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EX-32.1 - EXHIBIT 32.1 - Digital Realty Trust, Inc.ex32103312015.htm

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 March 31, 2015
 
¨
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 April 30, 2015
Common Stock, $.01 par value per share
  
135,799,327




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2015 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 March 31, 2015, Digital Realty Trust, Inc. owned an approximate 97.9% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 2.1% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of Digital Realty Trust, Inc. As of March 31, 2015, 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;


2


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 and Capital and Accumulated Other Comprehensive Income;

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 Chief Executive Officer of each entity during the period covered by this report has 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


DIGITAL REALTY TRUST, INC. AND DIGITAL REALTY TRUST, L.P.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2015
TABLE OF CONTENTS
 
 
 
Page
 Number
PART I.
FINANCIAL INFORMATION




ITEM 1.
Condensed Consolidated Financial Statements of Digital Realty Trust, Inc.:

























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




























ITEM 2.



ITEM 3.



ITEM 4.







PART II.



ITEM 1.



ITEM 1A. 



ITEM 2.



ITEM 3.



ITEM 4.



ITEM 5.



ITEM 6.






4




DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
657,770

 
$
671,602

Acquired ground leases
12,630

 
12,196

Buildings and improvements
8,833,712

 
8,823,814

Tenant improvements
513,379

 
475,000

Total investments in properties
10,017,491

 
9,982,612

Accumulated depreciation and amortization
(1,962,966
)
 
(1,874,054
)
Net investments in properties
8,054,525

 
8,108,558

Investment in unconsolidated joint ventures
103,475

 
94,729

Net investments in real estate
8,158,000

 
8,203,287

Cash and cash equivalents
37,329

 
41,321

Accounts and other receivables, net of allowance for doubtful accounts of $6,439 and $6,302 as of March 31, 2015 and December 31, 2014, respectively
112,995

 
135,931

Deferred rent
455,834

 
447,643

Acquired above-market leases, net
34,757

 
38,605

Acquired in-place lease value and deferred leasing costs, net
434,917

 
456,962

Deferred financing costs, net
28,243

 
30,821

Restricted cash
11,934

 
11,555

Assets held for sale
81,667

 
120,471

Other assets
52,750

 
40,188

Total assets
$
9,408,426

 
$
9,526,784

LIABILITIES AND EQUITY
 
 
 
Global revolving credit facility
$
826,906

 
$
525,951

Unsecured term loan
942,006

 
976,600

Unsecured senior notes, net of discount
2,672,472

 
2,791,758

Mortgage loans, net of premiums
376,527

 
378,818

Accounts payable and other accrued liabilities
523,948

 
605,923

Accrued dividends and distributions

 
115,019

Acquired below-market leases, net
97,234

 
104,235

Security deposits and prepaid rents
108,244

 
108,478

Obligations associated with assets held for sale
3,228

 
5,764

Total liabilities
5,550,565

 
5,612,546

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 March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, respectively
241,468

 
241,468

Series H Cumulative Redeemable Preferred Stock, 7.375%, $365,000 and $365,000 liquidation preference, respectively ($25.00 per share), 14,600,000 and 14,600,000 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
353,290

 
353,290

Common Stock: $0.01 par value, 215,000,000 shares authorized, 135,793,668 and
   135,626,255 shares issued and outstanding as of March 31, 2015 and
   December 31, 2014, respectively
1,350

 
1,349

Additional paid-in capital
3,967,846

 
3,970,439

Accumulated dividends in excess of earnings
(1,110,298
)
 
(1,096,607
)
Accumulated other comprehensive loss, net
(91,562
)
 
(45,046
)
Total stockholders’ equity
3,815,457

 
3,878,256

Noncontrolling Interests:
 
 
 
Noncontrolling interests in operating partnership
35,596

 
29,191

Noncontrolling interests in consolidated joint ventures
6,808

 
6,791

Total noncontrolling interests
42,404

 
35,982

Total equity
3,857,861

 
3,914,238

Total liabilities and equity
$
9,408,426

 
$
9,526,784

See accompanying notes to the condensed consolidated financial statements.

