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 March 31, 2018
 
¨
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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
¨
 
 
 
 
 
 
 
 
Emerging growth 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
¨
 
 
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Digital Realty Trust, Inc.
  
¨
Digital Realty Trust, L.P.
  
¨

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 May 4, 2018
Common Stock, $.01 par value per share
  
205,952,755



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EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2018 of Digital Realty Trust, Inc., a Maryland corporation, and Digital Realty Trust, L.P., a Maryland limited partnership, of which Digital Realty Trust, Inc. is the sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our Company” or “the Company” refer to Digital Realty Trust, Inc. together with its consolidated subsidiaries, including Digital Realty Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our Operating Partnership” or “the Operating Partnership” refer to Digital Realty Trust, L.P. together with its consolidated subsidiaries.
Digital Realty Trust, Inc. is a real estate investment trust, or REIT, and the sole general partner of Digital Realty Trust, L.P. As of March 31, 2018, Digital Realty Trust, Inc. owned an approximate 95.9% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 4.1% of the common limited partnership interests of Digital Realty Trust, L.P. are owned by non-affiliated third parties and certain directors and officers of Digital Realty Trust, Inc. As of March 31, 2018, Digital Realty Trust, Inc. owned all of the preferred limited partnership interests of Digital Realty Trust, L.P. As the sole general partner of Digital Realty Trust, L.P., Digital Realty Trust, Inc. has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control.

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

enhancing investors’ understanding of our Company and our Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both our Company and our Operating Partnership; and

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

There are a few differences between our Company and our Operating Partnership, which are reflected in the disclosure in this report. We believe it is important to understand the differences between our Company and our Operating Partnership in the context of how we operate as an interrelated consolidated company. Digital Realty Trust, Inc. is a REIT, whose only material asset is its ownership of partnership interests of Digital Realty Trust, L.P. As a result, Digital Realty Trust, Inc. does not conduct business itself, other than acting as the sole general partner of Digital Realty Trust, L.P., issuing public equity from time to time and guaranteeing certain unsecured debt of Digital Realty Trust, L.P. and certain of its subsidiaries and affiliates. Digital Realty Trust, Inc. itself does not issue any indebtedness but guarantees the unsecured debt of Digital Realty Trust, L.P. and certain of its subsidiaries and affiliates, 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.



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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 Loss, Net" and "Capital and Accumulated Other Comprehensive Loss";

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 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 MARCH 31, 2018
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)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
1,140,537

 
$
1,136,341

Acquired ground leases
11,516

 
11,150

Buildings and improvements
15,645,624

 
15,215,405

Tenant improvements
563,735

 
553,040

Total investments in properties
17,361,412

 
16,915,936

Accumulated depreciation and amortization
(3,439,050
)
 
(3,238,227
)
Net investments in properties
13,922,362

 
13,677,709

Investments in unconsolidated joint ventures
167,564

 
163,477

Net investments in real estate
14,089,926

 
13,841,186

Cash and cash equivalents
22,370

 
51

Accounts and other receivables, net of allowance for doubtful accounts of $6,906 and $6,737 as of March 31, 2018 and December 31, 2017, respectively
309,328

 
276,347

Deferred rent
442,887

 
430,026

Acquired above-market leases, net
165,568

 
184,375

Goodwill
3,405,110

 
3,389,595

Acquired in-place lease value, deferred leasing costs and intangibles, net
2,928,566

 
2,998,806

Restricted cash
7,330

 
13,130

Assets held for sale
41,707

 
139,538

Other assets
169,125

 
131,291

Total assets
$
21,581,917

 
$
21,404,345

LIABILITIES AND EQUITY
 
 
 
Global revolving credit facility, net
$
952,121

 
$
550,946

Unsecured term loan, net
1,428,498

 
1,420,333

Unsecured senior notes, net
6,660,727

 
6,570,757

Mortgage loans, including premiums, net
106,366

 
106,582

Accounts payable and other accrued liabilities
1,012,490

 
980,218

Accrued dividends and distributions

 
199,761

Acquired below-market leases, net
225,674

 
249,465

Security deposits and prepaid rents
207,859

 
217,898

Obligations associated with assets held for sale
1,767

 
5,033

Total liabilities
10,595,502

 
10,300,993

 
 
 
 
Redeemable noncontrolling interests – operating partnership
49,871

 
53,902

Commitments and contingencies

 

Equity:
 
 
 
Stockholders’ Equity:
 
 
 
Preferred Stock: $0.01 par value per share, 110,000,000 shares authorized; 50,650,000 and 50,650,000 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
1,249,560

 
1,249,560

Common Stock: $0.01 par value per share, 315,000,000 shares authorized, 205,874,914 and 205,470,300 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
2,045

 
2,044

Additional paid-in capital
11,283,489

 
11,261,461

Accumulated dividends in excess of earnings
(2,177,269
)
 
(2,055,552
)
Accumulated other comprehensive loss, net
(103,974
)
 
(108,432
)
Total stockholders’ equity
10,253,851

 
10,349,081

Noncontrolling Interests:
 
 
 
Noncontrolling interests in operating partnership
680,400

 
698,126

Noncontrolling interests in consolidated joint ventures
2,293

 
2,243

Total noncontrolling interests
682,693

 
700,369

Total equity
10,936,544

 
11,049,450

Total liabilities and equity
$
21,581,917

 
$
21,404,345

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 March 31,
 
2018
 
2017
Operating Revenues:
 
 
 
Rental and other services
$
592,298

 
$
461,351

Tenant reimbursements
150,079

 
87,288

Fee income
1,133

 
1,895

Other
858

 
35

Total operating revenues
744,368


550,569

Operating Expenses:
 
 
 
Rental property operating and maintenance
225,640

 
169,339

Property taxes
35,263

 
26,919

Insurance
3,731

 
2,592

Depreciation and amortization
294,789

 
176,466

General and administrative
36,523

 
34,647

Transactions and integration
4,178

 
3,323

Other
431

 

Total operating expenses
600,555


413,286

Operating income
143,813

 
137,283

Other Income (Expenses):
 
 
 
Equity in earnings of unconsolidated joint ventures
7,410

 
5,324

Gain (loss) on sale of properties
39,273

 
(522
)
Interest and other (expense) income
(42
)
 
