XNYS:DLR Digital Realty Trust Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 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)

Four Embarcadero Center, Suite 3200

San Francisco, CA

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

(415) 738-6500

(Registrant’s telephone number, including area code)

 

 

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

 

Digital Realty Trust, Inc.

   Yes  x      No   ¨

Digital Realty Trust, L.P.

   Yes  x      No   ¨

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

 

Digital Realty Trust, Inc.

   Yes  x      No   ¨

Digital Realty Trust, L.P.

   Yes  x      No   ¨

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

Digital Realty Trust, Inc.:

 

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

Digital Realty Trust, L.P.:

 

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

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

 

Digital Realty Trust, Inc.

   Yes  ¨      No   x

Digital Realty Trust, L.P.

   Yes  ¨      No   x

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

Digital Realty Trust, Inc.:

 

Class

 

Outstanding at July 30, 2012

Common Stock, $.01 par value per share   121,993,651

 

 

 


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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 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 June 30, 2012, Digital Realty Trust, Inc. owned an approximate 95.8% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 4.2% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of Digital Realty Trust, Inc. As of June 30, 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 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;

 

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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.

 

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

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 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 June 30, 2012 (unaudited) and December 31, 2011

     5   
 

Condensed Consolidated Income Statements for the three and six months ended June  30, 2012 and 2011 (unaudited)

     6   
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June  30, 2012 and 2011 (unaudited)

     7   
 

Condensed Consolidated Statement of Equity for the six months ended June 30, 2012 (unaudited)

     8   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)

     9   
 

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

  
 

Condensed Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

     11   
 

Condensed Consolidated Income Statements for the three and six months ended June  30, 2012 and 2011 (unaudited)

     12   
 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June  30, 2012 and 2011 (unaudited)

     13   
 

Condensed Consolidated Statement of Capital for the six months ended June 30, 2012 (unaudited)

     14   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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

     47   
ITEM 3.  

Quantitative and Qualitative Disclosures About Market Risk

     70   
ITEM 4.  

Controls and Procedures (Digital Realty Trust, Inc.)

     73   
 

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

     74   
PART II.  

OTHER INFORMATION

     75   
ITEM 1.  

Legal Proceedings

     75   
ITEM 1A.   

Risk Factors

     75   
ITEM 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     75   
ITEM 3.  

Defaults Upon Senior Securities

     75   
ITEM 4.  

Mine Safety Disclosures

     75   
ITEM 5.  

Other Information

     75   
ITEM 6.  

Exhibits

     76   
 

Signatures

     77   
 

Exhibit Index

     78   

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

     June 30,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Investments in real estate:

    

Properties:

    

Land

   $ 596,771      $ 555,113   

Acquired ground leases

     6,103        6,214   

Buildings and improvements

     5,838,885        5,253,754   

Tenant improvements

     344,215        303,502   
  

 

 

   

 

 

 

Total investments in properties

     6,785,974        6,118,583   

Accumulated depreciation and amortization

     (1,033,128     (900,044
  

 

 

   

 

 

 

Net investments in properties

     5,752,846        5,218,539   

Investment in unconsolidated joint ventures

     42,952        23,976   
  

 

 

   

 

 

 

Net investments in real estate

     5,795,798        5,242,515   

Cash and cash equivalents

     47,777        40,631   

Accounts and other receivables, net of allowance for doubtful accounts of $2,624 and $2,436 as of June 30, 2012 and December 31, 2011, respectively

     96,609        90,580   

Deferred rent

     279,971        246,815   

Acquired above market leases, net

     25,367        29,701   

Acquired in place lease value and deferred leasing costs, net

     370,179        335,381   

Deferred financing costs, net

     31,024        29,849   

Restricted cash

     35,322        55,165   

Other assets

     35,066        27,929   
  

 

 

   

 

 

 

Total assets

   $ 6,717,113      $ 6,098,566   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Global revolving credit facility

   $ 324,476      $ 275,106   

Unsecured term loan

     520,942        —     

Unsecured senior notes, net of discount

     1,441,569        1,441,072   

Exchangeable senior debentures

     266,400        266,400   

Mortgage loans, net of premiums

     846,825        947,132   

Other secured loan

     —          10,500   

Accounts payable and other accrued liabilities

     372,974        315,133   

Accrued dividends and distributions

     —          75,455   

Acquired below market leases, net

     112,891        85,819   

Security deposits and prepaid rents

     92,852        101,538   
  

 

 

   

 

 

 

Total liabilities

     3,978,929        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%, $0 and $128,159 liquidation preference, respectively ($25.00 per share), 0 and 5,126,364 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     —          123,820   

Series D Cumulative Convertible Preferred Stock, 5.500%, $174,096 and $174,426 liquidation preference, respectively ($25.00 per share), 6,963,848 and 6,977,055 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     168,350        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 June 30, 2012 and December 31, 2011, respectively

     277,172        277,292   

Series F Cumulative Redeemable Preferred Stock, 6.625%, $182,500 and $0 liquidation preference, respectively ($25.00 per share), 7,300,000 and 0 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     176,253        —     

Common Stock: $0.01 par value, 165,000,000 shares authorized, 110,268,388 and 106,039,279 shares issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     1,098        1,057   

Additional paid-in capital

     2,687,065        2,496,651   

Dividends in excess of earnings

     (566,273     (488,692

Accumulated other comprehensive loss, net

     (55,701     (55,880
  

 

 

   

 

 

 

Total stockholders’ equity

     2,687,964        2,522,917   
  

 

 

   

 

 

 

Noncontrolling Interests:

    

Noncontrolling interests in operating partnership

     46,273        45,057   

Noncontrolling interests in consolidated joint ventures

     3,947        12,437   
  

 

 

   

 

 

 

Total noncontrolling interests

     50,220        57,494   
  

 

 

   

 

 

 

Total equity

     2,738,184        2,580,411   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,717,113      $ 6,098,566   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Operating Revenues:

        

Rental

   $ 234,923      $ 202,806      $ 457,757      $ 399,601   

Tenant reimbursements

     60,422        51,311        118,284        103,145   

Construction management

     1,954        13,759        4,406        15,576   

Other

     6,405        5        6,405        300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     303,704        267,881        586,852        518,622   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

        

Rental property operating and maintenance

     87,576        72,337        167,421        144,060   

Property taxes

     15,769        13,962        31,811        27,433   

Insurance

     2,260        1,998        4,490        4,049   

Construction management

     596        11,199        789        12,936   

Depreciation and amortization

     89,000        76,848        172,995        150,766   

General and administrative

     15,109        14,077        29,359        26,482   

Transactions

     4,608        740        5,285        1,421   

Other

     337        —          337        90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     215,255        191,161        412,487        367,237   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     88,449        76,720        174,365        151,385   

Other Income (Expenses):

        

Equity in earnings of unconsolidated joint ventures

     3,493        1,058        4,882        2,266   

Interest and other income

     1,216        380        1,925        644   

Interest expense

     (37,681     (39,334     (75,711     (75,416

Tax expense

     (1,206     (233     (1,927     (661

Loss from early extinguishment of debt

     (303     (363     (303     (978
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     53,968        38,228        103,231        77,240   

Net income attributable to noncontrolling interests

     (1,634     (1,525     (2,855     (3,035
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Digital Realty Trust, Inc.

