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EX-10.6 - EXHIBIT 10.6 - Digital Realty Trust, Inc.ex10606302015.htm
EX-32.2 - EXHIBIT 32.2 - Digital Realty Trust, Inc.ex32206302015.htm
EX-31.3 - EXHIBIT 31.3 - Digital Realty Trust, Inc.ex31306302015.htm
EX-10.4 - EXHIBIT 10.4 - Digital Realty Trust, Inc.ex10406302015.htm
EX-10.7 - EXHIBIT 10.7 - Digital Realty Trust, Inc.ex10706302015.htm
EX-31.1 - EXHIBIT 31.1 - Digital Realty Trust, Inc.ex31106302015.htm
EX-32.4 - EXHIBIT 32.4 - Digital Realty Trust, Inc.ex32406302015.htm
EX-12.1 - EXHIBIT 12.1 - Digital Realty Trust, Inc.ex12106302015.htm
EX-10.5 - EXHIBIT 10.5 - Digital Realty Trust, Inc.ex10506302015.htm
EX-31.4 - EXHIBIT 31.4 - Digital Realty Trust, Inc.ex31406302015.htm
EX-10.3 - EXHIBIT 10.3 - Digital Realty Trust, Inc.ex10306302015.htm
EX-32.1 - EXHIBIT 32.1 - Digital Realty Trust, Inc.ex32106302015.htm
EX-32.3 - EXHIBIT 32.3 - Digital Realty Trust, Inc.ex32306302015.htm
EX-2.1 - EXHIBIT 2.1 - Digital Realty Trust, Inc.ex2106302015.htm
EX-31.2 - EXHIBIT 31.2 - Digital Realty Trust, Inc.ex31206302015.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 June 30, 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 July 31, 2015
Common Stock, $.01 par value per share
  
135,833,978




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 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 June 30, 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 June 30, 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. generally does not conduct business itself, other than acting as the sole general partner of Digital Realty Trust, L.P., issuing public securities 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 has not issued 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 primarily 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.

2



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" and "Capital and Accumulated Other Comprehensive Income";

Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources"; and

Part II, Item 2. "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 and the Chief Financial Officer of each entity during the period covered by this report 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


DIGITAL REALTY TRUST, INC. AND DIGITAL REALTY TRUST, L.P.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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)
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
645,918

 
$
671,602

Acquired ground leases
13,225

 
12,196

Buildings and improvements
8,938,019

 
8,823,814

Tenant improvements
543,964

 
475,000

Total investments in properties
10,141,126

 
9,982,612

Accumulated depreciation and amortization
(2,033,289
)
 
(1,874,054
)
Net investments in properties
8,107,837

 
8,108,558

Investment in unconsolidated joint ventures
103,410

 
94,729

Net investments in real estate
8,211,247

 
8,203,287

Cash and cash equivalents
59,152

 
41,321

Accounts and other receivables, net of allowance for doubtful accounts of $6,263 and $6,302
   as of June 30, 2015 and December 31, 2014, respectively
126,734

 
135,931

Deferred rent
467,262

 
447,643

Acquired above-market leases, net
33,936

 
38,605

Acquired in-place lease value and deferred leasing costs, net
424,229

 
456,962

Deferred financing costs, net
30,203

 
30,821

Restricted cash
9,394

 
11,555

Assets held for sale
171,990

 
120,471

Other assets
51,862

 
40,188

Total assets
$
9,586,009

 
$
9,526,784

LIABILITIES AND EQUITY
 
 
 
Global revolving credit facility
$
777,013

 
$
525,951

Unsecured term loan
961,098

 
976,600

Unsecured senior notes, net of discount
2,856,408

 
2,791,758

Mortgage loans, including premiums
374,307

 
378,818

Accounts payable and other accrued liabilities
516,232

 
605,923

Accrued dividends and distributions

 
115,019

Acquired below-market leases, net
94,312

 
104,235

Security deposits and prepaid rents
109,005

 
108,478

Obligations associated with assets held for sale
7,441

 
5,764

Total liabilities
5,695,816

 
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 June 30, 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 June 30, 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 June 30, 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 June 30, 2015 and December 31, 2014, respectively
353,290