151

Interest expense
(76,985
)
 
(55,450
)
Tax expense
(3,374
)
 
(2,223
)
Net income
110,095


84,563

Net income attributable to noncontrolling interests
(3,468
)
 
(1,025
)
Net income attributable to Digital Realty Trust, Inc.
106,627


83,538

Preferred stock dividends
(20,329
)
 
(17,393
)
Net income available to common stockholders
$
86,298


$
66,145

Net income per share available to common stockholders:
 
 
 
Basic
$
0.42

 
$
0.42

Diluted
$
0.42

 
$
0.41

Weighted average common shares outstanding:
 
 
 
Basic
205,714,173

 
159,297,027

Diluted
206,507,476

 
160,421,655

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 March 31,
 
2018
 
2017
Net income
$
110,095

 
$
84,563

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(3,743
)
 
16,578

Increase (decrease) in fair value of interest rate swaps and foreign currency hedges
8,616

 
(4,364
)
Reclassification to interest expense from interest rate swaps
(235
)
 
1,030

Comprehensive income
114,733

 
97,807

Comprehensive income attributable to noncontrolling interests
(3,648
)
 
(1,204
)
Comprehensive income attributable to Digital Realty Trust, Inc.
$
111,085

 
$
96,603

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)
 
 
 
Redeemable Noncontrolling Interests -- Operating Partnership
 
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, 2017
 
$
53,902

 
$
1,249,560

 
205,470,300

 
$
2,044

 
$
11,261,461

 
$
(2,055,552
)
 
$
(108,432
)
 
$
10,349,081

 
$
698,126

 
$
2,243

 
$
700,369

 
$
11,049,450

Conversion of common units to common stock
 

 

 
168,367

 
2

 
15,199

 

 

 
15,201

 
(15,201
)
 

 
(15,201
)
 

Issuance of unvested restricted stock, net of forfeitures
 

 

 
251,187

 

 

 

 

 

 

 

 

 

Issuance of common stock, net of offering costs
 

 

 

 

 
(12
)
 

 

 
(12
)
 

 

 

 
(12
)
Shares issued under employee stock purchase plan
 

 

 
31,893

 

 
2,509

 

 

 
2,509

 

 

 

 
2,509

Shares repurchased and retired to satisfy tax withholding upon vesting
 

 

 
(46,833
)
 
(1
)
 
(4,717
)
 

 

 
(4,718
)
 

 

 

 
(4,718
)
Amortization of share-based compensation
 

 

 

 

 
7,515

 

 

 
7,515

 

 

 

 
7,515

Reclassification of vested share-based awards
 

 

 

 

 
(2,497
)
 

 

 
(2,497
)
 
2,497

 

 
2,497

 

Adjustment to redeemable noncontrolling interests—operating partnership
 
(4,031
)
 

 

 

 
4,031

 

 

 
4,031

 

 

 

 
4,031

Dividends declared on preferred stock
 

 

 

 

 

 
(20,329
)
 

 
(20,329
)
 

 

 

 
(20,329
)
Dividends and distributions on common stock and common and incentive units
 

 

 

 

 

 
(208,015
)
 

 
(208,015
)
 
(8,682
)
 

 
(8,682
)
 
(216,697
)
Distributions to noncontrolling interests in consolidated joint ventures, net of contributions
 

 

 

 

 

 

 

 

 

 
62

 
62

 
62

Net income
 

 

 

 

 

 
106,627

 

 
106,627

 
3,480

 
(12
)
 
3,468

 
110,095

Other comprehensive loss—foreign currency translation adjustments
 

 

 

 

 

 

 
(3,598
)
 
(3,598
)
 
(145
)
 

 
(145
)
 
(3,743
)
Other comprehensive income—fair value of interest rate swaps and foreign currency hedges
 

 

 

 

 

 

 
8,282

 
8,282

 
334

 

 
334

 
8,616

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

 

 

 

 

 

 
(226
)
 
(226
)
 
(9
)
 

 
(9
)
 
(235
)
Balance as of March 31, 2018
 
$
49,871

 
$
1,249,560

 
205,874,914

 
$
2,045

 
$
11,283,489

 
$
(2,177,269
)
 
$
(103,974
)
 
$
10,253,851

 
$
680,400

 
$
2,293

 
$
682,693

 
$
10,936,544

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)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
110,095

 
$
84,563

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
(Gain) loss on sale of properties
(39,273
)
 
522

Equity in earnings of unconsolidated joint ventures
(7,410
)
 
(5,324
)
Distributions from unconsolidated joint ventures
5,270

 
4,448

Write-off of net assets due to early lease terminations
431

 

Depreciation and amortization of buildings and improvements, tenant improvements
   and acquired ground leases
186,431

 
131,807

Amortization of acquired in-place lease value and deferred leasing costs
108,358

 
44,659

Amortization of share-based compensation
5,872

 
4,064

Non-cash amortization of terminated swaps
301

 
301

Recovery of doubtful accounts
(494
)
 
(1,310
)
Amortization of deferred financing costs
3,060

 
2,443

Amortization of debt discount/premium
851

 
674

Amortization of acquired above-market leases and acquired below-market leases, net
6,660

 
(2,026
)
Changes in assets and liabilities:
 
 
 
Accounts and other receivables
(30,250
)
 
9,455

Deferred rent
(10,454
)
 
(4,033
)
Deferred leasing costs
(4,613
)
 
(1,898
)
Other assets
(1,750
)
 
(13,040
)
Accounts payable and other accrued liabilities
(83,206
)
 
(38,421
)
Security deposits and prepaid rents
(12,889
)
 
2,182

Net cash provided by operating activities
236,990

 
219,066

Cash flows from investing activities:
 
 
 
Acquisitions of real estate

 
(13,585
)
Proceeds from sale of properties, net of sales costs
137,175

 

Excess proceeds from forward contracts

 
51,308

Investments in unconsolidated joint ventures
(81
)
 
(5,749
)
Prepaid construction costs and other investments
(26,602
)
 

Improvements to investments in real estate
(289,840
)
 
(254,359
)
Improvement advances to tenants
(11,627
)
 