     52,334        36,703        100,376        74,205   

Preferred stock dividends

     (10,313     (4,713     (19,144     (11,235
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 42,021      $ 31,990      $ 81,232      $ 62,970   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share available to common stockholders:

        

Basic

   $ 0.38      $ 0.33      $ 0.75      $ 0.67   

Diluted

   $ 0.38      $ 0.33      $ 0.75      $ 0.66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding:

        

Basic

     109,761,017        96,295,585        108,430,437        93,875,415   

Diluted

     110,166,082        97,511,811        108,809,574        95,012,965   

See accompanying notes to the condensed consolidated financial statements.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  

Net income

   $ 53,968      $ 38,228      $ 103,231      $ 77,240   

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     (18,002     8,631        1,301        25,037   

Decrease in fair value of interest rate swaps

     (1,943     (2,453     (2,888     (947

Reclassification to interest expense from interest rate swaps

     686        1,589        1,790        3,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     34,709        45,995        103,434        104,504   

Comprehensive income attributable to noncontrolling interests

     (901     (1,891     (2,879     (4,387
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Digital Realty Trust, Inc.

   $ 33,808      $ 44,104      $ 100,555      $ 100,117   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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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

    —          304,120        3        3,218        —          —          3,221        (3,221     —          (3,221     —     

Issuance of restricted stock, net of forfeitures

    —          93,861        —          —          —          —          —          —          —          —          —     

Net proceeds from sale of common stock

    —          956,818        10        62,753        —          —          62,763        —          —          —          62,763   

Exercise of stock options

    —          56,775        —          2,005        —          —          2,005        —          —          —          2,005   

Issuance of series F preferred stock, net of offering costs

    176,133        —          —          —          —          —          176,133        —          —          —          176,133   

Conversion of convertible preferred stock

    (124,139     2,817,535        28        124,111        —          —          —          —          —          —          —     

Amortization of unearned compensation regarding share based awards

    —          —          —          8,612        —          —          8,612        —          —          —          8,612   

Reclassification of vested share based awards

    —          —          —          (8,252     —          —          (8,252     8,252        —          8,252        —     

Dividends declared on preferred stock

    —          —          —          —          (19,144     —          (19,144     —          —          —          (19,144

Dividends and distributions on common stock and common and incentive units

    —          —          —          —          (158,813     —          (158,813     (7,086     —          (7,086     (165,899

Contributions from noncontrolling interests in consolidated joint ventures

    —          —          —          —          —          —          —          —          2,253        2,253        2,253   

Purchase of noncontrolling interests of a consolidated joint venture

    —          —          —          (2,033     —          —          (2,033     —          (10,351     (10,351     (12,384

Net income

    —          —          —          —          100,376        —          100,376        3,247        (392     2,855        103,231   

Other comprehensive income - foreign currency translation adjustments

    —          —          —          —          —          1,235        1,235        66        —          66        1,301   

Other comprehensive income - fair value of interest rate swaps

    —          —          —          —          —          (2,777     (2,777     (111     —          (111     (2,888

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

    —          —          —          —          —          1,721        1,721        69        —          69        1,790   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

  $ 621,775        110,268,388      $ 1,098      $ 2,687,065      $ (566,273   $ (55,701   $ 2,687,964      $ 46,273      $ 3,947      $ 50,220      $ 2,738,184   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 103,231      $ 77,240   

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

    

Loss on early extinguishment of debt-non cash portion

     —          567   

Equity in earnings of unconsolidated joint ventures

     (4,882     (2,266

Distributions from unconsolidated joint ventures

     16,498        2,000   

Write-off of net assets due to early lease terminations

     337        81   

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

     142,870        118,520   

Amortization of share-based unearned compensation

     7,181        6,702   

Allowance for (recovery of) doubtful accounts

     188        (1,295

Amortization of deferred financing costs

     4,013        4,961   

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

     254        85   

Amortization of debt discount/premium

     480        1,498   

Amortization of acquired in place lease value and deferred leasing costs

     30,124        32,246   

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

     (5,110     (3,674

Changes in assets and liabilities:

    

Restricted cash

     13,225        2,654   

Accounts and other receivables

     (3,413     (7,224

Deferred rent

     (35,551     (27,053

Deferred leasing costs

     (8,520     (7,770

Other assets

     (8,757     (12,915

Accounts payable and other accrued liabilities

     (12,384     4,154   

Security deposits and prepaid rents

     (8,584     1,212   
  

 

 

   

 

 

 

Net cash provided by operating activities

     231,200        189,723   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of real estate

     (222,105     (17,523

Investment in unconsolidated joint ventures

     (30,592     (244

Deposits paid for acquisitions of real estate

     (500     (2,224

Receipt of value added tax refund

     6,793        5,623   

Refundable value added tax paid

     (9,269     (7,674

Change in restricted cash

     3,857        118   

Improvements to and advances for investments in real estate

     (394,245     (307,890

Improvement advances to tenants

     (1,798     (2,935

Collection of advances from tenants for improvements

     1,427        1,728   
  

 

 

   

 

 

 

Net cash used in investing activities

     (646,432     (331,021
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from financing activities:

    

Borrowings on revolving credit facilities

   $ 869,848      $ 537,431   

Repayments on revolving credit facilities

     (824,802     (527,500

Borrowings on unsecured term loan

     526,628        —     

Borrowings on 5.250% unsecured senior notes due 2021

     —          399,100   

Repayments on other secured loan

     (10,500     —     

Principal payments on mortgage loans

     (106,124     (123,645

Principal repayments on 2026 exchangeable senior debentures

     —          (40,457

Equity component settled associated with exchange of 2026 exchangeable senior debentures

     —          (11,783

Change in restricted cash

     2,507        1,311   

Payment of loan fees and costs

     (5,452     (3,825

Capital contributions received from noncontrolling interests in joint ventures

     2,253        42   

Gross proceeds from the sale of common stock

     63,346        179,583   

Gross proceeds from the issuance of Series F preferred stock

     182,500        —     

Common stock offering costs paid

     (583     (3,317

Preferred stock offering costs paid

     (6,367     —     

Proceeds from exercise of stock options

     2,005        3,053   

Payment of dividends to preferred stockholders

     (19,144     (11,235

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

     (241,354     (188,039

Purchase of noncontrolling interests in consolidated joint ventures

     (12,384     (53,240
  

 

 

   

 

 

 

Net cash provided by financing activities

     422,378        157,479   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     7,146        16,181   