5


DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except share and per share data)
 
Three Months Ended March 31,
 
 
2015
 
2014
 
Operating Revenues:
 
 
 
 
Rental
$
319,166

 
$
305,786

 
Tenant reimbursements
85,829

 
83,621

 
Fee income
1,614

 
1,183

 
Total operating revenues
406,609


390,590


Operating Expenses:
 
 
 
 
Rental property operating and maintenance
124,563

 
117,896

 
Property taxes
23,263

 
22,125

 
Insurance
2,155

 
2,422

 
Change in fair value of contingent consideration
(43,034
)
 
(3,403
)
 
Depreciation and amortization
129,073

 
130,620

 
General and administrative
21,194

 
30,678

 
Transactions
93

 
81

 
Other
(16
)
 
164

 
Total operating expenses
257,291


300,583


Operating income
149,318

 
90,007

 
Other Income (Expenses):
 
 
 
 
Equity in earnings of unconsolidated joint ventures
4,618

 
2,581

 
Gain on sale of property
17,820

 

 
Gain on contribution of properties to unconsolidated joint ventures

 
1,906

 
Interest and other income (expense)
(2,290
)
 
1,727

 
Interest expense
(45,466
)
 
(47,374
)
 
Tax expense
(1,675
)
 
(1,838
)
 
Loss from early extinguishment of debt

 
(292
)
 
Net income
122,325


46,717


Net income attributable to noncontrolling interests
(2,142
)
 
(805
)
 
Net income attributable to Digital Realty Trust, Inc.
120,183


45,912


Preferred stock dividends
(18,455
)
 
(11,726
)
 
Net income available to common stockholders
$
101,728


$
34,186


Net income per share available to common stockholders:
 
 
 
 
Basic
$
0.75

 
$
0.27

 
Diluted
$
0.75

 
$
0.26

 
Weighted average common shares outstanding:
 
 
 
 
Basic
135,704,525

 
128,535,995

 
Diluted
136,128,800

 
129,136,961

 
See accompanying notes to the condensed consolidated financial statements.

6


DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
Net income
$
122,325

 
$
46,717

 
Other comprehensive income:
 
 
 
 
Foreign currency translation adjustments
(45,843
)
 
3,819

 
Increase (decrease) in fair value of interest rate swaps
(2,417
)
 
(1,343
)
 
Reclassification to interest expense from interest rate swaps
818

 
846

 
Comprehensive income
74,883

 
50,039

 
Comprehensive income attributable to noncontrolling interests
(1,216
)
 
(871
)
 
Comprehensive income attributable to Digital Realty Trust, Inc.
$
73,667

 
$
49,168

 
See accompanying notes to the condensed consolidated financial statements.


7


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
Loss, 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, 2014
$
1,048,121

 
135,626,255

 
$
1,349

 
$
3,970,439

 
$
(1,096,607
)
 
$
(45,046
)
 
$
3,878,256

 
$
29,191

 
$
6,791

 
$
35,982

 
$
3,914,238

Conversion of units to common stock

 
79,274

 
1

 
856

 

 

 
857

 
(857
)
 

 
(857
)
 

Issuance of unvested restricted stock, net of forfeitures

 
80,138

 

 

 

 

 

 

 

 

 

Common stock offering costs

 

 

 
(148
)
 

 

 
(148
)
 

 

 

 
(148
)
Exercise of stock options

 
8,001

 

 
334

 

 

 
334

 

 

 

 
334

Amortization of unearned compensation on share-based awards

 

 

 
4,967

 

 

 
4,967

 

 

 

 
4,967

Reclassification of vested share-based awards

 

 

 
(8,602
)
 

 

 
(8,602
)
 
8,602

 

 
8,602

 

Dividends declared on preferred stock

 

 

 

 
(18,455
)
 

 
(18,455
)
 

 

 

 
(18,455
)
Dividends and distributions on common stock and common and incentive units

 

 

 

 
(115,419
)
 

 
(115,419
)
 
(2,440
)
 

 
(2,440
)
 
(117,859
)
Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

 

 

 

 

 

 

 

 
(99
)
 
(99
)
 
(99
)
Net income

 

 

 

 
120,183

 

 
120,183

 
2,026

 
116

 
2,142

 
122,325

Other comprehensive income—foreign currency translation adjustments

 

 

 

 

 
(44,948
)
 
(44,948
)
 
(895
)
 

 
(895
)
 
(45,843
)
Other comprehensive loss—fair value of interest rate swaps

 

 

 

 

 
(2,370
)
 
(2,370
)
 
(47
)
 

 
(47
)
 
(2,417
)
Other comprehensive income—reclassification of accumulated other comprehensive loss to interest expense

 

 

 

 

 
802

 
802

 
16

 

 
16

 
818

Balance as of March 31, 2015
$
1,048,121

 
135,793,668

 
$
1,350

 
$
3,967,846

 
$
(1,110,298
)
 
$
(91,562
)
 
$
3,815,457

 
$
35,596

 
$
6,808

 
$
42,404

 
$
3,857,861

See accompanying notes to the condensed consolidated financial statements.

8


DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
122,325

 
$
46,717

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of properties
(17,820
)
 

Gain on contribution of investment property to unconsolidated joint venture

 
(1,906
)
Equity in earnings of unconsolidated joint ventures
(4,618
)
 
(2,581
)
Change in fair value of accrued contingent consideration
(43,034
)
 
(3,403
)
Distributions from unconsolidated joint ventures
3,436

 
2,214

Write-off of net assets due to early lease terminations
(30
)
 

Depreciation and amortization of buildings and improvements, tenant improvements
   and acquired ground leases
111,696

 
111,142

Amortization of share-based unearned compensation
2,965

 
8,985

Allowance for doubtful accounts
137

 
1,580

Amortization of deferred financing costs
2,216

 
2,085

Loss on early extinguishment of debt

 
292

Amortization of debt discount/premium
484

 
385

Amortization of acquired in-place lease value and deferred leasing costs
17,379

 
19,478

Amortization of acquired above-market leases and acquired below-market leases
(2,324
)
 
(2,788
)
Changes in assets and liabilities:
 
 
 
Restricted cash
(399
)
 
(1,589
)
Accounts and other receivables
18,731

 
2,129

Deferred rent
(13,369
)
 
(21,335
)
Deferred leasing costs
(4,494
)
 
(6,798
)
Other assets
(14,849
)
 
(14,227
)
Accounts payable and other accrued liabilities
(42,482
)
 
(26,051
)
Security deposits and prepaid rents
2,972

 
2,082

Net cash provided by operating activities
138,922

 
116,411

Cash flows from investing activities:
 
 
 
Proceeds from sale of properties, net
43,274

 

Proceeds from contribution of investment properties to unconsolidated joint ventures

 
11,408

Investment in unconsolidated joint ventures
(7,547
)
 
(10,564
)
Investment in equity securities

 
(5
)
Receipt of value added tax refund
14,115

 
425

Refundable value added tax paid
(12,403
)
 
(2,289
)
Change in restricted cash
(75
)
 
(814
)
Improvements to and advances for investments in real estate
(183,817
)
 
(224,118
)
Improvement advances to tenants
(8,040
)
 
(2,499
)
Collection of advances from tenants for improvements
5,423

 
912

Net cash used in investing activities
(149,070
)
 
(227,544
)
 See accompanying notes to the condensed consolidated financial statements.







9





DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
$
540,142

 
$
433,297

Repayments on revolving credit facility
(213,468
)
 
(371,351
)
Repayments on other unsecured loans
(67,000
)
 

Principal payments on mortgage loans
(2,255
)
 
(3,343
)
Change in restricted cash
51


(68
)
Payment of loan fees and costs
(68
)
 
(150
)
Capital distributions paid to noncontrolling interests in consolidated joint ventures, net
(99
)


Gross proceeds from the issuance of preferred stock


300,000

Common stock offering costs paid
(148
)

(100
)
Preferred stock offering costs paid


(10,143
)
Proceeds from exercise of stock options
334


38

Payment of dividends to preferred stockholders
(18,455
)

(11,726
)
Payment of dividends to common stockholders and distributions to
    noncontrolling interests in operating partnership
(232,878
)

(211,887
)
Net cash provided by financing activities
6,156

 
124,567

Net (decrease) increase in cash and cash equivalents
(3,992
)
 
13,434

Cash and cash equivalents at beginning of period
41,321

 
56,808

Cash and cash equivalents at end of period
$
37,329

 
$
70,242

 
See accompanying notes to the condensed consolidated financial statements.

10


DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
63,289

 
$
67,824

Cash paid for income taxes
1,185

 
863

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
$
(45,843
)
 
$
3,819

(Decrease) increase in accounts payable and other accrued liabilities related to change in
   fair value of interest rate swaps
(2,417
)
 
(1,343
)
Noncontrolling interests in operating partnership redeemed for or converted to
   shares of common stock
857

 
51

Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
173,246

 
197,376

See accompanying notes to the condensed consolidated financial statements.


11



CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and per unit data)
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
657,770

 
$
671,602

Acquired ground leases
12,630

 
12,196

Buildings and improvements
8,833,712

 
8,823,814

Tenant improvements
513,379

 
475,000

Total investments in properties
10,017,491

 
9,982,612

Accumulated depreciation and amortization
(1,962,966
)
 
(1,874,054
)
Net investments in properties
8,054,525

 
8,108,558

Investment in unconsolidated joint ventures
103,475

 
94,729

Net investments in real estate
8,158,000

 
8,203,287

Cash and cash equivalents
37,329

 
41,321

Accounts and other receivables, net of allowance for doubtful accounts of $6,439 and $6,302 as of March 31, 2015 and December 31, 2014, respectively
112,995

 
135,931

Deferred rent
455,834

 
447,643

Acquired above-market leases, net
34,757

 
38,605

Acquired in-place lease value and deferred leasing costs, net
434,917

 
456,962

Deferred financing costs, net
28,243

 
30,821

Restricted cash
11,934

 
11,555

Assets held for sale
81,667

 
120,471

Other assets
52,750

 
40,188

Total assets
$
9,408,426

 
$
9,526,784

LIABILITIES AND CAPITAL

 

Global revolving credit facility
$
826,906

 
$
525,951

Unsecured term loan
942,006

 
976,600

Unsecured senior notes, net of discount
2,672,472

 
2,791,758

Mortgage loans, net of premiums
376,527

 
378,818

Accounts payable and other accrued liabilities
523,948

 
605,923

Accrued dividends and distributions

 
115,019

Acquired below-market leases, net
97,234

 
104,235

Security deposits and prepaid rents
108,244

 
108,478

Obligations associated with assets held for sale
3,228

 
5,764

Total liabilities
5,550,565

 
5,612,546

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 March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014, respectively
241,468

 
241,468

Series H Cumulative Redeemable Preferred Units, 7.375%, $365,000 and $365,000 liquidation preference, respectively ($25.00 per unit), 14,600,000 and 14,600,000 units issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
353,290

 
353,290

Common units:


 


135,793,668 and 135,626,255 units issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
2,858,898

 
2,875,181

Limited partners, 1,425,314 and 1,463,814 common units, 1,120,160 and 1,170,610 profits interest units and 379,237 and 379,237
class C units outstanding as of March 31, 2015 and December 31, 2014, respectively
39,909

 
32,578

Accumulated other comprehensive loss
(95,875
)
 
(48,433
)
Total partners’ capital
3,851,053

 
3,907,447

Noncontrolling interests in consolidated joint ventures
6,808

 
6,791

Total capital
3,857,861

 
3,914,238

Total liabilities and capital
$
9,408,426

 
$
9,526,784

See accompanying notes to the condensed consolidated financial statements.


12


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except unit and per unit data)
 
Three Months Ended March 31,
 
2015
 
2014
Operating Revenues:
 
 
 
Rental
$
319,166

 
$
305,786

Tenant reimbursements
85,829

 
83,621

Fee income
1,614

 
1,183

Total operating revenues
406,609

 
390,590

Operating Expenses:
 
 
 
Rental property operating and maintenance
124,563

 
117,896

Property taxes
23,263

 
22,125

Insurance
2,155

 
2,422

Change in fair value of contingent consideration
(43,034
)
 
(3,403
)
Depreciation and amortization
129,073

 
130,620

General and administrative
21,194

 
30,678

Transactions
93

 
81

Other
(16
)
 
164

Total operating expenses
257,291

 
300,583

Operating income
149,318

 
90,007

Other Income (Expenses):
 
 
 
Equity in earnings of unconsolidated joint ventures
4,618

 
2,581

Gain on sale of property
17,820

 

Gain on contribution of properties to unconsolidated joint ventures

 
1,906

Interest and other income (expense)
(2,290
)
 
1,727

Interest expense
(45,466
)
 
(47,374
)
Tax expense
(1,675
)
 
(1,838
)
Loss from early extinguishment of debt

 
(292
)
Net income
122,325

 
46,717

Net income attributable to noncontrolling interests in consolidated joint ventures
(116
)
 
(112
)
Net income attributable to Digital Realty Trust, L.P.
122,209

 
46,605

Preferred units distributions
(18,455
)
 
(11,726
)
Net income available to common unitholders
$
103,754

 
$
34,879

Net income per unit available to common unitholders:
 
 
 
Basic
$
0.75

 
$
0.27

Diluted
$
0.75

 
$
0.26

Weighted average common units outstanding:
 
 
 
Basic
138,406,993

 
131,142,664

Diluted
138,831,268

 
131,743,630

See accompanying notes to the condensed consolidated financial statements.


13


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2015
 
2014
Net income
$
122,325

 
$
46,717

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
(45,843
)
 
3,819

Decrease in fair value of interest rate swaps
(2,417
)
 
(1,343
)
Reclassification to interest expense from interest rate swaps
818

 
846

Comprehensive income
$
74,883


$
50,039

See accompanying notes to the condensed consolidated financial statements.


14


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL
(unaudited, in thousands, except unit data)
 
General Partner
 
Limited Partners
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests in
Consolidated Joint
Ventures
 
Total Capital
 
Preferred Units
 
Common Units
 
Common Units
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
 
 
Balance as of December 31, 2014
43,400,000

 
$
1,048,121

 
135,626,255

 
$
2,875,181

 
3,013,661

 
$
32,578

 
$
(48,433
)
 
$
6,791

 
$
3,914,238

Conversion of limited partner common units to general partner common units

 

 
79,274

 
857

 
(79,274
)
 
(857
)
 

 

 

Issuance of unvested restricted common units, net of forfeitures

 

 
80,138

 

 

 

 

 

 

Common unit offering costs

 

 

 
(148
)
 

 

 

 

 
(148
)
Issuance of common units in connection with the exercise of stock options

 

 
8,001

 
334

 

 

 

 

 
334

Issuance of common units, net of forfeitures

 

 

 

 
(9,676
)
 

 

 

 

Amortization of unearned compensation on share-based awards

 

 

 
4,967

 

 

 

 

 
4,967

Reclassification of vested share-based awards

 

 

 
(8,602
)
 

 
8,602

 

 

 

Distributions

 
(18,455
)
 

 
(115,419
)
 

 
(2,440
)
 

 

 
(136,314
)
Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

 

 

 

 

 

 

 
(99
)
 
(99
)
Net income

 
18,455

 

 
101,728

 

 
2,026

 

 
116

 
122,325

Other comprehensive income—foreign currency translation adjustments

 

 

 

 

 

 
(45,843
)
 

 
(45,843
)
Other comprehensive loss—fair value of interest rate swaps

 

 

 

 

 

 
(2,417
)
 

 
(2,417
)
Other comprehensive income—reclassification of accumulated other comprehensive loss to interest expense

 

 

 

 

 

 
818

 

 
818

Balance as of March 31, 2015
43,400,000

 
$
1,048,121

 
135,793,668

 
$
2,858,898

 
2,924,711

 
$
39,909

 
$
(95,875
)
 
$
6,808

 
$
3,857,861


See accompanying notes to the condensed consolidated financial statements.

15


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
122,325

 
$
46,717

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

 

Gain on sale of property
(17,820
)
 

Gain on contribution of investment properties to unconsolidated joint ventures

 
(1,906
)
Equity in earnings of unconsolidated joint ventures
(4,618
)
 
(2,581
)
Change in fair value of accrued contingent consideration
(43,034
)
 
(3,403
)
Distributions from unconsolidated joint ventures
3,436

 
2,214

Write-off of net assets due to early lease terminations
(30
)
 

Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases
111,696

 
111,142

Amortization of share-based unearned compensation
2,965

 
8,985

Allowance for doubtful accounts
137

 
1,580

Amortization of deferred financing costs
2,216

 
2,085

Loss on early extinguishment of debt

 
292

Amortization of debt discount/premium
484

 
385

Amortization of acquired in-place lease value and deferred leasing costs
17,379

 
19,478

Amortization of acquired above-market leases and acquired below-market leases
(2,324
)
 
(2,788
)
Changes in assets and liabilities:

 

Restricted cash
(399
)
 
(1,589
)
Accounts and other receivables
18,731

 
2,129

Deferred rent
(13,369
)
 
(21,335
)
Deferred leasing costs
(4,494
)
 
(6,798
)
Other assets
(14,849
)
 
(14,227
)
Accounts payable and other accrued liabilities
(42,482
)
 
(26,051
)
Security deposits and prepaid rents
2,972

 
2,082

Net cash provided by operating activities
138,922

 
116,411

Cash flows from investing activities:
 
 
 
Proceeds from sale of properties, net
43,274

 

Proceeds from contribution of investment properties to unconsolidated joint ventures

 
11,408

Investment in unconsolidated joint ventures
(7,547
)
 
(10,564
)
Investment in equity securities

 
(5
)
Receipt of value added tax refund
14,115

 
425

Refundable value added tax paid
(12,403
)
 
(2,289
)
Change in restricted cash
(75
)
 
(814
)
Improvements to and advances for investments in real estate
(183,817
)
 
(224,118
)
Improvement advances to tenants
(8,040
)
 
(2,499
)
Collection of advances from tenants for improvements
5,423

 
912

Net cash used in investing activities
(149,070
)
 
(227,544
)
 See accompanying notes to the condensed consolidated financial statements.

16


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
$
540,142

 
$
433,297

Repayments on revolving credit facility
(213,468
)
 
(371,351
)
Repayments on other unsecured loans
(67,000
)
 

Principal payments on mortgage loans
(2,255
)
 
(3,343
)
Change in restricted cash
51

 
(68
)
Payment of loan fees and costs
(68
)
 
(150
)
Capital distributions paid to noncontrolling interests in consolidated joint ventures, net
(99
)
 

General partner contributions
186

 
289,795

Payment of distributions to preferred unitholders
(18,455
)
 
(11,726
)
Payment of distributions to common unitholders
(232,878
)
 
(211,887
)
Net cash (used in) provided by financing activities
6,156

 
124,567

Net (decrease) increase in cash and cash equivalents
(3,992
)
 
13,434

Cash and cash equivalents at beginning of period
41,321

 
56,808

Cash and cash equivalents at end of period
$
37,329

 
$
70,242

 
See accompanying notes to the condensed consolidated financial statements.

17


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
63,289

 
$
67,824

Cash paid for income taxes
1,185

 
863

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
(45,843
)
 
3,819

(Decrease) increase in accounts payable and other accrued liabilities related to change in
   fair value of interest rate swaps
(2,417
)
 
(1,343
)
Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
173,246

 
197,376

See accompanying notes to the condensed consolidated financial statements.
 

18

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2015 and 2014


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 data center and colocation solutions for domestic and international tenants across a variety of industry verticals ranging from financial services, cloud and information technology services, to manufacturing, energy, healthcare, and consumer products. As of March 31, 2015, our portfolio consisted of 130 properties, including two properties held for sale, 14 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 offices 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 March 31, 2015, Digital Realty Trust, Inc. owns a 97.9% common interest and a 100.0% 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 for the year ended December 31, 2014.
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

19

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


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.
 
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 and Capital and Accumulated Other Comprehensive Income.
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 March 31, 2015, 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.


20

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


(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.

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 March 31, 2015 and 2014, we capitalized interest of approximately $4.3 million and $5.3 million, respectively. During the three months ended March 31, 2015 and 2014, we capitalized amounts relating to compensation and other overhead expense of employees direct and incremental to construction and successful leasing activities of approximately $12.3 million and $11.4 million, respectively. Capitalized leasing costs of $13.7 million and $9.6 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 three months ended March 31, 2015 and 2014, 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 Monte Carlo simulation method 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 subsidiaries are 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 March 31, 2015 and December 31, 2014, 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 months ended March 31, 2015 and 2014, we had no such interest or penalties. The tax year 2011 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.

21

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


 
(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.
(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.

(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.


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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


(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 $314.7 million and $295.2 million and outside the United States were $92.0 million and $95.4 million for the three months ended March 31, 2015 and 2014, respectively. We had long-lived assets located in the United States of $5.5 billion and $5.4 billion and outside the United States of $2.6 billion and $2.7 billion as of March 31, 2015 and December 31, 2014, respectively.
Operating revenues from properties located in the United Kingdom were $50.0 million and $54.9 million, or 12.3% and 14.1% of total operating revenues, for the three months ended March 31, 2015 and 2014, 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 $1.7 billion and $1.7 billion, or 20.7% and 21.3% of total long-lived assets, as of March 31, 2015 and December 31, 2014, respectively. No other foreign country comprised more than 10% of total long-lived assets as of March 31, 2015 and December 31, 2014.
 
(m) Reclassifications
Certain reclassifications of prior year amounts have been made to conform to the current year presentation. During the three months ended March 31, 2015, $0.2 million was reclassified from construction management expense to other expense.
(n) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued an update Accounting Standards Update (ASU) No. 2014-09 establishing ASC Topic 606, Revenue from Contracts with Customers. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. ASU 2014-09 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2016. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In accordance with the guidance, all legal entities are subject to reevaluation under the revised consolidation model. The guidance is effective in the first quarter of 2016, and early adoption is permitted. We are currently evaluating the potential impact of the adoption of ASU 2015-02 on our consolidated financial statements.
On April 17, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability.  Currently, debt issuance costs are recorded as an asset and amortization of these deferred financing costs is recorded in interest expense.  Under the new standard, debt issuance costs will continued to be amortized over the life of the debt instrument and amortization will continue to be recorded in interest expense.  The new standard is effective for the Company on January 1, 2016 and will be applied on a retrospective basis.  The Company is currently evaluating ASU 2015-03, and anticipates a change in our presentation only since the standard does not alter the accounting for debt issuance costs.
3. Investments in Real Estate
We acquired no real estate properties during the three months ended March 31, 2015.
Dispositions
We have identified certain non-core investment properties we intend to sell as part of our capital recycling strategy. Our capital recycling program is designed to identify non-strategic and underperforming assets that can be sold to generate proceeds that

23

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


will support the funding of our core investment activity. We expect our capital recycling initiative will likewise have a meaningfully positive impact on overall return on invested capital. In addition, our capital recycling program does not represent a strategic shift, as we are not entirely exiting regions or property types. During this process, we are evaluating the carrying value of certain investment properties identified for potential sale to ensure the carrying value is recoverable in light of a potentially shorter holding period. As a result of our evaluation, during the year ended December 31, 2014, we recognized approximately $126.5 million of impairment losses on five properties located in the Midwest, Northeast and West regions. The fair value of the five properties were primarily based on discounted cash flow analysis, and in certain cases, we supplemented the analysis by obtaining broker opinions of value. As of March 31, 2015, these properties do not yet meet the criteria to be classified as held for sale.
As of December 31, 2014, the Company had taken the necessary actions to conclude that five properties (separate from those referenced above) to be disposed of as part of our capital recycling strategy met the criteria to be classified as held for sale. As of December 31, 2014, these five properties had an aggregate carrying value of $120.5 million within total assets and $5.8 million within total liabilities and are shown as assets held for sale and obligations associated with assets held for sale on the condensed consolidated balance sheet. The five properties are not representative of a significant component of our portfolio, nor does the potential sales represent a significant shift in our strategy. During the three months ended March 31, 2015, two of the properties were sold, with aggregate gross sales proceeds of approximately $45.3 million and we recognized a gain of approximately $17.8 million. As of March 31, 2015, two of the remaining three properties still met the criteria to be classified as held for sale. As of March 31, 2015, these two properties had an aggregate carrying value of $81.7 million within total assets and $3.2 million within total liabilities and are shown as assets held for sale and obligations associated with assets held for sale on the condensed consolidated balance sheet. The Company reclassified one property that was held for sale as of December 31, 2014 back to held for use, and recorded catch-up depreciation expense of approximately $0.3 million associated with this property.
Subsequent to March 31, 2015, the Company has taken the necessary actions to conclude that one additional property to be disposed of met the criteria under authoritative accounting guidance to be classified as held for sale.  As these criteria had not been met as of March 31, 2015, the property is classified as held for use in the accompanying condensed consolidated financial statements.  As of March 31, 2015, the property had an aggregate carrying value of $15.6 million within total assets and $0.3 million within total liabilities.





24

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


4. Investment in Unconsolidated Joint Ventures
As of March 31, 2015, our investment in unconsolidated joint ventures consists of effective 50% interests in three joint ventures that own data center properties at 2001 Sixth Avenue in Seattle, Washington, 2020 Fifth Avenue in Seattle, Washington and 33 Chun Choi Street in Hong Kong, and 20% interests in two joint ventures, one of which owns 10 data center properties with an investment fund managed by Prudential Real Estate Investors (PREI®) and the other which owns one data center property with an affiliate of Griffin Capital Essential Asset REIT, Inc. (GCEAR). The following tables present summarized financial information for the joint ventures as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014 (unaudited, in thousands):
 
 
As of March 31, 2015
 
Three Months Ended March 31, 2015
2015
Net Investment
in Properties
 
Total Assets
 
Debt
 
Total
Liabilities
 
Equity
 
Revenues
 
Property
Operating
Expense
 
Net
Operating
Income
 
Net Income
Total Unconsolidated Joint Ventures
$
773,457

 
$
949,576

 
$
461,153

 
$
566,483

 
$
383,093

 
$
31,850

 
$
(8,175
)
 
$
23,675

 
$
10,026

Our investment in and share of equity in earnings of unconsolidated joint ventures
 
 
 
 
 
 
 
 
$
103,475

 
 
 
 
 
 
 
$
4,618

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2014
 
Three Months Ended March 31, 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
$
779,752

 
$
942,107

 
$
461,548

 
$
569,895

 
$
372,212

 
$
21,919

 
$
(5,009
)
 
$
16,910

 
$
5,894

Our investment in and share of equity in earnings of unconsolidated joint ventures
 
 
 
 
 
 
 
 
$
94,729

 
 
 
 
 
 
 
$
2,581

Prudential Real Estate Investors (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 its 80% share of the net asset less the Company’s book value.
Griffin Capital Essential Asset REIT, Inc. (GCEAR) Joint Venture

On September 9, 2014, we formed a joint venture with an affiliate of Griffin Capital Essential Asset REIT, Inc. (GCEAR). We contributed to the joint venture the property located at 43915 Devin Shafron Drive (Building A) in Ashburn, Virginia, which is a Turn-Key Flex® data center property valued at approximately $185.5 million (excluding approximately $2.1 million of closing costs). GCEAR contributed cash to the joint venture and will hold an 80% interest in the joint venture. We retained a 20% interest in the joint venture. The joint venture agreement provides for a current annual preferred return from cash flow first to GCEAR and then to us, after which a portion of any excess cash flows is shared by the partners based on their respective interests and the remaining portion is paid to us as a promote interest. We will perform the day-to-day accounting and property management functions for the joint venture and the property and, as such, will earn management fees. Although we are the managing member of the joint venture and manage the day-to-day activities, certain major decisions, including approval of

25

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


annual budgets, require approval of the GCEAR member. Thus, we concluded we do not own a controlling interest and will account for our interest in the joint venture as an equity method investment.
The joint venture arranged a $102.0 million five-year secured bank loan at LIBOR plus 225 basis points, representing a loan-to-value ratio of approximately 55%. The joint venture entered into an interest rate swap agreement to effectively fix the interest rate on approximately $51.0 million of borrowings under the loan through September 2019.  Two one-year extensions of the maturity date are available under the loan agreement, which the joint venture may exercise if certain conditions are met. Proceeds from this loan offset the initial cash capital contribution amount required from GCEAR and was used to provide us with a special distribution on account of a portion of the contribution value of the property. The transaction generated approximately $167.5 million of net proceeds to us, comprised of our share of the initial draw-down on the bank loan in addition to GCEAR’s equity contribution, less our share of closing costs. Accordingly we recognized a gain of approximately $93.5 million on the sale of the 80% interest in the joint venture during the three months ended September 30, 2014.
Differences between the Company’s investment in the joint ventures and the amount of the underlying equity in net assets of the joint ventures 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 ventures. Our proportionate share of the earnings or losses related to these unconsolidated joint ventures is reflected as equity in earnings of unconsolidated joint ventures on the accompanying consolidated income statements.


26

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


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 March 31, 2015 and December 31, 2014.
 
 
Balance as of
(Amounts in thousands)
March 31, 2015

December 31, 2014
Acquired in-place lease value:



Gross amount
$
674,243


$
680,419

Accumulated amortization
(463,049
)

(452,739
)
Net
$
211,194


$
227,680

Acquired above-market leases:



Gross amount
$
122,301


$
126,677

Accumulated amortization
(87,544
)

(88,072
)
Net
$
34,757


$
38,605

Acquired below-market leases:



Gross amount
$
278,360


$
282,670

Accumulated amortization
(181,126
)

(178,435
)
Net
$
97,234


$
104,235

Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase to rental revenues of $2.3 million and $2.8 million for the three months ended March 31, 2015 and 2014, respectively. The expected average remaining lives for acquired below-market leases and acquired above-market leases is 6.0 years and 3.7 years, respectively, as of March 31, 2015. Estimated annual amortization of acquired below-market leases, net of acquired above-market leases, for each of the five succeeding years and thereafter, commencing April 1, 2015 is as follows:
(Amounts in thousands)
 
Remainder of 2015
$
6,693

2016
7,579

2017
6,182

2018
4,574

2019
4,632

Thereafter
32,817

Total
$
62,477

 
Amortization of acquired in-place lease value (a component of depreciation and amortization expense) was $11.6 million and $15.1 million for the three months ended March 31, 2015 and 2014, respectively. The expected average amortization period for acquired in-place lease value is 5.9 years as of March 31, 2015. The weighted average remaining contractual life for acquired leases excluding renewals or extensions is 4.6 years as of March 31, 2015. Estimated annual amortization of acquired in-place lease value for each of the five succeeding years and thereafter, commencing April 1, 2015 is as follows:
(Amounts in thousands)
 
Remainder of 2015
$
28,812

2016
31,822

2017
27,223

2018
24,904

2019
22,416

Thereafter
76,017

Total
$
211,194



27

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


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 4.500% 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.

 

28

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014


7. Debt of the Operating Partnership
A summary of outstanding indebtedness of the Operating Partnership as of March 31, 2015 and December 31, 2014 is as follows (in thousands):

Indebtedness
Interest Rate at March 31, 2015

Maturity Date

Principal Outstanding March 31, 2015
 
Principal Outstanding December 31, 2014
 
Global revolving credit facility
Various
(1)
Nov 3, 2017

$
826,906

(2)
$
525,951

(2)
Unsecured term loan
Various
(3)(6)
Apr 16, 2017

942,006

(4)
976,600

(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


(9)
50,000

  
Series E
5.730%

Jan 20, 2017

50,000

  
50,000

  
Series F
4.500%

Feb 3, 2015


(9)
17,000

  
Total Prudential Shelf Facility
 



75,000

  
142,000

  
Senior Notes:
 







4.50% notes due 2015
4.500%

Jul 15, 2015
(8)
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

444,540

(7)
467,310

(7)
4.25% notes due 2025
4.250%

Jan 17, 2025

592,720

(7)
623,080

(7)
Unamortized discounts
 



(14,788
)

(15,632
)

Total senior notes, net of discount
 



2,597,472

  
2,649,758

  
Total unsecured senior notes, net of discount
 



2,672,472

  
2,791,758

  

 

29

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2015 and 2014