(5,073
)
Collection of improvement advances to tenants
13,691

 
11,890

Net cash used in investing activities
(177,284
)
 
(215,568
)
 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 (continued)
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Borrowings on global revolving credit facility
$
579,685

 
$
715,524

Repayments on global revolving credit facility
(183,467
)
 
(358,219
)
Repayments on unsecured notes


(50,000
)
Principal payments on mortgage loans
(192
)
 
(132
)
Payment of loan fees and costs
(294
)
 
(144
)
Capital distributions paid to noncontrolling interests in consolidated joint ventures, net
62


(146
)
Taxes paid related to net settlement of stock-based compensation awards
(4,718
)


Proceeds from common and preferred stock offerings, net
(12
)

118

Proceeds from equity plans
2,509


2,606

Payment of dividends to preferred stockholders
(20,329
)

(17,393
)
Payment of dividends to common stockholders and distributions to
    noncontrolling interests in operating partnership
(416,458
)

(295,105
)
Net cash used in financing activities
(43,214
)
 
(2,891
)
Net increase in cash, cash equivalents and restricted cash
16,492

 
607

Effect of exchange rate changes on cash, cash equivalents and restricted cash
27

 
2,754

Cash, cash equivalents and restricted cash at beginning of period
13,181

 
22,036

Cash, cash equivalents and restricted cash at end of period
$
29,700

 
$
25,397

 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
78,728

 
$
53,819

Cash paid for income taxes
4,272

 
3,569

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
$
(3,743
)
 
$
16,578

Increase (decrease) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps and foreign currency hedges
8,616

 
(4,364
)
Acquisition measurement period adjustment to goodwill and accounts payable and
other accrued liabilities

 
2,162

Noncontrolling interests in operating partnership converted to shares of common stock
15,201

 
2,744

Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
177,812

 
138,162

Addition to leasehold improvements pursuant to capital lease obligation
73,873

 

See accompanying notes to the condensed consolidated financial statements.

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
1,140,537

 
$
1,136,341

Acquired ground leases
11,516

 
11,150

Buildings and improvements
15,645,624

 
15,215,405

Tenant improvements
563,735

 
553,040

Total investments in properties
17,361,412

 
16,915,936

Accumulated depreciation and amortization
(3,439,050
)
 
(3,238,227
)
Net investments in properties
13,922,362

 
13,677,709

Investments in unconsolidated joint ventures
167,564

 
163,477

Net investments in real estate
14,089,926

 
13,841,186

Cash and cash equivalents
22,370

 
51

Accounts and other receivables, net of allowance for doubtful accounts of $6,906 and $6,737 as of March 31, 2018 and December 31, 2017, respectively
309,328

 
276,347

Deferred rent
442,887

 
430,026

Acquired above-market leases, net
165,568

 
184,375

Goodwill
3,405,110

 
3,389,595

Acquired in-place lease value, deferred leasing costs and intangibles, net
2,928,566

 
2,998,806

Restricted cash
7,330

 
13,130

Assets held for sale
41,707

 
139,538

Other assets
169,125

 
131,291

Total assets
$
21,581,917

 
$
21,404,345

LIABILITIES AND CAPITAL

 

Global revolving credit facility, net
$
952,121

 
$
550,946

Unsecured term loan, net
1,428,498

 
1,420,333

Unsecured senior notes, net
6,660,727

 
6,570,757

Mortgage loans, including premiums, net
106,366

 
106,582

Accounts payable and other accrued liabilities
1,012,490

 
980,218

Accrued dividends and distributions

 
199,761

Acquired below-market leases, net
225,674

 
249,465

Security deposits and prepaid rents
207,859

 
217,898

Obligations associated with assets held for sale
1,767

 
5,033

Total liabilities
10,595,502

 
10,300,993

Redeemable limited partner common units
49,871

 
53,902

Commitments and contingencies

 

Capital:
 
 
 
Partners’ capital:
 
 
 
General Partner:
 
 
 
Preferred units, 50,650,000 and 50,650,000 units issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
1,249,560

 
1,249,560

Common units, 205,874,914 and 205,470,300 units issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
9,108,265

 
9,207,953

Limited Partners, 8,736,488 and 8,489,095 units issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
684,673

 
702,579

Accumulated other comprehensive loss
(108,247
)
 
(112,885
)
Total partners’ capital
10,934,251

 
11,047,207

Noncontrolling interests in consolidated joint ventures
2,293

 
2,243

Total capital
10,936,544

 
11,049,450

Total liabilities and capital
$
21,581,917

 
$
21,404,345

See accompanying notes to the condensed consolidated financial statements.


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Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except unit and per unit data)
 
Three Months Ended March 31,
 
2018
 
2017
Operating Revenues:
 
 
 
Rental and other services
$
592,298

 
$
461,351

Tenant reimbursements
150,079

 
87,288

Fee income
1,133

 
1,895

Other
858

 
35

Total operating revenues
744,368

 
550,569

Operating Expenses:
 
 
 
Rental property operating and maintenance
225,640

 
169,339

Property taxes
35,263

 
26,919

Insurance
3,731

 
2,592

Depreciation and amortization
294,789

 
176,466

General and administrative
36,523

 
34,647

Transactions and integration
4,178

 
3,323

Other
431

 

Total operating expenses
600,555

 
413,286

Operating income
143,813

 
137,283

Other Income (Expenses):
 
 
 
Equity in earnings of unconsolidated joint ventures
7,410

 
5,324

Gain (loss) on sale of properties
39,273

 
(522
)
Interest and other (expense) income
(42
)
 
151

Interest expense
(76,985
)
 
(55,450
)
Tax expense
(3,374
)
 
(2,223
)
Net income
110,095

 
84,563

Net (loss) income attributable to noncontrolling interests in consolidated joint ventures
12

 
(121
)
Net income attributable to Digital Realty Trust, L.P.
110,107

 
84,442

Preferred units distributions
(20,329
)
 
(17,393
)
Net income available to common unitholders
$
89,778

 
$
67,049

Net income per unit available to common unitholders:
 
 
 
Basic
$
0.42

 
$
0.42

Diluted
$
0.42

 
$
0.41

Weighted average common units outstanding:
 
 
 
Basic
214,009,460

 
161,474,901

Diluted
214,802,763

 
162,599,529

See accompanying notes to the condensed consolidated financial statements.