Cash and cash equivalents at beginning of period

     40,631        11,719   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 47,777      $ 27,900   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest, including amounts capitalized

   $ 81,322      $ 72,557   

Cash paid for taxes

     1,517        1,080   

Supplementary disclosure of noncash investing and financing activities:

    

Change in net assets related to foreign currency translation adjustments

   $ 1,301      $ 25,037   

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

     (2,888     (947

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

     3,221        6,434   

Convertible preferred stock converted to shares of common stock

     124,139        —     

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

     215,456        126,039   

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

     —          230   

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

    

Investments in real estate

     226,855        17,523   

Acquired below market leases

     (36,708     —     

Acquired in place lease value and deferred leasing costs

     38,848        —     

Mortgage loan assumed, net of premium

     (6,890     —     
  

 

 

   

 

 

 

Cash paid for acquisition of real estate

   $ 222,105      $ 17,523   
  

 

 

   

 

 

 

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)

 

     June 30,
2012
    December 31,
2011
 
     (unaudited)        

ASSETS

    

Investments in real estate:

    

Properties:

    

Land

   $ 596,771      $ 555,113   

Acquired ground leases

     6,103        6,214   

Buildings and improvements

     5,838,885        5,253,754   

Tenant improvements

     344,215        303,502   
  

 

 

   

 

 

 

Total investments in properties

     6,785,974        6,118,583   

Accumulated depreciation and amortization

     (1,033,128     (900,044
  

 

 

   

 

 

 

Net investments in properties

     5,752,846        5,218,539   

Investment in unconsolidated joint ventures

     42,952        23,976   
  

 

 

   

 

 

 

Net investments in real estate

     5,795,798        5,242,515   

Cash and cash equivalents

     47,777        40,631   

Accounts and other receivables, net of allowance for doubtful accounts of $2,624 and $2,436 as of June 30, 2012 and December 31, 2011, respectively

     96,609        90,580   

Deferred rent

     279,971        246,815   

Acquired above market leases, net

     25,367        29,701   

Acquired in place lease value and deferred leasing costs, net

     370,179        335,381   

Deferred financing costs, net

     31,024        29,849   

Restricted cash

     35,322        55,165   

Other assets

     35,066        27,929   
  

 

 

   

 

 

 

Total assets

   $ 6,717,113      $ 6,098,566   
  

 

 

   

 

 

 

LIABILITIES AND CAPITAL

    

Global revolving credit facility

   $ 324,476      $ 275,106   

Unsecured term loan

     520,942        —     

Unsecured senior notes, net of discount

     1,441,569        1,441,072   

Exchangeable senior debentures

     266,400        266,400   

Mortgage loans, net of premiums

     846,825        947,132   

Other secured loan

     —          10,500   

Accounts payable and other accrued liabilities

     372,974        315,133   

Accrued dividends and distributions

     —          75,455   

Acquired below market leases, net

     112,891        85,819   

Security deposits and prepaid rents

     92,852        101,538   
  

 

 

   

 

 

 

Total liabilities

     3,978,929        3,518,155   

Commitments and contingencies

    

Capital:

    

Partners’ capital:

    

General Partner:

    

Series C Cumulative Convertible Preferred Units, 4.375%, $0 and $128,159 liquidation preference, respectively ($25.00 per unit), 0 and 5,126,364 units issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     —          123,820   

Series D Cumulative Convertible Preferred Units, 5.500%, $174,096 and $174,426 liquidation preference, respectively ($25.00 per unit), 6,963,848 and 6,977,055 units issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     168,350        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 June 30, 2012 and December 31, 2011, respectively

     277,172        277,292   

Series F Cumulative Redeemable Preferred Units, 6.625%, $182,500 and $0 liquidation preference, respectively ($25.00 per unit), 7,300,000 and 0 units issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     176,253        —     

110,268,388 and 106,039,279 common units issued and outstanding as of June 30, 2012 and December 31, 2011, respectively

     2,121,890        2,009,016   

Limited partners, 3,235,814 and 3,405,814 common units, 1,099,409 and 1,054,473 profits interest units and 446,917 and 475,843 class C units outstanding as of June 30, 2012 and December 31, 2011, respectively

     50,436        49,240   

Accumulated other comprehensive loss

     (59,864     (60,063
  

 

 

   

 

 

 

Total partners’ capital

     2,734,237        2,567,974   

Noncontrolling interests in consolidated joint ventures

     3,947        12,437   
  

 

 

   

 

 

 

Total capital

     2,738,184        2,580,411   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 6,717,113      $ 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 June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Operating Revenues:

        

Rental

   $ 234,923      $ 202,806      $ 457,757      $ 399,601   

Tenant reimbursements

     60,422        51,311        118,284        103,145   

Construction management

     1,954        13,759        4,406        15,576   

Other

     6,405        5        6,405        300   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     303,704        267,881        586,852        518,622   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

        

Rental property operating and maintenance

     87,576        72,337        167,421        144,060   

Property taxes

     15,769        13,962        31,811        27,433   

Insurance

     2,260        1,998        4,490        4,049   

Construction management

     596        11,199        789        12,936   

Depreciation and amortization

     89,000        76,848        172,995        150,766   

General and administrative

     15,109        14,077        29,359        26,482   

Transactions

     4,608        740        5,285        1,421   

Other

     337        —          337        90   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     215,255        191,161        412,487        367,237   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     88,449        76,720        174,365        151,385   

Other Income (Expenses):

        

Equity in earnings of unconsolidated joint ventures

     3,493        1,058        4,882        2,266   

Interest and other income

     1,216        380        1,925        644   

Interest expense

     (37,681     (39,334     (75,711     (75,416

Tax expense

     (1,206     (233     (1,927     (661

Loss from early extinguishment of debt

     (303     (363     (303     (978
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     53,968        38,228        103,231        77,240   

Net loss attributable to noncontrolling interests in consolidated joint ventures

     27        57        392        199   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     53,995        38,285        103,623        77,439   

Preferred units distributions

     (10,313     (4,713     (19,144     (11,235
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common unitholders

   $ 43,682      $ 33,572      $ 84,479      $ 66,204   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per unit available to common unitholders:

        

Basic

   $ 0.38      $ 0.33      $ 0.75      $ 0.67   

Diluted

   $ 0.38      $ 0.33      $ 0.75      $ 0.66   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common units outstanding:

        

Basic

     114,100,498        101,056,387        112,766,660        98,698,968   

Diluted

     114,505,563        102,272,613        113,145,797        99,836,518   

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 June 30,     Six months ended June 30,  
     2012     2011     2012     2011  

Net income

   $ 53,968      $ 38,228      $ 103,231      $ 77,240   

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     (18,002     8,631        1,301        25,037   

Decrease in fair value of interest rate swaps

     (1,943     (2,453     (2,888     (947

Reclassification to interest expense from interest rate swaps

     686        1,589        1,790        3,174   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 34,709      $ 45,995      $ 103,434      $ 104,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     —          —          304,120         3,221        (304,120     (3,221     —          —          —     

