long-lived assets located in the United States of $5.7 billion and $5.6 billion and outside the United States of $2.8 billion and $2.7 billion as of June 30, 2014 and December 31, 2013, respectively.

Operating revenues from properties located in the United Kingdom were $54.5 million and $48.6 million, or 13.6% and 13.4% of total operating revenues, for the three months ended June 30, 2014 and 2013, respectively. Operating revenues from properties located in the United Kingdom were $109.4 million and $95.9 million, or 13.8% and 13.3% of total operating revenues, for the six months ended June 30, 2014 and 2013, respectively. No other foreign country comprised more than 10% of total operating revenues for each of these periods. We had long-lived assets located in the United Kingdom of $1.8 billion and $1.8 billion, or 21.2% and 21.1% of total long-lived assets, as of June 30, 2014 and December 31, 2013, respectively. No other foreign country comprised more than 10% of total long-lived assets as of June 30, 2014 and December 31, 2013.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

(m) Reclassifications

Certain reclassifications to prior year amounts have been made to conform to the current year presentation. During the three and six months ended June 30, 2013, ($0.4) million and $0.9 million were reclassified from rental property operating and maintenance expense to change in fair value of contingent consideration, respectively.

(n) Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the requirements for reporting discontinued operations. Under ASU 2014-08, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the component or group of components meets the criteria to be classified as held for sale or when the component or group of components is disposed of by sale or other than by sale. In addition, this ASU requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. As permitted by the standard, the Company has elected to early adopt the provisions of ASU 2014-08 as of January 1, 2014 and is applying the provisions prospectively.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, a comprehensive new revenue recognition standard that supersedes most all existing revenue recognition guidance. This standard’s core principle is that a company will recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. However, leasing contracts, representing the major source of the Company’s revenues, are not within the scope of the new standard and will continue to be accounted for under existing standards. This new standard is effective for the Company for annual and interim periods beginning on January 1, 2017 with early adoption prohibited. The Company has not yet determined the effects on the condensed consolidated financial statements and related notes resulting from the adoption of this new standard.

3. Investments in Real Estate

We acquired no real estate properties during the six months ended June 30, 2014.

On April 7, 2014, the Operating Partnership sold 6 Braham Street to the tenant pursuant to a sale of the ownership interests in the Operating Partnership’s wholly owned subsidiary that owned the building for £25.0 million (or approximately $41.5 million based on the exchange rate as of April 7, 2014). The transaction after costs and various tenant prepayments resulted in net proceeds of approximately £22.6 million (or approximately $37.5 million based on the exchange rate as of April 7, 2014) and a net gain of approximately $15.9 million. The transaction includes substantially all of the assets of 6 Braham Street and we expect no further cash flows following the sale date.

The property was identified as held for sale in March 2014. 6 Braham Street was not a significant component of our United Kingdom portfolio nor does the sale of 6 Braham represent a significant shift in our strategy.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

4. Investment in Unconsolidated Joint Ventures

As of June 30, 2014, our investment in unconsolidated joint ventures consists of effective 50% interests in joint ventures that own a data center property at 2001 Sixth Avenue in Seattle, Washington, a data center property at 2020 Fifth Avenue in Seattle, Washington and a data center property at 33 Chun Choi Street in Hong Kong, and a 20% interest in a joint venture, which owns ten data center properties, with an investment fund managed by Prudential Real Estate Investors (PREI®). The following tables present summarized financial information for the joint ventures as of June 30, 2014 and December 31, 2013 and for the six months ended June 30, 2014 and 2013 (in thousands):

 

     As of June 30, 2014      Six Months Ended June 30, 2014  

2014

   Net Investment
in Properties
     Total Assets      Debt      Total
Liabilities
     Equity      Revenues      Property
Operating
Expense
    Net
Operating
Income
     Net Income  

Total Unconsolidated Joint Ventures

   $  632,896      $ 751,515      $ 360,240      $ 462,084      $ 289,431      $ 46,188      $ (10,940   $ 35,248      $ 14,896  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Our investment in and share of equity in earnings of unconsolidated joint ventures

               $ 92,619              $ 6,058  
              

 

 

            

 

 

 
     As of December 31, 2013      Six Months Ended June 30, 2013  

2013

   Net Investment
in Properties
     Total Assets      Debt      Total
Liabilities
     Equity      Revenues      Property
Operating
Expense
    Net
Operating
Income
     Net Income  

Total Unconsolidated Joint Ventures

   $  584,837      $ 676,015      $ 337,953      $ 444,062      $ 231,953      $ 22,440      $ (6,107   $ 16,333      $ 9,357  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Our investment in and share of equity in earnings of unconsolidated joint ventures

               $ 70,504              $ 4,665  
              

 

 

            

 

 

 

PREI ® Joint Venture

On March 5, 2014, we contributed the 636 Pierce Street property, which we acquired in December 2013, to our unconsolidated joint venture with the PREI® fund that was formed in September 2013. The property was valued at approximately $40.4 million and subject to $26.1 million in debt, which the joint venture assumed. The PREI® fund contributed approximately $11.4 million in cash for their 80% share of the net asset value of $14.3 million. Subsequent to the closing, the joint venture refinanced the existing debt with $23.0 million drawn from the joint venture’s bank facility. Including the refinance costs, the PREI® fund contributed $17.5 million for the 636 Pierce Street property, bringing their contributed capital in the joint venture to $164.8 million.

The transaction produced a $1.9 million gain for the Company representing the difference between the $11.4 million of cash proceeds received by the Company for their 80% share of the net asset less the Company’s book value.

Differences between the Company’s investment in the joint venture and the amount of the underlying equity in net assets of the joint venture are due to basis differences resulting from the Company’s equity investment recorded at its historical basis versus the fair value of the Company’s contributed interest in the joint venture. Our proportionate share of the earnings or losses related to this unconsolidated joint venture is reflected as equity in earnings of unconsolidated joint ventures on the accompanying consolidated income statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

5. Acquired Intangible Assets and Liabilities

The following summarizes our acquired intangible assets (acquired in-place lease value and acquired above-market lease value) and intangible liabilities (acquired below-market lease value) as of June 30, 2014 and December 31, 2013.

 

     Balance as of  

(Amounts in thousands)

   June 30,
2014
    December 31,
2013
 

Acquired in-place lease value:

    

Gross amount

   $ 718,319      $ 725,458   

Accumulated amortization

     (450,935     (423,549
  

 

 

   

 

 

 

Net

   $ 267,384      $ 301,909   
  

 

 

   

 

 

 

Acquired above-market leases:

    

Gross amount

   $ 131,792      $ 132,750   

Accumulated amortization

     (84,611     (80,486
  

 

 

   

 

 

 

Net

   $ 47,181      $ 52,264   
  

 

 

   

 

 

 

Acquired below-market leases:

    

Gross amount

   $ 289,475      $ 291,638   

Accumulated amortization

     (171,043     (161,369
  

 

 

   

 

 

 

Net

   $ 118,432      $ 130,269   
  

 

 

   

 

 

 

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental revenues of $2.6 million and $3.0 million for the three months ended June 30, 2014 and 2013, respectively, and $5.3 million and $6.1 million for the six months ended June 30, 2014 and 2013, respectively. The expected average remaining lives for acquired below-market leases and acquired above-market leases is 6.4 years and 4.2 years, respectively, as of June 30, 2014. Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years and thereafter, commencing July 1, 2014 is as follows:

 

(Amounts in thousands)

      

Remainder of 2014

   $ 4,635   

2015

     9,002   

2016

     7,484   

2017

     5,968   

2018

     4,348   

Thereafter

     39,814   
  

 

 

 

Total

   $ 71,251   
  

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

Amortization of acquired in-place lease value (a component of depreciation and amortization expense) was $18.4 million and $15.4 million for the three months ended June 30, 2014 and 2013, respectively, and $33.4 million and $30.3 million for the six months ended June 30, 2014 and 2013, respectively. The expected average amortization period for acquired in-place lease value is 6.3 years as of June 30, 2014. The weighted average remaining contractual life for acquired leases excluding renewals or extensions is 4.8 years as of June 30, 2014. Estimated annual amortization of acquired in-place lease value for each of the five succeeding years and thereafter, commencing July 1, 2014 is as follows:

 

(Amounts in thousands)

      

Remainder of 2014

   $ 21,771   

2015

     44,416   

2016

     41,471   

2017

     28,650   

2018

     26,253   

Thereafter

     104,823   
  

 

 

 

Total

   $ 267,384   
  

 

 

 

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

6. Debt of the Company

In this Note 6, the “Company” refers only to Digital Realty Trust, Inc. and not to any of its subsidiaries.

The Company itself does not have any indebtedness. All debt is held directly or indirectly by the Operating Partnership.

Guarantee of Debt

The Company guarantees the Operating Partnership’s obligations with respect to its 4.50% notes due 2015 (2015 Notes), 5.875% notes due 2020 (2020 Notes), 5.250% notes due 2021 (2021 Notes), 3.625% notes due 2022 (2022 Notes) and its unsecured senior notes sold to Prudential Investment Management, Inc. and certain of its affiliates pursuant to the Amended and Restated Note Purchase and Private Shelf Agreement, as amended, which we refer to as the Prudential Shelf Facility. The Company and the Operating Partnership guarantee the obligations of Digital Stout Holding, LLC, a wholly owned subsidiary of the Operating Partnership, with respect to its 4.750% notes due 2023 (2023 Notes) and 4.250% notes due 2025 (2025 Notes). The Company is also the guarantor of the Operating Partnership’s and its subsidiary borrowers’ obligations under the global revolving credit facility and unsecured term loan.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

7. Debt of the Operating Partnership

A summary of outstanding indebtedness of the Operating Partnership as of June 30, 2014 and December 31, 2013 is as follows (in thousands):

 

Indebtedness

  Interest Rate at
June 30, 2014
  Maturity Date   Principal Outstanding
June 30, 2014
    Principal  Outstanding
December 31, 2013
 

Global revolving credit facility

  Various (1)   Nov. 3, 2017   $ 374,641  (2)    $ 724,668  (2) 
     

 

 

   

 

 

 

Unsecured term loan

  Various (3)(8)   Apr. 16, 2017   $ 1,034,830  (4)    $ 1,020,984  (4) 
     

 

 

   

 

 

 

Unsecured senior notes:

       

Prudential Shelf Facility:

       

Series C

  9.680%   Jan. 6, 2016     25,000        25,000   

Series D

  4.570%   Jan. 20, 2015     50,000        50,000   

Series E

  5.730%   Jan. 20, 2017     50,000        50,000   

Series F

  4.500%   Feb. 3, 2015     17,000        17,000   
     

 

 

   

 

 

 

Total Prudential Shelf Facility

        142,000        142,000   

Senior Notes:

       

4.50% notes due 2015

  4.500%   Jul. 15, 2015     375,000        375,000   

5.875% notes due 2020

  5.875%   Feb. 1, 2020     500,000        500,000   

5.25% notes due 2021

  5.250%   Mar. 15, 2021     400,000        400,000   

3.625% notes due 2022

  3.625%   Oct. 1, 2022     300,000        300,000   

4.75% notes due 2023

  4.750%   Oct. 13, 2023     513,180  (9)      —     

4.25% notes due 2025

  4.250%   Jan. 17, 2025     684,240  (9)      662,280  (9) 

Unamortized discounts

        (17,352     (15,048
     

 

 

   

 

 

 

Total senior notes, net of discount

        2,755,068        2,222,232   
     

 

 

   

 

 

 

Total unsecured senior notes, net of discount

        2,897,068        2,364,232   
     

 

 

   

 

 

 

Exchangeable senior debentures:

       

5.50% exchangeable senior debentures due 2029

  5.500%   Apr. 15, 2029 (5)     —          266,400   
     

 

 

   

 

 

 

Total exchangeable senior debentures

        —          266,400   
     

 

 

   

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

Indebtedness

  Interest Rate at
June 30, 2014
  Maturity Date   Principal Outstanding
June 30, 2014
    Principal  Outstanding
December 31, 2013
 

Mortgage loans:

       

Secured Term Debt (6)(7)

  5.65%   Nov. 11, 2014   $ 131,377      $ 132,966   

200 Paul Avenue 1-4 (7)

  5.74%   Oct. 8, 2015     69,698        70,713   

2045 & 2055 Lafayette Street (7)

  5.93%   Feb. 6, 2017     63,096        63,623   

34551 Ardenwood Boulevard 1-4 (7)

  5.95%   Nov. 11, 2016     51,747        52,152   

1100 Space Park Drive (7)

  5.89%   Dec. 11, 2016     51,707        52,115   

600 West Seventh Street

  5.80%   Mar. 15, 2016     48,699        49,548   

150 South First Street (7)

  6.30%   Feb. 6, 2017     49,709        50,097   

2334 Lundy Place (7)

  5.96%   Nov. 11, 2016     37,637        37,930   

Cressex 1 (10)

  5.68%   Oct. 16, 2014     29,268  (9)      28,583  (9) 

636 Pierce Street

  5.27%   Apr. 15, 2023     —    (11)      26,327   

Manchester Technopark (10)

  5.68%   Oct. 16, 2014     8,904  (9)      8,695  (9) 

8025 North Interstate 35

  4.09%   Mar. 6, 2016     6,187        6,314   

731 East Trade Street

  8.22%   Jul. 1, 2020     4,014        4,186   

Unamortized net premiums

        653        2,359   
     

 

 

   

 

 

 

Total mortgage loans, net of premiums

        552,696        585,608   
     

 

 

   

 

 

 

Total indebtedness

      $ 4,859,235      $ 4,961,892   
     

 

 

   

 

 

 

 

(1) The interest rate for borrowings under the global revolving credit facility equals the applicable index plus a margin of 110 basis points, which is based on the current credit ratings of our long-term debt. An annual facility fee of 20 basis points, which is based on the credit ratings of our long-term debt, is due and payable quarterly on the total commitment amount of the facility. Two six-month extensions are available, which we may exercise if certain conditions are met.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

(2) Balances as of June 30, 2014 and December 31, 2013 are as follows (balances, in thousands):

 

Denomination of Draw

  Balance as of
June 30, 2014
    Weighted-average
interest rate
    Balance as of
December  31, 2013
    Weighted-average
interest rate
 

Floating Rate Borrowing (a)

       

U.S. dollar ($)

  $ 85,000        1.25   $ 466,000        1.27

Euro (€)

    73,937  (c)      1.21     78,335  (d)      1.33

Australian dollar (AUD)

    77,351  (c)      3.76     67,212  (d)      3.70

Hong Kong dollar (HKD)

    76,990  (c)      1.31     57,390  (d)      1.31

Japanese yen (JPY)

    14,507  (c)      1.20     12,858  (d)      1.21

Canadian dollar (CAD)

    46,856  (c)      2.34     14,873  (d)      2.32
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 374,641        1.91   $ 696,668        1.53
 

 

 

   

 

 

   

 

 

   

 

 

 

Base Rate Borrowing (b)

       

U.S. dollar ($)

  $ —          —        $ 28,000        3.35
 

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowings

  $ 374,641        1.91   $ 724,668        1.60
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) The interest rates for floating rate borrowings under the global revolving credit facility equal the applicable index plus a margin of 110 basis points, which is based on the credit ratings of our long-term debt.
  (b) The interest rates for base rate borrowings under the global revolving credit facility equal the U.S. Prime Rate plus a margin of 10 basis points, which is based on the credit ratings of our long-term debt.
  (c) Based on exchange rates of $1.37 to €1.00, $0.94 to 1.00 AUD, $0.13 to 1.00 HKD, $0.01 to 1.00 JPY and $0.94 to 1.00 CAD, respectively, as of June 30, 2014.
  (d) Based on exchange rates of $1.37 to €1.00, $0.89 to 1.00 AUD, $0.13 to 1.00 HKD, $0.01 to 1.00 JPY and $0.94 to 1.00 CAD, respectively, as of December 31, 2013.

 

(3) Interest rates are based on our current senior unsecured debt ratings and are 120 basis points over the applicable index for floating rate advances. Two six-month extensions are available, which we may exercise if certain conditions are met.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

(4) Balances as of June 30, 2014 and December 31, 2013 are as follows (balances, in thousands):

 

Denomination of Draw

  Balance as of
June 30, 2014
    Weighted-average
interest rate
    Balance as of
December  31, 2013
    Weighted-average
interest rate
 

U.S. dollar ($)

  $ 410,905        1.35 % (b)    $ 410,905        1.37 % (d) 

Singapore dollar (SGD)

    183,299  (a)      1.41 % (b)      180,918  (c)      1.40 % (d) 

British pound sterling (£)

    206,854  (a)      1.73     200,216  (c)      1.72

Euro (€)

    136,235  (a)      1.38     136,743  (c)      1.43

Australian dollar (AUD)

    97,537  (a)      3.90     92,202  (c)      3.78
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,034,830        1.68 % (b)    $ 1,020,984        1.67 % (d) 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Based on exchange rates of $0.80 to 1.00 SGD, $1.71 to £1.00, $1.37 to €1.00 and $0.94 to 1.00 AUD, respectively, as of June 30, 2014.
  (b) As of June 30, 2014, the weighted-average interest rate reflecting interest rate swaps was 1.92% (U.S. dollar), 2.00% (Singapore dollar) and 2.01% (Total). See Note 14 for further discussion on interest rate swaps.
  (c) Based on exchange rates of $0.79 to 1.00 SGD, $1.66 to £1.00, $1.37 to €1.00 and $0.89 to 1.00 AUD, respectively, as of December 31, 2013.
  (d) As of December 31, 2013, the weighted-average interest rate reflecting interest rate swaps was 1.92% (U.S. dollar), 2.00% (Singapore dollar) and 2.00% (Total). See Note 14 for further discussion on interest rate swaps.

 

(5) The 2029 Debentures were redeemed in April 2014.
(6) This amount represents six mortgage loans secured by our interests in 36 NE 2nd Street, 3300 East Birch Street, 100 & 200 Quannapowitt Parkway, 300 Boulevard East, 4849 Alpha Road, and 11830 Webb Chapel Road. Each of these loans is cross-collateralized by the six properties.
(7) The respective borrower’s assets and credit are not available to satisfy the debts and other obligations of affiliates or any other person.
(8) We have entered into interest rate swap agreements as a cash flow hedge for interest generated by the U.S. dollar and Singapore dollar tranches of the unsecured term loan. See note 14 for further information.
(9) Based on exchange rate of $1.71 to £1.00 as of June 30, 2014 and $1.66 to £1.00 as of December 31, 2013.
(10) These loans are also secured by a £7.8 million letter of credit. These loans are cross-collateralized by the two properties.
(11) On March 5, 2014, we contributed this property to our unconsolidated joint venture with an investment fund managed by Prudential Real Estate Investors which was formed in September 2013. Also on March 5, 2014, the joint venture assumed the debt and repaid in full the outstanding balance of $26.1 million on the mortgage loan.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

Global Revolving Credit Facility

On August 15, 2013, the Operating Partnership refinanced its global revolving credit facility, increasing its total borrowing capacity to $2.0 billion from $1.8 billion. The global revolving credit facility has an accordion feature that would enable us to increase the borrowing capacity of the credit facility to $2.55 billion, subject to the receipt of lender commitments and other conditions precedent. The refinanced facility matures on November 3, 2017, with two six-month extension options. The interest rate for borrowings under the expanded facility equals the applicable index plus a margin which is based on the credit ratings of our long-term debt and is currently 110 basis points. An annual facility fee on the total commitment amount of the facility, based on the credit ratings of our long-term debt, currently 20 basis points, is payable quarterly. Funds may be drawn in U.S., Canadian, Singapore, Australian and Hong Kong dollars, as well as Euro, British pound sterling, Swiss franc, Japanese yen and Mexican peso denominations. As of June 30, 2014, interest rates are based on 1-month LIBOR, 1-month EURIBOR, 1-month BBR, 1-month HIBOR, 1-month JPY LIBOR and 1-month CDOR plus a margin of 1.10%. We have used and intend to use available borrowings under the global revolving credit facility to acquire additional properties, to fund development opportunities and for general working capital and other corporate purposes, including potentially for the repurchase, redemption or retirement of outstanding debt or equity securities. As of June 30, 2014, we have capitalized approximately $18.0 million of financing costs related to the global revolving credit facility. As of June 30, 2014, approximately $374.6 million was drawn under the global revolving credit facility and $24.8 million of letters of credit were issued.

The global revolving credit facility contains various restrictive covenants, including limitations on our ability to incur additional indebtedness, make certain investments or merge with another company, and requirements to maintain financial coverage ratios, including with respect to unencumbered assets. In addition, the global revolving credit facility restricts Digital Realty Trust, Inc. from making distributions to its stockholders, or redeeming or otherwise repurchasing shares of its capital stock, after the occurrence and during the continuance of an event of default, except in limited circumstances including as necessary to enable Digital Realty Trust, Inc. to maintain its qualification as a REIT and to minimize the payment of income or excise tax. As of June 30, 2014, we were in compliance with all of such covenants.

Unsecured Term Loan

On August 15, 2013, we refinanced the senior unsecured multi-currency term loan facility, increasing its total borrowing capacity to $1.0 billion from $750.0 million, and pursuant to the accordion feature total commitments can be increased up to $1.1 billion, subject to the receipt of lender commitments and other conditions precedent. The facility matures on April 16, 2017, with two six-month extension options. Interest rates are based on our senior unsecured debt ratings and are currently 120 basis points over the applicable index for floating rate advances. Funds may be drawn in U.S, Singapore and Australian dollars, as well as Euro and British pound sterling denominations with the option to add Hong Kong dollars and Japanese yen upon an accordion exercise. Based on exchange rates in effect at June 30, 2014, the balance outstanding is approximately $1,034.8 million. We have used borrowings under the term loan for acquisitions, repayment of indebtedness, development, working capital and general corporate purposes. The covenants under this loan are consistent with our global revolving credit facility and, as of June 30, 2014, we were in compliance with all of such covenants. As of June 30, 2014, we have capitalized approximately $8.4 million of financing costs related to the unsecured term loan.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

Exchangeable Senior Debentures

5.50% Exchangeable Senior Debentures due 2029

On April 20, 2009, the Operating Partnership issued $266.4 million of its 5.50% exchangeable senior debentures due April 15, 2029 (the 2029 Debentures). Costs incurred to issue the 2029 Debentures were approximately $7.8 million. These costs were amortized over a period of five years, which represented the estimated term of the 2029 Debentures, and are included in deferred financing costs, net in the condensed consolidated balance sheet. The 2029 Debentures were general unsecured senior obligations of the Operating Partnership, ranked equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and were fully and unconditionally guaranteed by Digital Realty Trust, Inc.

Interest was payable on October 15 and April 15 of each year beginning October 15, 2009 until the maturity date of April 15, 2029. The 2029 Debentures bore interest at 5.50% per annum and were exchangeable for shares of Digital Realty Trust, Inc. common stock at an exchange rate that was initially 23.2558 shares per $1,000 principal amount of 2029 Debentures. The exchange rate on the 2029 Debentures was subject to adjustment for certain events, including, but not limited to, certain dividends on Digital Realty Trust, Inc. common stock in excess of $0.33 per share per quarter (the “reference dividend”). Effective December 11, 2013, the exchange rate had been adjusted to 25.5490 shares per $1,000 principal amount of 2029 Debentures as a result of the aggregate dividends in excess of the reference dividend that Digital Realty Trust, Inc. declared and paid on its common stock beginning with the quarter ended September 30, 2013 and through the quarter ended December 31, 2013.

On March 17, 2014, we commenced an offer to repurchase, at the option of each holder, any and all of the outstanding 2029 Debentures at a price equal to 100% of the principal amount, as required by the terms of the indenture governing the 2029 Debentures. The repurchase offer expired on April 11, 2014. No 2029 Debentures were repurchased pursuant to this offer. On March 17, 2014, we also distributed a Notice of Redemption to the holders of the 2029 Debentures that the Operating Partnership intended to redeem all of the outstanding 2029 Debentures, pursuant to its option under the indenture governing the 2029 Debentures, on April 18, 2014, at a price equal to 100% of the principal amount, plus accrued and unpaid interest thereon up to the redemption date. In connection with the redemption, holders of the 2029 Debentures had the right to exchange their 2029 Debentures on or prior to April 16, 2014. The 2029 Debentures not surrendered pursuant to the repurchase offer on or prior to April 11, 2014, or for exchange on or prior to April 16, 2014, were redeemed on April 18, 2014.

In connection with the redemption, at the request of the holders that exercised their exchange right pursuant to the terms of the 2029 Debentures, we issued 6,734,938 restricted shares of Digital Realty Trust, Inc. common stock in exchange for approximately $261.2 million in aggregate principal amount of the 2029 Debentures based on the then-applicable exchange rate of 25.7880 shares per $1,000 principal amount of 2029 Debentures. On April 18, 2014, the Operating Partnership redeemed for cash approximately $5.2 million in aggregate principal amount of the 2029 Debentures pursuant to its option under the indenture governing the 2029 Debentures at a price equal to 100% of the principal amount plus accrued and unpaid interest thereon up to the redemption date.

On July 11, 2014, we issued 134,974 restricted shares of Digital Realty Trust, Inc. common stock in exchange for approximately $5.2 million in aggregate principal amount of the 2029 Debentures to certain previous holders of the 2029 Debentures. The holders had the right to exchange the 2029 Debentures for shares of Digital Realty Trust, Inc. common stock, but inadvertently failed to exercise such rights. As a result, the 2029 Debentures were redeemed by the Operating Partnership for cash. We agreed to issue the shares of the common stock to the holders in exchange for the redemption payment that they received in the original redemption, effectively putting such holders in the same place as if they had originally exercised their rights to exchange their 2029 Debentures for the shares of Digital Realty Trust, Inc. common stock.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

Senior Notes

4.750% Notes due 2023

On April 1, 2014, Digital Stout Holding, LLC, a wholly owned subsidiary of Digital Realty Trust, L.P., issued £300.0 million (or approximately $498.9 million based on the April 1, 2014 exchange rate of £1.00 to $1.66) aggregate principal amount of its 4.750% Guaranteed Notes due 2023, or the 2023 Notes. The 2023 Notes are senior unsecured obligations of Digital Stout Holding, LLC and are fully and unconditionally guaranteed by Digital Realty Trust, Inc. and Digital Realty Trust, L.P. Interest on the 2023 Notes is payable semiannually in arrears at a rate of 4.750% per annum. The 2023 Notes mature on October 13, 2023. The net proceeds from the offering after deducting the original issue discount of approximately $3.0 million and underwriting commissions and estimated expenses of approximately $5.0 million was approximately $490.9 million. We used the net proceeds from this offering to temporarily repay borrowings under our global revolving credit facility. The 2023 Notes have been reflected net of discount in the condensed consolidated balance sheet. The indenture governing the 2023 Notes contains certain covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 40% and (3) an interest coverage ratio of greater than 1.50, and also requires us to maintain total unencumbered assets of not less than 150% of the aggregate principal amount of the unsecured debt. At June 30, 2014, we were in compliance with these financial covenants.

The table below summarizes our debt maturities and principal payments as of June 30, 2014 (in thousands):

 

    Global Revolving
Credit Facility (1)
    Unsecured
Term Loan  (1)
    Prudential
Shelf Facility
    Senior Notes     Mortgage
Loans (2)
    Total
Debt
 

Remainder of 2014

  $  —        $  —        $  —        $  —        $ 173,806      $ 173,806   

2015

    —          —          67,000        375,000        75,493        517,493   

2016

    —          —          25,000        —          191,979        216,979   

2017

    374,641        1,034,830        50,000        —          108,395        1,567,866   

2018

    —          —          —          —          593        593   

Thereafter

    —          —          —          2,397,420        1,777        2,399,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

  $ 374,641      $ 1,034,830      $ 142,000      $ 2,772,420      $ 552,043      $ 4,875,934   

Unamortized discount

    —          —          —          (17,352     —          (17,352

Unamortized premium

    —          —          —          —          653        653   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 374,641      $ 1,034,830      $ 142,000      $ 2,755,068      $ 552,696      $ 4,859,235   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Subject to two six-month extension options exercisable by us. The bank group is obligated to grant the extension options provided we give proper notice, we make certain representations and warranties and no default exists under the global revolving credit facility and the unsecured term loan, as applicable.
(2) Our mortgage loans are generally non-recourse to us, subject to carve-outs for specified actions by us or specified undisclosed environmental liabilities. As of June 30, 2014, we provided partial letter of credit support with respect to approximately $38.2 million of the outstanding mortgage indebtedness (based on exchange rates as of June 30, 2014).

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

8. Income per Share

The following is a summary of basic and diluted income per share (in thousands, except share and per share amounts):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2014      2013      2014      2013  

Net income available to common stockholders

   $ 41,510       $ 47,077       $ 75,696       $ 89,734   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—basic

     133,802,622         128,419,745         131,183,857         127,437,970   

Potentially dilutive common shares:

           

Stock options

     45,278         68,146         43,023         69,304   

Unvested incentive units

     74,345         135,185         65,847         120,222   

2014 market performance-based awards

     55,640         —           27,820         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     133,977,885         128,623,076         131,320,547         127,627,496   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per share:

           

Basic

   $ 0.31       $ 0.37       $ 0.58       $ 0.70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.31       $ 0.37       $ 0.58       $ 0.70   
  

 

 

    

 

 

    

 

 

    

 

 

 

We have excluded the following potentially dilutive securities in the calculations above as they would be antidilutive or not dilutive:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2014      2013      2014      2013  

Weighted average of Operating Partnership common units not owned by Digital Realty Trust, Inc.

     2,812,716         2,556,095         2,710,262         2,499,738   

Potentially dilutive 2029 Debentures

     1,121,910         6,609,993         3,948,379         6,600,286   

Potentially dilutive Series D Cumulative Convertible Preferred Stock

     —           —           —           949,299   

Potentially dilutive Series E Cumulative Redeemable Preferred Stock

     5,060,744         4,929,167         5,367,507         4,655,435   

Potentially dilutive Series F Cumulative Redeemable Preferred Stock

     3,209,512         3,126,066         3,404,060         2,952,466   

Potentially dilutive Series G Cumulative Redeemable Preferred Stock

     4,388,483         3,893,598         4,654,496         1,957,555   

Potentially dilutive Series H Cumulative Redeemable Preferred Stock

     6,437,332         —           3,449,841         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     23,030,697         21,114,919         23,534,545         19,614,779   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

9. Income per Unit

The following is a summary of basic and diluted income per unit (in thousands, except unit and per unit amounts):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2014      2013      2014      2013  

Net income available to common unitholders

   $ 42,383       $ 48,013       $ 77,262       $ 91,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average units outstanding—basic

     136,615,338         130,973,952         133,894,119         129,936,759   

Potentially dilutive common units:

           

Stock options

     45,278         68,146         43,023         69,304   

Unvested incentive units

     74,345         135,185         65,847         120,222   

2014 market performance-based awards

     55,640         —           27,820         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average units outstanding—diluted

     136,790,601         131,177,283         134,030,809         130,126,285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per unit:

           

Basic

   $ 0.31       $ 0.37       $ 0.58       $ 0.70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.31       $ 0.37       $ 0.58       $ 0.70   
  

 

 

    

 

 

    

 

 

    

 

 

 

We have excluded the following potentially dilutive securities in the calculations above as they would be antidilutive or not dilutive:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2014      2013      2014      2013  

Potentially dilutive 2029 Debentures

     1,121,910         6,609,993         3,948,379         6,600,286   

Potentially dilutive Series D Cumulative Convertible Preferred Units

     —           —           —           949,299   

Potentially dilutive Series E Cumulative Redeemable Preferred Units

     5,060,744         4,929,167         5,367,507         4,655,435   

Potentially dilutive Series F Cumulative Redeemable Preferred Units

     3,209,512         3,126,066         3,404,060         2,952,466   

Potentially dilutive Series G Cumulative Redeemable Preferred Units

     4,388,483         3,893,598         4,654,496         1,957,555   

Potentially dilutive Series H Cumulative Redeemable Preferred Units

     6,437,332         —           3,449,841         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     20,217,981         18,558,824         20,824,283         17,115,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

10. Income Taxes

Digital Realty Trust, Inc. has elected to be treated and believes that it has been organized and has operated in a manner that has enabled it to qualify as a REIT for federal income tax purposes. As a REIT, Digital Realty Trust, Inc. is generally not subject to corporate level federal income taxes on earnings distributed currently to its stockholders. Since inception, Digital Realty Trust, Inc. has distributed at least 100% of its taxable income annually and intends to do so for the tax year ending December 31, 2014. As such, no provision for federal income taxes has been included in the accompanying condensed consolidated financial statements for the three and six months ended June 30, 2014 and 2013.

The Operating Partnership is a partnership and is not required to pay federal income tax. Instead, taxable income is allocated to its partners, who include such amounts on their federal income tax returns. As such, no provision for federal income taxes has been included in the Operating Partnership’s accompanying condensed consolidated financial statements.

We have elected taxable REIT subsidiary (“TRS”) status for some of our consolidated subsidiaries. In general, a TRS may provide services that would otherwise be considered impermissible for REITs to provide and may hold assets that REITs cannot hold directly. Income taxes for TRS entities were accrued, as necessary, for the three and six months ended June 30, 2014 and 2013.

For our TRS entities and foreign subsidiaries that are subject to U.S. federal, state and foreign income taxes, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe it is more likely than not that the deferred tax asset may not be realized, based on available evidence at the time the determination is made. An increase or decrease in the valuation allowance that results from the change in circumstances that causes a change in our judgment about the realizability of the related deferred tax asset is included in income. Deferred tax assets (net of valuation allowance) and liabilities for our TRS entities and foreign subsidiaries were accrued, as necessary, for the three and six months ended June 30, 2014 and 2013. As of June 30, 2014, we had deferred tax liabilities, net of deferred tax assets, of approximately $151.5 million primarily related to our foreign properties. The majority of our net deferred tax liability relates to differences between tax basis and book basis of the assets acquired in the Sentrum Portfolio acquisition during 2012.

11. Equity and Accumulated Other Comprehensive Income, Net

(a) Equity Distribution Agreements

Digital Realty Trust, Inc. entered into equity distribution agreements in June 2011, which we refer to as the 2011 Equity Distribution Agreements, with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and Morgan Stanley & Co. LLC, or the Agents, under which it can issue and sell shares of its common stock having an aggregate offering price of up to $400.0 million from time to time through, at its discretion, any of the Agents as its sales agents. The sales of common stock made under the 2011 Equity Distribution Agreements will be made in “at the market” offerings as defined in Rule 415 of the Securities Act. To date, Digital Realty Trust, Inc. has generated net proceeds of approximately $342.7 million from the issuance of approximately 5.7 million common shares under the 2011 Equity Distribution Agreements at an average price of $60.35 per share after payment of approximately $3.5 million of commissions to the sales agents and before offering expenses. No sales were made under the program during the six months ended June 30, 2014 and 2013. As of June 30, 2014, shares of common stock having an aggregate offering price of $53.8 million remained available for offer and sale under the program.

(b) Redeemable Preferred Stock

7.375% Series H Cumulative Redeemable Preferred Stock

On March 26, 2014, Digital Realty Trust, Inc. issued 12,000,000 shares of its 7.375% series H cumulative redeemable preferred stock, or the series H preferred stock, for net proceeds of approximately $289.3 million. In addition, on April 7, 2014, Digital Realty Trust, Inc. issued an additional 600,000 shares of series H preferred stock pursuant to a partial exercise of the underwriters’ over-allotment option. Also, on April 7, 2014, Digital Realty Trust, Inc. re-opened and issued an additional 2,000,000 shares of series H preferred

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

stock. Pursuant to these issuances, Digital Realty Trust, Inc. issued a total of 14,600,000 shares of its series H preferred stock, for net proceeds of approximately $353.4 million. Dividends are cumulative on the series H preferred stock from the date of original issuance in the amount of $1.84375 per share each year, which is equivalent to 7.375% of the $25.00 liquidation preference per share. Dividends on the series H preferred stock are payable quarterly in arrears. The first dividend payable on the series H preferred stock on June 30, 2014 was a pro rata dividend from and including the original issue date to and including June 30, 2014 in the amount of $0.48655 per share. The series H preferred stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the series H preferred stock will rank senior to Digital Realty Trust, Inc. common stock and rank on parity with Digital Realty Trust, Inc.’s series E cumulative redeemable preferred stock, series F cumulative redeemable preferred stock and series G cumulative redeemable preferred stock with respect to the payment of distributions and other amounts. Digital Realty Trust, Inc. is not allowed to redeem the series H preferred stock before March 26, 2019, except in limited circumstances to preserve its status as a REIT. On or after March 26, 2019, Digital Realty Trust, Inc. may, at its option, redeem the series H preferred stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends on such series H preferred stock up to but excluding the redemption date. Holders of the series H preferred stock generally have no voting rights except for limited voting rights if Digital Realty Trust, Inc. fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances. Upon the occurrence of specified changes of control, as a result of which neither Digital Realty Trust, Inc.’s common stock nor the common securities of the acquiring or surviving entity (or American Depositary Receipts representing such securities) is listed on the New York Stock Exchange, the NYSE MKT, LLC or the NASDAQ Stock Market or listed or quoted on a successor exchange or quotation system, each holder of series H preferred stock will have the right (unless, prior to the change of control conversion date specified in the Articles Supplementary governing the series H preferred stock, Digital Realty Trust, Inc. has provided or provides notice of its election to redeem the series H preferred stock) to convert some or all of the series H preferred stock held by it into a number of shares of Digital Realty Trust, Inc.’s common stock per share of series H preferred stock to be converted equal to the lesser of:

 

   

the quotient obtained by dividing (i) the sum of the $25.00 liquidation preference plus the amount of any accrued and unpaid dividends to, but not including, the change of control conversion date (unless the change of control conversion date is after a record date for a series H preferred stock dividend payment and prior to the corresponding series H preferred stock dividend payment date, in which case no additional amount for such accrued and unpaid dividend will be included in this sum) by (ii) the common stock price specified in the Articles Supplementary governing the series H preferred stock; and

 

   

0.9632, or the share cap, subject to certain adjustments;

subject, in each case, to provisions for the receipt of alternative consideration as described in the Articles Supplementary governing the series H preferred stock. Except in connection with specified change of control transactions, the series H preferred stock is not convertible into or exchangeable for any other property or securities of Digital Realty Trust, Inc.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

(c) Noncontrolling Interests in Operating Partnership

Noncontrolling interests in the Operating Partnership relate to the interests that are not owned by Digital Realty Trust, Inc. The following table shows the ownership interests in the Operating Partnership as of June 30, 2014 and December 31, 2013:

 

     June 30, 2014     December 31, 2013  
     Number of units      Percentage of total     Number of units      Percentage of total  

Digital Realty Trust, Inc.

     135,370,016         97.7     128,455,350         97.7

Noncontrolling interests consist of:

          

Common units held by third parties

     1,481,814         1.1        1,491,814         1.2   

Incentive units held by employees and directors (see note 13)

     1,646,566         1.2        1,475,207         1.1   
  

 

 

    

 

 

   

 

 

    

 

 

 
     138,498,396         100.0     131,422,371         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Limited partners have the right to require the Operating Partnership to redeem part or all of their common units for cash based on the fair market value of an equivalent number of shares of Digital Realty Trust, Inc. common stock at the time of redemption. Alternatively, Digital Realty Trust, Inc. may elect to acquire those common units in exchange for shares of Digital Realty Trust, Inc. common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events. Pursuant to authoritative accounting guidance, Digital Realty Trust, Inc. evaluated whether it controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement of the noncontrolling Operating Partnership common and incentive units. Based on the results of this analysis, we concluded that the common and incentive Operating Partnership units met the criteria to be classified within equity.

The redemption value of the noncontrolling Operating Partnership common units and the vested incentive units was approximately $164.1 million and $124.1 million based on the closing market price of Digital Realty Trust, Inc. common stock on June 30, 2014 and December 31, 2013, respectively.

The following table shows activity for the noncontrolling interests in the Operating Partnership for the six months ended June 30, 2014:

 

     Common Units     Incentive Units     Total  

As of December 31, 2013

     1,491,814        1,475,207        2,967,021   

Redemption of common units for shares of Digital Realty Trust, Inc. common stock (1)

     (10,000     —          (10,000

Conversion of incentive units held by employees and directors for shares of Digital Realty Trust, Inc. common stock (1)

     —          (4,941     (4,941

Cancellation of incentive units held by employees and directors

     —          (18,773     (18,773

Grant of incentive units to employees and directors

     —          195,073        195,073   
  

 

 

   

 

 

   

 

 

 

As of June 30, 2014

     1,481,814        1,646,566        3,128,380   
  

 

 

   

 

 

   

 

 

 

 

(1) This redemption was recorded as a reduction to noncontrolling interests in the Operating Partnership and an increase to common stock and additional paid in capital based on the book value per unit in the accompanying condensed consolidated balance sheet of Digital Realty Trust, Inc.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2014 and 2013

 

(d) Dividends

We have declared and paid the following dividends on our common and preferred stock for the six months ended June 30, 2014 (in thousands, except per share data):