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Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
110,095

 
$
84,563

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
(3,743
)
 
16,578

(Decrease) increase in fair value of interest rate swaps and foreign currency hedges
8,616

 
(4,364
)
Reclassification to interest expense from interest rate swaps
(235
)
 
1,030

Comprehensive income
$
114,733


$
97,807

Comprehensive loss (income) attributable to noncontrolling interests in consolidated joint ventures
12

 
(121
)
Comprehensive income attributable to Digital Realty Trust, L.P.
$
114,745

 
$
97,686

See accompanying notes to the condensed consolidated financial statements.


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Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CAPITAL
(unaudited, in thousands, except unit data)
 
Redeemable Limited Partner Common Units
 
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, 2017
$
53,902

 
50,650,000

 
$
1,249,560

 
205,470,300

 
$
9,207,953

 
8,489,095

 
$
702,579

 
$
(112,885
)
 
$
2,243

 
$
11,049,450

Conversion of limited partner common units to general partner common units

 

 

 
168,367

 
15,201

 
(168,367
)
 
(15,201
)
 

 

 

Issuance of unvested restricted common units

 

 

 
251,187

 

 

 

 

 

 

Issuance of common units, net of offering costs

 

 

 

 
(12
)
 

 

 

 

 
(12
)
Issuance of common units, net of forfeitures

 

 

 

 

 
415,760

 

 

 

 

Units issued in connection with employee stock purchase plan

 

 

 
31,893

 
2,509

 

 

 

 

 
2,509

Units repurchased and retired to satisfy tax withholding upon vesting

 

 

 
(46,833
)
 
(4,718
)
 

 

 

 

 
(4,718
)
Amortization of share-based compensation

 

 

 

 
7,515

 

 

 

 

 
7,515

Reclassification of vested share-based awards

 

 

 

 
(2,497
)
 

 
2,497

 

 

 

Adjustment to redeemable partnership units
(4,031
)
 

 

 

 
4,031

 

 

 

 

 
4,031

Distributions

 

 
(20,329
)
 

 
(208,015
)
 

 
(8,682
)
 

 

 
(237,026
)
Distributions to noncontrolling interests in consolidated joint ventures, net of contributions

 

 

 

 

 

 

 

 
62

 
62

Net income

 

 
20,329

 

 
86,298

 

 
3,480

 

 
(12
)
 
110,095

Other comprehensive loss—foreign currency translation adjustments

 

 

 

 

 

 

 
(3,743
)
 

 
(3,743
)
Other comprehensive income—fair value of interest rate swaps and foreign currency hedges

 

 

 

 

 

 

 
8,616

 

 
8,616

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

 

 

 

 

 

 

 
(235
)
 

 
(235
)
Balance as of March 31, 2018
$
49,871

 
50,650,000

 
$
1,249,560

 
205,874,914

 
$
9,108,265

 
8,736,488

 
$
684,673

 
$
(108,247
)
 
$
2,293

 
$
10,936,544


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
(unaudited, in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
110,095

 
$
84,563

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

 

Gain on sale of properties
(39,273
)
 
522

Equity in earnings of unconsolidated joint ventures
(7,410
)
 
(5,324
)
Distributions from unconsolidated joint ventures
5,270

 
4,448

Write-off of net assets due to early lease terminations
431

 

Depreciation and amortization of buildings and improvements, tenant improvements
   and acquired ground leases
186,431

 
131,807

Amortization of debt discount/premium
851

 
674

Amortization of acquired in-place lease value and deferred leasing costs
108,358

 
44,659

Amortization of share-based compensation
5,872

 
4,064

Non-cash amortization of terminated swaps
301

 
301

Recovery of doubtful accounts
(494
)
 
(1,310
)
Amortization of deferred financing costs
3,060

 
2,443

Amortization of acquired above-market leases and acquired below-market leases, net
6,660

 
(2,026
)
Changes in assets and liabilities:

 

Accounts and other receivables
(30,250
)
 
9,455

Deferred rent
(10,454
)
 
(4,033
)
Deferred leasing costs
(4,613
)
 
(1,898
)
Other assets
(1,750
)
 
(13,040
)
Accounts payable and other accrued liabilities
(83,206
)
 
(38,421
)
Security deposits and prepaid rents
(12,889
)
 
2,182

Net cash provided by operating activities
236,990

 
219,066

Cash flows from investing activities:
 
 
 
Acquisitions of real estate

 
(13,585
)
Proceeds from sale of properties, net of sales costs
137,175

 

Excess proceeds from forward contracts

 
51,308

Investments in unconsolidated joint ventures
(81
)
 
(5,749
)
Prepaid construction costs and other investments
(26,602
)
 

Improvements to investments in real estate
(289,840
)
 
(254,359
)
Improvement advances to tenants
(11,627
)
 
(5,073
)
Collection of improvement advances to tenants
13,691

 
11,890

Net cash used in investing activities
(177,284
)
 
(215,568
)
 See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Borrowings on global revolving credit facility
$
579,685

 
$
715,524

Repayments on global revolving credit facility
(183,467
)
 
(358,219
)
Repayments on unsecured notes

 
(50,000
)
Borrowings on mortgage loans
(192
)
 
(132
)
Payment of loan fees and costs
(294
)
 
(144
)
Capital distributions paid to noncontrolling interests in consolidated joint ventures, net
62

 
(146
)
Taxes paid related to net settlement of stock-based compensation awards
(4,718
)
 

General partner contributions, net
2,497

 
2,724

Payment of distributions to preferred unitholders
(20,329
)
 
(17,393
)
Payment of distributions to common unitholders
(416,458
)
 
(295,105
)
Net cash used in financing activities
(43,214
)
 
(2,891
)
Net increase in cash, cash equivalents and restricted cash
16,492

 
607

Effect of exchange rate changes on cash, cash equivalents and restricted cash
27

 
2,754

Cash, cash equivalents and restricted cash at beginning of period
13,181

 
22,036

Cash, cash equivalents and restricted cash at end of period
$
29,700

 
$
25,397

 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
78,728

 
$
53,819

Cash paid for income taxes
4,272

 
3,569

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
$
(3,743
)
 