Issuance of restricted common units, net of forfeitures

     —          —          93,861         —          —          —          —          —          —     

Net proceeds from issuance of common units

     —          —          956,818         62,763        —          —          —          —          62,763   

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

     —          —          56,775         2,005        —          —          —          —          2,005   

Issuance of common units, net of forfeitures

     —          —          —           —          150,130        —          —          —          —     

Net proceeds from issuance of preferred units

     7,300,000        176,133        —           —          —          —          —          —          176,133   

Conversion of convertible preferred units

     (5,139,571     (124,139     2,817,535         124,139        —          —          —          —          —     

Amortization of unearned compensation regarding share based awards

     —          —          —           8,612        —          —          —          —          8,612   

Reclassification of vested share based awards

     —          —          —           (8,252     —          8,252        —          —          —     

Distributions

     —          (19,144     —           (158,813     —          (7,086     —          —          (185,043

Purchase of noncontrolling interests of a consolidated joint venture

     —          —          —           (2,033     —          —          —          (10,351     (12,384

Contributions from noncontrolling interest in consolidated joint ventures

     —          —          —           —          —          —          —          2,253        2,253   

Net income

     —          19,144        —           81,232        —          3,247        —          (392     103,231   

Other comprehensive loss - foreign currency translation adjustments

     —          —          —           —          —          —          1,301        —          1,301   

Other comprehensive loss - fair value of interest rate swaps

     —          —          —           —          —          —          (2,888     —          (2,888

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

     —          —          —           —          —          —          1,790        —          1,790   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

     25,763,848      $ 621,775        110,268,388       $ 2,121,890        4,782,140      $ 50,436      $ (59,864   $ 3,947      $ 2,738,184   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 103,231      $ 77,240   

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

    

Loss on early extinguishment of debt-non cash portion

     —          567   

Equity in earnings of unconsolidated joint ventures

     (4,882     (2,266

Distributions from unconsolidated joint ventures

     16,498        2,000   

Write-off of net assets due to early lease terminations

     337        81   

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

     142,870        118,520   

Amortization of share-based unearned compensation

     7,181        6,702   

Allowance for (recovery of) doubtful accounts

     188        (1,295

Amortization of deferred financing costs

     4,013        4,961   

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

     254        85   

Amortization of debt discount/premium

     480        1,498   

Amortization of acquired in place lease value and deferred leasing costs

     30,124        32,246   

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

     (5,110     (3,674

Changes in assets and liabilities:

    

Restricted cash

     13,225        2,654   

Accounts and other receivables

     (3,413     (7,224

Deferred rent

     (35,551     (27,053

Deferred leasing costs

     (8,520     (7,770

Other assets

     (8,757     (12,915

Accounts payable and other accrued liabilities

     (12,384     4,154   

Security deposits and prepaid rents

     (8,584     1,212   
  

 

 

   

 

 

 

Net cash provided by operating activities

     231,200        189,723   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of real estate

     (222,105     (17,523

Investment in unconsolidated joint ventures

     (30,592     (244

Deposits paid for acquisitions of real estate

     (500     (2,224

Receipt of value added tax refund

     6,793        5,623   

Refundable value added tax paid

     (9,269     (7,674

Change in restricted cash

     3,857        118   

Improvements to and advances for investments in real estate

     (394,245     (307,890

Improvement advances to tenants

     (1,798     (2,935

Collection of advances from tenants for improvements

     1,427        1,728   
  

 

 

   

 

 

 

Net cash used in investing activities

     (646,432     (331,021
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)

 

     Six Months Ended June 30,  
     2012     2011  

Cash flows from financing activities:

    

Borrowings on revolving credit facilities

   $ 869,848      $ 537,431   

Repayments on revolving credit facilities

     (824,802     (527,500

Borrowings on unsecured term loan

     526,628        —     

Borrowings on 5.250% unsecured senior notes due 2021

     —          399,100   

Repayments on other secured loan

     (10,500  

Principal payments on mortgage loans

     (106,124     (123,645

Principal repayments on 2026 exchangeable senior debentures

     —          (40,457

Equity component settled associated with exchange of 2026 exchangeable senior debentures

     —          (11,783

Change in restricted cash

     2,507        1,311   

Payment of loan fees and costs

     (5,452     (3,825

Capital contributions received from noncontrolling interests in joint ventures

     2,253        42   

General partner contributions

     240,901        179,319   

Payment of distributions to preferred unitholders

     (19,144     (11,235

Payment of distributions to common unitholders

     (241,354     (188,039
  

 

 

   

 

 

 

Net cash provided by financing activities

     422,378        157,479   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     7,146        16,181   

Cash and cash equivalents at beginning of period

     40,631        11,719   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 47,777      $ 27,900   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest, including amounts capitalized

   $ 81,322      $ 72,557   

Cash paid for taxes

     1,517        1,080   

Supplementary disclosure of noncash investing and financing activities:

    

Change in net assets related to foreign currency translation adjustments

   $ 1,301      $ 25,037   

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

     (2,888     (947

Convertible preferred units converted to common units

     124,139        —     

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

     215,456        126,039   

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

     —          230   

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

    

Investments in real estate

     226,855        17,523   

Acquired below market leases

     (36,708     —     

Acquired in place lease value and deferred leasing costs

     38,848        —     

Mortgage loan assumed, net of premium

     (6,890     —     
  

 

 

   

 

 

 

Cash paid for acquisition of real estate

   $ 222,105      $ 17,523   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 FlexSM 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 June 30, 2012, our portfolio consisted of 105 properties, excluding three properties held as investments in unconsolidated joint ventures and land held for development, of which 89 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 June 30, 2012, Digital Realty Trust, Inc. owns a 95.8% 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

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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 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 June 30, 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.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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 June 30, 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 and six months ended June 30, 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 June 30, 2012 and December 31, 2011, the amount included in accounts payable and other accrued liabilities on our condensed consolidated balance sheets was approximately $1.7 million and $1.2 million, respectively.

(g) Construction Management Revenue

Construction management revenue for long-term contracts are 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

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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.

During the three months ended June 30, 2012 and 2011, we capitalized interest of approximately $4.6 million and $4.2 million, respectively, and $9.1 million and $8.9 million during the six months ended June 30, 2012 and 2011, respectively. During the three months ended June 30, 2012 and 2011, we capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $7.4 million and $6.1 million, respectively, and $15.3 million and $12.3 million during the six months ended June 30, 2012 and 2011, respectively. Cash flows from capitalized leasing costs of $14.7 million and $13.2 million are included in improvements to and advances for investments in real estate in cash flows from investing activities in the condensed consolidated statements of cash flows for the six months ended June 30, 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.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

(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.

(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 properties during the six months ended June 30, 2012:

 

Location

   Metropolitan Area    Date Acquired    Amount
(in millions)
 

Convergence Business Park (1)

   Dallas, Texas    February 22, 2012    $ 123.0   

9333, 9355, 9377 Grand Avenue (2)

   Chicago, Illinois    May 10, 2012      22.3   

8025 North Interstate 35(3)

   Austin, Texas    May 18, 2012      12.5   

400 S. Akard Street

   Dallas, Texas    June 13, 2012      75.0   
        

 

 

 
         $ 232.8   

 

(1) Convergence Business Park is comprised of nine buildings along with undeveloped land. It is considered one property for our property count.
(2) 9333, 9355, 9377 Grand Avenue is comprised of three buildings. It is considered one property for our property count.
(3) In connection with the acquisition, we assumed a $6.7 million secured mortgage loan.

On July 11, 2012, we completed the acquisition of a three-property data center portfolio, totaling approximately 761,000 square feet, located in the greater London area, referred to as the Sentrum Portfolio. The purchase price was £715.9 million (equivalent to approximately $1.1 billion based on the July 11, 2012 exchange rate of £1.00 to $1.55), subject to adjustment in limited circumstances and to earn-out payments, and was funded with proceeds from our common stock offering in July 2012 along with borrowings under our global revolving credit facility.

We will account for this acquisition under current purchase accounting guidance, and will include the Sentrum Portfolio’s results of operations in our consolidated financial statements beginning on July 11, 2012, the acquisition date. Under current purchase accounting guidance, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values. Given the recent date on which we acquired the Sentrum Portfolio, we are unable to provide the acquisition date fair value of assets acquired at this time. Accordingly, we are also unable at this time to provide a qualitative description of the factors that make up identified intangible assets and liabilities to be recognized, if any, such as above-market and below-market lease values, in-place lease value and tenant relationship value.

In March 2012, we entered into a joint venture with Savvis, Inc., a CenturyLink company. On June 26, 2012, this unconsolidated joint venture acquired a 164,000 square foot property in Hong Kong. The property is located at Tseung Kwan O Industrial Estate in New Territories, approximately 12 miles from downtown Hong Kong. As of June 30, 2012, we have contributed approximately $20.6 million to the joint venture.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

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 June 30, 2012 and December 31, 2011.

 

     Balance as of  

(Amounts in thousands)

   June 30,
2012
    December 31,
2011
 

Acquired in place lease value:

    

Gross amount

   $ 584,012      $ 545,409   

Accumulated amortization

     (336,632     (312,499
  

 

 

   

 

 

 

Net

   $ 247,380      $ 232,910   
  

 

 

   

 

 

 

Acquired above-market lease value:

    

Gross amount

   $ 87,674      $ 87,800   

Accumulated amortization

     (62,307     (58,099
  

 

 

   

 

 

 

Net

   $ 25,367      $ 29,701   
  

 

 

   

 

 

 

Acquired below-market lease value:

    

Gross amount

   $ 237,553      $ 201,275   

Accumulated amortization

     (124,662     (115,456
  

 

 

   

 

 

 

Net

   $ 112,891      $ 85,819   
  

 

 

   

 

 

 

Amortization of acquired below-market lease value, net of acquired above-market lease value, resulted in an increase to rental revenues of $2.9 million and $1.9 million for the three months ended June 30, 2012 and 2011, respectively, and $5.1 million and $3.7 million for the six months ended June 30, 2012 and 2011, respectively. The expected average remaining lives for acquired below market leases and acquired above market leases is 6.9 years and 4.2 years, respectively, as of June 30, 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

   $ 12,658   

2014

     10,732   

2015

     9,687   

2016

     8,788   

2017

     7,869   

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 $12.4 million and $13.5 million for the three months ended June 30, 2012 and 2011, respectively, and $24.3 million and $27.8 million for the six months ended June 30, 2012 and 2011, respectively. The expected average amortization period for acquired in place lease value is 6.2 years as of June 30, 2012. The weighted average remaining contractual life for acquired leases excluding renewals or extensions is 5.3 years as of June 30, 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

   $ 46,609   

2014

     41,425   

2015

     32,748   

2016

     30,321   

2017

     15,849   

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

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 its 5.50% exchangeable senior debentures due 2029 (2029 Debentures), 4.50% notes due 2015 (2015 Notes), 5.875% notes due 2020 (2020 Notes), 5.25% notes due 2021 (2021 Notes) and its unsecured senior notes sold to Prudential Investment Management, Inc. and certain of its affiliates pursuant to the Amended and Restated Note Purchase and Private Shelf Agreement, which we refer to as the Prudential shelf facility. The Company is also the guarantor of the Operating Partnership’s obligations under its global revolving credit facility and unsecured term loan.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

6. Debt of the Operating Partnership

A summary of outstanding indebtedness of the Operating Partnership as of June 30, 2012 and December 31, 2011 is as follows (in thousands):

 

Indebtedness

   Interest Rate at
June 30, 2012
  Maturity Date   Principal Outstanding
June 30, 2012
    Principal Outstanding
December 31, 2011
 

Global revolving credit facility

   Various (1)   Nov. 3, 2015   $ 324,476  (2)    $ 275,106  (2) 
      

 

 

   

 

 

 

Unsecured term loan

   Various (3)(9)   Apr. 16, 2017   $ 520,942  (4)    $ —     
      

 

 

   

 

 

 

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

         (8,431     (8,928
      

 

 

   

 

 

 

Total senior notes, net of discount

         1,266,569        1,266,072   
      

 

 

   

 

 

 

Total unsecured senior notes, net of discount

         1,441,569        1,441,072   
      

 

 

   

 

 

 

Exchangeable senior debentures:

        

5.50% exchangeable senior debentures due 2029

   5.50%   Apr. 15, 2029 (5)     266,400        266,400   
      

 

 

   

 

 

 

Total exchangeable senior debentures

         266,400        266,400   

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

Indebtedness

   Interest Rate at
June 30, 2012
  Maturity Date   Principal Outstanding
June 30, 2012
    Principal Outstanding
December 31, 2011
 

Mortgage loans:

        

Secured Term Debt (6)(7)

   5.65%   Nov. 11, 2014     137,430        138,828   

200 Paul Avenue 1-4 (7)

   5.74%   Oct. 8, 2015     73,565        74,458   

Mundells Roundabout

   3-month GBP LIBOR + 1.20% (9)   Nov. 30, 2013     67,265  (10)      66,563  (10) 

2045 & 2055 LaFayette Street (7)

   5.93%   Feb. 6, 2017     65,093        65,551   

34551 Ardenwood Boulevard 1-4 (7)

   5.95%   Nov. 11, 2016     53,277        53,627   

1100 Space Park Drive (7)

   5.89%   Dec. 11, 2016     53,255        53,609   

1350 Duane Avenue/3080 Raymond Street (7)

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

600 West Seventh Street

   5.80%   Mar. 15, 2016     51,953        52,709   

150 South First Street (7)

   6.30%   Feb. 6, 2017     51,175        51,508   

360 Spear Street (7)

   6.32%   Nov. 8, 2013     47,098        47,569   

114 Rue Ambroise Croizat

   3-month EURIBOR + 1.35%   Jan. 18, 2012 (13)     —          39,483  (11) 

2334 Lundy Place (7)

   5.96%   Nov. 11, 2016     38,748        39,003   

Clonshaugh Industrial Estate II (8)

   3-month EURIBOR + 4.50% (9)   Sep. 4, 2014     38,001  (11)      38,883  (11) 

1500 Space Park Drive (7)

   6.15%   Oct. 5, 2013     36,796        37,875   

Unit 9, Blanchardstown Corporate Park

   3-month EURIBOR + 1.35%   Jan. 18, 2012 (13)     —          33,946  (11) 

Cressex 1 (12)

   5.68%   Oct. 16, 2014     27,838  (10)      27,786  (10) 

1201 Comstock Street (7)

   1-month LIBOR + 3.50%    Jun. 24, 2012 (13)     —          16,163   

Paul van Vlissingenstraat 16

   3-month EURIBOR + 1.60% (9)   Jul. 18, 2013     12,910  (11)      13,319  (11) 

800 Central Expressway (7)

   1-month LIBOR + 4.75%   Jun. 9, 2013 (13)     —          10,000   

Chemin de l’Epinglier 2

   3-month EURIBOR + 1.50% (9)   Jul. 18, 2013     9,341  (11)      9,636  (11) 

Gyroscoopweg 2E-2F

   3-month EURIBOR + 1.50% (9)   Oct. 18, 2013     8,220  (11)      8,480  (11) 

Manchester Technopark (12)

   5.68%   Oct. 16, 2014     8,469  (10)      8,453  (10) 

8025 North Interstate 35

   4.09%   Mar. 6, 2017     6,680        —     

731 East Trade Street

   8.22%   Jul. 1, 2020     4,661        4,806   

Unamortized net premiums

         2,250        2,077   
      

 

 

   

 

 

 

Total mortgage loans, net of premiums

         846,825        947,132   

Other secured loan:

        

800 Central Expressway Mezzanine (7)

   1-month LIBOR + 8.50%   Jun. 9, 2013 (13)     —          10,500   
      

 

 

   

 

 

 

Total other secured loan

         —          10,500   
      

 

 

   

 

 

 

Total indebtedness

       $ 3,400,212      $ 2,940,210   
      

 

 

   

 

 

 

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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 June 30, 2012 and December 31, 2011 are as follows (balances, in thousands):

 

Denomination of Draw

   Balance as of
June 30, 2012
    Weighted-average
interest rate
    Balance as of
December 31, 2011
    Weighted-average
interest rate
 

U.S. Dollar ($)

   $ 261,500        1.50   $ 194,000        1.54

British Pound Sterling (£)

     19,634  (a)      1.92     49,892  (b)      1.99

Singapore Dollar (SGD)

     10,276  (a)      1.57     28,151  (b)      1.56

Australian Dollar (AUD)

     13,923  (a)      4.90     3,063  (b)      5.89

Hong Kong Dollar (HKD)

     19,143  (a)      1.55     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 324,476        1.68   $ 275,106        1.67
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Based on exchange rates of $1.57 to £1.00, $0.80 to 1.00 SGD, $1.02 to 1.00 AUD and $0.13 to 1.00 HKD, respectively, as of June 30, 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) Interest rates are based on our senior unsecured debt ratings and are currently 145 basis points over the applicable index for floating rate advances.
(4) Balances as of June 30, 2012 are as follows (balances, in thousands):

 

Denomination of Draw

   Balance as of
June 30, 2012
    Weighted-average
interest rate
 

U.S. Dollar ($)

   $ 206,000        1.69

Singapore Dollar (SGD)

     149,791  (a)      1.79

British Pound Sterling (£)

     88,116  (a)      2.14

Euro (€)

     62,702  (a)      1.81

Australian Dollar (AUD)

     14,333  (a)      5.74
  

 

 

   

 

 

 
   $ 520,942        1.92
  

 

 

   

 

 

 

 

  (a) Based on exchange rates of $0.80 to 1.00 SGD, $1.57 to £1.00, $1.27 to €1.00 and $1.02 to 1.00 AUD, respectively, as of June 30, 2012.

 

(5) 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.
(6) This amount represents six mortgage loans secured by our interests in 36 NE 2nd Street, 3300 East Birch Street, 100 & 200 Quannapowitt Parkway, 300 Boulevard East, 4849 Alpha Road, and 11830 Webb Chapel Road. Each of these loans is cross-collateralized by the six properties.
(7) The respective borrower’s assets and credit are not available to satisfy the debts and other obligations of affiliates or any other person.
(8) The Operating Partnership or its subsidiary provides a limited recourse guarantee with respect to this loan.
(9) We have entered into interest rate swap agreements as a cash flow hedge for interest generated by these US LIBOR, EURIBOR and GBP LIBOR based loans as well as a portion of the U.S. Dollar portion of the unsecured term loan. See note 13 for further information.
(10) Based on exchange rate of $1.57 to £1.00 as of June 30, 2012 and $1.55 to £1.00 as of December 31, 2011.
(11) Based on exchange rate of $1.27 to €1.00 as of June 30, 2012 and $1.30 to €1.00 as of December 31, 2011.
(12) These loans are also secured by a £7.8 million letter of credit. These loans are cross-collateralized by the two properties.
(13) These loans were repaid in full: 114 Rue Ambroise Croizat (January 2012), Unit 9, Blanchardstown Corporate Park (January 2012), 1201 Comstock Street (April 2012), 800 Central Expressway (May 2012) and 800 Central Expressway Mezzanine (May 2012). Net loss from early extinguishment of debt related to write-off of unamortized deferred loan costs on 1201 Comstock Street, 800 Central Expressway and 800 Central Expressway Mezzanine amounted to $0.3 million for both the three and six months ended June 30, 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 global revolving credit facility has an accordion feature that would enable us to increase the borrowing capacity of the credit facility to $2.25 billion. 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 June 30, 2012, borrowings under the global revolving credit facility bore interest at a blended rate of 1.50% (U.S), 1.92% (GBP), 1.57% (Singapore Dollars), 4.90% (Australian Dollars) and 1.55% (Hong Kong Dollars), which are based on 1-month LIBOR, 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 June 30, 2012, approximately $324.5 million was drawn under this facility and $22.5 million of letters of credit were issued.

The global revolving credit facility contains various restrictive covenants, including limitations on our ability to incur additional indebtedness, make certain investments or merge with another company, and requirements to maintain financial coverage ratios, including with respect to unencumbered assets. In addition, the global revolving credit facility restricts Digital Realty Trust, Inc. from making distributions to its stockholders, or redeeming or otherwise repurchasing shares of its capital stock, after the occurrence and during the continuance of an event of default, except in limited circumstances including as necessary to enable Digital Realty Trust, Inc. to maintain its qualification as a REIT and to minimize the payment of income or excise tax. As of June 30, 2012, we were in compliance with all of such covenants.

 

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Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

Unsecured Term Loan

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 are 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. We have the ability to delay draw up to $250.0 million for up to 90 days from the date of closing. The new term loan provides funds for acquisitions, repayment of indebtedness, development and redevelopment, working capital and general corporate purposes. The covenants under this loan are consistent with our global revolving credit facility. We capitalized approximately $5.1 million of financing costs related to the unsecured term loan. As of June 30, 2012, there was $520.9 million outstanding under the unsecured term loan. In July 2012, the delay draw of approximately $222.5 million was funded on the unsecured term loan.

5.50% Exchangeable Senior Debentures due 2029

On April 20, 2009, the Operating Partnership issued $266.4 million of its 5.50% exchangeable senior debentures due April 15, 2029. The 2029 Debentures bear interest at 5.50% per annum and may be exchanged for shares of Digital Realty Trust, Inc. common stock at an exchange rate that was initially 23.2558 shares per $1,000 principal amount of 2029 Debentures. The exchange rate on the 2029 Debentures is subject to adjustment for certain events, including, but not limited to, certain dividends on Digital Realty Trust, Inc. common stock in excess of $0.33 per share per quarter (the “reference dividend”). Effective June 13, 2012, the exchange rate was adjusted to 24.4550 shares per $1,000 principal amount of 2029 Debentures as a result of the aggregate dividends in excess of the reference dividend that Digital Realty Trust, Inc. declared and paid on its common stock beginning with the quarter ended March 31, 2012 and through the quarter ended June 30, 2012.

The table below summarizes our debt maturities and principal payments as of June 30, 2012 (in thousands):

 

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

Remainder of 2012

   $ —         $ —         $ —         $ —        $ —        $ 60,176       $ 60,176   

2013

     —           —           33,000         —          —          191,388         224,388   

2014

     —           —           —           —          266,400 (3)      214,774         481,174   

2015

     324,476         —           67,000         375,000        —          75,493         841,969   

2016

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

Thereafter

     —           520,942         50,000         900,000        —          110,765         1,581,707   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Subtotal

   $ 324,476       $ 520,942       $ 175,000       $ 1,275,000      $ 266,400      $ 844,575       $ 3,406,393   

Unamortized discount

     —           —           —           (8,431     —          —           (8,431

Unamortized premium

     —           —           —           —          —          2,250         2,250   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 324,476       $ 520,942       $ 175,000       $ 1,266,569      $ 266,400      $ 846,825       $ 3,400,212   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 June 30, 2012, we provided limited recourse guarantees with respect to approximately $38.0 million principal amount of the outstanding mortgage indebtedness, and partial letter of credit support with respect to approximately an additional $36.3 million of the outstanding mortgage indebtedness.
(3) Assumes maturity of the 2029 Debentures at their first redemption date in April 2014.

 

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Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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 June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Net income available to common stockholders

   $ 42,021       $ 31,990       $ 81,232       $ 62,970   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—basic

     109,761,017         96,295,585         108,430,437         93,875,415   

Potentially dilutive common shares:

           

Stock options

     195,635         203,078         193,775         193,985   

Class C Units (2007 Grant)

     1,334         73,855         —           67,856   

Unvested incentive units

     208,096         180,377         185,362         152,927   

Excess exchange value of the 2026 Debentures

     —           758,916         —           722,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     110,166,082         97,511,811         108,809,574         95,012,965   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per share:

           

Basic

   $ 0.38       $ 0.33       $ 0.75       $ 0.67   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.38       $ 0.33       $ 0.75       $ 0.66   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended December 31, 2011, the Operating Partnership’s remaining 4.125% exchangeable senior debentures due August 15, 2026 (2026 Debentures) were redeemed and exchanged. 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. 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. Using the treasury stock method, 758,916 and 722,782 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 and six months ended June 30, 2011, respectively.

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Weighted average of Operating Partnership common units not owned by us

     4,339,481         4,760,686         4,336,223         4,823,375   

Potentially dilutive 2029 Debentures

     6,456,471         6,289,434         6,449,278         6,279,766   

Potentially dilutive Series C Cumulative Convertible Preferred Stock

     489,298         2,864,660         1,637,072         3,256,316   

Potentially dilutive Series D Cumulative Convertible Preferred Stock

     4,374,117         6,418,585         4,355,773         7,370,713   

Potentially dilutive Series E Cumulative Redeemable Preferred Stock

     3,959,975         —           3,992,679         —     

Potentially dilutive Series F Cumulative Redeemable Preferred Stock

     2,509,588         —           1,185,849         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     22,128,930         20,333,365         21,956,874         21,730,170   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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 June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  

Net income available to common unitholders

   $ 43,682       $ 33,572       $ 84,479       $ 66,204   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average units outstanding—basic

     114,100,498         101,056,387         112,766,660         98,698,968   

Potentially dilutive common units:

           

Stock options

     195,635         203,078         193,775         193,985   

Class C Units (2007 Grant)

     1,334         73,855         —           67,856   

Unvested incentive units

     208,096         180,377         185,362         152,927   

Excess exchange value of the 2026 Debentures

     —           758,916         —           722,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average units outstanding—diluted

     114,505,563         102,272,613         113,145,797         99,836,518   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per unit:

           

Basic

   $ 0.38       $ 0.33       $ 0.75       $ 0.67   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.38       $ 0.33       $ 0.75       $ 0.66   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the year ended December 31, 2011, the remaining 2026 Debentures were redeemed and exchanged. 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. Using the treasury method, 758,916 and 722,782 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 and six months ended June 30, 2011, respectively.

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2011      2010  

Potentially dilutive 2029 Debentures

     6,456,471         6,289,434         6,449,278         6,279,766   

Potentially dilutive Series C Cumulative Convertible Preferred Units

     489,298         2,864,660         1,637,072         3,256,316   

Potentially dilutive Series D Cumulative Convertible Preferred Units

     4,374,117         6,418,585         4,355,773         7,370,713   

Potentially dilutive Series E Cumulative Redeemable Preferred Units

     3,959,975         —           3,992,679         —     

Potentially dilutive Series F Cumulative Redeemable Preferred Units

     2,509,588         —           1,185,849         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     17,789,449         15,572,679         17,620,651         16,906,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

9. Income Taxes

Digital Realty Trust, Inc. (the Parent Company) has 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 and six months ended June 30, 2012 and 2011.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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 and six months ended June 30, 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 and six months ended June 30, 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 six months ended June 30, 2011, Digital Realty Trust, Inc. generated aggregate net proceeds of approximately $176.9 million from the issuance of approximately 3.0 million common shares under the 2009 Equity Distribution Agreements at an average price of $60.51 per share after payment of approximately $2.7 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 and six months ended June 30, 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.