 
353,290

Common Stock: $0.01 par value, 215,000,000 shares authorized, 135,832,492 and
   135,626,255 shares issued and outstanding as of June 30, 2015 and
   December 31, 2014, respectively
1,351

 
1,349

Additional paid-in capital
3,974,398

 
3,970,439

Accumulated dividends in excess of earnings
(1,108,701
)
 
(1,096,607
)
Accumulated other comprehensive loss, net
(67,324
)
 
(45,046
)
Total stockholders’ equity
3,847,845

 
3,878,256

Noncontrolling Interests:
 
 
 
Noncontrolling interests in operating partnership
35,577

 
29,191

Noncontrolling interests in consolidated joint ventures
6,771

 
6,791

Total noncontrolling interests
42,348

 
35,982

Total equity
3,890,193

 
3,914,238

Total liabilities and equity
$
9,586,009

 
$
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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Operating Revenues:
 
 
 
 
 
 
 
Rental
$
330,676

 
$
313,420

 
$
649,842

 
$
619,206

Tenant reimbursements
87,572

 
85,687

 
173,401

 
169,308

Fee income
1,549

 
1,466

 
3,163

 
2,649

Other
498

 
873

 
498

 
873

Total operating revenues
420,295


401,446


826,904


792,036

Operating Expenses:
 
 
 
 

 

Rental property operating and maintenance
129,539

 
126,796

 
254,102

 
244,692

Property taxes
20,900

 
20,595

 
44,163

 
42,720

Insurance
2,154

 
1,896

 
4,309

 
4,318

Change in fair value of contingent consideration
352

 
766

 
(42,682
)
 
(2,637
)
Depreciation and amortization
131,524

 
137,092

 
260,597

 
267,712

General and administrative
25,613

 
20,321

 
46,807

 
50,999

Transactions
3,166

 
755

 
3,259

 
836

Other
(6
)
 
772

 
(22
)
 
936

Total operating expenses
313,242


308,993


570,533


609,576

Operating income
107,053

 
92,453

 
256,371

 
182,460

Other Income (Expenses):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
3,383

 
3,477

 
8,001

 
6,058

Gain on sale of property
76,669

 
15,945

 
94,489

 
15,945

Gain on contribution of property to unconsolidated joint venture

 

 

 
1,906

Interest and other income (expense)
(231
)
 
(83
)
 
(2,521
)
 
1,644

Interest expense
(46,114
)
 
(49,146
)
 
(91,580
)
 
(96,520
)
Tax expense
(2,615
)
 
(1,021
)
 
(4,290
)
 
(2,859
)
Loss from early extinguishment of debt
(148
)
 
(293
)
 
(148
)
 
(585
)
Net income
137,997


61,332


260,322


108,049

Net income attributable to noncontrolling interests
(2,486
)
 
(993
)
 
(4,628
)
 
(1,798
)
Net income attributable to Digital Realty Trust, Inc.
135,511


60,339


255,694


106,251

Preferred stock dividends
(18,456
)
 
(18,829
)
 
(36,911
)
 
(30,555
)
Net income available to common stockholders
$
117,055


$
41,510


$
218,783


$
75,696

Net income per share available to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.86

 
$
0.31

 
$
1.61

 
$
0.58

Diluted
$
0.86

 
$
0.31

 
$
1.61

 
$
0.58

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
135,810,060

 
133,802,622

 
135,757,584

 
131,183,857

Diluted
136,499,004

 
133,977,885

 
136,260,995

 
131,320,547

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
137,997

 
$
61,332

 
$
260,322

 
$
108,049

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
23,468

 
4,921

 
(22,375
)
 
8,740

Increase (decrease) in fair value of interest rate swaps
577

 
(4,739
)
 
(1,840
)
 
(6,082
)
Reclassification to interest expense from interest rate swaps
685

 
854

 
1,503

 
1,700

Comprehensive income
162,727

 
62,368

 
237,610

 
112,407

Comprehensive income attributable to noncontrolling interests
(2,978
)
 
(1,014
)
 
(4,194
)
 
(1,885
)
Comprehensive income attributable to Digital Realty Trust, Inc.
$
159,749

 
$
61,354

 
$
233,416

 
$
110,522

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

 
114,587

 
2

 
1,310

 

 

 
1,312

 
(1,312
)
 

 
(1,312
)
 

Issuance of unvested restricted stock, net of forfeitures

 
79,689

 

 

 

 

 

 

 

 

 

Common stock offering costs

 

 

 
(273
)
 

 

 
(273
)
 

 

 

 
(273
)
Exercise of stock options

 
11,961

 

 
493

 

 

 
493

 

 

 

 
493

Amortization of unearned compensation on share-based awards

 

 

 
11,031

 

 

 
11,031

 

 

 

 
11,031

Reclassification of vested share-based awards

 

 

 
(8,602
)
 

 

 
(8,602
)
 
8,602

 

 
8,602

 

Dividends declared and paid on preferred stock

 

 

 

 
(36,911
)
 

 
(36,911
)
 

 

 

 
(36,911
)
Dividends and distributions on common stock and common and incentive units

 

 

 

 
(230,877
)
 

 
(230,877
)
 
(4,873
)
 

 
(4,873
)
 
(235,750
)
Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

 

 

 

 

 

 

 

 
(245
)
 
(245
)
 
(245
)
Net income

 

 

 

 
255,694

 

 
255,694

 
4,403

 
225

 
4,628

 
260,322

Other comprehensive income—foreign currency translation adjustments

 

 

 

 

 
(21,947
)
 
(21,947
)
 
(428
)
 

 
(428
)
 
(22,375
)
Other comprehensive loss—fair value of interest rate swaps

 

 

 

 

 
(1,804
)
 
(1,804
)
 
(36
)
 

 
(36
)
 
(1,840
)
Other comprehensive income—reclassification of accumulated other comprehensive loss to interest expense

 

 

 

 

 
1,473

 
1,473

 
30

 

 
30

 
1,503

Balance as of June 30, 2015
$
1,048,121

 
135,832,492

 
$
1,351

 
$
3,974,398

 
$
(1,108,701
)
 
$
(67,324
)
 
$
3,847,845

 
$
35,577

 
$
6,771

 
$
42,348

 
$
3,890,193

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)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
260,322

 
$
108,049

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of properties
(94,489
)
 
(15,945
)
Gain on contribution of investment property to unconsolidated joint venture

 
(1,906
)
Equity in earnings of unconsolidated joint ventures
(8,001
)
 
(6,058
)
Change in fair value of accrued contingent consideration
(42,682
)
 
(2,637
)
Distributions from unconsolidated joint ventures
6,898

 
4,603

Write-off of net assets due to early lease terminations
(59
)
 
651

Depreciation and amortization of buildings and improvements, tenant improvements
   and acquired ground leases
226,767

 
225,025

Amortization of share-based unearned compensation
7,483

 
12,640

Allowance for doubtful accounts
(39
)
 
954

Amortization of deferred financing costs
4,285

 
4,487

Loss on early extinguishment of debt
148

 
585

Amortization of debt discount/premium
915

 
864

Amortization of acquired in-place lease value and deferred leasing costs
33,830

 
42,687

Amortization of acquired above-market leases and acquired below-market leases, net
(4,683
)
 
(5,340
)
Changes in assets and liabilities:
 
 
 
Restricted cash
566

 
1,922

Accounts and other receivables
4,826

 
20,583

Deferred rent
(27,868
)
 
(41,283
)
Deferred leasing costs
(4,675
)
 
(7,663
)
Other assets
(15,429
)
 
(13,328
)
Accounts payable and other accrued liabilities
4,344

 
3,718

Security deposits and prepaid rents
2,692

 
(17,344
)
Net cash provided by operating activities
355,151

 
315,264

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(48,424
)
 

Proceeds from sale of properties, net
185,565

 
37,945

Proceeds from contribution of investment properties to unconsolidated joint ventures

 
11,408

Investment in unconsolidated joint ventures
(7,547
)
 
(20,627
)
Investment in equity securities

 
(3
)
Receipt of value added tax refund
13,422

 
4,956

Refundable value added tax paid
(2,771
)
 
(3,816
)
Change in restricted cash
1,484

 
(1,340
)
Improvements to and advances for investments in real estate
(380,148
)
 
(431,217
)
Improvement advances to tenants
(17,881
)
 
(7,091
)
Collection of advances from tenants for improvements
14,441

 
5,969

Net cash used in investing activities
(241,859
)
 
(403,816
)
 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)
 
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
$
1,291,832

 
$
677,264

Repayments on revolving credit facility
(1,032,798
)
 
(1,033,838
)
Principal payments on unsecured notes
(374,927
)
 

Repayments on other unsecured loans
(67,000
)
 

Borrowings on 3.950% unsecured senior notes due 2022
496,190



Borrowings on 4.750% unsecured senior notes due 2023


495,872

Principal payments on mortgage loans
(4,440
)
 
(6,349
)
Principal repayments on exchangeable senior debentures

 
(5,234
)
Earnout payments related to acquisitions
(12,985
)

(5,706
)
Change in restricted cash
113


51

Payment of loan fees and costs
(3,741
)
 
(5,311
)
Capital distributions paid to noncontrolling interests in consolidated joint ventures, net
(245
)

(274
)
Gross proceeds from the issuance of preferred stock


365,000

Common stock offering costs paid
(273
)

(93
)
Preferred stock offering costs paid


(11,622
)
Proceeds from exercise of stock options
493


237

Payment of dividends to preferred stockholders
(36,911
)

(30,555
)
Payment of dividends to common stockholders and distributions to
    noncontrolling interests in operating partnership
(350,769
)

(326,772
)
Net cash (used in) provided by financing activities
(95,461
)
 
112,670

Net increase in cash and cash equivalents
17,831

 
24,118

Cash and cash equivalents at beginning of period
41,321

 
56,808

Cash and cash equivalents at end of period
$
59,152

 
$
80,926

 
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)
 
 
Six Months Ended June 30,
 
2015
 
2014
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
101,036

 
$
98,240

Cash paid for income taxes
1,785

 
2,800

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
$
(22,375
)
 
$
8,740

(Decrease) increase in accounts payable and other accrued liabilities related to change in
   fair value of interest rate swaps
(1,840
)
 
(6,082
)
Noncontrolling interests in operating partnership redeemed for or converted to
   shares of common stock
1,312

 
191

Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
134,625

 
191,148

Accrual for potential earnout contingency
12,443

 

Issuance of common units associated with exchange of exchangeable senior debentures

 
261,166

Note receivable related to sale of property
9,000

 

Allocation of purchase price of real estate/investment in partnership to:
 
 
 
Investments in real estate
48,424

 

Cash paid for acquisition of real estate
$
48,424

 
$

See accompanying notes to the condensed consolidated financial statements.


11



DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and per unit data)
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
645,918

 
$
671,602

Acquired ground leases
13,225

 
12,196

Buildings and improvements
8,938,019

 
8,823,814

Tenant improvements
543,964

 
475,000

Total investments in properties
10,141,126

 
9,982,612

Accumulated depreciation and amortization
(2,033,289
)
 
(1,874,054
)
Net investments in properties
8,107,837

 
8,108,558

Investment in unconsolidated joint ventures
103,410

 
94,729

Net investments in real estate
8,211,247

 
8,203,287

Cash and cash equivalents
59,152

 
41,321

Accounts and other receivables, net of allowance for doubtful accounts of $6,263 and $6,302
   as of June 30, 2015 and December 31, 2014, respectively
126,734

 
135,931

Deferred rent
467,262

 
447,643

Acquired above-market leases, net
33,936

 
38,605

Acquired in-place lease value and deferred leasing costs, net
424,229

 
456,962

Deferred financing costs, net
30,203

 
30,821

Restricted cash
9,394

 
11,555

Assets held for sale
171,990

 
120,471

Other assets
51,862

 
40,188

Total assets
$
9,586,009

 
$
9,526,784

LIABILITIES AND CAPITAL

 

Global revolving credit facility
$
777,013

 
$
525,951

Unsecured term loan
961,098

 
976,600

Unsecured senior notes, net of discount
2,856,408

 
2,791,758

Mortgage loans, including premiums
374,307

 
378,818

Accounts payable and other accrued liabilities
516,232

 
605,923

Accrued dividends and distributions

 
115,019

Acquired below-market leases, net
94,312

 
104,235

Security deposits and prepaid rents
109,005

 
108,478

Obligations associated with assets held for sale
7,441

 
5,764

Total liabilities
5,695,816

 
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 June 30, 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 June 30, 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 June 30, 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 June 30, 2015 and December 31, 2014, respectively
353,290

 
353,290

Common units:


 


135,832,492 and 135,626,255 units issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
2,867,048

 
2,875,181

Limited partners, 1,425,314 and 1,463,814 common units, 1,126,429 and 1,170,610 profits interest units and 379,237 and 379,237
class C units outstanding as of June 30, 2015 and December 31, 2014, respectively
39,398

 
32,578

Accumulated other comprehensive loss
(71,145
)
 
(48,433
)
Total partners’ capital
3,883,422

 
3,907,447

Noncontrolling interests in consolidated joint ventures
6,771

 
6,791

Total capital
3,890,193

 
3,914,238

Total liabilities and capital
$
9,586,009

 
$
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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Operating Revenues:
 
 
 
 
 
 
 
Rental
$
330,676

 
$
313,420

 
$
649,842

 
$
619,206

Tenant reimbursements
87,572

 
85,687

 
173,401

 
169,308

Fee income
1,549

 
1,466

 
3,163

 
2,649

Other
498

 
873

 
498

 
873

Total operating revenues
420,295

 
401,446

 
826,904

 
792,036

Operating Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
129,539

 
126,796

 
254,102

 
244,692

Property taxes
20,900

 
20,595

 
44,163

 
42,720

Insurance
2,154

 
1,896

 
4,309

 
4,318

Change in fair value of contingent consideration
352

 
766

 
(42,682
)
 
(2,637
)
Depreciation and amortization
131,524

 
137,092

 
260,597

 
267,712

General and administrative
25,613

 
20,321

 
46,807

 
50,999

Transactions
3,166

 
755

 
3,259

 
836

Other
(6
)
 
772

 
(22
)
 
936

Total operating expenses
313,242

 
308,993

 
570,533

 
609,576

Operating income
107,053

 
92,453

 
256,371

 
182,460

Other Income (Expenses):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
3,383

 
3,477

 
8,001

 
6,058

Gain on sale of properties
76,669

 
15,945

 
94,489

 
15,945

Gain on contribution of property to unconsolidated joint venture

 

 

 
1,906

Interest and other income (expense)
(231
)
 
(83
)
 
(2,521
)
 
1,644

Interest expense
(46,114
)
 
(49,146
)
 
(91,580
)
 
(96,520
)
Tax expense
(2,615
)
 
(1,021
)
 
(4,290
)
 
(2,859
)
Loss from early extinguishment of debt
(148
)
 
(293
)
 
(148
)
 
(585
)
Net income
137,997

 
61,332

 
260,322

 
108,049

Net income attributable to noncontrolling interests in consolidated joint ventures
(109
)
 
(120
)
 
(225
)
 
(232
)
Net income attributable to Digital Realty Trust, L.P.
137,888

 
61,212

 
260,097

 
107,817

Preferred units distributions
(18,456
)
 
(18,829
)
 
(36,911
)
 
(30,555
)
Net income available to common unitholders
$
119,432

 
$
42,383

 
$
223,186

 
$
77,262

Net income per unit available to common unitholders:
 
 
 
 
 
 
 
Basic
$
0.86

 
$
0.31

 
$
1.61

 
$
0.58

Diluted
$
0.86

 
$
0.31

 
$
1.61

 
$
0.58

Weighted average common units outstanding:
 
 
 
 
 
 
 
Basic
138,567,526

 
136,615,338

 
138,487,704

 
133,894,119

Diluted
139,256,470

 
136,790,601

 
138,991,115

 
134,030,809

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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
137,997

 
$
61,332

 
$
260,322

 
$
108,049

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
23,468

 
4,921

 
(22,375
)
 
8,740

Decrease in fair value of interest rate swaps
577

 
(4,739
)
 
(1,840
)
 
(6,082
)
Reclassification to interest expense from interest rate swaps
685

 
854

 
1,503

 
1,700

Comprehensive income
$
162,727


$
62,368


$
237,610


$
112,407

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

 

 
114,587

 
1,312

 
(114,587
)
 
(1,312
)
 

 

 

Issuance of unvested restricted common units, net of forfeitures

 

 
79,689

 

 

 

 

 

 

Common stock offering costs

 

 

 
(273
)
 

 

 

 

 
(273
)
Issuance of common units in connection with the exercise of stock options

 

 
11,961

 
493

 

 

 

 

 
493

Issuance of common units, net of forfeitures

 

 

 

 
31,906

 

 

 

 

Amortization of unearned compensation on share-based awards

 

 

 
11,031

 

 

 

 

 
11,031

Reclassification of vested share-based awards

 

 

 
(8,602
)
 

 
8,602

 

 

 

Distributions

 
(36,911
)
 

 
(230,877
)
 

 
(4,873
)
 

 

 
(272,661
)
Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

 

 

 

 

 

 

 
(245
)
 
(245
)
Net income

 
36,911

 

 
218,783

 

 
4,403

 

 
225

 
260,322

Other comprehensive income—foreign currency translation adjustments

 

 

 

 

 

 
(22,375
)
 

 
(22,375
)
Other comprehensive loss—fair value of interest rate swaps

 

 

 

 

 

 
(1,840
)
 

 
(1,840
)
Other comprehensive income—reclassification of accumulated other comprehensive loss to interest expense

 

 

 

 

 

 
1,503

 

 
1,503

Balance as of June 30, 2015
43,400,000

 
$
1,048,121

 
135,832,492

 
$
2,867,048

 
2,930,980

 
$
39,398

 
$
(71,145
)
 
$
6,771

 
$
3,890,193


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)
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
260,322

 
$
108,049

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

 

Gain on sale of property
(94,489
)
 
(15,945
)
Gain on contribution of investment property to unconsolidated joint venture

 
(1,906
)
Equity in earnings of unconsolidated joint ventures
(8,001
)
 
(6,058
)
Change in fair value of accrued contingent consideration
(42,682
)
 
(2,637
)
Distributions from unconsolidated joint ventures
6,898

 
4,603

Write-off of net assets due to early lease terminations
(59
)
 
651

Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases
226,767

 
225,025

Amortization of share-based unearned compensation
7,483

 
12,640

Allowance for doubtful accounts
(39
)
 
954

Amortization of deferred financing costs
4,285

 
4,487

Loss on early extinguishment of debt
148

 
585

Amortization of debt discount/premium
915

 
864

Amortization of acquired in-place lease value and deferred leasing costs
33,830

 
42,687

Amortization of acquired above-market leases and acquired below-market leases, net
(4,683
)
 
(5,340
)
Changes in assets and liabilities:

 

Restricted cash
566

 
1,922

Accounts and other receivables
4,826

 
20,583

Deferred rent
(27,868
)
 
(41,283
)
Deferred leasing costs
(4,675
)
 
(7,663
)
Other assets
(15,429
)
 
(13,328
)
Accounts payable and other accrued liabilities
4,344

 
3,718

Security deposits and prepaid rents
2,692

 
(17,344
)
Net cash provided by operating activities
355,151

 
315,264

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(48,424
)
 

Proceeds from sale of properties, net
185,565

 
37,945

Proceeds from contribution of investment properties to unconsolidated joint ventures

 
11,408

Investment in unconsolidated joint ventures
(7,547
)
 
(20,627
)
Investment in equity securities

 
(3
)
Receipt of value added tax refund
13,422

 
4,956

Refundable value added tax paid
(2,771
)
 
(3,816
)
Change in restricted cash
1,484

 
(1,340
)
Improvements to and advances for investments in real estate
(380,148
)
 
(431,217
)
Improvement advances to tenants
(17,881
)
 
(7,091
)
Collection of advances from tenants for improvements
14,441

 
5,969

Net cash used in investing activities
(241,859
)
 
(403,816
)
 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)
 
 
Six Months Ended June 30,
 
2015
 
2014
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
$
1,291,832

 
$
677,264

Repayments on revolving credit facility
(1,032,798
)
 
(1,033,838
)
Principal payments on unsecured notes
(374,927
)
 

Repayments on other unsecured loans
(67,000
)
 

Borrowings on 3.950% unsecured senior notes due 2022
496,190

 

Borrowings on 4.750% unsecured senior notes due 2023

 
495,872

Principal payments on mortgage loans
(4,440
)
 
(6,349
)
Principal repayments on exchangeable senior debentures

 
(5,234
)
Earnout payments related to acquisitions
(12,985
)
 
(5,706
)
Change in restricted cash
113

 
51

Payment of loan fees and costs
(3,741
)
 
(5,311
)
Capital distributions paid to noncontrolling interests in consolidated joint ventures, net
(245
)
 
(274
)
General partner contributions, net
220

 
353,522

Payment of distributions to preferred unitholders
(36,911
)
 
(30,555
)
Payment of distributions to common unitholders
(350,769
)
 
(326,772
)
Net cash (used in) provided by financing activities
(95,461
)
 
112,670

Net increase in cash and cash equivalents
17,831

 
24,118

Cash and cash equivalents at beginning of period
41,321

 
56,808

Cash and cash equivalents at end of period
$
59,152

 
$
80,926

 
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)
 
 
Six Months Ended June 30,
 
2015
 
2014
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
101,036

 
$
98,240

Cash paid for income taxes
1,785

 
2,800

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
(22,375
)
 
8,740

(Decrease) increase in accounts payable and other accrued liabilities related to change in
   fair value of interest rate swaps
(1,840
)
 
(6,082
)
Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
134,625

 
191,148

Accrual for potential earnout contingency
12,443

 

Issuance of common units associated with exchange of exchangeable senior debentures

 
261,166

Note receivable related to sale of property
9,000

 

Allocation of purchase price of real estate/investment in partnership to:
 
 
 
Investments in real estate
48,424

 

Cash paid for acquisition of real estate
$
48,424

 
$

See accompanying notes to the condensed consolidated financial statements.
 

18

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2015, our portfolio consisted of 132 properties, including eight properties held for sale, 14 properties held as investments in unconsolidated joint ventures and developable land, of which 103 are located throughout North America, 23 are located in Europe, three are located in Australia and three are located in Asia. We are diversified in major metropolitan areas where corporate data center 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, the Amsterdam, Dublin, London and Paris metropolitan areas in Europe and the Singapore, Sydney, Melbourne, Hong Kong and Osaka metropolitan areas in the Asia Pacific region. The portfolio consists of Internet gateway and corporate data center 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 June 30, 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. generally does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing

19

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2015 and 2014


public securities from time to time and guaranteeing certain unsecured debt of the Operating Partnership and certain of its subsidiaries. Digital Realty Trust, Inc. itself has not issued 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 primarily 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 June 30, 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.


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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, 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 June 30, 2015 and 2014, we capitalized interest of approximately $3.2 million and $4.9 million, respectively, and $7.5 million and $10.2 million during the six months ended June 30, 2015 and 2014, respectively. During the three months ended June 30, 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 $14.0 million and $14.1 million, respectively, and $28.3 million and $27.9 million during the six months ended June 30, 2015 and 2014, respectively. Capitalized leasing costs of approximately $26.4 million and $21.8 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, 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 "Incentive Plan") 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 June 30, 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 and six months ended June 30, 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.

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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, 2015 and 2014


See Note 10 "Income Taxes" for further discussion on income taxes.
 
(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) Gains on Sale of Properties

Gains on sale of properties are recognized using the full accrual or partial sale methods, as applicable, in accordance with U.S. GAAP, provided various criteria relating to the terms of sale and any subsequent involvement with the real estate sold are satisfied.
(l) 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,

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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, 2015 and 2014


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.
(m) 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 $322.4 million and $305.5 million and outside the United States were $97.9 million and $95.9 million for the three months ended June 30, 2015 and 2014, respectively. Operating revenues from properties in the United States were $637.1 million and $600.7 million and outside the United States were $189.8 million and $191.3 million for the six months ended June 30, 2015 and 2014, respectively. We had long-lived assets located in the United States of $5.4 billion and $5.4 billion and outside the United States of $2.7 billion and $2.7 billion as of June 30, 2015 and December 31, 2014, respectively.
Operating revenues from properties located in the United Kingdom were $54.8 million and $54.5 million, or 13.0% and 13.6% of total operating revenues, for the three months ended June 30, 2015 and 2014, respectively. Operating revenues from properties located in the United Kingdom were $104.9 million and $109.4 million, or 12.7% and 13.8% of total operating revenues, for the six months ended June 30, 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 $1.8 billion and $1.7 billion, or 21.7% and 21.3% of total long-lived assets, as of June 30, 2015 and December 31, 2014, respectively. No other foreign country comprised more than 10% of total long-lived assets as of June 30, 2015 and December 31, 2014.
 
(n) Reclassifications
Certain reclassifications of prior year amounts have been made to conform to the current year presentation. During the three and six months ended June 30, 2014, $0.1 million and $0.3 million, respectively, were reclassified from rental property operating and maintenance expense to other expense.
(o) Recent Accounting Pronouncements
In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09, which outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers and notes that lease contracts with customers are a scope exception. Public business entities may elect to adopt the amendments as of the original effective date; however, if the proposed deferral is approved, adoption is required for annual reporting periods beginning after December 15, 2017. We are currently assessing the impact of the guidance 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 continue 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.

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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, 2015 and 2014


3. Investments in Real Estate
We acquired the following real estate properties during the six months ended June 30, 2015:
Location
 
Metropolitan Area
 
Date Acquired
 
Amount
(in millions)
(1)
Deer Park 3 (2)
 
Melbourne
 
April 15, 2015
 
$
1.6

3 Loyang Way (3)(4)
 
Singapore
 
June 25, 2015
 
45.0

 
 
 
 
 
 
$
46.6

(1)
Purchase price in U.S. dollars and excludes capitalized closing costs on land acquisitions. Purchase prices for acquisitions outside the United States are based on the exchange rate at the date of acquisition.
(2)
Represents currently vacant land which is not included in our operating property count.
(3)
Represents a development property with an existing shell, which is included in our operating property count. This acquisition lacked key inputs to qualify as a business combination under purchase accounting guidance, and has therefore been accounted for as an asset acquisition, not a business combination.
(4)
Property is subject to a ground lease, which expires in February 2024, with a renewal provision of an additional 28 years upon satisfaction of certain requirements.
Dispositions
We sold the following real estate properties during the six months ended June 30, 2015:
Location
 
Metropolitan Area
 
Date Sold
 
Gross Proceeds (in millions)