$
16,578

Increase (decrease) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps and foreign currency hedges
8,616

 
(4,364
)
Acquisition measurement period adjustment to goodwill and accounts payable and
other accrued liabilities

 
2,162

Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
177,812

 
138,162

Addition to leasehold improvements pursuant to capital lease obligation
73,873

 

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
March 31, 2018 and 2017


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 a leading global provider of data center, colocation and interconnection solutions for customers across a variety of industry verticals ranging from cloud and information technology services, communications and social networking to financial services, manufacturing, energy, healthcare, and consumer products. The Operating Partnership, a Maryland limited partnership, is the entity through which Digital Realty Trust, Inc., a Maryland corporation, conducts its business of owning, acquiring, developing and operating data centers.  Digital Realty Trust, Inc. operates as a REIT for federal income tax purposes. A summary of our data center portfolio as of March 31, 2018 and December 31, 2017 is as follows:
 
 
Data Centers
 
 
As of March 31, 2018
 
As of December 31, 2017
Region
 
Operating
Held for Sale
Unconsolidated Joint Ventures
Total
 
Operating
Held for Sale
Unconsolidated Joint Ventures
Total
United States
 
133

4

14

151

 
131

7

14

152

Europe
 
37



37

 
38



38

Asia
 
3


4

7

 
3


4

7

Australia
 
5



5

 
5



5

Canada
 
3



3

 
3



3

Total
 
181

4

18

203

 
180

7

18

205


We are diversified in major metropolitan areas where data center and technology customers are concentrated, including the Atlanta, Boston, Chicago, Dallas, Los Angeles, New York, Northern Virginia, Phoenix, San Francisco, Seattle, Silicon Valley and Toronto metropolitan areas in North America, the Amsterdam, Dublin, Frankfurt, London and Paris metropolitan areas in Europe and the Hong Kong, Melbourne, Osaka, Singapore, Sydney, and Tokyo metropolitan areas in the Asia Pacific region. The portfolio consists of data centers, Internet gateway facilities 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 March 31, 2018, Digital Realty Trust, Inc. owns a 95.9% common interest and a 100.0% preferred interest in the Operating Partnership. As of December 31, 2017, Digital Realty Trust, Inc. owned a 96.0% 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.

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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)
March 31, 2018 and 2017

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, 2017.
The notes to the condensed consolidated financial statements of Digital Realty Trust, Inc. and the Operating Partnership have been combined to provide the following benefits:
enhancing investors’ understanding of the Company and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminating duplicative disclosure and providing a more streamlined and readable presentation since a substantial portion of the disclosure applies to both the Company and the Operating Partnership; and
creating time and cost efficiencies through the preparation of one set of notes instead of two separate sets of notes.

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

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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)
March 31, 2018 and 2017

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 Loss, Net of the Company" and "Capital and Accumulated Other Comprehensive Loss 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 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 March 31, 2018, cash equivalents consist of investments in money market instruments.
(c) Investments in Unconsolidated Joint Ventures
The Company’s investments in unconsolidated joint ventures are accounted for using the equity method, whereby our investment is increased for capital contributed and our share of the joint venture's net income and decreased by distributions we receive and our share of any losses of the joint ventures. We do not record losses of the joint ventures in excess of our investment balances unless we are liable for the obligations of the joint venture or are otherwise committed to provide financial support to the joint venture. Likewise, and as long as we have no explicit or implicit obligations to the joint venture, we will suspend equity method accounting to the extent that cash distributions exceed our investment balances until those unrecorded earnings exceed the excess distributions previously recognized in income. In this case, we will apply cost accounting concepts which tie income recognition to the receipt of cash.  Cost basis accounting concepts will apply until earnings exceed the excess distributions previously recognized in income.
We amortize the difference between the cost of our investments in the joint ventures and the book value of the underlying equity into income on a straight-line basis consistent with the lives of the underlying assets. The amortization of this difference was immaterial for the three months ended March 31, 2018 and 2017, respectively.

(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.

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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)
March 31, 2018 and 2017

During the three months ended March 31, 2018 and 2017, we capitalized interest of approximately $7.4 million and $4.6 million, respectively. We capitalized amounts relating to compensation and other overhead expense of employees direct and incremental to construction and successful leasing activities of approximately $18.3 million and $18.7 million during the three months ended March 31, 2018 and 2017, respectively. In addition to capitalized cash compensation, approximately $2.3 million and $3.2 million of capitalized costs primarily related to external leasing commissions are included in improvements to and advances for investments in real estate in cash flows from investing activities in the condensed consolidated statements of cash flows for the three months ended March 31, 2018 and 2017, respectively.
(e) Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired and tangible and intangible liabilities assumed in a business combination. Goodwill is not amortized.  We perform an annual impairment test for goodwill and between annual tests, we evaluate goodwill for impairment whenever events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value.  In our impairment tests of goodwill, we 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, we determine 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 including goodwill to the fair value of the reporting unit. If the fair value is determined to be less than the book value of the net assets, including goodwill, a second step is performed to compute the amount of impairment as the difference between the implied fair value of goodwill and its carrying value. We estimate the fair value of the reporting units using discounted cash flows. If the carrying value of goodwill exceeds its implied fair value, an impairment charge is recognized. We have not recognized any goodwill impairments since our inception. Since some of the goodwill is denominated in foreign currencies, changes to the goodwill balance occur over time due to changes in foreign exchange rates.

The following is a summary of goodwill activity for the three months ended March 31, 2018 (in thousands):
 
 
Balance as of December 31, 2017
 
Impact of Change in Foreign Exchange Rates
 
Balance as of March 31, 2018
Merger / Portfolio Acquisition
 
 
 
 
 
 
 
 
 
 
 
 
 
Telx Acquisition
 
$
330,845

 
$

 
$
330,845

European Portfolio Acquisition
 
466,604

 
15,515

 
482,119

DuPont Fabros Technology Merger
 
2,592,146

 

 
2,592,146

Total
 
$
3,389,595

 
$
15,515

 
$
3,405,110

(f) Share-Based Compensation
The Company measures all share-based compensation awards at fair value on the date they are granted to employees and directors, and recognizes compensation cost, net of forfeitures, over the requisite service period for awards with only a service condition. The estimated fair value of the long-term incentive units and Class D units (discussed in Note 13) granted by us is being amortized on a straight-line basis over the expected service period.