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

(b) Redeemable Preferred Stock

On April 5, 2012 and April 18, 2012, Digital Realty Trust, Inc. issued an aggregate of 7,300,000 shares of its 6.625% series F cumulative redeemable preferred stock, or the series F preferred stock, for gross proceeds of $182.5 million. Dividends are cumulative on the series F preferred stock from the date of original issuance in the amount of $1.65625 per share each year, which is equivalent to 6.625% of the $25.00 liquidation preference per share. Dividends on the series F preferred stock are payable quarterly in arrears. The first dividend paid on the series F preferred stock on June 29, 2012 was a pro rata dividend from and including the original issue date to and including June 30, 2012 in the amount of $0.395660 per share. The series F preferred stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the series F preferred stock will rank senior to Digital Realty Trust, Inc. common stock with respect to the payment of distributions and other amounts and rank on parity with Digital Realty Trust, Inc.’s series D cumulative convertible preferred stock and series E cumulative redeemable preferred stock. Digital Realty Trust, Inc. is not allowed to redeem the series F preferred stock before April 5, 2017, except in limited circumstances to preserve its status as a REIT. On or after April 5, 2017, Digital Realty Trust, Inc. may, at its option, redeem the series F preferred stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends on such series F preferred stock up to but excluding the redemption date. Holders of the series F preferred stock generally have no voting rights except for limited voting rights if Digital Realty Trust, Inc. fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances. Upon the occurrence of specified changes of control, as a result of which neither Digital Realty Trust, Inc.’s common stock nor the common securities of the acquiring or surviving entity (or American Depositary Receipts representing such securities) is listed on the New York Stock Exchange, or NYSE, the NYSE Amex Equities or the NASDAQ Stock Market or listed or quoted on a successor exchange or quotation system, each holder of series F preferred stock will have the right (unless, prior to the change of control conversion date specified in the Articles Supplementary governing the series F preferred stock, Digital Realty Trust, Inc. has provided or provides notice of its election to redeem the series F preferred stock) to convert some or all of the series F preferred stock held by it into a number of shares of Digital Realty Trust, Inc.’s common stock per share of series F preferred stock to be converted equal to the lesser of:

 

   

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

 

   

0.6843, or the share cap, subject to certain adjustments;

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

 

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

(c) Noncontrolling Interests in Operating Partnership

Noncontrolling interests in the Operating Partnership relate to the interests that are not owned by Digital Realty Trust, Inc. The following table shows the ownership interest in the Operating Partnership as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012     December 31, 2011  
     Number of units      Percentage of total     Number of units      Percentage of total  

Digital Realty Trust, Inc.

     110,268,388         95.8     106,039,279         95.6

Noncontrolling interests consist of:

          

Common units held by third parties

     3,235,814         2.8        3,405,814         3.0   

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

     1,546,326         1.4        1,530,316         1.4   
  

 

 

    

 

 

   

 

 

    

 

 

 
     115,050,528         100.0     110,975,409         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

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

The redemption value of the noncontrolling Operating Partnership common units and the vested incentive units was approximately $323.3 million and $291.5 million based on the closing market price of Digital Realty Trust, Inc. common stock on June 30, 2012 and December 31, 2011, respectively.

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

     (170,000     —          (170,000

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

     —          (134,120     (134,120

Cancellation of incentive units held by employees and directors

     —          (15,950     (15,950

Grant of incentive units to employees and directors

     —          166,080        166,080   
  

 

 

   

 

 

   

 

 

 

As of June 30, 2012

     3,235,814        1,546,326        4,782,140   
  

 

 

   

 

 

   

 

 

 

 

(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

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

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.

(d) Dividends

We have declared and paid the following dividends on our common and preferred stock for the six months ended June 30, 2012 (in thousands):

 

Date dividend declared

   Dividend payable
date
     Series C
Preferred
Stock(1)(6)
     Series D
Preferred
Stock(2)
     Series E
Preferred
Stock(3)
     Series F
Preferred
Stock(4)
    Common Stock(5)  

February 14, 2012

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

April 23, 2012

     June 29, 2012         —           2,394         5,031         2,888  (7)     80,478   
     

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
      $ 1,402       $ 4,792       $ 10,062       $ 2,888     $ 158,813   
     

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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) $1.656 annual rate of dividend per share.
(5) $2.920 annual rate of dividend per share.
(6) Effective April 17, 2012, Digital Realty Trust, Inc. converted all outstanding shares of its 4.375% series C cumulative convertible preferred stock, or the series C preferred stock, into shares of 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.
(7) Represents a pro rata dividend from and including the original issue date to and including June 30, 2012.

 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2012 and 2011

(unaudited)

 

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.

(e) Accumulated Other Comprehensive Loss, Net

The accumulated balances for each classification of other comprehensive loss, net as of June 30, 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

     1,235        (2,777     (1,542

Reclassification to interest expense from interest rate swaps

     —          1,721        1,721   
  

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2012

   $ (48,063   $ (7,638   $ (55,701
  

 

 

   

 

 

   

 

 

 

(f) Noncontrolling Interests in Consolidated Joint Ventures

On May 4, 2012, we acquired all of the noncontrolling ownership interest in the entity that owns 800 Central Expressway from our joint venture partner for approximately $12.4 million (subject to adjustment in limited circumstances). Concurrent with the acquisition, we repaid the secured debt on the property. The acquisition and debt repayment were financed with borrowings under our global revolving credit facility. The amount paid in excess of the carrying value of the noncontrolling ownership interest resulted in a decrease to additional paid-in capital, as presented in the accompanying condensed consolidated statement of equity.

11. Capital and Comprehensive Income

(a) Redeemable Preferred Units

On April 5, 2012 and April 18, 2012, the Operating Partnership issued a total of 7,300,000 units of its 6.625% series F cumulative redeemable preferred units, or series F preferred units, to Digital Realty Trust, Inc. (the General Partner) in conjunction with the General Partner’s issuance of an equivalent number of shares of its 6.625% series F cumulative redeemable preferred stock, or the series F preferred stock. Distributions are cumulative on the series F preferred units from the date of original issuance in the amount of $1.65625 per unit each year, which is equivalent to 6.625% of the $25.00 liquidation preference per unit. Distributions on the series F preferred units are payable quarterly in arrears. The first distribution paid on the series F preferred units on June 29, 2012 was a pro rata distribution from and including the original issue date to and including June 30, 2012 in the amount of $0.395660 per unit. The series F preferred units do not have a stated maturity date and are not subject to any sinking fund. The Operating Partnership is required to redeem the series F preferred units in the event that the General Partner redeems the series F preferred stock. The General Partner is not allowed to redeem the series F preferred stock prior to April 5, 2017 except in limited circumstances to preserve the General Partner’s status as a REIT. On or after April 5, 2017, the General Partner may, at its option, redeem the series F preferred stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid di