Document
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 September 30, 2016
 
¨
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 November 3, 2016
Common Stock, $.01 par value per share
  
158,935,108



Table of Contents

EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2016 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 September 30, 2016, Digital Realty Trust, Inc. owned an approximate 98.4% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 1.6% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of Digital Realty Trust, Inc. As of September 30, 2016, Digital Realty Trust, Inc. owned all of the preferred limited partnership interests of Digital Realty Trust, L.P. As the sole general partner of Digital Realty Trust, L.P., Digital Realty Trust, Inc. has the full, exclusive and complete responsibility for the operating partnership’s day-to-day management and control.

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

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

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

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

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

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

Condensed consolidated financial statements;

the following notes to the condensed consolidated financial statements:

"Debt of the Company" and "Debt of the Operating Partnership";

"Income per Share" and "Income per Unit"; and

"Equity and Accumulated Other Comprehensive Income, Net" and "Capital and Accumulated Other Comprehensive Income";

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

Part II, Item 2. "Unregistered Sales of Equity Securities and Use of Proceeds".
This report also includes separate Part I, Item 4. "Controls and Procedures" sections and separate Exhibit 31 and 32 certifications for each of the company and the operating partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity during the period covered by this report have made the requisite certifications and that the company and the operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.
In order to highlight the differences between the company and the operating partnership, the separate sections in this report for the company and the operating partnership specifically refer to the company and the operating partnership. In the sections that combine disclosure of the company and the operating partnership, this report refers to actions or holdings as being actions or holdings of the company. Although the operating partnership is generally the entity that enters into contracts and joint ventures and holds assets and debt, reference to the company is appropriate because the business is one enterprise and the company generally 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 generally 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 SEPTEMBER 30, 2016
TABLE OF CONTENTS
 
 
 
Page
 Number
PART I.
FINANCIAL INFORMATION




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

























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




























ITEM 2.



ITEM 3.



ITEM 4.







PART II.



ITEM 1.



ITEM 1A. 



ITEM 2.



ITEM 3.



ITEM 4.



ITEM 5.



ITEM 6.






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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
737,562

 
$
689,573

Acquired ground leases
11,916

 
12,639

Buildings and improvements
10,222,116

 
9,676,427

Tenant improvements
540,271

 
536,734

Total investments in properties
11,511,865

 
10,915,373

Accumulated depreciation and amortization
(2,565,368
)
 
(2,251,268
)
Net investments in properties
8,946,497

 
8,664,105

Investment in unconsolidated joint ventures
105,819

 
106,107

Net investments in real estate
9,052,316

 
8,770,212

Cash and cash equivalents
36,445

 
57,053

Accounts and other receivables, net of allowance for doubtful accounts of $10,052 and $5,844
   as of September 30, 2016 and December 31, 2015, respectively
208,097

 
177,398

Deferred rent
412,977

 
403,327

Acquired above-market leases, net
24,554

 
32,698

Goodwill
780,099

 
330,664

Acquired in-place lease value, deferred leasing costs and intangibles, net
1,526,563

 
1,391,659

Restricted cash
11,685

 
18,009

Assets held for sale
55,915

 
180,139

Other assets
190,384

 
54,904

Total assets
$
12,299,035

 
$
11,416,063

LIABILITIES AND EQUITY
 
 
 
Global revolving credit facility
$
153,189

 
$
960,271

Unsecured term loan
1,521,613

 
923,267

Unsecured senior notes, net of discount
4,238,435

 
3,712,569

Mortgage loans, including premiums
111,750

 
302,930

Accounts payable and other accrued liabilities
823,905

 
608,343

Accrued dividends and distributions

 
126,925

Acquired below-market leases, net
86,888

 
101,114

Security deposits and prepaid rents
163,787

 
138,347

Obligations associated with assets held for sale
2,820

 
5,795

Total liabilities
7,102,387

 
6,879,561

Commitments and contingencies

 

Equity:
 
 
 
Stockholders’ Equity:
 
 
 
Preferred Stock: $0.01 par value per share, 110,000,000 and 70,000,000 shares authorized as
of September 30, 2016 and December 31, 2015, respectively:
 
 
 
Series E Cumulative Redeemable Preferred Stock, 7.000%, $0 and $287,500
liquidation preference, respectively ($25.00 per share), 0 and 11,500,000 shares
issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

 
277,172

Series F Cumulative Redeemable Preferred Stock, 6.625%, $182,500 and $182,500
liquidation preference, respectively ($25.00 per share), 7,300,000 and 7,300,000 shares
issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
176,191

 
176,191

Series G Cumulative Redeemable Preferred Stock, 5.875%, $250,000 and $250,000
liquidation preference, respectively ($25.00 per share), 10,000,000 and 10,000,000 shares
issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
241,468

 
241,468

Series H Cumulative Redeemable Preferred Stock, 7.375%, $365,000 and $365,000
liquidation preference, respectively ($25.00 per share), 14,600,000 and 14,600,000 shares
issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
353,290

 
353,290

Series I Cumulative Redeemable Preferred Stock, 6.350%, $250,000 and $250,000
liquidation preference, respectively ($25.00 per share), 10,000,000 and 10,000,000 shares
issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
242,012