The fair value of share-based compensation awards that contain a market condition is measured using a Monte Carlo simulation method and not adjusted based on actual achievement of the market condition.


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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2018 and 2017

(g) Assets and Liabilities Measured at Fair Value

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

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


liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair-value measurement is based on inputs from different levels of the fair-value hierarchy, the lowest level input that is significant would be used to determine the fair-value measurement in its entirety. Our assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
(h) Derivative Instruments

Derivative financial instruments are employed to manage risks, including foreign currency and interest rate exposures and are not used for trading or speculative purposes. As part of the Company’s risk management program, a variety of financial instruments, such as interest rate swaps and foreign exchange contracts, may be used to mitigate interest rate exposure and foreign currency exposure. The Company recognizes all derivative instruments in the balance sheet at fair value.

Changes in the fair value of derivatives are recognized periodically either in earnings or in stockholders’ equity as a component of accumulated other comprehensive income (loss), depending on whether the derivative financial instrument is undesignated or qualifies for hedge accounting, and if so, whether it represents a fair value, cash flow, or net investment hedge. Gains and losses on derivatives designated as cash flow hedges, to the extent they are included in the assessment of effectiveness, are recorded in other comprehensive income (loss) and subsequently reclassified to earnings to offset the impact of the hedged items when they occur. In the event it becomes probable the forecasted transaction to which a cash flow hedge relates will not occur, the derivative would be terminated and the amount in other comprehensive income (loss) would be recognized in earnings. Changes in the fair value of derivatives that are designated and qualify as a hedge of the net investment in foreign operations, to the extent they are included in the assessment of effectiveness, are reported in other comprehensive income (loss) and are deferred until disposal of the underlying assets. Gains and losses representing components excluded from the assessment of effectiveness for cash flow and fair value hedges are recognized in earnings on a straight-line basis in the same caption as the hedged item over the term of the hedge. Gains and losses representing components excluded from the assessment of effectiveness for net investment hedges are recognized in earnings on a straight-line basis over the term of the hedge.

The net interest paid or received on interest rate swaps is recognized as interest expense. Gains and losses resulting from the early termination of interest rate swap agreements are deferred and amortized as adjustments to interest expense over the remaining period of the debt originally covered by the terminated swap.
See Note 14 for further discussion on derivative instruments.



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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2018 and 2017

(i) 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 for taxable years prior to 2018) on its taxable income.

The Company is subject to foreign, state and local income taxes in the jurisdictions in which it conducts business. The Company’s taxable REIT subsidiaries are subject to federal, state and foreign income taxes to the extent there is taxable income. Accordingly, the Company recognizes current and deferred income taxes for its taxable REIT subsidiaries, including federal, state and non-U.S. jurisdictions, as appropriate.
We assess our significant tax positions in accordance with U.S. GAAP for all open tax years and determine whether we have any material unrecognized liabilities from uncertain tax benefits. If a tax position is not considered “more-likely-than-not” to be sustained solely on its technical merits, no benefits of the tax position are to be recognized (for financial statement purposes). As of March 31, 2018 and December 31, 2017, we had no assets or liabilities for uncertain tax positions. We classify interest and penalties from significant uncertain tax positions as interest expense and operating expense, respectively, in our condensed consolidated income statements. For the three months ended March 31, 2018 and 2017, we had no such interest or penalties. The tax year 2014 and thereafter remain open to examination by the major taxing jurisdictions with which the Company files tax returns.
See Note 10 for further discussion on income taxes.
 
(j) 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.

(k) Redeemable Noncontrolling Interests

Redeemable noncontrolling interests include amounts related to partnership units issued by consolidated subsidiaries of the Company in which redemption for equity is outside the control of the Company.  Partnership units which are determined to be contingently redeemable for cash under the Financial Accounting Standards Board’s "Distinguishing Liabilities from Equity" guidance are classified as redeemable noncontrolling interests and presented in the mezzanine section between total liabilities and stockholder’s equity on the Company’s condensed consolidated balance sheets. The amounts of consolidated net income attributable to the Company and to the noncontrolling interests are presented on the Company’s condensed consolidated income statements.
(l) Revenue Recognition

The majority of our revenue is derived from lease arrangements, which we account for in accordance with “Leases (Topic 840)”. We account for the non-lease components within our lease arrangements, as well as other sources of revenue, in accordance with “Revenue from Contracts with Customers (Topic 606)”. Revenue recognized as a result of applying Topic 840 was 97% and Topic 606 was 3% of total operating revenue for the quarter ended March 31, 2018.

Our leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases, which may span multiple years. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is included in deferred rent in the accompanying condensed consolidated balance sheets and contractually due but unpaid rents are included in accounts and other receivables.
 
Tenant reimbursements for real estate taxes, common area maintenance, and other recoverable costs under our leases are recognized in the period that the expenses are incurred. Lease termination fees are recognized over the remaining term of the lease, effective as of the date the lease modification is finalized, assuming collection is not considered doubtful. As discussed above, we recognize amortization of the value of acquired above or below-market tenant leases as a reduction of rental revenue in the case of above-market leases or an increase to rental revenue in the case of below-market leases.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2018 and 2017

Interconnection services are included in rental and other services on the condensed consolidated income statements and are generally provided on a month-to-month, one-year or multi-year term. Interconnection services include port and cross-connect services. Port services are typically sold on a one-year or multi-year term and revenue is recognized on a recurring monthly basis (straight-line). The Company bills customers on a monthly basis and recognizes the revenue over the period the service is provided. Revenue for cross-connect installations is generally recognized in the period the cross-connect is installed. Interconnection services that are not specific to a particular space are accounted for under Topic 606 and have terms that are generally one year or less.

Occasionally, customers engage the Company for certain services. The nature of these services historically involves property management and construction management. 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 arises primarily from contractual management 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 noncontrolled entities are recognized to the extent attributable to the unaffiliated interest.

