XNYS:DLR Digital Realty Trust Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:DLR Fair Value Estimate
Premium
XNYS:DLR Consider Buying
Premium
XNYS:DLR Consider Selling
Premium
XNYS:DLR Fair Value Uncertainty
Premium
XNYS:DLR Economic Moat
Premium
XNYS:DLR Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

 

¨ 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)

560 Mission Street, Suite 2900

San Francisco, CA

  94105
(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, 2012

Common Stock, $.01 par value per share   110,190,705

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2012 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, 2012, Digital Realty Trust, Inc. owned an approximate 95.7% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 4.3% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of Digital Realty Trust, Inc. As of March 31, 2012, 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. Digital Realty Trust, Inc. itself does not issue any indebtedness but guarantees some of the unsecured debt of Digital Realty Trust, L.P., as disclosed in this report. Digital Realty Trust, L.P. holds substantially all the assets of the company and holds the ownership interests in the company’s joint ventures. Digital Realty Trust, L.P. conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity issuances by Digital Realty Trust, Inc., which are generally contributed to Digital Realty Trust, L.P. in exchange for partnership units, Digital Realty Trust, L.P. generates the capital required by the company’s business through Digital Realty Trust, L.P.’s operations, by Digital Realty Trust, L.P.’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.

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

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

 

   

condensed consolidated financial statements;

 

   

the following notes to the condensed consolidated financial statements:

 

   

Debt of the company and Debt of the operating partnership;

 

2


Table of Contents
   

Income per Share and Income per Unit; and

 

   

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

 

   

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 and the Chief Financial Officer of each entity have made the requisite certifications and that the company and the operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

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

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

 

3


Table of Contents

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

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS

 

         Page
Number
 
PART I.  

FINANCIAL INFORMATION

  
ITEM 1.  

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

  
 

Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     5   
 

Condensed Consolidated Income Statements for the three months ended March 31, 2012 and 2011 (unaudited)

     6   
 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31,  2012 and 2011 (unaudited)

     7   
 

Condensed Consolidated Statement of Equity for the three months ended March 31, 2012 (unaudited)

     8   
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

     9   
 

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

  
 

Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     11   
 

Condensed Consolidated Income Statements for the three months ended March 31, 2012 and 2011 (unaudited)

     12   
 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31,  2012 and 2011 (unaudited)

     13   
 

Condensed Consolidated Statement of Capital for the three months ended March 31, 2012 (unaudited)

     14   
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 (unaudited)

     15   
 

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

     17   
ITEM 2.  

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

     42   
ITEM 3.  

Quantitative and Qualitative Disclosures About Market Risk

     65   
ITEM 4.  

Controls and Procedures (Digital Realty Trust, Inc.)

     67   
 

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

     68   
PART II.  

OTHER INFORMATION

     69   
ITEM 1.  

Legal Proceedings

     69   
ITEM 1A.   

Risk Factors

     69   
ITEM 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     69   
ITEM 3.  

Defaults Upon Senior Securities

     69   
ITEM 4.  

Mine Safety Disclosures

     69   
ITEM 5.  

Other Information

     69   
ITEM 6.  

Exhibits

     70   
 

Signatures

     71   
 

Exhibit Index

     72   

 

4


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Investments in real estate:

    

Properties:

    

Land

   $ 580,411      $ 555,113   

Acquired ground leases

     6,358        6,214   

Buildings and improvements

     5,552,398        5,253,754   

Tenant improvements

     344,882        303,502   
  

 

 

   

 

 

 

Total investments in properties

     6,484,049        6,118,583   

Accumulated depreciation and amortization

     (970,169     (900,044
  

 

 

   

 

 

 

Net investments in properties

     5,513,880        5,218,539   

Investment in unconsolidated joint ventures

     27,661        23,976   
  

 

 

   

 

 

 

Net investments in real estate

     5,541,541        5,242,515   

Cash and cash equivalents

     26,243        40,631   

Accounts and other receivables, net of allowance for doubtful accounts of $3,461 and $2,436 as of March 31, 2012 and December 31, 2011, respectively

     91,132        90,580   

Deferred rent

     261,197        246,815   

Acquired above market leases, net

     27,595        29,701   

Acquired in place lease value and deferred leasing costs, net

     353,398        335,381   

Deferred financing costs, net

     27,695        29,849   

Restricted cash

     43,810        55,165   

Other assets

     45,450        27,929   
  

 

 

   

 

 

 

Total assets

   $ 6,418,061      $ 6,098,566   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Global revolving credit facility

   $ 678,554      $ 275,106   

Unsecured senior notes, net of discount

     1,441,319        1,441,072   

Exchangeable senior debentures

     266,400        266,400   

Mortgage loans, net of premiums

     875,075        947,132   

Other secured loan

     10,500        10,500   

Accounts payable and other accrued liabilities

     313,968        315,133   

Accrued dividends and distributions

     —          75,455   

Acquired below market leases, net

     108,270        85,819   

Security deposits and prepaid rents

     90,991        101,538   
  

 

 

   

 

 

 

Total liabilities

     3,785,077        3,518,155   

Commitments and contingencies

    

Equity:

    

Stockholders’ Equity:

    

Preferred Stock: $0.01 par value per share, 30,000,000 shares authorized:

    

Series C Cumulative Convertible Preferred Stock, 4.375%, $128,155 and $128,159 liquidation preference, respectively ($25.00 per share), 5,126,214 and 5,126,364 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

     123,816        123,820   

Series D Cumulative Convertible Preferred Stock, 5.500%, $174,426 and $174,426 liquidation preference, respectively ($25.00 per share), 6,977,055 and 6,977,055 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

     168,669        168,669   

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, 2012 and December 31, 2011, respectively

     277,172        277,292   

Common Stock: $0.01 par value per share, 165,000,000 shares authorized, 107,342,049 and 106,039,279 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

     1,069        1,057   

Additional paid-in capital

     2,558,968        2,496,651   

Accumulated dividends in excess of earnings

     (527,816     (488,692

Accumulated other comprehensive loss, net

     (37,175     (55,880
  

 

 

   

 

 

 

Total stockholders’ equity

     2,564,703        2,522,917   
  

 

 

   

 

 

 

Noncontrolling Interests:

    

Noncontrolling interests in operating partnership

     49,639        45,057   

Noncontrolling interests in consolidated joint ventures

     18,642        12,437   
  

 

 

   

 

 

 

Total noncontrolling interests

     68,281        57,494   
  

 

 

   

 

 

 

Total equity

     2,632,984        2,580,411   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,418,061      $ 6,098,566   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

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

 

     Three Months Ended March 31,  
     2012     2011  

Operating Revenues:

    

Rental

   $ 222,834      $ 196,795   

Tenant reimbursements

     57,862        51,834   

Construction management

     2,452        1,817   

Other

     —          295   
  

 

 

   

 

 

 

Total operating revenues

     283,148        250,741   
  

 

 

   

 

 

 

Operating Expenses:

    

Rental property operating and maintenance

     79,845        71,723   

Property taxes

     16,042        13,471   

Insurance

     2,230        2,051   

Construction management

     193        1,737   

Depreciation and amortization

     83,995        73,918   

General and administrative

     14,250        12,405   

Transactions

     677        681   

Other

     —          90   
  

 

 

   

 

 

 

Total operating expenses

     197,232        176,076   
  

 

 

   

 

 

 

Operating income

     85,916        74,665   

Other Income (Expenses):

    

Equity in earnings of unconsolidated joint ventures

     1,389        1,208   

Interest and other income

     709        264   

Interest expense

     (38,030     (36,082

Tax expense

     (721     (428

Loss from early extinguishment of debt

     —          (615
  

 

 

   

 

 

 

Net income

     49,263        39,012   

Net income attributable to noncontrolling interests

     (1,221     (1,510
  

 

 

   

 

 

 

Net income attributable to Digital Realty Trust, Inc.

     48,042        37,502   

Preferred stock dividends

     (8,831     (6,522
  

 

 

   

 

 

 

Net income available to common stockholders

   $ 39,211      $ 30,980   
  

 

 

   

 

 

 

Net income per share available to common stockholders:

    

Basic

   $ 0.37      $ 0.34   

Diluted

   $ 0.36      $ 0.33   
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     107,099,856        91,428,355   

Diluted

     107,584,856        92,600,215   

See accompanying notes to the condensed consolidated financial statements.

 

6


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

     Three months ended
March 31,
 
     2012     2011  

Net income

   $ 49,263      $ 39,012   

Other comprehensive income (loss):

    

Foreign currency translation adjustments

     19,303        16,406   

(Decrease) increase in fair value of interest rate swaps

     (945     1,506   

Reclassification to interest expense from interest rate swaps

     1,104        1,585   
  

 

 

   

 

 

 

Comprehensive income

     68,725        58,509   

Comprehensive income attributable to noncontrolling interests

     (1,978     (2,496
  

 

 

   

 

 

 

Comprehensive income attributable to Digital Realty Trust, Inc.

   $ 66,747      $ 56,013   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

7


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(unaudited, in thousands, except share data)

 

    Preferred
Stock
    Number of
Common
Shares
    Common
Stock
    Additional
Paid-in
Capital
    Accumulated
Dividends in
Excess of
Earnings
    Accumulated
Other
Comprehensive
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, 2011

  $  569,781        106,039,279      $  1,057      $  2,496,651        $ (488,692     $ (55,880   $  2,522,917      $  45,057      $  12,437      $  57,494      $  2,580,411   

Conversion of units to common stock

    —          221,716        2        2,282        —          —          2,284        (2,284     —          (2,284     —     

Issuance of restricted stock, net of forfeitures

    —          91,397        —          —          —          —          —          —          —          —          —     

Net proceeds from sale of common stock

    —          956,818        10        62,702        —          —          62,712        —          —          —          62,712   

Exercise of stock options

    —          32,758        —          1,298        —          —          1,298        —          —          —          1,298   

Preferred stock offering costs

    (120     —          —          —          —          —          (120     —          —          —          (120

Conversion of preferred stock

    (4     81        —          4        —          —          —          —          —          —          —     

Amortization of unearned compensation regarding share based awards

    —          —          —          4,137        —          —          4,137        —          —          —          4,137   

Reclassification of vested share based awards

    —          —          —          (8,106     —          —          (8,106     8,106        —          8,106        —     

Dividends declared on preferred stock

    —          —          —          —          (8,831     —          (8,831     —          —          —          (8,831

Dividends and distributions on common stock and common and incentive units

    —          —          —          —          (78,335     —          (78,335     (3,583     —          (3,583     (81,918

Contributions from noncontrolling interests in consolidated joint ventures

    —          —          —          —          —          —          —          —          6,570        6,570        6,570   

Net income

    —          —          —          —          48,042        —          48,042        1,586        (365     1,221        49,263   

Other comprehensive income - foreign currency translation adjustments

    —          —          —          —          —          18,552        18,552        751        —          751        19,303   

Other comprehensive income - fair value of interest rate swaps

    —          —          —          —          —          (908     (908     (37     —          (37     (945

Other comprehensive income - reclassification to interest expense from interest rate swaps

    —          —          —          —          —          1,061        1,061        43        —          43        1,104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

  $ 569,657        107,342,049      $ 1,069      $ 2,558,968      $ (527,816   $ (37,175   $ 2,564,703      $ 49,639      $ 18,642      $ 68,281      $ 2,632,984   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

8


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

     Three Months Ended March 31,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 49,263      $ 39,012   

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

    

Loss on early extinguishment of debt-non cash portion

     —          519   

Equity in earnings of unconsolidated joint ventures

     (1,389     (1,208

Distributions from unconsolidated joint venture

     1,500        1,000   

Write-off of net assets due to early lease terminations

     —          90   

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

     69,216        57,559   

Amortization of share-based unearned compensation

     3,407        3,022   

Allowance for (recovery of) doubtful accounts

     1,025        (919

Amortization of deferred financing costs

     2,214        2,451   

Write-off of deferred financing costs, included in net loss on early extinguishment of debt

     —          79   

Amortization of debt discount/premium

     242        786   

Amortization of acquired in place lease value and deferred leasing costs

     14,779        16,359   

Amortization of acquired above market leases and acquired below market leases, net

     (2,239     (1,814

Changes in assets and liabilities:

    

Restricted cash

     9,272        381   

Accounts and other receivables

     1,484        (5,841

Deferred rent

     (15,902     (12,749

Deferred leasing costs

     (2,922     (4,591

Other assets

     (11,473     (10,730

Accounts payable and other accrued liabilities

     (36,159     (20,289

Security deposits and prepaid rents

     (11,781     1,372   
  

 

 

   

 

 

 

Net cash provided by operating activities

     70,537        64,489   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of real estate

     (119,069     —     

Investment in unconsolidated joint ventures

     (3,796     (119

Deposits paid for acquisitions of real estate

     (7,132     (1,294

Receipt of value added tax refund

     892        1,201   

Refundable value added tax paid

     (2,986     (1,009

Change in restricted cash

     1,101        (67

Improvements to and advances for investments in real estate

     (185,964     (135,110

Improvement advances to tenants

     (437     (1,346

Collection of advances from tenants for improvements

     562        187   
  

 

 

   

 

 

 

Net cash used in investing activities

     (316,829     (137,557
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

9


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)

 

     Three Months Ended March 31  
     2012     2011  

Cash flows from financing activities:

    

Borrowings on revolving credit facilities

   $ 525,037      $ 260,873   

Repayments on revolving credit facilities

     (122,367     (382,500

Borrowings on 5.250% unsecured senior notes due 2021

     —          399,100   

Principal payments on mortgage loans

     (76,643     (3,900

Principal repayments on 2026 exchangeable senior debentures

     —          (35,850

Equity component settled associated with exchange of 2026 exchangeable senior debentures

     —          (11,783

Change in restricted cash

     1,603        625   

Payment of loan fees and costs

     18        (3,369

Capital contributions received from noncontrolling interests in joint ventures

     6,570        42   

Gross proceeds from the sale of common stock

     63,346        5,734   

Common stock offering costs paid

     (634     (137

Preferred stock offering costs paid

     (120     —     

Proceeds from exercise of stock options

     1,298        866   

Payment of dividends to preferred stockholders

     (8,831     (6,522

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

     (157,373     (117,462
  

 

 

   

 

 

 

Net cash provided by financing activities

     231,904        105,717   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (14,388     32,649   

Cash and cash equivalents at beginning of period

     40,631        11,719   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 26,243      $ 44,368   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest, including amounts capitalized

   $ 53,876      $ 45,208   

Cash paid for taxes

     259        87   

Supplementary disclosure of noncash investing and financing activities:

    

Change in net assets related to foreign currency translation adjustments

   $ 19,303      $ 16,406   

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

     (945     1,506   

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

     2,284        1,815   

Preferred stock converted to shares of common stock

     4        10,690   

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

     180,499        134,693   

Issuance of common stock in exchange of 2026 exchangeable senior debentures, net

     —          194   

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

    

Investments in real estate

     122,433        —     

Acquired below market leases

     (26,450     —     

Acquired in place lease value and deferred leasing costs

     23,086        —     
  

 

 

   

 

 

 

Cash paid for acquisition of real estate

   $ 119,069      $ —     
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

10


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except unit and per unit data)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Investments in real estate:

    

Properties:

    

Land

   $ 580,411      $ 555,113   

Acquired ground leases

     6,358        6,214   

Buildings and improvements

     5,552,398        5,253,754   

Tenant improvements

     344,882        303,502   
  

 

 

   

 

 

 

Total investments in properties

     6,484,049        6,118,583   

Accumulated depreciation and amortization

     (970,169     (900,044
  

 

 

   

 

 

 

Net investments in properties

     5,513,880        5,218,539   

Investment in unconsolidated joint ventures

     27,661        23,976   
  

 

 

   

 

 

 

Net investments in real estate

     5,541,541        5,242,515   

Cash and cash equivalents

     26,243        40,631   

Accounts and other receivables, net of allowance for doubtful accounts of $3,461 and $2,436 as of March 31, 2012 and December 31, 2011, respectively

     91,132        90,580   

Deferred rent

     261,197        246,815   

Acquired above market leases, net

     27,595        29,701   

Acquired in place lease value and deferred leasing costs, net

     353,398        335,381   

Deferred financing costs, net

     27,695        29,849   

Restricted cash

     43,810        55,165   

Other assets

     45,450        27,929   
  

 

 

   

 

 

 

Total assets

   $ 6,418,061      $ 6,098,566   
  

 

 

   

 

 

 

LIABILITIES AND CAPITAL

    

Global revolving credit facility

   $ 678,554      $ 275,106   

Unsecured senior notes, net of discount

     1,441,319        1,441,072   

Exchangeable senior debentures

     266,400        266,400   

Mortgage loans, net of premiums

     875,075        947,132   

Other secured loan

     10,500        10,500   

Accounts payable and other accrued liabilities

     313,968        315,133   

Accrued dividends and distributions

     —          75,455   

Acquired below market leases, net

     108,270        85,819   

Security deposits and prepaid rents

     90,991        101,538   
  

 

 

   

 

 

 

Total liabilities

     3,785,077        3,518,155   

Commitments and contingencies

    

Capital:

    

Partners’ capital:

    

General Partner:

    

Series C Cumulative Convertible Preferred Units, 4.375%, $128,155 and $128,159 liquidation preference, respectively ($25.00 per unit), 5,126,214 and 5,126,364 units issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

     123,816        123,820   

Series D Cumulative Convertible Preferred Units, 5.500%, $174,426 and $174,426 liquidation preference, respectively ($25.00 per unit), 6,977,055 and 6,977,055 units issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

     168,669        168,669   

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, 2012 and December 31, 2011, respectively

     277,172        277,292   

107,342,049 and 106,039,279 common units issued and outstanding as of March 31, 2012 and December 31, 2011, respectively

     2,032,221        2,009,016   

Limited partners, 3,240,814 and 3,405,814 common units, 1,179,808 and 1,054,473 profits interest units and 453,012 and 475,843 class C units outstanding as of March 31, 2012 and December 31, 2011, respectively

     53,069        49,240   

Accumulated other comprehensive loss

     (40,605     (60,063
  

 

 

   

 

 

 

Total partners’ capitals

     2,614,342        2,567,974   

Noncontrolling interests in consolidated joint ventures

     18,642        12,437   
  

 

 

   

 

 

 

Total capital

     2,632,984        2,580,411   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 6,418,061      $ 6,098,566   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

11


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

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

 

     Three Months Ended March 31,  
     2012     2011  

Operating Revenues:

    

Rental

   $ 222,834      $ 196,795   

Tenant reimbursements

     57,862        51,834   

Construction management

     2,452        1,817   

Other

     —          295   
  

 

 

   

 

 

 

Total operating revenues

     283,148        250,741   
  

 

 

   

 

 

 

Operating Expenses:

    

Rental property operating and maintenance

     79,845        71,723   

Property taxes

     16,042        13,471   

Insurance

     2,230        2,051   

Construction management

     193        1,737   

Depreciation and amortization

     83,995        73,918   

General and administrative

     14,250        12,405   

Transactions

     677        681   

Other

     —          90   
  

 

 

   

 

 

 

Total operating expenses

     197,232        176,076   
  

 

 

   

 

 

 

Operating income

     85,916        74,665   

Other Income (Expenses):

    

Equity in earnings of unconsolidated joint ventures

     1,389        1,208   

Interest and other income

     709        264   

Interest expense

     (38,030     (36,082

Tax expense

     (721     (428

Loss from early extinguishment of debt

     —          (615
  

 

 

   

 

 

 

Net income

     49,263        39,012   

Net loss attributable to noncontrolling interests in consolidated joint ventures

     365        142   
  

 

 

   

 

 

 

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

     49,628        39,154   

Preferred units distributions

     (8,831     (6,522
  

 

 

   

 

 

 

Net income available to common unitholders

   $ 40,797      $ 32,632   
  

 

 

   

 

 

 

Net income per unit available to common unitholders:

    

Basic

   $ 0.37      $ 0.34   

Diluted

   $ 0.36      $ 0.33   
  

 

 

   

 

 

 

Weighted average common units outstanding:

    

Basic

     111,432,822        96,302,608   

Diluted

     111,917,822        97,474,468   

See accompanying notes to the condensed consolidated financial statements.

 

12


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

      Three months ended March 31,  
     2012     2011  

Net income

   $ 49,263      $ 39,012   

Other comprehensive income (loss):

    

Foreign currency translation adjustments

     19,303        16,406   

(Decrease) increase in fair value of interest rate swaps

     (945     1,506   

Reclassification to interest expense from interest rate swaps

     1,104        1,585   
  

 

 

   

 

 

 

Comprehensive income

   $ 68,725      $ 58,509   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

13


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED 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, 2011

     23,603,419      $ 569,781        106,039,279       $ 2,009,016        4,936,130      $ 49,244      $ (60,067   $ 12,437      $ 2,580,411   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Conversion of limited partner common units to general partner common units

     —          —          221,716         2,284        (221,716     (2,284     —          —          —     

Issuance of restricted common units, net of forfeitures

     —          —          91,397         —          —          —          —          —          —     

Net proceeds from issuance of common units

     —          —          956,818         62,712        —          —          —          —          62,712   

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

     —          —          32,758         1,298        —          —          —          —          1,298   

Issuance of common units, net of forfeitures

     —          —          —           —          159,220        —          —          —          —     

Preferred unit offering costs

     —          (120     —           —          —          —          —          —          (120

Conversion of preferred units

     (150     (4     81         4        —          —          —          —          —     

Amortization of unearned compensation regarding share based awards

     —          —          —           4,137        —          —          —          —          4,137   

Reclassification of vested share based awards

     —          —          —           (8,106     —          8,106        —          —          —     

Distributions

     —          (8,831     —           (78,335     —          (3,583     —          —          (90,749

Contributions from noncontrolling interests in consolidated joint ventures

     —          —          —           —          —          —          —          6,570        6,570   

Net income

     —          8,831        —           39,211        —          1,586        —          (365     49,263   

Other comprehensive loss - foreign currency translation adjustments

     —          —          —           —          —          —          19,303        —          19,303   

Other comprehensive loss - fair value of interest rate swaps

     —          —          —           —          —          —          (945     —          (945

Other comprehensive income - reclassification to interest expense from interest rate swaps

     —          —          —           —          —          —          1,104        —          1,104   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

     23,603,269      $ 569,657        107,342,049       $ 2,032,221        4,873,634      $ 53,069      $ (40,605   $ 18,642      $ 2,632,984   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

14


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

     Three Months Ended March 31,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 49,263      $ 39,012   

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

    

Loss on early extinguishment of debt-non cash portion

     —          519   

Equity in earnings of unconsolidated joint ventures

     (1,389     (1,208

Distributions from unconsolidated joint venture

     1,500        1,000   

Write-off of net assets due to early lease terminations

     —          90   

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

     69,216        57,559   

Amortization of share-based unearned compensation

     3,407        3,022   

Allowance for (recovery of) doubtful accounts

     1,025        (919

Amortization of deferred financing costs

     2,214        2,451   

Write-off of deferred financing costs, included in net loss on early extinguishment of debt

     —          79   

Amortization of debt discount/premium

     242        786   

Amortization of acquired in place lease value and deferred leasing costs

     14,779        16,359   

Amortization of acquired above market leases and acquired below market leases, net

     (2,239     (1,814

Changes in assets and liabilities:

    

Restricted cash

     9,272        381   

Accounts and other receivables

     1,484        (5,841

Deferred rent

     (15,902     (12,749

Deferred leasing costs

     (2,922     (4,591

Other assets

     (11,473     (10,730

Accounts payable and other accrued liabilities

     (36,159     (20,289

Security deposits and prepaid rents

     (11,781     1,372   
  

 

 

   

 

 

 

Net cash provided by operating activities

     70,537        64,489   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of real estate

     (119,069     —     

Investment in unconsolidated joint ventures

     (3,796     (119

Deposits paid for acquisitions of real estate

     (7,132     (1,294

Receipt of value added tax refund

     892        1,201   

Refundable value added tax paid

     (2,986     (1,009

Change in restricted cash

     1,101        (67

Improvements to and advances for investments in real estate

     (185,964     (135,110

Improvement advances to tenants

     (437     (1,346

Collection of advances from tenants for improvements

     562        187   
  

 

 

   

 

 

 

Net cash used in investing activities

     (316,829     (137,557
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

15


Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)

 

     Three Months Ended March 31,  
     2012     2011  

Cash flows from financing activities:

    

Borrowings on revolving credit facilities

   $ 525,037      $ 260,873   

Repayments on revolving credit facilities

     (122,367     (382,500

Borrowings on 5.250% unsecured senior notes due 2021

     —          399,100   

Principal payments on mortgage loans

     (76,643     (3,900

Principal repayments on 2026 exchangeable senior debentures

     —          (35,850

Equity component settled associated with exchange of 2026 exchangeable senior debentures

     —          (11,783

Change in restricted cash

     1,603        625   

Payment of loan fees and costs

     18        (3,369

Capital contributions received from noncontrolling interests in joint ventures

     6,570        42   

General partner contributions

     63,890        6,463   

Payment of distributions to preferred unitholders

     (8,831     (6,522

Payment of distributions to common unitholders

     (157,373     (117,462
  

 

 

   

 

 

 

Net cash provided by financing activities

     231,904        105,717   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (14,388     32,649   

Cash and cash equivalents at beginning of period

     40,631        11,719   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 26,243      $ 44,368   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest, including amounts capitalized

   $ 53,876      $ 45,208   

Cash paid for taxes

     259        87   

Supplementary disclosure of noncash investing and financing activities:

    

Change in net assets related to foreign currency translation adjustments

   $ 19,303      $ 16,406   

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

     (945     1,506   

Preferred units converted to common units

     4        10,690   

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

     180,499        134,693   

Issuance of common units associated with exchange of 2026 exchangeable senior debentures, net

     —          194   

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

    

Investments in real estate

     122,433        —     

Acquired below market leases

     (26,450     —     

Acquired in place lease value and deferred leasing costs

     23,086        —     
  

 

 

   

 

 

 

Cash paid for acquisition of real estate

   $ 119,069      $ —     
  

 

 

   

 

 

 

See accompanying notes to the condesed consolidated financial statements.

 

16


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 and 2011

(unaudited)

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, redeveloping and managing technology-related real estate. The Company is focused on providing Turn-Key Datacenter® and Powered Base Building® datacenter solutions for domestic and international tenants across a variety of industry verticals ranging from information technology and Internet enterprises, to manufacturing and financial services. As of March 31, 2012, our portfolio consisted of 102 properties, excluding three properties held as investments in unconsolidated joint ventures and land held for development, of which 86 are located throughout North America, 15 are located in Europe and one is 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 U.S., Amsterdam, Dublin, London and Paris markets in Europe and Singapore, Sydney and Melbourne markets in the Asia Pacific region. The portfolio consists of Internet gateway and corporate datacenter properties, technology manufacturing properties and regional or national headquarters of technology companies.

The Operating Partnership was formed on July 21, 2004 in anticipation of Digital Realty Trust, Inc.’s initial public offering (IPO) on November 3, 2004 and commenced operations on that date. As of March 31, 2012, Digital Realty Trust, Inc. owns a 95.7% common interest and a 100% preferred interest in the Operating Partnership. As sole general partner, Digital Realty Trust, Inc. has control over the Operating Partnership. 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, 2011.

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 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

 

17


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

equity from time to time and guaranteeing certain unsecured debt of the Operating Partnership. Digital Realty Trust, Inc. itself does not hold any indebtedness but guarantees some of the unsecured debt of the Operating Partnership, 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, stockholder’s 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 condensed 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 Loss, Net of the Company and Capital and Comprehensive Income of the Operating Partnership.

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

(b) Cash Equivalents

For the purpose of the condensed consolidated statements of cash flows, we consider short-term investments with original maturities of 90 days or less to be cash equivalents. As of March 31, 2012, cash equivalents consist of investments in money market instruments.

(c) Share Based Compensation

We account for share based compensation using the fair value method of accounting. The estimated fair value of the stock options granted by us is being amortized on a straight-line basis over the vesting period of the stock options. The estimated fair value of the long-term incentive units and Class C Units (discussed in note 12(b)) granted by us is being amortized on a straight-line basis over the expected service period.

For share based compensation awards with performance conditions, we estimate the fair value of the award for each of the possible performance condition outcomes and amortize the compensation cost based on management’s projected performance outcome. In the instance management’s projected performance outcome changes prior to the final measurement date, compensation cost is adjusted accordingly.

(d) Income Taxes

Digital Realty Trust, Inc. (the Parent Company) has elected to be treated and believes that it has been organized and has operated in a manner that has enabled the Parent Company to qualify as a REIT for federal income tax purposes. As a REIT, the Parent Company generally is not required to pay federal corporate income taxes on its taxable income to the extent it is currently distributed to its stockholders.

 

18


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

However, qualification and taxation as a REIT depend upon the Parent Company’s ability to meet the various qualification tests imposed under the Internal Revenue Code of 1986, as amended (the Code), including tests related to annual operating results, asset composition, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that the Parent Company has been organized or has operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT. If the Parent Company 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 Operating Partnership is a partnership and is not required to pay federal income tax. Instead, taxable income is allocated to its partners, who include such amounts on their federal income tax returns. As such, no provision for federal income taxes has been included in the Operating Partnership’s accompanying condensed consolidated financial statements.

Even if the Parent Company and the Operating Partnership are not subject to federal income taxes, they are taxed in certain states in which they operate. The Company is also taxed in non-U.S. countries where it operates that do not recognize U.S. REITs under their respective tax laws. The Company’s consolidated taxable REIT subsidiary is subject to both federal and state income taxes to the extent there is taxable income. Accordingly, the Company recognizes and accrues income taxes for its taxable REIT subsidiary, 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, 2012 and December 31, 2011, 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 statements of operations. For the three months ended March 31, 2012 and 2011, we had no such interest or penalties. The tax years 2008 through 2011 remain open to examination by the major taxing jurisdictions with which the Parent Company and its subsidiaries file tax returns.

See Note 9 for further discussion on income taxes.

(e) 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.

(f) Asset Retirement Obligations

We record accruals for estimated retirement obligations as required by current accounting guidance. The amount of asset retirement obligations relates primarily to estimated asbestos removal costs at the end of the economic life of properties that were built before 1984. As of March 31, 2012 and December 31, 2011, the amount included in accounts payable and other accrued liabilities on our condensed consolidated balance sheets was approximately $1.2 million.

(g) Construction Management Revenue

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

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

(h) 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

 

19


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

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 level in the fair-value hierarchy within which the entire fair-value measurement falls is based on the lowest level input that is significant to 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.

(i) 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 potential acquisitions.

(j) Capitalization of Costs

Direct and indirect project costs that are clearly associated with the development and redevelopment of properties are capitalized as incurred. Project costs include all costs directly associated with the development or redevelopment 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/redevelopment are not capitalized and are charged to expense as incurred.

Capitalization of costs begins when the activities necessary to get the development/redevelopment project ready for its intended use begins, which include costs incurred before the beginning of construction. Capitalization of costs ceases when the development/redevelopment project is substantially complete and ready for its intended use. Determining when a development/redevelopment project commences, and when it is substantially complete and ready for its intended use involves a degree of judgment. We generally consider a development/redevelopment project to be substantially complete and ready for its intended use upon recommissioning, which is when the redeveloped/developed project has been tested at full load, or receipt of a certificate of occupancy. We cease cost capitalization if activities necessary for the development/redevelopment of the property have been suspended. Capitalized costs are allocated to the specific components of a project that are benefited.

Interest capitalized during the three months ended March 31, 2012 and 2011 was $4.5 million and $4.7 million, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of $7.9 million and $6.2 million for the three months ended March 31, 2012 and 2011, respectively. Cash flows from capitalized leasing costs of $6.2 million and $4.9 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, 2012 and 2011, respectively.

(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, accounts receivable and deferred rent receivable, performance-based equity compensation plans, the completeness of accrued liabilities and Digital Realty Trust, Inc.’s qualification as a REIT. We base our estimates on historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could vary under different assumptions or conditions.

(l) Segment 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 services provided to them are limited to a few core principles. 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.

 

20


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

(m) Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820). This ASU is intended to create consistency between U.S. GAAP and International Financial Reporting Standards on the definition of fair value and on the guidance on how to measure fair value and on what to disclose about fair value measurements. We adopted this accounting guidance for financial statements issued for fiscal periods beginning after December 15, 2011. This update did not have a material effect on our financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). This update amends Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income, to provide that total comprehensive income will be reported in one continuous statement or two separate but consecutive statements of financial performance. Presentation of total comprehensive income in the statement of stockholders’ equity (or statement of capital) or the footnotes will no longer be allowed. The calculation of net income and basic and diluted net income per share (or per unit) will not be affected. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011. This update did not have a material effect on our financial statements.

3. Investments in Real Estate

We acquired the following real estate property during the three months ended March 31, 2012:

 

Location

   Metropolitan Area    Date Acquired    Amount
(in  millions)
 

Convergence Business Park (1)

   Dallas, Texas    February 22, 2012    $ 123.0   

 

(1) Convergence Business Park is comprised of eight buildings along with undeveloped land. It is considered one property for our property count.

On March 14, 2012, we entered into a joint venture with Savvis, Inc., a CenturyLink company, to acquire a 165,000 square foot property in Hong Kong. Subject to closing conditions, the joint venture is expected to close on the acquisition in the second quarter of 2012.

4. 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, 2012 and December 31, 2011.

 

     Balance as of  

(Amounts in thousands)

   March 31,
2012
    December 31,
2011
 

Acquired in place lease value:

    

Gross amount

   $ 569,669      $ 545,409   

Accumulated amortization

     (325,041     (312,499
  

 

 

   

 

 

 

Net

   $ 244,628      $ 232,910   
  

 

 

   

 

 

 

Acquired above-market lease value:

    

Gross amount

   $ 87,980      $ 87,800   

Accumulated amortization

     (60,385     (58,099
  

 

 

   

 

 

 

Net

   $ 27,595      $ 29,701   
  

 

 

   

 

 

 

Acquired below-market lease value:

    

Gross amount

   $ 228,490      $ 201,275   

Accumulated amortization

     (120,220     (115,456
  

 

 

   

 

 

 

Net

   $ 108,270      $ 85,819   
  

 

 

   

 

 

 

Amortization of acquired below-market lease value, net of acquired above-market lease value, resulted in an increase to rental revenues of $2.2 million and $1.8 million for the three months ended March 31, 2012 and 2011, respectively. The expected average remaining lives for acquired below market leases and acquired above market leases is 6.8 years and 4.4 years, respectively, as of March 31, 2012. Estimated annual amortization of acquired below-market lease value, net of acquired above-market lease value, for each of the five succeeding years, commencing January 1, 2013 is as follows:

 

(Amounts in thousands)

      

2013

   $ 11,684   

2014

     9,852   

2015

     8,968   

2016

     8,088   

2017

     7,160   

 

 

21


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

Costs associated with extending or renewing acquired leases are capitalized and classified as deferred leasing cost. Amortization of acquired in place lease value (a component of depreciation and amortization expense) was $12.0 million and $14.3 million for the three months ended March 31, 2012 and 2011, respectively. The expected average amortization period for acquired in place lease value is 6.2 years as of March 31, 2012. The weighted average remaining contractual life for acquired leases excluding renewals or extensions is 5.3 years as of March 31, 2012. Estimated annual amortization of acquired in place lease value for each of the five succeeding years, commencing January 1, 2013 is as follows:

 

(Amounts in thousands)

      

2013

   $ 44,791   

2014

     39,594   

2015

     31,370   

2016

     29,134   

2017

     14,858   

5. Debt of the Company

In this Note 5, 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 the 2029 Debentures, the 2015 Notes, the 2020 Notes, the 2021 Notes (each, as defined in Note 6) and its unsecured senior notes sold to Prudential (as defined in Note 6) pursuant to the Prudential shelf facility. The Company is also the guarantor of the Operating Partnership’s obligations under its global revolving credit facility.

 

22


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

6. Debt of the Operating Partnership

A summary of outstanding indebtedness of the Operating Partnership as of March 31, 2012 and December 31, 2011 is as follows (in thousands):

 

Indebtedness

   Interest Rate at
March 31, 2012
  Maturity Date   Principal Outstanding
March 31, 2012
    Principal Outstanding
December 31, 2011
 

Global revolving credit facility

   Various (1)   Nov. 3, 2015   $ 678,554  (2)    $ 275,106  (2) 
      

 

 

   

 

 

 

Unsecured senior notes:

        

Prudential Shelf Facility:

        

Series B

   9.320%   Nov. 5, 2013     33,000        33,000   

Series C

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

Series D

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

Series E

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

Series F

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

 

 

   

 

 

 

Total Prudential Shelf Facility

         175,000        175,000   

Senior Notes:

        

4.50% notes due 2015

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

5.875% notes due 2020

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

5.25% notes due 2021

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

Unamortized discounts

         (8,681     (8,928
      

 

 

   

 

 

 

Total senior notes, net of discount

         1,266,319        1,266,072   
      

 

 

   

 

 

 

Total unsecured senior notes, net of discount

         1,441,319        1,441,072   
      

 

 

   

 

 

 

Exchangeable senior debentures:

        

5.50% exchangeable senior debentures due 2029

   5.50%   Apr. 15, 2029 (3)     266,400        266,400   
      

 

 

   

 

 

 

Total exchangeable senior debentures

         266,400        266,400   

 

23


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

Indebtedness

   Interest Rate at
March 31, 2012
  Maturity Date   Principal Outstanding
March 31, 2012
    Principal Outstanding
December 31, 2011
 

Mortgage loans:

        

Secured Term Debt (4)(5)

   5.65%   Nov. 11, 2014   $ 138,123      $ 138,828   

200 Paul Avenue 1-4 (5)

   5.74%   Oct. 8, 2015     74,009        74,458   

Mundells Roundabout

   3-month GBP LIBOR + 1.20% (7)   Nov. 30, 2013     68,554  (8)      66,563  (8)

2045 & 2055 LaFayette Street (5)

   5.93%   Feb. 6, 2017     65,318        65,551   

34551 Ardenwood Boulevard 1-4 (5)

   5.95%   Nov. 11, 2016     53,449        53,627   

1100 Space Park Drive (5)

   5.89%   Dec. 11, 2016     53,429        53,609   

1350 Duane Avenue/3080 Raymond Street (5)

   5.42%   Oct. 1, 2012     52,800        52,800   

600 West Seventh Street

   5.80%   Mar. 15, 2016     52,334        52,709   

150 South First Street (5)

   6.30%   Feb. 6, 2017     51,339        51,508   

360 Spear Street

   6.32%   Nov. 8, 2013     47,331        47,569   

114 Rue Ambroise Croizat

   3-month EURIBOR + 1.35% (7)   Jan. 18, 2012 (12)     —          39,483  (9) 

2334 Lundy Place (5)

   5.96%   Nov. 11, 2016     38,873        39,003   

Clonshaugh Industrial Estate II (6)

   3-month EURIBOR + 4.50% (7)   Sep. 4, 2014     40,029  (9)      38,883  (9) 

1500 Space Park Drive (5)

   6.15%   Oct. 5, 2013     37,337        37,875   

Unit 9, Blanchardstown Corporate Park

   3-month EURIBOR + 1.35% (7)   Jan. 18, 2012 (12)     —          33,946  (9) 

Cressex 1 (10)

   5.68%   Oct. 16, 2014     28,494  (8)      27,786  (8) 

1201 Comstock Street (5)(6)

   1-month LIBOR + 3.50% (7)   Jun. 24, 2012 (11) (13)     15,952        16,163   

Paul van Vlissingenstraat 16

   3-month EURIBOR + 1.60% (7)   Jul. 18, 2013     13,655  (9)      13,319  (9) 

800 Central Expressway (5)

   1-month LIBOR + 4.75% (7)   Jun. 9, 2013     10,000        10,000   

Chemin de l’Epinglier 2

   3-month EURIBOR + 1.50% (7)   Jul. 18, 2013     9,880  (9)      9,636  (9) 

Gyroscoopweg 2E-2F

   3-month EURIBOR + 1.50% (7)   Oct. 18, 2013     8,695  (9)      8,480  (9) 

Manchester Technopark (10)

   5.68%   Oct. 16, 2014     8,668  (8)      8,453  (8) 

731 East Trade Street

   8.22%   Jul. 1, 2020     4,734        4,806   

Unamortized net premiums

         2,072        2,077   
      

 

 

   

 

 

 

Total mortgage loans, net of premiums

         875,075        947,132   

Other secured loan:

        

800 Central Expressway Mezzanine (5)

   1-month LIBOR + 8.50% (7)   Jun. 9, 2013     10,500        10,500   
      

 

 

   

 

 

 

Total other secured loan

         10,500        10,500   
      

 

 

   

 

 

 

Total indebtedness

       $ 3,271,848      $ 2,940,210   
      

 

 

   

 

 

 

 

24


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

 

(1) The interest rate for borrowings under the global revolving credit facility equals the applicable index plus a margin which is based on the credit rating of our long-term debt and is currently 125 basis points. An annual facility fee on the unused portion of the facility, based on the credit rating of our long-term debt and currently 25 basis points, is payable quarterly.
(2) Balances as of March 31, 2012 and December 31, 2011 are as follows (balances, in thousands):

 

Denomination of Draw

   Balance as of
March 31, 2012
    Weighted-average
interest rate
    Balance as of
December 31, 2011
    Weighted-average
interest rate
 

US ($)

   $ 498,000        1.50   $ 194,000        1.54

Euro (€)

     65,914  (a)      1.72     —          —     

British Sterling (£)

     51,386  (a)      1.98     49,892  (b)      1.99

Singapore Dollar (SGD)

     44,923  (a)      1.56     28,151  (b)      1.56

Australian Dollar (AUD)

     14,484  (a)      5.67     3,063  (b)      5.89

Hong Kong Dollar (HKD)

     3,847  (a)      1.55     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 678,554        1.65   $ 275,106        1.67
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Based on exchange rates of $1.33 to €1.00, $1.60 to £1.00, $0.80 to 1.00 SGD, $1.03 to 1.00 AUD and $0.13 to 1.00 HKD, respectively, as of March 31, 2012.
  (b) Based on exchange rates of $1.55 to £1.00, $0.77 to 1.00 SGD and $1.02 to 1.00 AUD, respectively, as of December 31, 2011.

 

(3) The holders of the debentures have the right to require the Operating Partnership to repurchase the debentures in cash in whole or in part for a price of 100% of the principal amount plus accrued and unpaid interest on each of April 15, 2014, April 15, 2019 and April 15, 2024. We have the right to redeem the debentures in cash for a price of 100% of the principal amount plus accrued and unpaid interest commencing on April 18, 2014.
(4) This amount represents six mortgage loans secured by our interests in 36 NE 2nd Street, 3300 East Birch Street, 100 & 200 Quannapowitt Parkway, 300 Boulevard East, 4849 Alpha Road, and 11830 Webb Chapel Road. Each of these loans is cross-collateralized by the six properties.
(5) The respective borrower’s assets and credit are not available to satisfy the debts and other obligations of affiliates or any other person.
(6) The Operating Partnership or its subsidiary provides a limited recourse guarantee with respect to this loan.
(7) We have entered into interest rate swap or interest rate cap agreements as a cash flow hedge for interest generated by these US LIBOR, EURIBOR and GBP LIBOR based loans. See note 13 for further information.
(8) Based on exchange rate of $1.60 to £1.00 as of March 31, 2012 and $1.55 to £1.00 as of December 31, 2011.
(9) Based on exchange rate of $1.33 to €1.00 as of March 31, 2012 and $1.30 to €1.00 as of December 31, 2011.
(10) These loans are also secured by a £7.8 million letter of credit. These loans are cross-collateralized by the two properties.
(11) A one-year extension is available, which we may exercise if certain conditions are met.
(12) These mortgage loans were repaid in full in January 2012.
(13) This mortgage loan was repaid in full in April 2012.

Global Revolving Credit Facility

On November 3, 2011, the Operating Partnership replaced its corporate and Asia Pacific revolving credit facilities with an expanded revolving credit facility, which we refer to as the global revolving credit facility, increasing its total capacity to $1.5 billion from $850 million. The renewed facility matures in November 2015, with a one-year extension option. The interest rate for borrowings under the expanded facility equals the applicable index plus a margin which is based on the credit rating of our long-term debt and is currently 125 basis points. An annual facility fee on the unused portion of the facility, based on the credit rating of our long-term debt and currently 25 basis points, is payable quarterly. Funds may be drawn in U.S., Canadian, Singapore, Australian and Hong Kong dollars, as well as Euro, Pound Sterling, Swiss Franc and Japanese yen denominations. As of March 31, 2012, borrowings under the global revolving credit facility bore interest at a blended rate of 1.50% (U.S), 1.72% (Euro), 1.98% (GBP), 1.56% (Singapore Dollars), 5.67% (Australian Dollars) and 1.55% (Hong Kong Dollars), which are based on 1-month LIBOR, 1-month EURIBOR, 1-month GBP LIBOR, 1-month SIBOR, 1-month BBR and 1-month HIBOR, respectively, plus a margin of 1.25%. We have used and intend to use available borrowings under the global revolving credit facility to acquire additional properties, fund development and redevelopment opportunities and to provide for working capital and other corporate purposes, including potentially for the repurchase, redemption or retirement of outstanding debt or preferred equity securities. We capitalized approximately $10.2 million of financing costs related to the global revolving credit facility. As of March 31, 2012, approximately $678.6 million was drawn under this facility and $23.0 million of letters of credit were issued.

The global revolving credit facility contains various restrictive covenants, including limitations on our ability to incur additional indebtedness, make certain investments or merge with another company, and requirements to maintain financial coverage ratios, including with respect to unencumbered assets. In addition, the global revolving credit facility restricts Digital Realty Trust, Inc. from making distributions to its stockholders, or redeeming or otherwise repurchasing shares of its capital stock, after the occurrence and during the continuance of an event of default, except in limited circumstances including as necessary to enable Digital Realty Trust, Inc. to maintain its qualification as a REIT and to minimize the payment of income or excise tax. As of March 31, 2012, we were in compliance with all of such covenants.

 

25


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

The table below summarizes our debt maturities and principal payments as of March 31, 2012 (in thousands):

 

     Global Revolving
Credit Facility (1)
     Unsecured
Senior Notes
     Senior Notes     Exchangeable
Senior Debentures
    Mortgage
Loans (2)
     Other Secured
Loan
     Total
Debt
 

Remainder of 2012

   $ —         $ —         $ —        $ —        $ 79,545       $ —         $ 79,545   

2013

     —           33,000         —          —          204,055         10,500         247,555   

2014

     —           —           —          266,400 (3)      217,222         —           483,622   

2015

     678,554         67,000         375,000        —          75,225         —           1,195,779   

2016

     —           25,000         —          —          186,190         —           211,190   

Thereafter

     —           50,000         900,000        —          110,766         —           1,060,766   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Subtotal

   $ 678,554       $ 175,000       $ 1,275,000      $ 266,400      $ 873,003       $ 10,500       $ 3,278,457   

Unamortized discount

     —           —           (8,681     —          —           —           (8,681

Unamortized premium

     —           —           —          —          2,072         —           2,072   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 678,554       $ 175,000       $ 1,266,319      $ 266,400      $ 875,075       $ 10,500       $ 3,271,848   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) 

Subject to a one-year extension option exercisable by us. The bank group is obligated to grant the extension option provided we give proper notice, we make certain representations and warranties and no default exists under the global revolving credit facility.

(2) 

Our mortgage loans are generally non-recourse to us, subject to carve outs for specified actions by us or specified undisclosed environmental liabilities. As of March 31, 2012, we had provided limited recourse guarantees with respect to approximately $56.0 million principal amount of the outstanding mortgage indebtedness, and partial letter of credit support with respect to approximately an additional $37.2 million of the outstanding mortgage indebtedness.

(3) 

Assumes maturity of the 2029 Debentures at first redemption date in April 2014.

 

26


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

7. Income per Share

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

 

     Three Months Ended March 31,  
     2012      2011  

Net income available to common stockholders

   $ 39,211       $ 30,980   
  

 

 

    

 

 

 

Weighted average shares outstanding—basic

     107,099,856         91,428,355   

Potentially dilutive common shares:

     

Stock options

     205,830         202,038   

Class C Units (2007 Grant)

     16,358         92,795   

Unvested incentive units

     262,812         153,066   

Excess exchange value of the 2026 Debentures

     —           723,961   
  

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     107,584,856         92,600,215   
  

 

 

    

 

 

 

Income per share:

     

Basic

   $ 0.37       $ 0.34   
  

 

 

    

 

 

 

Diluted

   $ 0.36       $ 0.33   
  

 

 

    

 

 

 

On or after July 15, 2026, the 4.125% exchangeable senior debentures due August 15, 2026 (the 2026 Debentures) would have been exchangeable at the then-applicable exchange rate for cash (up to the principal amount of the 2026 Debentures) and, with respect to any excess exchange value, into cash, shares of Digital Realty Trust, Inc. common stock or a combination of cash and shares of Digital Realty Trust, Inc. common stock. The 2026 Debentures also would have been exchangeable prior to July 15, 2026, but only upon the occurrence of certain specified events, including if the weighted average common stock price exceeded a specified strike price as of the end of a fiscal quarter. During the year ended December 31, 2011, the remaining 2026 Debentures were redeemed and exchanged. Using the treasury stock method, 723,961 shares of common stock contingently issuable upon settlement of the excess exchange value were included as potentially dilutive common shares in determining diluted earnings per share for the three months ended March 31, 2011.

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

 

     Three Months Ended March 31,  
     2012      2011  

Weighted average of Operating Partnership common units not owned by us

     4,332,966         4,874,253   

Potentially dilutive 2029 Debentures

     6,442,085         6,269,990   

Potentially dilutive Series C Cumulative Convertible Preferred Stock

     2,784,845         3,652,324   

Potentially dilutive Series D Cumulative Convertible Preferred Stock

     4,337,429         8,333,421   

Potentially dilutive Series E Cumulative Redeemable Preferred Stock

     4,025,863         —     
  

 

 

    

 

 

 
     21,923,188         23,129,988   
  

 

 

    

 

 

 

 

27


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

8. Income per Unit

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

 

     Three Months Ended March 31,  
     2012      2011  

Net income available to common unitholders

   $ 40,797       $ 32,632   
  

 

 

    

 

 

 

Weighted average units outstanding—basic

     111,432,822         96,302,608   

Potentially dilutive common units:

     

Stock options

     205,830         202,038   

Class C Units (2007 Grant)

     16,358         92,795   

Unvested incentive units

     262,812         153,066   

Excess exchange value of the 2026 Debentures

     —           723,961   
  

 

 

    

 

 

 

Weighted average units outstanding—diluted

     111,917,822         97,474,468   
  

 

 

    

 

 

 

Income per unit:

     

Basic

   $ 0.37       $ 0.34   
  

 

 

    

 

 

 

Diluted

   $ 0.36       $ 0.33   
  

 

 

    

 

 

 

On or after July 15, 2026, the 2026 Debentures would have been exchangeable at the then-applicable exchange rate for cash (up to the principal amount of the 2026 Debentures) and, with respect to any excess exchange value, into cash, shares of Digital Realty Trust, Inc. common stock or a combination of cash and shares of Digital Realty Trust, Inc. common stock. Pursuant to the terms of the Operating Partnership’s agreement of limited partnership, the Operating Partnership would have delivered to Digital Realty Trust, Inc. one common unit for each share of common stock issued upon exchange of the 2026 Debentures. The 2026 Debentures also would have been exchangeable prior to July 15, 2026, but only upon the occurrence of certain specified events, including if the weighted average common stock price exceeded a specified strike price as of the end of a fiscal quarter. During the year ended December 31, 2011, the remaining 2026 Debentures were redeemed and exchanged. Using the treasury method, 723,961 common units contingently issuable upon settlement of the excess exchange value were included as potentially dilutive common units in determining diluted earnings per unit for the three months ended March 31, 2011.

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

 

     Three Months Ended March 31,  
     2012      2011  

Potentially dilutive 2029 Debentures

     6,442,085         6,269,990   

Potentially dilutive Series C Cumulative Convertible Preferred Units

     2,784,845         3,652,324   

Potentially dilutive Series D Cumulative Convertible Preferred Units

     4,337,429         8,333,421   

Potentially dilutive Series E Cumulative Redeemable Preferred Units

     4,025,863         —     
  

 

 

    

 

 

 
     17,590,222         18,255,735   
  

 

 

    

 

 

 

9. Income Taxes

Digital Realty Trust, Inc. (the Parent Company) elected to be taxed as a REIT and believes that it has complied with the REIT requirements of the Code. As a REIT, the Parent Company is generally not subject to corporate level federal income taxes on taxable income to the extent it is currently distributed to its stockholders. Since inception, the Parent Company has distributed 100% of its taxable income and intends to do so for the tax year ending December 31, 2012. As such, no provision for federal income taxes has been included in the accompanying condensed consolidated financial statements for the three months ended March 31, 2012 and 2011.

 

28


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

We have elected taxable REIT subsidiary (TRS) status for some of our consolidated subsidiaries. In general, a TRS may provide services that would otherwise be considered impermissible for REITs and hold assets that REITs cannot hold directly. A TRS is subject to federal income tax as a regular C corporation. Income taxes for TRS entities were accrued, as necessary, for the three months ended March 31, 2012 and 2011.

For our TRS entities and foreign subsidiaries that are subject to U.S. federal, state and foreign income taxes, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe it is more likely than not that the deferred tax asset may not be realized, based on available evidence at the time the determination is made. An increase or decrease in the valuation allowance that results from the change in circumstances that causes a change in our judgment about the realizability of the related deferred tax asset is included in income. Deferred tax assets (net of valuation allowance) and liabilities for our TRS entities and foreign subsidiaries were accrued, as necessary, for the three months ended March 31, 2012 and 2011.

10. Equity and Accumulated Other Comprehensive Loss, Net

(a) Equity Distribution Agreements

On December 31, 2009, Digital Realty Trust, Inc. entered into equity distribution agreements, as amended, which we refer to as the 2009 Equity Distribution Agreements under which it could issue and sell shares of its common stock having an aggregate offering price of up to $400.0 million. The sales of common stock made under the 2009 Equity Distribution Agreements were made in “at the market” offerings as defined in Rule 415 of the Securities Act. In June 2011, we completed this equity distribution program. For the three months ended March 31, 2011, Digital Realty Trust, Inc. generated net proceeds of approximately $5.6 million from the issuance of approximately 0.1 million common shares under the 2009 Equity Distribution Agreements at an average price of $58.44 per share after payment of approximately $0.1 million of commissions to the sales agents and before offering expenses. Pursuant to the program, we sold 6.8 million shares of common stock for gross proceeds of $400.0 million, resulting in net proceeds of approximately $394.0 million after deducting commissions.

On June 29, 2011, Digital Realty Trust, Inc. entered into new equity distribution agreements, which we refer to as the 2011 Equity Distribution Agreements, with each of Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and Morgan Stanley & Co. LLC, or the Agents, under which it could issue and sell shares of its common stock having an aggregate offering price of up to $400.0 million from time to time through, at its discretion, any of the Agents as its sales agents. The sales of common stock made under the 2011 Equity Distribution Agreements will be made in “at the market” offerings as defined in Rule 415 of the Securities Act. For the three months ended March 31, 2012, Digital Realty Trust, Inc. generated net proceeds of approximately $62.7 million from the issuance of approximately 1.0 million common shares under the 2011 Equity Distribution Agreements at an average price of $66.19 per share after payment of approximately $0.6 million of commissions to the sales agents and before offering expenses.

 

29


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

(b) Noncontrolling Interests in Operating Partnership

Noncontrolling interests in the Operating Partnership relate to the interests that are not owned by Digital Realty Trust, Inc. The following table shows the ownership interest in the Operating Partnership as of March 31, 2012 and December 31, 2011:

 

    March 31, 2012     December 31, 2011  
    Number of units     Percentage of total     Number of units     Percentage of total  

Digital Realty Trust, Inc.

    107,342,049        95.7     106,039,279        95.6

Noncontrolling interests consist of:

       

Common units held by third parties

    3,240,814        2.8        3,405,814        3.0   

Incentive units held by employees and directors (see note 12)

    1,632,820        1.5        1,530,316        1.4   
 

 

 

   

 

 

   

 

 

   

 

 

 
    112,215,683        100.0     110,975,409        100.0
 

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

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

The redemption value of the noncontrolling Operating Partnership common units and the vested incentive units was approximately $322.8 million and $291.5 million based on the closing market price of Digital Realty Trust, Inc. common stock on March 31, 2012 and December 31, 2011, respectively.

The following table shows activity for the noncontrolling interests in the Operating Partnership for the three months ended March 31, 2012:

 

     Common Units     Incentive Units     Total  

As of December 31, 2011

     3,405,814        1,530,316        4,936,130   

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

     (165,000     —          (165,000

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

     —          (56,716     (56,716

Grant of incentive units to employees and directors

     —          159,220        159,220   
  

 

 

   

 

 

   

 

 

 

As of March 31, 2012

     3,240,814        1,632,820        4,873,634   
  

 

 

   

 

 

   

 

 

 

 

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

Under the terms of certain third parties’ (the eXchange parties) contribution agreements signed in the third quarter of 2004, we have agreed to indemnify each eXchange party against adverse tax consequences in the event the Operating Partnership directly or indirectly sells, exchanges or otherwise disposes of (whether by way of merger, sale of assets or otherwise) in a taxable transaction any interest in 200 Paul Avenue 1-4 or 1100 Space Park Drive until the earlier of November 3, 2013 and the date on which these contributors or certain transferees hold less than 25% of the Operating Partnership common units issued to them in the formation transactions consummated concurrently with the IPO. Under the eXchange parties’ amended contribution agreement, the Operating Partnership has agreed to make approximately $17.8 million of indebtedness available for guaranty by the eXchange parties until the earlier of November 3, 2013 and the date on which these contributors or certain transferees hold less than 25% of the Operating Partnership common units issued to them in the formation transactions consummated concurrently with the IPO, and we have agreed to indemnify each eXchange party against adverse tax consequences if the Operating Partnership does not provide such indebtedness to guarantee.

(c) Dividends

We have declared and paid the following dividends on our common and preferred stock for the three months ended March 31, 2012 (in thousands):

 

Date dividend declared

   Dividend payable
date
     Series C
Preferred
Stock(1)
     Series D
Preferred
Stock(2)
     Series E
Preferred
Stock(3)
     Common Stock (4)  

February 14, 2012

     March 30, 2012       $ 1,402       $ 2,398       $ 5,031      $ 78,335   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

 

(1) $1.094 annual rate of dividend per share.
(2) $1.375 annual rate of dividend per share.
(3) $1.750 annual rate of dividend per share.
(4) $2.920 annual rate of dividend per share.

Distributions out of Digital Realty Trust, Inc.’s current or accumulated earnings and profits are generally classified as dividends whereas distributions in excess of its current and accumulated earnings and profits, to the extent of a stockholder’s U.S. federal income tax basis in Digital Realty Trust, Inc.’s stock, are generally classified as a return of capital. Distributions in excess of a stockholder’s U.S. federal income tax basis in Digital Realty Trust, Inc.’s stock are generally characterized as capital gain. Cash provided by operating activities has generally been sufficient to fund all distributions, however, we may also need to utilize borrowings under the global revolving credit facility to fund all distributions.

(d) Accumulated Other Comprehensive Loss, Net

The accumulated balances for each classification of other comprehensive loss, net as of March 31, 2012 are as follows (in thousands):

 

     Foreign currency
translation
adjustments
    Cash flow hedge
adjustments
    Accumulated other
comprehensive loss,
net
 

Balance as of December 31, 2011

   $ (49,298   $ (6,582   $ (55,880

Net current period change

     18,552        (908     17,644   

Reclassification to interest expense from interest rate swaps

     —          1,061        1,061   
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ (30,746   $ (6,429   $ (37,175
  

 

 

   

 

 

   

 

 

 

11. Capital and Comprehensive Income

(a) Allocations of Net Income and Net Losses to Partners

Except for special allocations to holders of profits interest units described below in note 12(a) under the heading “Incentive Plan-Long-Term Incentive Units,” the Operating Partnership’s net income will generally be allocated to Digital Realty Trust, Inc. (the General Partner) to the extent of the accrued preferred return on its preferred units, and then to the General Partner and the Operating Partnership’s limited partners in accordance with the respective percentage interests in the common units issued by the Operating Partnership. Net loss will generally be allocated to the General Partner and the Operating Partnership’s limited partners in accordance with the respective common percentage interests in the Operating Partnership until the limited partner’s capital is reduced to zero and any remaining net loss would be allocated to the General Partner. However, in some cases, losses may be disproportionately allocated to partners who have guaranteed our debt. The allocations described above are subject to special allocations relating to depreciation deductions and to compliance with the provisions of Sections 704(b) and 704(c) of the Code, and the associated Treasury Regulations.

(b) Partnership Units

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

The redemption value of the limited partners’ common units and the vested incentive units was approximately $322.8 million and $291.5 million based on the closing market price of Digital Realty Trust, Inc.’s common stock on March 31, 2012 and December 31, 2011, respectively.

 

32


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

(c) Distributions

All distributions on our units are at the discretion of Digital Realty Trust, Inc.’s board of directors. As of March 31, 2012, the Operating Partnership declared and paid the following distributions (in thousands):

 

Date distribution declared

   Distribution
payable date
     Series C
Preferred
Units(1)
     Series D
Preferred
Units(2)
     Series E
Preferred
Units(3)
     Common
Units(4)
 

February 14, 2012

     March 30, 2012       $ 1,402       $ 2,398       $ 5,031      $ 81,917   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) $1.094 annual rate of distribution per unit.
(2) $1.375 annual rate of distribution per unit.
(3) $1.750 annual rate of distribution per unit.
(4) $2.920 annual rate of distribution per unit.

(d) Accumulated Other Comprehensive Loss

The accumulated balances for each classification of other comprehensive loss as of March 31, 2012 are as follows (in thousands):

 

     Foreign currency
translation
adjustments
    Cash flow hedge
adjustments
    Accumulated other
comprehensive loss
 

Balance as of December 31, 2011

   $ (52,704   $ (7,363   $ (60,067

Net current period change

     19,303        (945     18,358   

Reclassification to interest expense from interest rate swaps

     —          1,104        1,104   
  

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2012

   $ (33,401   $ (7,204   $ (40,605
  

 

 

   

 

 

   

 

 

 

12. Incentive Plan

Our Amended and Restated 2004 Incentive Award Plan (as defined below) provides for the grant of incentive awards to employees, directors and consultants. Awards issuable under the Amended and Restated 2004 Incentive Award Plan include stock options, restricted stock, dividend equivalents, stock appreciation rights, long-term incentive units, cash performance bonuses and other incentive awards. Only employees are eligible to receive incentive stock options under the Amended and Restated 2004 Incentive Award Plan. Initially, we had reserved a total of 4,474,102 shares of common stock for issuance pursuant to the 2004 Incentive Award Plan, subject to certain adjustments set forth in the 2004 Incentive Award Plan. On May 2, 2007, Digital Realty Trust, Inc.’s stockholders approved the First Amended and Restated Digital Realty Trust, Inc., Digital Services, Inc. and Digital Realty Trust, L.P. 2004 Incentive Award Plan (as amended, the Amended and Restated 2004 Incentive Award Plan). The Amended and Restated 2004 Incentive Award Plan increases the aggregate number of shares of stock which may be issued or transferred under the plan by 5,000,000 shares to a total of 9,474,102 shares, and provides that the maximum number of shares of stock with respect to awards granted to any one participant during a calendar year will be 1,500,000 and the maximum amount that may be paid in cash during any calendar year with respect to any performance-based award not denominated in stock or otherwise for which the foregoing limitation would not be an effective limitation for purposes of Section 162(m) of the Code will be $10.0 million.

As of March 31, 2012, 3,488,165 shares of common stock or awards convertible into or exchangeable for common stock remained available for future issuance under the Amended and Restated 2004 Incentive Award Plan. Each long-term incentive unit and Class C Unit issued under the Amended and Restated 2004 Incentive Award Plan will count as one share of common stock for purposes of calculating the limit on shares that may be issued under the Amended and Restated 2004 Incentive Award Plan and the individual award limit discussed above.

(a) Long-Term Incentive Units

Long-term incentive units, which are also referred to as profits interest units, may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. Long-term incentive units, whether vested or not, will receive the same quarterly per unit distributions as Operating Partnership common units, which equal per share distributions on Digital Realty Trust, Inc. common stock. Initially, long-term incentive units do not have full parity with common units with respect to liquidating distributions. If such parity is reached, vested long-term incentive units may be converted into an equal number of common units of the Operating Partnership at any time, and thereafter enjoy all the rights of common units of the Operating Partnership, including redemption rights.

 

33


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

In order to achieve full parity with common units, long-term incentive units must be fully vested and the holder’s capital account balance in respect of such long-term incentive units must be equal to the capital account balance of a holder of an equivalent number of common units. The capital account balance attributable to each common unit is generally expected to be the same, in part because of the amount credited to a partner’s capital account upon the partner’s contribution of property to the Operating Partnership, and in part because the partnership agreement provides, in most cases, that allocations of income, gain, loss and deduction (which will adjust the partner’s capital accounts) are to be made to the common units on a proportionate basis. As a result, with respect to a number of long-term incentive units, it is possible to determine the capital account balance of an equivalent number of common units by multiplying the number of long-term incentive units by the capital account balance with respect to a common unit.

A partner’s initial capital account balance is equal to the amount the partner paid (or contributed to the Operating Partnership) for the partner’s units and is subject to subsequent adjustments, including with respect to the partner’s share of income, gain or loss of the Operating Partnership. Because a holder of long-term incentive units generally will not pay for the long-term incentive units, the initial capital account balance attributable to such long-term incentive units will be zero. However, the Operating Partnership is required to allocate income, gain, loss and deduction to the partner’s capital accounts in accordance with the terms of the partnership agreement, subject to applicable Treasury Regulations. The partnership agreement provides that holders of long-term incentive units will receive special allocations of gain in the event of a sale or “hypothetical sale” of assets of the Operating Partnership prior to the allocation of gain to Digital Realty Trust, Inc. or other limited partners with respect to their common units. The amount of such allocation will, to the extent of any such gain, be equal to the difference between the capital account balance of a holder of long-term incentive units attributable to such units and the capital account balance attributable to an equivalent number of common units. If and when such gain allocation is fully made, a holder of long-term incentive units will have achieved full parity with holders of common units. To the extent that, upon an actual sale or a “hypothetical sale” of the Operating Partnership’s assets as described above, there is not sufficient gain to allocate to a holder’s capital account with respect to long-term incentive units, or if such sale or “hypothetical sale” does not occur, such units will not achieve parity with common units.

The term “hypothetical sale” refers to circumstances that are not actual sales of the Operating Partnership’s assets but that require certain adjustments to the value of the Operating Partnership’s assets and the partners’ capital account balances. Specifically, the partnership agreement provides that, from time to time, in accordance with applicable Treasury Regulations, the Operating Partnership will adjust the value of its assets to equal their respective fair market values, and adjust the partners’ capital accounts, in accordance with the terms of the partnership agreement, as if the Operating Partnership sold its assets for an amount equal to their value. Times for making such adjustments generally include the liquidation of the Operating Partnership, the acquisition of an additional interest in the Operating Partnership by a new or existing partner in exchange for more than a de minimis capital contribution, the distribution by the Operating Partnership to a partner of more than a de minimis amount of partnership property as consideration for an interest in the Operating Partnership, in connection with the grant of an interest in the Operating Partnership (other than a de minimis interest) as consideration for the performance of services to or for the benefit of the Operating Partnership (including the grant of a long-term incentive unit), and at such other times as may be desirable or required to comply with the Treasury Regulations.

During the three months ended March 31, 2012 and 2011, certain employees were granted an aggregate of 72,377 and 78,903 long-term incentive units, respectively. During the three months ended March 31, 2012 and 2011, certain employees were also granted an aggregate of 86,843 and 98,632 long-term incentive units, respectively, which, in addition to a service condition, are subject to a performance condition that impacts the number of units which ultimately vests. The performance condition is based upon our achievement of the respective fiscal years’ Funds From Operations per share targets. Upon evaluating the results of the performance condition, the final number of units is determined and such units vest based on satisfaction of the service conditions. The service conditions of the awards provide for 20% vesting on each of the first and second anniversaries of the grant date and 30% vesting on each of the third and fourth anniversaries of the grant date, provided the grantee continues employment on each anniversary date. Based on our 2011 FFO per diluted share and unit, all of the 2011 long-term incentive units satisfied the performance condition. The grant date fair values, which equal the market price of Digital Realty Trust, Inc. common stock, are being expensed on a straight-line basis for service awards over the vesting period of the long-term incentive units, which ranges from three to five years. For performance based awards, we expense the fair value using an accelerated method with each vesting tranche valued as a separate award.

The expense recorded for the three months ended March 31, 2012 and 2011 related to long-term incentive units was approximately $2.2 million and $1.9 million, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $0.2 million for the three months ended March 31, 2012 and 2011. Unearned compensation representing the unvested portion of the long-term incentive units totaled $21.3 million and $12.7 million as of March 31, 2012 and December 31, 2011, respectively. We expect to recognize this unearned compensation over the next 3.1 years on a weighted average basis.

 

34


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

(b) Class C Profits Interest Units

On May 2, 2007, we granted awards of Class C Profits Interest Units of the Operating Partnership or similar stock-based performance awards, which we refer to collectively as the Class C Units, under the Amended and Restated 2004 Incentive Award Plan (2007 Grant) to each of our named executive officers and certain other officers and employees.

The Class C Units subject to this award were subject to vesting based on the achievement of a total stockholder return (which we refer to as the market condition) as measured on November 1, 2008 (which we refer to as the first measurement date) and May 1, 2010 (which we refer to as the second measurement date).

We previously determined that the market condition with respect to the first measurement date was not achieved. On May 1, 2010, we determined that 593,316 of the Class C Units and 20,169 shares of restricted stock subject to the 2007 Grant satisfied the market condition on the second measurement date (May 1, 2010), with the value of these units equal to the maximum amount of the award pool payable pursuant to the 2007 Grant on the second measurement date. Of the Class C Units that satisfied the market condition on May 1, 2010, 60% vested on May 1, 2010 and the remaining 40% will vest ratably each month thereafter for 24 months.

The fair value of the 2007 Grant was measured on the grant date using a Monte Carlo simulation to estimate the probability of the multiple market conditions being satisfied. The Monte Carlo simulation uses a statistical formula underlying the Black-Scholes and binomial formulas, and such simulation was run approximately 100,000 times. For each simulation, the value of the payoff was calculated at the settlement date and was then discounted to the grant date at a risk-free interest rate. The expected value of the Class C units on the grant date was determined by multiplying the average of the values over all simulations by the number of outstanding shares of Digital Realty Trust, Inc. common stock and Operating Partnership units. The valuation was performed in a risk-neutral framework, so no assumption was made with respect to an equity risk premium. Other significant assumptions used in the valuation included an expected term of 36 months, expected stock price volatility of 23%, a risk-free interest rate of 4.6%, and a dividend growth rate of 5.0%. The fixed award limit under the plan was $17 million for the first market condition and $40 million for the second market condition, and there were 69.2 million shares of Digital Realty Trust, Inc. common stock and Operating Partnership units outstanding as of the 2007 grant date. The grant date fair value of these awards of approximately $11.8 million will be recognized as compensation expense on a straight-line basis over the expected service period of five years. The unearned compensation as of March 31, 2012 and December 31, 2011 was $0.2 million and $0.6 million, respectively. As of March 31, 2012 and December 31, 2011, 580,554 and 558,872, respectively, of the Class C Units subject to the 2007 Grant had vested. We recognized compensation expense related to the Class C Units subject to the 2007 Grant of $0.4 million and $0.5 million for the three months ended March 31, 2012 and 2011, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $0.1 million for the three months ended March 31, 2012 and 2011.

(c) Stock Options

The fair value of each option granted under the Amended and Restated 2004 Incentive Award Plan is estimated on the date of the grant using the Black-Scholes option-pricing model. For the three months ended March 31, 2012 and 2011, no stock options were granted. The fair values are being expensed on a straight-line basis over the vesting period of the options, which ranges from four to five years. The expense recorded for the three months ended March 31, 2012 and 2011 was approximately $0.1 million and $0.2 million, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $0.1 million for the three months ended March 31, 2012 and 2011. Unearned compensation representing the unvested portion of the stock options totaled $0.1 million and $0.3 million as of March 31, 2012 and December 31, 2011, respectively. We expect to recognize this unearned compensation over the next 0.1 year on a weighted average basis.

 

35


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

The following table summarizes the Amended and Restated 2004 Incentive Award Plan’s stock option activity for the three months ended March 31, 2012:

 

     Period ended
March 31, 2012
 
     Shares     Weighted average
exercise price
 

Options outstanding, beginning of period

     337,760      $ 24.17   

Exercised

     (32,758     39.62   

Cancelled / Forfeited

     —          —     
  

 

 

   

Options outstanding, end of period

     305,002      $ 22.51   
  

 

 

   

Exercisable, end of period

     293,751      $ 21.78   
  

 

 

   

The following table summarizes information about stock options outstanding and exercisable as of March 31, 2012:

 

Options outstanding

     Options exercisable  

Exercise price

   Number
outstanding
     Weighted
average
remaining
contractual life
(years)
     Weighted
average
exercise price
     Aggregate
intrinsic value
     Number
exercisable
     Weighted
average
remaining
contractual life
(years)
     Weighted
average
exercise price
     Aggregate
intrinsic value
 

$12.00-13.02

     181,119         2.58       $ 12.00       $ 11,223,944         181,119         2.58       $ 12.00       $ 11,223,944   

$20.37-28.09

     17,000         3.64         21.28         895,760         17,000         3.64         21.28         895,760   

$33.18-41.73

     106,883         5.02         40.52         3,575,032         95,632         5.01         40.38         3,212,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     305,002         3.49       $ 22.51       $ 15,694,736         293,751         3.43       $ 21.78       $ 15,332,004   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

(d) Restricted Stock

During the three months ended March 31, 2012 and 2011, certain employees were granted an aggregate of 42,720 and 40,807 shares of restricted stock, respectively. During the three months ended March 31, 2012 and 2011, certain employees were also granted an aggregate of 52,947 and 50,999 shares of restricted stock, respectively, which, in addition to a service condition, are subject to a performance condition that impacts the number of shares which ultimately vests. The performance condition is based upon our achievement of the respective year’s FFO per share targets. Upon evaluating the results of the performance condition, the final number of shares is determined and such shares vest based on satisfaction of the service conditions. The service conditions of the awards provide for 20% vesting on each of the first and second anniversaries of the grant date and 30% vesting on each of the third and fourth anniversaries of the grant date provided the grantee continues employment on each anniversary date. Based on our 2011 FFO per diluted share and unit, all of the 2011 restricted stock satisfied the performance condition.

The grant date fair values, which equal the market price of Digital Realty Trust, Inc. common stock, are being expensed on a straight-line basis for service awards over the vesting period of the restricted stock, which ranges from three to four years. For performance based awards, we expense the fair value using an accelerated method with each vesting tranche valued as a separate award.

The expense recorded for the three months ended March 31, 2012 and 2011 related to grants of restricted stock was approximately $0.7 million and $0.4 million, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $0.4 million and $0.3 million for the three months ended March 31, 2012 and 2011, respectively. Unearned compensation representing the unvested portion of the restricted stock totaled $11.1 million and $5.5 million as of March 31, 2012 and December 31, 2011, respectively. We expect to recognize this unearned compensation over the next 3.3 years on a weighted average basis.

13. Derivative Instruments

Currently, we use interest rate caps and swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

 

36


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

To comply with the provisions of fair value accounting guidance, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of December 31, 2011, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements related to US LIBOR, GBP LIBOR and EURIBOR based mortgage loans. To accomplish this objective, we primarily use interest rate swaps and caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Under an interest rate cap, if the reference interest rate, such as one-month LIBOR, increases above the cap rate, the holder of the instrument receives a payment based on the notional value of the instrument, the length of the period, and the difference between the current reference rate and the cap rate. If the reference rate increases above the cap rate, the payment received under the interest rate cap will offset the increase in the payments due under the variable rate notes payable.

We record all our interest rate swaps and caps on the condensed consolidated balance sheet at fair value. In determining the fair value of our interest rate swaps and caps, we consider the credit risk of our counterparties. These counterparties are generally larger financial institutions engaged in providing a variety of financial services. These institutions generally face similar risks regarding adverse changes in market and economic conditions, including, but not limited to, fluctuations in interest rates, exchange rates, equity and commodity prices and credit spreads. The current and pervasive disruptions in the financial markets have heightened the risks to these institutions.

Interest rate caps are viewed as a series of call options or caplets which exist for each period the cap agreement is in existence. As each caplet expires, the related cost of the expired caplet is amortized to interest expense with the remaining caplets carried at fair value. The value of interest rate caps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero. The purchase price of an interest rate cap is amortized to interest expense over the contractual life of the instrument. For interest rate caps that are designated as cash flow hedges under accounting guidance as it relates to derivative instruments, the change in the fair value of an effective interest rate cap is recorded to accumulated other comprehensive income in equity. Amounts we are entitled to under interest rate caps, if any, are recognized on an accrual basis, and are recorded as a reduction against interest expense in the accompanying condensed consolidated statements of operations.

Our agreements with some of our derivative counterparties provide either that (1) we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness or (2) we could be declared in default on our derivative obligations if we default on any of our indebtedness, including a default where repayment of the underlying indebtedness has not been accelerated by the lender.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2012, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The fair value of these derivatives was ($5.3) million and ($5.5) million at March 31, 2012 and December 31, 2011, respectively. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2012 and 2011, respectively, there were no ineffective portions to our interest rate swaps.

Amounts reported in accumulated other comprehensive loss related to interest rate swaps will be reclassified to interest expense as interest payments are made on our debt. As of March 31, 2012, we estimate that an additional $3.3 million will be reclassified as an increase to interest expense during the twelve months ending March 31, 2013, when the hedged forecasted transactions impact earnings.

 

37


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

As of March 31, 2012 and December 31, 2011, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands):

 

Notional Amount                                Fair Value at Significant
Other Observable Inputs (Level 2)
 

As of
March 31,
2012

    As of
December 31,
2011
    Type of
Derivative
     Strike
Rate
     Effective Date      Expiration Date     As of
March 31,
2012
    As of
December 31,
2011
 
  $68,554 (1)    $ 66,563 (1)      Swap         2.980         April 6, 2009         Nov. 30, 2013      $ (2,215   $ (2,363
  13,655 (2)      13,319 (2)      Swap         3.981         May 17, 2006         Jul. 18, 2013        (558     (583
  9,880 (2)      9,636 (2)      Swap         4.070         Jun. 23, 2006         Jul. 18, 2013        (415     (435
  8,695 (2)      8,480 (2)      Swap         3.989         Jul. 27, 2006         Oct. 18, 2013        (421     (432
  —          39,483 (2)      Swap         3.776         Dec. 5, 2006         Jan. 18, 2012 (3)      —          (41
  —          33,946 (2)      Swap         4.000         Dec. 20, 2006         Jan. 18, 2012 (3)      —          (38
  40,029 (2)      38,883 (2)      Swap         2.703         Dec. 3, 2009         Sep. 4, 2014        (1,713     (1,592
  15,952        16,163        Cap         4.000         June 24, 2009         June 25, 2012 (4)      —          —     
  20,500        20,500        Cap         4.000         Aug. 4, 2010         June 15, 2013        —          —     

 

 

   

 

 

              

 

 

   

 

 

 
  $177,265      $ 246,973                 $ (5,322   $ (5,484

 

 

   

 

 

              

 

 

   

 

 

 

 

(1) Translation to U.S. dollars is based on exchange rate of $1.60 to £1.00 as of March 31, 2012 and $1.55 to £1.00 as of December 31, 2011.
(2) Translation to U.S. dollars is based on exchange rate of $1.33 to €1.00 as of March 31, 2012 and $1.30 to €1.00 as of December 31, 2011.
(3) The swap agreements were terminated as the mortgage loans were paid in full at maturity in January 2012.
(4) This cap agreement was terminated on April 27, 2012 as the mortgage loan was paid in full on April 26, 2012.

We do not have any fair value measurements using significant unobservable inputs (Level 3) as of March 31, 2012 or December 31, 2011.

14. Fair Value of Instruments

We disclose fair value information about all financial instruments, whether or not recognized in the condensed consolidated balance sheets, for which it is practicable to estimate fair value.

Current accounting guidance requires the Company to disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value. The Company’s disclosures of estimated fair value of financial instruments at March 31, 2012 and December 31, 2011 were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The carrying amounts for cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and other accrued liabilities, security deposits and prepaid rents approximate fair value because of the short-term nature of these instruments. As described in note 13, the interest rate cap and interest rate swaps are recorded at fair value.

We calculate the fair value of our mortgage loans, unsecured senior notes and exchangeable senior debentures based on currently available market rates assuming the loans are outstanding through maturity and considering the collateral and other loan terms. In determining the current market rate for fixed rate debt, a market spread is added to the quoted yields on federal government treasury securities with similar maturity dates to debt. The carrying value of our global revolving credit facility approximates fair value, due to the short-term nature of this instrument along with the variability of interest rates.

 

38


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

As of March 31, 2012 and December 31, 2011, the aggregate estimated fair value and carrying value of our global revolving credit facility, unsecured senior notes, exchangeable senior debentures, mortgage loans and other secured loan were as follows (in thousands):

 

     As of March 31, 2012      As of December 31, 2011  
     Estimated Fair Value      Carrying Value      Estimated Fair Value      Carrying Value  

Global revolving credit facility (1)

   $ 678,554       $ 678,554       $ 275,106       $ 275,106   

Unsecured senior notes (2)(3)

     1,540,111         1,441,319         1,502,271         1,441,072   

Exchangeable senior debentures (2)

     484,057         266,400         438,327         266,400   

Mortgage loans (2)

     939,756         875,075         1,007,615         947,132   

Other secured loan

     10,699         10,500         10,688         10,500   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,653,177       $ 3,271,848       $ 3,234,007       $ 2,940,210   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The carrying value of our global revolving credit facility approximates estimated fair value, due to the short-term nature of this instrument along with the variability of interest rates.
(2) Valuations for our unsecured senior notes, mortgage loans and other secured loan are determined based on the expected future payments discounted at risk-adjusted rates. The 2015 Notes, 2020 Notes, 2021 Notes and exchangeable senior debentures are valued based on quoted market prices.
(3) The carrying value of the 2015 Notes, 2020 Notes and 2021 Notes are net of discount of $8,681 and $8,928 in the aggregate as of March 31, 2012 and December 31, 2011, respectively.

15. Tenant Concentration

For the three months ended March 31, 2012 and 2011, revenues recognized from subsidiaries of CenturyLink, Inc. comprised approximately 9.2% and 10.6% of total revenues, respectively. Other than noted here, for the three months ended March 31, 2012 and 2011, no single tenant comprised more than 10% of total revenues.

16. Related Party Transactions

In December 2006, we entered into ten leases with tel(x), pursuant to which tel(x) provides enhanced meet-me-room services to our customers. The initial terms of these leases expire in 2026, and tel(x) has options to extend them through 2046. tel(x) was acquired by GI Partners Fund II, LLP in November 2006, which, collectively with GI Partners Side Fund II, L.P., owned the majority of the outstanding stock of tel(x). Richard Magnuson, our director and Chairman until our 2012 Annual Meeting of Stockholders, or the Annual Meeting, is the chief executive officer of the advisor to GI Partners Fund II, LLP and GI Partners Side Fund II, L.P. During the year ended December 31, 2011, GI Partners Fund II, LLP and GI Partners Side Fund II, L.P completed the sale of tel(x) to an unrelated third party. Our condensed consolidated statements of operations include rental revenues of approximately $10.4 million and $8.8 million from tel(x) for the three months ended March 31, 2012 and 2011, respectively, from leases entered into before tel(x) was sold to an unrelated third party. In connection with the lease agreements, we entered into an operating agreement with tel(x), effective as of December 1, 2006, with respect to joint sales and marketing efforts, designation of representatives to manage the national relationship between us and tel(x) and future meet-me-room facilities. As of March 31, 2012 and December 31, 2011, tel(x) leased from us 254,364 square feet under 42 lease agreements and 254,314 square feet under 41 lease agreements, respectively; all but one lease for 50 square feet, was entered into prior to the sale of tel(x) to an unrelated third party in September 2011.

We also entered into an agreement with tel(x), effective as of December 1, 2006, with respect to percentage rent arising out of potential future lease agreements for rentable space in buildings covered by the meet-me-room lease agreements. Percentage rent earned during the three months ended March 31, 2012 and 2011 amounted to approximately $0.3 million and $0.1 million, respectively.

 

39


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

In addition, in connection with the lease agreements, we entered into a management agreement with tel(x), effective as of December 1, 2007, pursuant to which tel(x) agreed to provide us with certain management services in exchange for a management fee of one percent of rents actually collected by tel(x).

We are party to nine leases with SoftLayer, of which eight are in place as of March 31, 2012 and the remaining lease will commence in a future period. The initial terms of these leases expire from 2013 to 2025, and SoftLayer has options to extend them from 2018 through 2035. On August 3, 2010, GI Partners Fund III, L.P. acquired a controlling interest in SoftLayer. Richard Magnuson, our director and Chairman until our Annual Meeting, is also a manager of the general partner to GI Partners Fund III, L.P. Our condensed consolidated statements of operations include rental revenues of approximately $7.3 million and $2.3 million from SoftLayer for the three months ended March 31, 2012 and 2011, respectively.

Mr. Magnuson did not stand for re-election to our Board of Directors at our Annual Meeting. His term as a member of our Board of Directors and our Chairman ended effective April 23, 2012, the date of the Annual Meeting.

17. Commitments and Contingencies

We have agreed with the seller of 350 East Cermak Road to share a portion, not to exceed $135,000 per month, of rental revenue, adjusted for our costs to lease the premises, from the leases of the 192,000 square feet of space held for redevelopment. This revenue sharing agreement will terminate in May 2012. We made payments of approximately $0.4 million to the seller during the three months ended March 31, 2012 and 2011. We have recorded approximately $0.3 million and $0.7 million for this contingent liability on our condensed consolidated balance sheet at March 31, 2012 and December 31, 2011, respectively.

As part of the acquisition of 29A International Business Park, the seller could earn additional consideration based on future net operating income growth in excess of certain performance targets, as defined. As of March 31, 2012, construction is not complete and none of the leases executed subsequent to purchase would cause an amount to become probable of payment and therefore no amount is accrued as of March 31, 2012. The maximum amount that could be earned by the seller is $50.0 million SGD (or approximately $39.8 million based on the exchange rate as of March 31, 2012). The earnout contingency expires in November 2020.

One of the tenants at our Convergence Business Park property has an option to expand as part of their lease agreement, which expires in April 2017. As part of this option, development activities are not permitted on specifically identified expansion space within the property until April 2014. If the tenant elects to take this option, we can elect one of two options. The first option is to construct and develop an additional shell building on the expansion space. Concurrent with this obligation, the tenant would also execute an amendment to the existing lease to reflect the expansion of the space to include the additional shell building. The second option is to sell the existing building and the expansion space to the tenant for a price of approximately $24.0 million and $225,000 per square acre, respectively, plus additional adjustments as provided in the lease.

Our properties require periodic investments of capital for tenant-related capital expenditures and for general capital improvements and from time to time in the normal course of our business, we enter into various construction contracts with third parties that may obligate us to make payments. At March 31, 2012, we had open commitments related to construction contracts of approximately $213.1 million.

18. Subsequent Events

On April 5, 2012 and April 18, 2012, Digital Realty Trust, Inc. issued an aggregate of 7.3 million shares of its 6.625% Series F Cumulative Redeemable Preferred Stock for total net proceeds, after underwriting discounts and estimated offering expenses, of $175.8 million, including the proceeds from the partial exercise of the underwriters’ over-allotment option. We intend to use the net proceeds from the offering to temporarily repay borrowings under our global revolving credit facility, to acquire additional properties, to fund development and redevelopment opportunities and for general working capital purposes including potentially for the repurchase, redemption or retirement of outstanding debt or preferred equity securities.

On April 17, 2012, we closed a new $750.0 million senior unsecured multi-currency term loan facility. The new facility matures on April 16, 2017. Interest rates are based on our senior unsecured debt ratings and is currently 145 basis points over the applicable index for floating rate advances. Funds may be drawn in U.S, Singapore and Australian dollars, as well as Euro and Pound Sterling denominations with the option to add Hong Kong dollars and Yen upon an accordion exercise. The new term loan provides funds for acquisitions, repayment of indebtedness, development and redevelopment, working capital and general corporate purposes. Covenants are consistent with our global revolving credit facility.

 

40


Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

March 31, 2012 and 2011

(unaudited)

 

Effective April 17, 2012, Digital Realty Trust, Inc. converted all outstanding shares of its 4.375% Series C Cumulative Convertible Preferred Stock (“Series C Preferred Stock”) into shares its of common stock in accordance with the terms of the Series C Preferred Stock. Each share of Series C Preferred Stock was converted into 0.5480 shares of common stock of Digital Realty Trust, Inc.

On April 23, 2012, we declared the following dividends per share and the Operating Partnership declared an equivalent distribution per unit:

 

Share Class

   Series D
Preferred Stock
     Series E
Preferred Stock
     Series F
Preferred Stock
    Common stock and
common unit
 

Dividend and distribution amount

   $ 0.343750       $ 0.437500       $ 0.395660 (1)    $ 0.730000   

Dividend and distribution payable date

    
 
June 29,
2012
  
  
    
 
June 29,
2012
  
  
    
 
June 29,
2012
  
  
   
 
June 29,
2012
  
  

Dividend payable to shareholders of record on

    
 
June 15,
2012
  
  
    
 
June 15,
2012
  
  
    
 
June 15,
2012
  
  
   
 
June 15,
2012
  
  

Annual equivalent rate of dividend and distribution

   $ 1.375       $ 1.750       $ 1.65625      $ 2.920   

 

(1) Represents a pro rata dividend from and including the original issue date to and including June 30, 2012.

Effective April 23, 2012, Richard A. Magnuson’s term as a member of our Board of Directors and our Chairman ended and our Board of Directors selected Dennis E. Singleton, our director since 2004, to serve as the permanent Chairman of our Board of Directors.

 

41


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion should be read in conjunction with the condensed conso