 
242,014

Common Stock: $0.01 par value, 265,000,000 and 215,000,000 shares authorized as of
    September 30, 2016 and December 31, 2015, respectively, 158,926,811 and 146,384,247
shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
1,581

 
1,456

Additional paid-in capital
5,759,338

 
4,655,220

Accumulated dividends in excess of earnings
(1,483,220
)
 
(1,350,089
)
Accumulated other comprehensive loss, net
(131,939
)
 
(96,590
)
Total stockholders’ equity
5,158,721

 
4,500,132

Noncontrolling Interests:
 
 
 
Noncontrolling interests in operating partnership
31,088

 
29,612

Noncontrolling interests in consolidated joint ventures
6,839

 
6,758

Total noncontrolling interests
37,927

 
36,370

Total equity
5,196,648

 
4,536,502

Total liabilities and equity
$
12,299,035

 
$
11,416,063

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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Operating Revenues:
 
 
 
 
 
 
 
Rental
$
395,212

 
$
336,679

 
$
1,143,449

 
$
983,695

Tenant reimbursements
95,665

 
95,484

 
268,094

 
268,885

Interconnection and other
53,897

 
1,651

 
149,223

 
4,477

Fee income
1,517

 
1,595

 
4,567

 
4,758

Other
2

 
580

 
93

 
1,078

Total operating revenues
546,293


435,989


1,565,426


1,262,893

Operating Expenses:
 
 
 
 

 

Rental property operating and maintenance
177,192

 
140,538

 
490,909

 
394,640

Property taxes
20,620

 
19,953

 
75,400

 
64,116

Insurance
2,470

 
2,140

 
7,123

 
6,449

Change in fair value of contingent consideration

 
(1,594
)
 

 
(44,276
)
Depreciation and amortization
178,133

 
136,974

 
522,743

 
397,571

General and administrative
46,135

 
22,755

 
111,580

 
69,562

Transactions
6,015

 
11,042

 
11,530

 
14,301

Other
(22
)
 
51

 
(23
)
 
29

Total operating expenses
430,543


331,859


1,219,262


902,392

Operating income
115,750

 
104,130

 
346,164

 
360,501

Other Income (Expenses):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
4,152

 
4,169

 
12,362

 
12,170

Gain (loss) on sale of properties
169,000

 
(207
)
 
170,097

 
94,282

Interest and other (expense) income
355

 
(358
)
 
(3,594
)
 
(2,879
)
Interest expense
(63,084
)
 
(48,138
)
 
(180,254
)
 
(139,718
)
Tax expense
(3,720
)
 
(1,754
)
 
(8,081
)
 
(6,044
)
Loss from early extinguishment of debt
(18
)
 

 
(982
)
 
(148
)
Net income
222,435


57,842


335,712


318,164

Net income attributable to noncontrolling interests
(3,247
)
 
(864
)
 
(4,600
)
 
(5,492
)
Net income attributable to Digital Realty Trust, Inc.
219,188


56,978


331,112


312,672

Preferred stock dividends
(21,530
)
 
(18,456
)
 
(66,378
)
 
(55,367
)
Issuance costs associated with redeemed preferred stock
(10,328
)
 

 
(10,328
)
 

Net income available to common stockholders
$
187,330


$
38,522


$
254,406


$
257,305

Net income per share available to common stockholders:
 
 
 
 
 
 
 
Basic
$
1.27

 
$
0.28

 
$
1.73

 
$
1.89

Diluted
$
1.25

 
$
0.28

 
$
1.72

 
$
1.88

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
147,397,853

 
135,832,503

 
146,930,939

 
135,782,831

Diluted
149,384,871

 
138,259,936

 
147,655,184

 
136,920,477

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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
222,435

 
$
57,842

 
$
335,712

 
$
318,164

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(18,438
)
 
(19,105
)
 
(37,388
)
 
(41,480
)
Increase (decrease) in fair value of interest rate swaps and foreign currency hedges
14,806

 
(2,534
)
 
(2,113
)
 
(4,374
)
Reclassification to interest expense from interest rate swaps
1,313

 
574

 
3,569

 
2,077

Comprehensive income
220,116

 
36,777

 
299,780

 
274,387

Comprehensive income attributable to noncontrolling interests
(3,210
)
 
(463
)
 
(4,017
)
 
(4,657
)
Comprehensive income attributable to Digital Realty Trust, Inc.
$
216,906

 
$
36,314

 
$
295,763

 
$
269,730

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, 2015
$
1,290,135

 
146,384,247

 
$
1,456

 
$
4,655,220

 
$
(1,350,089
)
 
$
(96,590
)
 
$
4,500,132

 
$
29,612

 
$
6,758

 
$
36,370

 
$
4,536,502

Conversion of units to common stock

 
339,146

 
4

 
4,045

 

 

 
4,049

 
(4,049
)
 

 
(4,049
)
 

Issuance of unvested restricted stock, net of forfeitures

 
119,122

 

 

 

 

 

 

 

 

 

Issuance of common stock, net of offering costs

 
12,000,000

 
120

 
1,085,971

 

 

 
1,086,091

 

 

 

 
1,086,091

Exercise of stock options

 
33,948

 

 
1,380

 

 

 
1,380

 

 

 

 
1,380

 Shares issued under employee stock purchase plan

 
50,348

 
1

 
3,348

 

 

 
3,349

 

 

 

 
3,349

Preferred stock offering costs
(2
)
 

 

 

 

 

 
(2
)
 

 

 

 
(2
)
Redemption of series E preferred stock
(277,172
)
 

 

 

 
(10,328
)
 

 
(287,500
)
 

 

 

 
(287,500
)
Amortization of share-based compensation

 

 

 
18,496

 

 

 
18,496

 

 

 

 
18,496

Reclassification of vested share-based awards

 

 

 
(9,122
)
 

 

 
(9,122
)
 
9,122

 

 
9,122

 

Dividends declared on preferred stock

 

 

 

 
(66,378
)
 

 
(66,378
)
 

 

 

 
(66,378
)
Dividends and distributions on common stock and common and incentive units

 

 

 

 
(387,537
)
 

 
(387,537
)
 
(7,158
)
 

 
(7,158
)
 
(394,695
)
Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

 

 

 

 

 

 

 

 
(375
)
 
(375
)
 
(375
)
Net income

 

 

 

 
331,112

 

 
331,112

 
4,144

 
456

 
4,600

 
335,712

Other comprehensive income—foreign currency translation adjustments

 

 

 

 

 
(36,789
)
 
(36,789
)
 
(599
)
 

 
(599
)
 
(37,388
)
Other comprehensive loss—fair value of interest rate swaps

 

 

 

 

 
(2,071
)
 
(2,071
)
 
(42
)
 

 
(42
)
 
(2,113
)
Other comprehensive income—reclassification of accumulated other comprehensive loss to interest expense

 

 

 

 

 
3,511

 
3,511

 
58

 

 
58

 
3,569

Balance as of September 30, 2016
$
1,012,961

 
158,926,811

 
$
1,581

 
$
5,759,338

 
$
(1,483,220
)
 
$
(131,939
)
 
$
5,158,721

 
$
31,088

 
$
6,839

 
$
37,927

 
$
5,196,648

See accompanying notes to the condensed consolidated financial statements.

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
335,712

 
$
318,164

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of properties
(170,097
)
 
(94,282
)
Equity in earnings of unconsolidated joint ventures
(12,362
)
 
(12,170
)
Change in fair value of accrued contingent consideration

 
(44,276
)
Distributions from unconsolidated joint ventures
12,578

 
10,786

Write-off of net assets due to early lease terminations
(23
)
 
(8
)
Depreciation and amortization of buildings and improvements, tenant improvements
   and acquired ground leases
387,492

 
346,459

Amortization of share-based compensation
13,459

 
5,717

Allowance for doubtful accounts
4,208

 
739

Amortization of deferred financing costs
7,453

 
6,360

Loss on early extinguishment of debt
982

 
148

Amortization of debt discount/premium
1,947

 
1,472

Amortization of acquired in-place lease value and deferred leasing costs
135,252

 
51,112

Amortization of acquired above-market leases and acquired below-market leases, net
(6,303
)
 
(6,856
)
Changes in assets and liabilities:
 
 
 
Restricted cash
4,398

 
2,878

Accounts and other receivables
(46,497
)
 
(1,382
)
Deferred rent
(20,347
)
 
(41,447
)
Deferred leasing costs
(3,905
)
 
(2,611
)
Other assets
(146,763
)
 
(14,869
)
Accounts payable and other accrued liabilities
127,139

 
13,213

Security deposits and prepaid rents
7,128

 
60

Net cash provided by operating activities
631,451

 
539,207

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(873,285
)
 
(48,424
)
Proceeds from sale of properties, net
359,319

 
185,565

Investment in unconsolidated joint ventures

 
(7,547
)
Receipt of value added tax refund
7,807

 
2,934

Refundable value added tax paid
(36,328
)
 
(24,142
)
Change in restricted cash
2,028

 
1,520

Improvements to investments in real estate
(549,364
)
 
(535,141
)
Improvement advances to tenants
(7,937
)
 
(26,977
)
Collection of advances from tenants for improvements
25,369

 
26,971

Net cash used in investing activities
(1,072,391
)
 
(425,241
)
 See accompanying notes to the condensed consolidated financial statements.










9

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
$
2,355,166

 
$
1,430,671

Repayments on revolving credit facility
(3,161,016
)
 
(1,240,340
)
Borrowings on unsecured term loan
766,201

 

Repayments on unsecured term loan
(170,736
)
 

Borrowings on unsecured senior notes
675,591

 
496,190

Principal payments on unsecured senior notes

 
(374,927
)
Repayments on unsecured notes
(25,000
)

(67,000
)
Principal payments on mortgage loans
(191,302
)
 
(73,724
)
Earnout payments related to acquisition
(23,842
)

(12,985
)
Change in restricted cash
(99
)

1,137

Payment of loan fees and costs
(19,274
)
 
(5,116
)
Capital distributions paid to noncontrolling interests in consolidated joint ventures, net
(375
)

(372
)
Gross proceeds from the issuance of common stock
1,089,154

 

Gross proceeds from the issuance of preferred stock


250,000

Common and preferred stock offering costs paid, net
(3,063
)

(5,934
)
Redemption of series E preferred stock
(287,500
)
 

Proceeds from equity plans
4,729


798

Payment of dividends to preferred stockholders
(66,378
)

(55,367
)
Payment of dividends to common stockholders and distributions to
    noncontrolling interests in operating partnership
(521,620
)

(468,813
)
Net cash provided by (used in) financing activities
420,636

 
(125,782
)
Net decrease in cash and cash equivalents
(20,304
)
 
(11,816
)
Effect of exchange rate changes on cash
(304
)
 

Cash and cash equivalents at beginning of period
57,053

 
34,814

Cash and cash equivalents at end of period
$
36,445

 
$
22,998

 
See accompanying notes to the condensed consolidated financial statements.

10

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
2016
 
2015
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
172,463

 
$
146,105

Cash paid for income taxes
3,646

 
2,979

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
$
(37,388
)
 
$
(41,480
)
Decrease in accounts payable and other accrued liabilities related to change in
   fair value of interest rate swaps
(2,113
)
 
(4,374
)
Acquisition measurement period adjustment included in accounts payable and
other accrued liabilities
 
 
 
Noncontrolling interests in operating partnership redeemed for or converted to
   shares of common stock
4,049

 
1,364

Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
125,104

 
115,632

Accrual for potential earnout contingency

 
18,900

Note receivable related to sale of property

 
9,000

Allocation of purchase price of real estate/investment in partnership to:
 
 
 
Investments in real estate
$
874,220

 
$
48,424

Acquired below-market leases
(935
)
 

Cash paid for acquisition of real estate
$
873,285

 
$
48,424

See accompanying notes to the condensed consolidated financial statements.


11

Table of Contents


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit and per unit data)
 
September 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
737,562

 
$
689,573

Acquired ground leases
11,916

 
12,639

Buildings and improvements
10,222,116

 
9,676,427

Tenant improvements
540,271

 
536,734

Total investments in properties
11,511,865

 
10,915,373

Accumulated depreciation and amortization
(2,565,368
)
 
(2,251,268
)
Net investments in properties
8,946,497

 
8,664,105

Investment in unconsolidated joint ventures
105,819

 
106,107

Net investments in real estate
9,052,316

 
8,770,212

Cash and cash equivalents
36,445

 
57,053

Accounts and other receivables, net of allowance for doubtful accounts of $10,052 and $5,844
   as of September 30, 2016 and December 31, 2015, respectively
208,097

 
177,398

Deferred rent
412,977

 
403,327

Acquired above-market leases, net
24,554

 
32,698

Goodwill
780,099

 
330,664

Acquired in-place lease value, deferred leasing costs and intangibles, net
1,526,563

 
1,391,659

Restricted cash
11,685

 
18,009

Assets held for sale
55,915

 
180,139

Other assets
190,384

 
54,904

Total assets
$
12,299,035

 
$
11,416,063

LIABILITIES AND CAPITAL

 

Global revolving credit facility
$
153,189

 
$
960,271

Unsecured term loan
1,521,613

 
923,267

Unsecured senior notes, net of discount
4,238,435

 
3,712,569

Mortgage loans, including premiums
111,750

 
302,930

Accounts payable and other accrued liabilities
823,905

 
609,708

Accrued dividends and distributions

 
126,925

Acquired below-market leases, net
86,888

 
101,114

Security deposits and prepaid rents
163,787

 
138,347

Obligations associated with assets held for sale
2,820

 
5,795

Total liabilities
7,102,387

 
6,880,926

Commitments and contingencies

 

Capital:
 
 
 
Partners’ capital:
 
 
 
General Partner:
 
 
 
Series E Cumulative Redeemable Preferred Units, 7.000%, $0 and $287,500 liquidation preference, respectively ($25.00 per unit), 0 and 11,500,000 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

 
277,172

Series F Cumulative Redeemable Preferred Units, 6.625%, $182,500 and $182,500 liquidation preference, respectively ($25.00 per unit), 7,300,000 and 7,300,000 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
176,191

 
176,191

Series G Cumulative Redeemable Preferred Units, 5.875%, $250,000 and $250,000 liquidation preference, respectively ($25.00 per unit), 10,000,000 and 10,000,000 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
241,468

 
241,468

Series H Cumulative Redeemable Preferred Units, 7.375%, $365,000 and $365,000 liquidation preference, respectively ($25.00 per unit), 14,600,000 and 14,600,000 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
353,290

 
353,290

Series I Cumulative Redeemable Preferred Units, 6.350%, $250,000 and $250,000 liquidation preference, respectively ($25.00 per unit), 10,000,000 and 10,000,000 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
242,012

 
242,014

Common units:


 


158,926,811 and 146,384,247 units issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
4,277,699

 
3,305,222

Limited partners, 1,218,814 and 1,421,314 common units, 963,593 and 1,170,610 profits interest units and 338,584 and 379,237 class C units outstanding as of September 30, 2016 and December 31, 2015, respectively
36,045

 
33,986

Accumulated other comprehensive loss
(136,896
)
 
(100,964
)
Total partners’ capital
5,189,809

 
4,528,379

Noncontrolling interests in consolidated joint ventures
6,839

 
6,758

Total capital
5,196,648

 
4,535,137

Total liabilities and capital
$
12,299,035

 
$
11,416,063

See accompanying notes to the condensed consolidated financial statements.


12

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 September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Operating Revenues:
 
 
 
 
 
 
 
Rental
$
395,212

 
$
336,679

 
$
1,143,449

 
$
983,695

Tenant reimbursements
95,665

 
95,484

 
268,094

 
268,885

Interconnection and other
53,897

 
1,651

 
149,223

 
4,477

Fee income
1,517

 
1,595

 
4,567

 
4,758

Other
2

 
580

 
93

 
1,078

Total operating revenues
546,293

 
435,989

 
1,565,426

 
1,262,893

Operating Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
177,192

 
140,538

 
490,909

 
394,640

Property taxes
20,620

 
19,953

 
75,400

 
64,116

Insurance
2,470

 
2,140

 
7,123

 
6,449

Change in fair value of contingent consideration

 
(1,594
)
 

 
(44,276
)
Depreciation and amortization
178,133

 
136,974

 
522,743

 
397,571

General and administrative
46,135

 
22,755

 
111,580

 
69,562

Transactions
6,015

 
11,042

 
11,530

 
14,301

Other
(22
)
 
51

 
(23
)
 
29

Total operating expenses
430,543

 
331,859

 
1,219,262

 
902,392

Operating income
115,750

 
104,130

 
346,164

 
360,501

Other Income (Expenses):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
4,152

 
4,169

 
12,362

 
12,170

Gain (loss) on sale of properties
169,000

 
(207
)
 
170,097

 
94,282

Interest and other (expense) income
355

 
(358
)
 
(3,594
)
 
(2,879
)
Interest expense
(63,084
)
 
(49,291
)
 
(180,254
)
 
(140,871
)
Tax expense
(3,720
)
 
(1,754
)
 
(8,081
)
 
(6,044
)
Loss from early extinguishment of debt
(18
)
 

 
(982
)
 
(148
)
Net income
222,435

 
56,689

 
335,712

 
317,011

Net income attributable to noncontrolling interests in consolidated joint ventures
(223
)
 
(117
)
 
(456
)
 
(342
)
Net income attributable to Digital Realty Trust, L.P.
222,212

 
56,572

 
335,256

 
316,669

Preferred units distributions
(21,530
)
 
(18,456
)
 
(66,378
)
 
(55,367
)
Issuance costs associated with redeemed preferred units
(10,328
)
 

 
(10,328
)
 

Net income available to common unitholders
$
190,354

 
$
38,116

 
$
258,550

 
$
261,302

Net income per unit available to common unitholders:
 
 
 
 
 
 
 
Basic
$
1.27

 
$
0.28

 
$
1.73

 
$
1.89

Diluted
$
1.25

 
$
0.27

 
$
1.72

 
$
1.88

Weighted average common units outstanding:
 
 
 
 
 
 
 
Basic
149,777,524

 
138,467,947

 
149,352,237

 
138,481,046

Diluted
151,764,542

 
139,192,198

 
150,076,482

 
139,050,965

See accompanying notes to the condensed consolidated financial statements.


13

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
222,435

 
$
56,689

 
$
335,712

 
$
317,011

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(18,438
)
 
(19,105
)
 
(37,388
)
 
(41,480
)
Increase (decrease) in fair value of interest rate swaps and foreign currency hedges
14,806

 
(2,534
)
 
(2,113
)
 
(4,374
)
Reclassification to interest expense from interest rate swaps
1,313

 
574

 
3,569

 
2,077

Comprehensive income
$
220,116


$
35,624


$
299,780


$
273,234

Comprehensive income attributable to noncontrolling interests in consolidated joint ventures
(223
)
 
(117
)
 
(456
)
 
(342
)
Comprehensive income attributable to Digital Realty Trust, L.P.
$
219,893

 
$
35,507

 
$
299,324

 
$
272,892

See accompanying notes to the condensed consolidated financial statements.


14

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, 2015
53,400,000

 
$
1,290,135

 
146,384,247

 
$
3,305,222

 
2,833,326

 
$
33,986

 
$
(100,964
)
 
$
6,758

 
$
4,535,137

Conversion of limited partner common units to general partner common units

 

 
339,146

 
4,049

 
(339,146
)
 
(4,049
)
 

 

 

Issuance of unvested restricted common units, net of forfeitures

 

 
119,122

 

 

 

 

 

 

Common unit offering costs, net

 

 
12,000

 
1,086,091

 

 

 

 

 
1,086,091

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

 

 
33,948

 
1,380

 

 

 

 

 
1,380

Issuance of common units, net of forfeitures

 

 

 

 
26,811

 

 

 

 

 Units issued in connection with employee stock purchase plan

 

 
50,348

 
3,349

 

 

 

 

 
3,349

Preferred unit offering costs

 
(2
)
 

 

 

 

 

 

 
(2
)
Redemption of series E preferred units
(11,500,000
)
 
(277,172
)
 

 
(10,328
)
 

 

 

 

 
(287,500
)
Amortization of share-based compensation

 

 

 
18,496

 

 

 

 

 
18,496

Reclassification of vested share-based awards

 

 

 
(9,122
)
 

 
9,122

 

 

 

Distributions

 
(66,378
)
 

 
(386,172
)
 

 
(7,158
)
 

 

 
(459,708
)
Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

 

 

 

 

 

 

 
(375
)
 
(375
)
Net income

 
66,378

 

 
264,734

 

 
4,144

 

 
456

 
335,712

Other comprehensive income—foreign currency translation adjustments

 

 

 

 

 

 
(37,388
)
 

 
(37,388
)
Other comprehensive loss—fair value of interest rate swaps

 

 

 

 

 

 
(2,113
)
 

 
(2,113
)
Other comprehensive income—reclassification of accumulated other comprehensive loss to interest expense

 

 

 

 

 

 
3,569

 

 
3,569

Balance as of September 30, 2016
41,900,000

 
$
1,012,961

 
158,926,811

 
$
4,277,699

 
2,520,991

 
$
36,045

 
$
(136,896
)
 
$
6,839

 
$
5,196,648


See accompanying notes to the condensed consolidated financial statements.

15

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
335,712

 
$
317,011

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

 

Gain on sale of properties
(170,097
)
 
(94,282
)
Equity in earnings of unconsolidated joint ventures
(12,362
)
 
(12,170
)
Change in fair value of accrued contingent consideration

 
(44,276
)
Distributions from unconsolidated joint ventures
12,578

 
10,786

Write-off of net assets due to early lease terminations
(23
)
 
(8
)
Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases
387,492

 
346,459

Amortization of share-based compensation
13,459

 
5,717

Allowance for doubtful accounts
4,208

 
739

Amortization of deferred financing costs
7,453

 
6,360

Loss on early extinguishment of debt
982

 
148

Amortization of debt discount/premium
1,947

 
1,472

Amortization of acquired in-place lease value and deferred leasing costs
135,252

 
51,112

Amortization of acquired above-market leases and acquired below-market leases, net
(6,303
)
 
(6,856
)
Changes in assets and liabilities:

 

Restricted cash
4,398

 
2,878

Accounts and other receivables
(46,497
)
 
(1,382
)
Deferred rent
(20,347
)
 
(41,447
)
Deferred leasing costs
(3,905
)
 
(2,611
)
Other assets
(146,763
)
 
(14,869
)
Accounts payable and other accrued liabilities
127,139

 
14,366

Security deposits and prepaid rents
7,128

 
60

Net cash provided by operating activities
631,451

 
539,207

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(873,285
)
 
(48,424
)
Proceeds from sale of properties, net
359,319

 
185,565

Investment in unconsolidated joint ventures

 
(7,547
)
Receipt of value added tax refund
7,807

 
2,934

Refundable value added tax paid
(36,328
)
 
(24,142
)
Change in restricted cash
2,028

 
1,520

Improvements to investments in real estate
(549,364
)
 
(535,141
)
Improvement advances to tenants
(7,937
)
 
(26,977
)
Collection of advances from tenants for improvements
25,369

 
26,971

Net cash used in investing activities
(1,072,391
)
 
(425,241
)
 See accompanying notes to the condensed consolidated financial statements.

16

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facility
$
2,355,166

 
$
1,430,671

Repayments on revolving credit facility
(3,161,016
)
 
(1,240,340
)
Borrowings on unsecured term loan
766,201

 

Repayments on unsecured term loan
(170,736
)
 

Borrowings on unsecured senior notes
675,591

 
496,190

Principal payments on unsecured senior notes

 
(374,927
)
Repayments on unsecured notes
(25,000
)
 
(67,000
)
Principal payments on mortgage loans
(191,302
)
 
(73,724
)
Earnout payments related to acquisition
(23,842
)
 
(12,985
)
Change in restricted cash
(99
)
 
1,137

Payment of loan fees and costs
(19,274
)
 
(5,116
)
Capital distributions paid to noncontrolling interests in consolidated joint ventures, net
(375
)
 
(372
)
General partner contributions, net
803,320

 
2,175

Due to Parent

 
242,689

Payment of distributions to preferred unitholders
(66,378
)
 
(55,367
)
Payment of distributions to common unitholders
(521,620
)
 
(468,813
)
Net cash provided by (used in) financing activities
420,636

 
(125,782
)
Net decrease in cash and cash equivalents
(20,304
)
 
(11,816
)
Effect of exchange rate changes on cash
(304
)
 

Cash and cash equivalents at beginning of period
57,053

 
34,814

Cash and cash equivalents at end of period
$
36,445

 
$
22,998

 
See accompanying notes to the condensed consolidated financial statements.

17

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
2016
 
2015
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
172,463

 
$
146,105

Cash paid for income taxes
3,646

 
2,979

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
$
(37,388
)
 
$
(41,480
)
Decrease in accounts payable and other accrued liabilities related to change in
   fair value of interest rate swaps
(2,113
)
 
(4,374
)
Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
125,104

 
115,632

Accrual for potential earnout contingency

 
18,900

Note receivable related to sale of property

 
9,000

Allocation of purchase price of real estate/investment in partnership to:
 
 
 
Investments in real estate
$
874,220

 
$
48,424

Acquired below-market leases
(935
)
 

Cash paid for acquisition of real estate
$
873,285

 
$
48,424

See accompanying notes to the condensed consolidated financial statements.
 

18

Table of Contents
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016 and 2015


1. Organization and Description of Business
Digital Realty Trust, Inc. through its controlling interest in Digital Realty Trust, L.P. (the Operating Partnership) and the subsidiaries of the Operating Partnership (collectively, we, our, us or the Company) is engaged in the business of owning, acquiring, developing and operating data centers. The Company is focused on providing data center, colocation and interconnection solutions for domestic and international tenants across a variety of industry verticals ranging from financial services, cloud and information technology services, to manufacturing, energy, healthcare, and consumer products. As of September 30, 2016, our portfolio consisted of 144 operating properties, including 14 properties held as investments in unconsolidated joint ventures, of which 106 are located throughout North America, 31 are located in Europe, three are located in Australia and four are located in Asia.

We are diversified in major metropolitan areas where corporate data center and technology tenants are concentrated, including the Atlanta, Boston, Chicago, Dallas, Los Angeles, New York, Northern Virginia, Phoenix, San Francisco, Seattle and Silicon Valley metropolitan areas in the United States, the Amsterdam, Dublin, Frankfurt, London and Paris metropolitan areas in Europe and the Singapore, Sydney, Melbourne, Hong Kong and Osaka metropolitan areas in the Asia Pacific region. The portfolio consists of corporate data centers, Internet gateway data centers and office and other non-data center space.
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 September 30, 2016, Digital Realty Trust, Inc. owns a 98.4% common interest and a 100.0% preferred interest in the Operating Partnership. As sole general partner of the Operating Partnership, Digital Realty Trust, Inc. has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control. The limited partners of the Operating Partnership do not have rights to replace Digital Realty Trust, Inc. as the general partner nor do they have participating rights, although they do have certain protective rights.
2. Summary of Significant Accounting Policies
(a) Principles of Consolidation and Basis of Presentation
The accompanying interim condensed consolidated financial statements include all of the accounts of Digital Realty Trust, Inc., the Operating Partnership and the subsidiaries of the Operating Partnership. Intercompany balances and transactions have been eliminated.
The accompanying interim condensed consolidated financial statements are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and in compliance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. All such adjustments are considered to be of a normal recurring nature, except as otherwise indicated. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2015, as amended.
The notes to the condensed consolidated financial statements of Digital Realty Trust, Inc. and the Operating Partnership have been combined to provide the following benefits:
enhancing investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
creating time and cost efficiencies through the preparation of one set of notes instead of two separate sets of notes.

There are a few differences between the Company and the Operating Partnership, which are reflected in these condensed consolidated financial statements. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how we operate as an interrelated consolidated company. As a result, Digital Realty Trust, Inc. generally does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public securities from time to time and guaranteeing certain unsecured debt of the Operating Partnership and certain of

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September 30, 2016 and 2015


its subsidiaries and affiliates. Digital Realty Trust, Inc. itself has not issued any indebtedness but guarantees the unsecured debt of the Operating Partnership and certain of its subsidiaries and affiliates, 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 generally generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s or its affiliates direct or indirect incurrence of indebtedness or through the issuance of partnership units.
The presentation of noncontrolling interests in operating partnership, stockholders’ equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of Digital Realty Trust, Inc. and those of the Operating Partnership. The common limited partnership interests held by the limited partners in the Operating Partnership are presented as limited partners’ capital within partners’ capital in the Operating Partnership’s condensed consolidated financial statements and as noncontrolling interests in operating partnership within equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The common and preferred partnership interests held by Digital Realty Trust, Inc. in the Operating Partnership are presented as general partner’s capital within partners’ capital in the Operating Partnership’s condensed consolidated financial statements and as preferred stock, common stock, additional paid-in capital and accumulated dividends in excess of earnings within stockholders’ equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity issued at the Digital Realty Trust, Inc. and the Operating Partnership levels.
To help investors understand the significant differences between the Company and the Operating Partnership, these consolidated financial statements present the following separate sections for each of the Company and the Operating Partnership:
condensed consolidated face financial statements; and
the following notes to the condensed consolidated financial statements:
"Debt of the Company" and "Debt of the Operating Partnership";
"Income per Share" and "Income per Unit"; and
"Equity and Accumulated Other Comprehensive Income, Net" and "Capital and Accumulated Other Comprehensive Income".
In the sections that combine disclosure of Digital Realty Trust, Inc. and the Operating Partnership, these notes refer to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Company generally 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 September 30, 2016, cash equivalents consist of investments in money market instruments.
(c) Investment in Unconsolidated Joint Ventures
The Company’s investment in unconsolidated joint ventures is accounted for using the equity method, whereby the investment is increased for capital contributed and our share of the joint ventures’ net income and decreased by distributions we receive and our share of any losses of the joint ventures.
We amortize the difference between the cost of our investments in unconsolidated joint ventures and the book value of the underlying equity into equity in earnings from unconsolidated affiliates on a straight-line basis consistent with the lives of the underlying assets.


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(d) Capitalization of Costs

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

Capitalization of costs begins when the activities necessary to get the development project ready for its intended use begins, which include costs incurred before the beginning of construction. Capitalization of costs ceases when the development project is substantially complete and ready for its intended use. Determining when a development project commences, and when it is substantially complete and ready for its intended use involves a degree of judgment. We generally consider a development project to be substantially complete and ready for its intended use upon receipt of a certificate of occupancy. If and when development of a property is suspended pursuant to a formal change in the planned use of the property, we will evaluate whether the accumulated costs exceed the estimated value of the project and write-off the amount of any such excess accumulated costs. For a development project that is suspended for reasons other than a formal change in the planned use of such property, the accumulated project costs are evaluated for impairment consistent with our impairment policies for long-lived assets. Capitalized costs are allocated to the specific components of a project that are benefited.
We capitalized interest of approximately $3.8 million and $2.4 million during the three months ended September 30, 2016 and 2015, respectively. We capitalized interest of approximately $11.4 million and $9.9 million during the nine months ended September 30, 2016 and 2015, respectively. We capitalized amounts relating to compensation and other overhead expense of employees direct and incremental to construction and successful leasing activities of approximately $18.7 million and $17.2 million during the three months ended September 30, 2016 and 2015, respectively, and approximately $52.7 million and $43.0 million during the nine months ended September 30, 2016 and 2015, respectively. Capitalized leasing costs of approximately $31.4 million and $37.8 million are included in improvements to investments in real estate in cash flows from investing activities in the condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015, respectively.
(e) Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. Goodwill is not amortized.  Management performs an annual impairment test for goodwill and between annual tests, management will evaluate the recoverability of goodwill whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable.  In its impairment tests of goodwill, management will first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.  If based on this assessment, management determines that the fair value of the reporting unit is not less than its carrying value, then performing the additional two-step impairment test is unnecessary. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. If the carrying value of goodwill exceeds its fair value, an impairment charge is recognized.  We have not recognized any goodwill impairments since our inception. Goodwill amounted to approximately $780.1 million and $330.7 million as of September 30, 2016 and December 31, 2015, respectively.
(f) Share-Based Compensation
The Company measures all share-based compensation awards at fair value on the date they are granted to employees, consultants and directors. The fair value of share-based compensation awards that contain a market condition, including market performance-based Class D units of the Operating Partnership and market performance-based restricted stock units (discussed in Note 13 "Incentive Plan"), is measured using a Monte Carlo simulation method and not adjusted based on actual achievement of the performance goals.
We recognize compensation cost, net of forfeitures, for all of our existing awards, including long-term incentive units, market performance-based awards and restricted stock, over a four-year period.

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September 30, 2016 and 2015



(g) Income Taxes
Digital Realty Trust, Inc. has elected to be treated as a real estate investment trust (a “REIT”) for federal income tax purposes. As a REIT, Digital Realty Trust, Inc. generally is not required to pay federal corporate income tax to the extent taxable income is currently distributed to its stockholders. If Digital Realty Trust, Inc. fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.
The Company is subject to foreign, state and local income taxes in the jurisdictions in which it conducts business. The Company’s U.S. consolidated taxable REIT subsidiaries are subject to both federal and state income taxes to the extent there is taxable income. Accordingly, the Company recognizes current and deferred income taxes for its taxable REIT subsidiaries, certain states and non-U.S. jurisdictions, as appropriate.
We assess our significant tax positions in accordance with U.S. GAAP for all open tax years and determine whether we have any material unrecognized liabilities from uncertain tax benefits. If a tax position is not considered “more-likely-than-not” to be sustained solely on its technical merits, no benefits of the tax position are to be recognized (for financial statement purposes). As of September 30, 2016 and December 31, 2015, we have no assets or liabilities for uncertain tax positions. We classify interest and penalties from significant uncertain tax positions as interest expense and operating expense, respectively, in our condensed consolidated income statements. For the three and nine months ended September 30, 2016 and 2015, we had no such interest or penalties. The tax year 2013 and thereafter remain open to examination by the major taxing jurisdictions with which the Company files tax returns.
See Note 10 "Income Taxes" for further discussion on income taxes.
 
(h) 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.
(i) Fee Income
Occasionally, customers engage the company for certain services. The nature of these services historically involves property management, construction management, and assistance with financing. The proper revenue recognition of these services can be different, depending on whether the arrangements are service revenue or contractor type revenue.
Service revenues are typically recognized on an equal monthly basis based on the minimum fee to be earned. The monthly amounts could be adjusted depending on if certain performance milestones are met.
Fee income also includes management fees. These fees arise from contractual agreements with entities in which we have a noncontrolling interest. The management fees are recognized as earned under the respective agreements. Management and other fee income related to partially owned entities are recognized to the extent attributable to the unaffiliated interest.
(j) Assets and Liabilities Measured at Fair Value

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

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or

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

(l) Gains on Sale of Properties

Gains on sale of properties are recognized using the full accrual or partial sale methods, as applicable, in accordance with U.S. GAAP, provided various criteria relating to the terms of sale and any subsequent involvement with the real estate sold are satisfied.
(m) Management’s Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates made. On an on-going basis, we evaluate our estimates, including those related to the valuation of our real estate properties, contingent consideration, accounts receiv