We make subjective estimates as to when our revenue is earned and the collectability of our accounts receivable related to minimum rent, deferred rent, expense reimbursements, lease termination fees and other income. We specifically analyze accounts receivable and historical bad debts, customer concentrations, customer creditworthiness and current economic trends when evaluating the adequacy of the allowance for bad debts. These estimates have a direct impact on our net revenue because a higher bad debt allowance would result in lower net revenue, and recognizing rental revenue as earned in one period versus another would result in higher or lower net revenue for a particular period.

(m) Transaction and Integration Expense
Transaction and integration expense includes business combination expenses, other business development expenses and other expenses to integrate newly acquired investments, which are expensed as incurred. Transaction expenses include closing costs, broker commissions and other professional fees, including legal and accounting fees related to business combinations or acquisitions that were not consummated. Integration costs include transition costs associated with organizational restructuring (such as severance and retention payments and recruiting expenses), third-party consulting expenses directly related to the integration of acquired companies (in areas such as cost savings and synergy realization, technology and systems work), and internal costs such as training, travel and labor, reflecting time spent by Company personnel on integration activities and projects. Recurring costs are recorded in general and administrative expense. 

(n) Gains on Sale of Properties

As of January 1, 2018, we began accounting for the sale of real estate properties under Financial Accounting Standards Board, or FASB, Accounting Standards Update, or ASU, No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which provides for revenue recognition based on transfer of ownership. All properties were non-financial real estate assets and thus not businesses which were sold to noncustomers with no performance obligations subsequent to transfer of ownership. During the three months ended March 31, 2018, the Company sold real estate properties for gross proceeds of $139.3 million, and a recorded net gain of $39.4 million.

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2018 and 2017

(o) 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 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, tenant relationship value, goodwill, contingent consideration, accounts receivable and deferred rent receivable, performance-based equity compensation plans and the completeness of accrued liabilities. 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.
(p) Segment and Geographic Information
All of our properties generate similar revenues and expenses related to tenant rent and services and reimbursements and operating expenses. The sale and delivery of our products is consistent across all properties and although services are provided to a wide range of customers, the types of real estate services provided to them are standardized throughout the portfolio. As such, the properties in our portfolio have similar economic characteristics and the nature of the products and services provided to our customers and the method to distribute such services are consistent throughout the portfolio. In addition, the chief operating decision makers evaluate operating performance and make resource allocation decisions for the portfolio as a whole, rather than by property type or revenue stream. Consequently, our properties qualify for aggregation into one reporting segment.
Operating revenues from properties in the United States were $603.5 million and $429.1 million and outside the United States were $140.9 million and $121.4 million for the three months ended March 31, 2018 and 2017, respectively. We had investments in real estate located in the United States of $10.6 billion and $10.5 billion, and outside the United States of $3.3 billion and $3.1 billion, as of March 31, 2018 and December 31, 2017, respectively.
Operating revenues from properties located in the United Kingdom were $75.2 million and $65.2 million, or 10.1% and 11.8% of total operating revenues, for the three months ended March 31, 2018 and 2017, respectively. No other foreign country comprised more than 10% of total operating revenues for each of these periods. We had investments in real estate located in the United Kingdom of $1.8 billion and $1.7 billion, or 12.8% and 12.1% of total long-lived assets, as of March 31, 2018 and December 31, 2017, respectively. No other foreign country comprised more than 10% of total long-lived assets as of March 31, 2018 and December 31, 2017.

(q) New Accounting Pronouncements
New Accounting Standards Adopted

In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". The new standard amends the hedge accounting recognition and presentation requirements in Accounting Standards Codification, or ASC, 815. As permitted by ASU 2017-12, the Company early adopted this standard in the first quarter of 2018 on a prospective basis. Refer to Note 2(h), Derivative Instruments, for our policy related to the adoption of this standard.

In January 2016, the FASB issued ASU No. 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities". The guidance requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and to record changes in instruments specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. The principal effect of ASU 2016-01 on our condensed consolidated financial statements is that, prior to adoption of ASU 2016-01, changes in the fair values of investments in equity securities with readily determinable fair values or redemption values were recognized in other comprehensive income until realized, while under ASU 2016-01 all changes in the fair values of these equity securities are recognized in current earnings. The update is effective for fiscal years beginning after December 15, 2017, and for interim periods therein. We adopted this standard in the first quarter of 2018 and the adoption did not have a material impact on our condensed consolidated financial statements. 

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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2018 and 2017

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", and since that date has issued several additional ASUs intended to clarify certain aspects of ASU 2014-09 and to provide for certain practical expedients entities may elect upon adoption. Collectively, these ASUs outline a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. We adopted Topic 606 in the first quarter of 2018 using the modified retrospective transition method and applied Topic 606 to those contracts that were not completed as of January 1, 2018. The results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be presented under Topic 605. Our financial statements did not recognize a material effect from the cumulative impact of adopting Topic 606 as the new accounting standard does not impact lessor accounting. Refer to Note 2(l), Revenue Recognition, for the updated policy related to the adoption of this standard.
New Accounting Standards Issued but not yet Adopted
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Accounting for leases with a term of 12 months or less will be similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases.
ASU 2016-02 is expected to impact the Company’s consolidated financial statements for leases where the Company is a lessee, primarily for the Company’s data center operating leases, ground leases and administrative office leases, and the Company will be required to record a lease liability and a right of use asset on its condensed consolidated balance sheet at fair value upon adoption. ASU 2016-02 also limits the capitalization of leasing costs to initial direct costs, which will likely result in a reduction to our capitalized leasing costs and an increase in expenses, though the amount of such change is highly dependent upon the leasing compensation structures in place at the time of adoption.
ASU 2016-02 supersedes the previous leases standard, Leases (Topic 840). The standard is effective on January 1, 2019, with early adoption permitted. The new leasing standard requires modified retrospective transition. In March 2018, the FASB affirmed a proposed ASU that would allow entities to elect a simplified transition approach which would require applying the provisions of the new guidance at the effective date as opposed to the earliest period presented under the modified retrospective approach.
A set of practical expedients for implementation, which must be elected as a package and for all leases, may also be elected. These practical expedients include relief from re-assessing lease classification at the adoption date for expired or existing leases, although a right-of-use asset and lease liability would still be recorded for such leases. In March 2018, the FASB affirmed a proposed ASU that would include creating a practical expedient that would provide lessors an option not to separate lease and non-lease components when certain criteria are met and instead account for those components as a single component.
We will be subject to the requirements of Topic 842 as both a lessor and a lessee. We are currently assessing the method of adoption and the impact that ASU 2016-02, and any subsequent amendments, will have on our consolidated financial statements.
In January 2017, the FASB issued guidance codified in ASU Topic 2017-04, "Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the process of measuring the implied value of goodwill, known as step two, from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We do not expect the provisions of ASC 2017-04 to have a material impact on our consolidated financial statements.


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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2018 and 2017

3. Investments in Real Estate
Acquisitions
We had no acquisitions during the three months ended March 31, 2018.

Held for Sale
As of March 31, 2018, we have identified four properties that met the criteria to be classified as held for sale. As of March 31, 2018, the four properties had an aggregate carrying value of $41.7 million within total assets and $1.8 million within total liabilities and are shown as assets held for sale and obligations associated with assets held for sale on the condensed consolidated balance sheet, respectively. As of December 31, 2017, we had identified eight properties that met the criteria to be classified as held for sale. As of December 31, 2017, the eight properties had an aggregate carrying value of $139.5 million within total assets and $5.0 million within total liabilities and are shown as assets held for sale and obligations associated with assets held for sale on the consolidated balance sheet, respectively. The properties are not representative of a significant component of our portfolio, nor do the potential sales represent a significant shift in our strategy.
Dispositions

We sold the following real estate properties during the three months ended March 31, 2018:
Location
 
Metro Area
 
Date Sold
 
Gross Proceeds (in millions)
 
Gain (loss) on sale (in millions)
200 Quannapowitt Parkway
 
Boston
 
January 25, 2018
 
$
15.0

 
$
(0.4
)
34551 Ardenwood Boulevard
 
Silicon Valley
 
February 9, 2018
 
73.3

 
25.3

3065 Gold Camp Drive
 
Sacramento
 
March 14, 2018
 
14.2

 
5.4

11085 Sun Center Drive
 
Sacramento
 
March 14, 2018
 
36.8

 
9.1

 
 
 
 
 
 
$
139.3

 
$
39.4


On April 19, 2018, the Company closed on the sale of a three-property portfolio in Austin, Texas for approximately $48.0 million. The Company expects to recognize a gain on the sale of approximately $12 million in the second quarter of 2018. The properties were classified as held for sale as of March 31, 2018.


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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2018 and 2017

4. Investments in Unconsolidated Joint Ventures
As of March 31, 2018, our investments in unconsolidated joint ventures consist of effective 50% interests in four joint ventures that own data center buildings in Seattle, Hong Kong, Tokyo and Osaka, 20% interests in two joint ventures, one of which owns 10 data center properties with an investment fund managed by Prudential Real Estate Investors (PREI®) and the other which owns one data center property with an affiliate of Griffin Capital Essential Asset REIT, Inc. (GCEAR), and a 17% interest in a joint venture that owns a data center property in Silicon Valley. The Osaka/Tokyo joint venture was formed on November 1, 2017.
The following tables present summarized financial information for our joint ventures as of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017 (unaudited, in thousands):
 
 
As of March 31, 2018
 
Three Months Ended March 31, 2018
2018
Net Investment
in Properties
 
Total Assets
 
Debt
 
Total
Liabilities
 
Equity
 
Revenues
 
Property
Operating
Expense
 
Net
Operating
Income
 
Net Income
Total Unconsolidated Joint Ventures
$
1,053,058

 
$
1,361,412

 
$
726,234

 
$
846,918

 
$
514,494

 
$
51,731

 
$
(18,419
)
 
$
33,312

 
$
15,334

Our investment in and share of equity in earnings of unconsolidated joint ventures
 
 
 
 
 
 
 
 
$
167,564

 
 
 
 
 
 
 
$
7,410

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
Three Months Ended March 31, 2017
2017
Net Investment
in Properties
 
Total Assets
 
Debt
 
Total
Liabilities
 
Equity
 
Revenues
 
Property
Operating
Expense
 
Net
Operating
Income
 
Net Income
Total Unconsolidated Joint Ventures
$
1,061,950

 
$
1,375,006

 
$
712,690

 
$
869,879

 
$
505,127

 
$
35,062

 
$
(10,391
)
 
$
24,671

 
$
11,286

Our investment in and share of equity in earnings of unconsolidated joint ventures
 
 
 
 
 
 
 
 
$
163,477

 
 
 
 
 
 
 
$
5,324


The amounts reflected in the tables above, except for our investment in and share of equity in earnings of unconsolidated joint ventures, are based on the historical financial information of the individual joint ventures. The debt of our unconsolidated joint ventures generally are non-recourse to us, except for customary exceptions pertaining to such matters as intentional misuse of funds, environmental conditions, and material misrepresentations.

Differences between the Company’s investment in the joint ventures and the amount of the underlying equity in net assets of the joint ventures are due to basis differences resulting from the Company’s equity investment recorded at its historical basis versus the fair value of the Company’s contributed interest in the joint ventures. Our proportionate share of the earnings or losses related to these unconsolidated joint ventures is reflected as equity in earnings of unconsolidated joint ventures on the accompanying condensed consolidated income statements.



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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
March 31, 2018 and 2017

5. Acquired Intangible Assets and Liabilities

The following summarizes our acquired intangible assets (real estate intangibles, comprised of acquired in-place lease value and tenant relationship value along with acquired above-market lease value) and intangible liabilities (acquired below-market lease value) as of March 31, 2018 and December 31, 2017.
 
 
Balance as of
(Amounts in thousands)
March 31, 2018

December 31, 2017
Real Estate Intangibles:
 
 
 
Acquired in-place lease value:



Gross amount
$
1,478,934


$
1,473,515

Accumulated amortization
(666,047
)

(613,948
)
Net
$
812,887


$
859,567

Tenant relationship value: