Edgar Filing: Digital Realty Trust, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended June 30, 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 August 3, 2018
Common Stock, $.01 par value per share		206,097,243

Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 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 June 30, 2018, Digital Realty Trust, Inc. owned an approximate 96.0% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 4.0% 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 June 30, 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.

Table of Contents

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.

Table of Contents

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

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2018

TABLE OF CONTENTS



		Page Number
PART I.	FINANCIAL INFORMATION

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

	Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017	5

	Condensed Consolidated Income Statements for the three and six months ended June 30, 2018 and 2017 (unaudited)	6

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 (unaudited)	7

	Condensed Consolidated Statement of Equity for the six months ended June 30, 2018 (unaudited)	8

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)	9

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

	Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017	11

	Condensed Consolidated Income Statements for the three and six months ended June 30, 2018 and 2017 (unaudited)	12

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 (unaudited)	13

	Condensed Consolidated Statement of Capital for the six months ended June 30, 2018 (unaudited)	14

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)	15

	Notes to Condensed Consolidated Financial Statements of Digital Realty Trust, Inc. and Digital Realty Trust, L.P.	17

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	51

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	77

ITEM 4.	Controls and Procedures (Digital Realty Trust, Inc.)	78

	Controls and Procedures (Digital Realty Trust, L.P.)	78

PART II.	OTHER INFORMATION	80

ITEM 1.	Legal Proceedings	80

ITEM 1A.	Risk Factors	80

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	80

ITEM 3.	Defaults Upon Senior Securities	80

ITEM 4.	Mine Safety Disclosures	80

ITEM 5.	Other Information	80

ITEM 6.	Exhibits	81

	Signatures	82

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)



	June 30, 2018			December 31, 2017
	(unaudited)
ASSETS
Investments in real estate:
Properties:
Land	$	1,202,174		$	1,136,341
Acquired ground leases	10,879			11,150
Buildings and improvements	15,781,203			15,215,405
Tenant improvements	561,048			553,040
Total investments in properties	17,555,304			16,915,936
Accumulated depreciation and amortization	(3,588,124		)	(3,238,227		)
Net investments in properties	13,967,180			13,677,709
Investments in unconsolidated joint ventures	167,306			163,477
Net investments in real estate	14,134,486			13,841,186
Cash and cash equivalents	17,589			51
Accounts and other receivables, net of allowance for doubtful accounts of $8,825 and $6,737 as of June 30, 2018 and December 31, 2017, respectively	282,287			276,347
Deferred rent	445,766			430,026
Acquired above-market leases, net	150,084			184,375
Goodwill	3,378,325			3,389,595
Acquired in-place lease value, deferred leasing costs and intangibles, net	2,823,275			2,998,806
Restricted cash	9,443			13,130
Assets held for sale	—			139,538
Other assets	170,168			131,291
Total assets	$	21,411,423		$	21,404,345
LIABILITIES AND EQUITY
Global revolving credit facility, net	$	466,971		$	550,946
Unsecured term loan, net	1,376,784			1,420,333
Unsecured senior notes, net	7,156,084			6,570,757
Mortgage loans, including premiums, net	106,245			106,582
Accounts payable and other accrued liabilities	1,031,794			980,218
Accrued dividends and distributions	—			199,761
Acquired below-market leases, net	216,520			249,465
Security deposits and prepaid rents	207,292			217,898
Obligations associated with assets held for sale	—			5,033
Total liabilities	10,561,690			10,300,993

Redeemable noncontrolling interests – operating partnership	52,805			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 June 30, 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, 206,055,117 and 205,470,300 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively	2,047			2,044
Additional paid-in capital	11,310,132			11,261,461
Accumulated dividends in excess of earnings	(2,314,291		)	(2,055,552		)
Accumulated other comprehensive loss, net	(107,070		)	(108,432		)
Total stockholders’ equity	10,140,378			10,349,081
Noncontrolling Interests:
Noncontrolling interests in operating partnership	654,261			698,126
Noncontrolling interests in consolidated joint ventures	2,289			2,243
Total noncontrolling interests	656,550			700,369
Total equity	10,796,928			11,049,450
Total liabilities and equity	$	21,411,423		$	21,404,345

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Operating Revenues:
Rental and other services	$	596,326		$	470,877		$	1,188,624		$	932,228
Tenant reimbursements	155,723			93,342			305,802			180,630
Fee income	2,343			1,429			3,476			3,324
Other	527			341			1,385			376
Total operating revenues	754,919			565,989			1,499,287			1,116,558
Operating Expenses:
Rental property operating and maintenance	230,322			174,716			455,962			344,055
Property taxes	27,284			28,161			62,547			55,080
Insurance	2,606			2,576			6,337			5,168
Depreciation and amortization	298,788			178,111			593,577			354,577
General and administrative	46,099			37,509			82,622			72,156
Transactions and integration	5,606			14,235			9,784			17,558
Other	152			24			583			24
Total operating expenses	610,857			435,332			1,211,412			848,618
Operating income	144,062			130,657			287,875			267,940
Other Income (Expenses):
Equity in earnings of unconsolidated joint ventures	7,438			8,388			14,848			13,712
Gain (loss) on sale of properties	14,192			380			53,465			(142		)
Interest and other income	3,398			367			3,356			518
Interest expense	(78,810		)	(57,582		)	(155,795		)	(113,032		)
Tax expense	(2,121		)	(2,639		)	(5,495		)	(4,862		)
Net income	88,159			79,571			198,254			164,134
Net income attributable to noncontrolling interests	(2,696		)	(920		)	(6,164		)	(1,945		)
Net income attributable to Digital Realty Trust, Inc.	85,463			78,651			192,090			162,189
Preferred stock dividends	(20,329		)	(14,505		)	(40,658		)	(31,898		)
Issuance costs associated with redeemed preferred stock	—			(6,309		)	—			(6,309		)
Net income available to common stockholders	$	65,134		$	57,837		$	151,432		$	123,982
Net income per share available to common stockholders:
Basic	$	0.32		$	0.36		$	0.74		$	0.77
Diluted	$	0.32		$	0.36		$	0.73		$	0.77
Weighted average common shares outstanding:
Basic	205,956,005			160,832,889			205,835,757			160,069,201
Diluted	206,563,079			161,781,867			206,460,170			161,059,527

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net income	$	88,159		$	79,571		$	198,254		$	164,134
Other comprehensive income (loss):
Foreign currency translation adjustments	(7,233		)	13,677			(10,976		)	30,255
Increase (decrease) in fair value of interest rate swaps and foreign currency hedges	4,795			(2,328		)	13,411			(6,692		)
Reclassification to interest expense from interest rate swaps	(783		)	647			(1,018		)	1,677
Comprehensive income	84,938			91,567			199,671			189,374
Comprehensive income attributable to noncontrolling interests	(2,571		)	(1,085		)	(6,219		)	(2,289		)
Comprehensive income attributable to Digital Realty Trust, Inc.	$	82,367		$	90,482		$	193,452		$	187,085

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

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	—			—		406,639		4			35,823			—			—			35,827			(35,827		)	—			(35,827		)	—
Issuance of unvested restricted stock, net of forfeitures	—			—		193,118		—			—			—			—			—			—			—			—			—
Issuance of common stock, net of offering costs	—			—		—		—			(652		)	—			—			(652		)	—			—			—			(652		)
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	—			—		—		—			17,458			—			—			17,458			—			—			—			17,458
Reclassification of vested share-based awards	—			—		—		—			(2,847		)	—			—			(2,847		)	2,847			—			2,847			—
Adjustment to redeemable noncontrolling interests—operating partnership	(1,097		)	—		—		—			1,097			—			—			1,097			—			—			—			1,097
Dividends declared on preferred stock	—			—		—		—			—			(40,658		)	—			(40,658		)	—			—			—			(40,658		)
Dividends and distributions on common stock and common and incentive units	—			—		—		—			—			(416,086		)	—			(416,086		)	(17,120		)	—			(17,120		)	(433,206		)
Contributions from noncontrolling interests in consolidated joint ventures, net of distributions	—			—		—		—			—			—			—			—			—			62			62			62
Cumulative effect adjustment from adoption of new accounting standard	—			—		—		—			—			5,915			—			5,915			—			—			—			5,915
Net income	—			—		—		—			—			192,090			—			192,090			6,180			(16		)	6,164			198,254
Other comprehensive loss—foreign currency translation adjustments	—			—		—		—			—			—			(10,550		)	(10,550		)	(426		)	—			(426		)	(10,976		)
Other comprehensive income—fair value of interest rate swaps and foreign currency hedges	—			—		—		—			—			—			12,891			12,891			520			—			520			13,411
Other comprehensive loss—reclassification of accumulated other comprehensive income to interest expense	—			—		—		—			—			—			(979		)	(979		)	(39		)	—			(39		)	(1,018		)
Balance as of June 30, 2018	$	52,805		$	1,249,560	206,055,117		$	2,047		$	11,310,132		$	(2,314,291	)	$	(107,070	)	$	10,140,378		$	654,261		$	2,289		$	656,550		$	10,796,928

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net income	$	198,254		$	164,134
Adjustments to reconcile net income to net cash provided by operating activities:
(Gain) loss on sale of properties	(53,465		)	142
Unrealized gain on equity investment	(3,136		)	—
Equity in earnings of unconsolidated joint ventures	(14,848		)	(13,712		)
Distributions from unconsolidated joint ventures	10,422			21,376
Write-off of net assets due to early lease terminations	583			24
Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases	378,734			264,125
Amortization of acquired in-place lease value and deferred leasing costs	214,843			90,452
Amortization of share-based compensation	14,828			10,125
Non-cash amortization of terminated swaps	558			602
Allowance for (recovery of) doubtful accounts	2,120			(2,555		)
Amortization of deferred financing costs	6,013			4,956
Amortization of debt discount/premium	1,711			1,363
Amortization of acquired above-market leases and acquired below-market leases, net	13,452			(3,978		)
Changes in assets and liabilities:
Accounts and other receivables	(9,312		)	(23,711		)
Deferred rent	(18,955		)	(6,198		)
Deferred leasing costs	(11,946		)	(8,143		)
Other assets	2,959			(5,357		)
Accounts payable and other accrued liabilities	(50,252		)	17,083
Security deposits and prepaid rents	(9,475		)	8,584
Net cash provided by operating activities	673,088			519,312
Cash flows from investing activities:
Acquisitions of real estate	(76,286		)	(34,829		)
Proceeds from sale of properties, net of sales costs	195,385			—
Excess proceeds from forward contracts	—			51,308
Investments in unconsolidated joint ventures	(348		)	(5,749		)
Prepaid construction costs and other investments	(27,869		)	—
Improvements to investments in real estate	(613,841		)	(476,070		)
Improvement advances to tenants	(25,054		)	(19,929		)
Collection of improvement advances to tenants	22,433			21,805
Net cash used in investing activities	(525,580		)	(463,464		)

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)



	Six Months Ended June 30,
	2018			2017
Cash flows from financing activities:
Borrowings on global revolving credit facility	$	773,811		$	1,141,370
Repayments on global revolving credit facility	(853,697		)	(801,837		)
Repayments on unsecured term loan	(21,376		)	—
Borrowings on unsecured senior notes	649,038			140,463
Repayments on unsecured notes	—			(50,000		)
Principal payments on mortgage loans	(290		)	(268		)
Payment of loan fees and costs	(6,461		)	(777		)
Capital contributions from (distributions paid to) noncontrolling interests in consolidated joint ventures, net	62			(262		)
Taxes paid related to net settlement of stock-based compensation awards	(4,718		)	—
Proceeds from common and preferred stock offerings, net	(652		)	211,887
Redemption of preferred stock	—			(182,500		)
Proceeds from equity plans	2,509			2,606
Proceeds from forward swap contract	1,560			—
Payment of dividends to preferred stockholders	(40,658		)	(31,898		)
Payment of dividends to common stockholders and distributions to noncontrolling interests in operating partnership	(632,967		)	(448,219		)
Net cash used in financing activities	(133,839		)	(19,435		)
Net increase in cash, cash equivalents and restricted cash	13,669			36,413
Effect of exchange rate changes on cash, cash equivalents and restricted cash	182			(17,135		)
Cash, cash equivalents and restricted cash at beginning of period	13,181			22,036
Cash, cash equivalents and restricted cash at end of period	$	27,032		$	41,314



Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	146,650		$	114,352
Cash paid for income taxes	5,510			5,364
Supplementary disclosure of noncash investing and financing activities:
Change in net assets related to foreign currency translation adjustments	$	(10,976	)	$	30,255
Increase (decrease) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps and foreign currency hedges	13,411			(6,692		)
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	35,827			6,429
Accrual for additions to investments in real estate and tenant improvement advances included in accounts payable and accrued expenses	202,377			141,590
Addition to leasehold improvements pursuant to capital lease obligation	73,873			—

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except unit data)



	June 30, 2018			December 31, 2017
	(unaudited)
ASSETS
Investments in real estate:
Properties:
Land	$	1,202,174		$	1,136,341
Acquired ground leases	10,879			11,150
Buildings and improvements	15,781,203			15,215,405
Tenant improvements	561,048			553,040
Total investments in properties	17,555,304			16,915,936
Accumulated depreciation and amortization	(3,588,124		)	(3,238,227		)
Net investments in properties	13,967,180			13,677,709
Investments in unconsolidated joint ventures	167,306			163,477
Net investments in real estate	14,134,486			13,841,186
Cash and cash equivalents	17,589			51
Accounts and other receivables, net of allowance for doubtful accounts of $8,825 and $6,737 as of June 30, 2018 and December 31, 2017, respectively	282,287			276,347
Deferred rent	445,766			430,026
Acquired above-market leases, net	150,084			184,375
Goodwill	3,378,325			3,389,595
Acquired in-place lease value, deferred leasing costs and intangibles, net	2,823,275			2,998,806
Restricted cash	9,443			13,130
Assets held for sale	—			139,538
Other assets	170,168			131,291
Total assets	$	21,411,423		$	21,404,345
LIABILITIES AND CAPITAL
Global revolving credit facility, net	$	466,971		$	550,946
Unsecured term loan, net	1,376,784			1,420,333
Unsecured senior notes, net	7,156,084			6,570,757
Mortgage loans, including premiums, net	106,245			106,582
Accounts payable and other accrued liabilities	1,031,794			980,218
Accrued dividends and distributions	—			199,761
Acquired below-market leases, net	216,520			249,465
Security deposits and prepaid rents	207,292			217,898
Obligations associated with assets held for sale	—			5,033
Total liabilities	10,561,690			10,300,993
Redeemable limited partner common units	52,805			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 June 30, 2018 and December 31, 2017, respectively	1,249,560			1,249,560
Common units, 206,055,117 and 205,470,300 units issued and outstanding as of June 30, 2018 and December 31, 2017, respectively	8,997,888			9,207,953
Limited Partners, 8,498,032 and 8,489,095 units issued and outstanding as of June 30, 2018 and December 31, 2017, respectively	658,659			702,579
Accumulated other comprehensive loss	(111,468		)	(112,885		)
Total partners’ capital	10,794,639			11,047,207
Noncontrolling interests in consolidated joint ventures	2,289			2,243
Total capital	10,796,928			11,049,450
Total liabilities and capital	$	21,411,423		$	21,404,345

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Operating Revenues:
Rental and other services	$	596,326		$	470,877		$	1,188,624		$	932,228
Tenant reimbursements	155,723			93,342			305,802			180,630
Fee income	2,343			1,429			3,476			3,324
Other	527			341			1,385			376
Total operating revenues	754,919			565,989			1,499,287			1,116,558
Operating Expenses:
Rental property operating and maintenance	230,322			174,716			455,962			344,055
Property taxes	27,284			28,161			62,547			55,080
Insurance	2,606			2,576			6,337			5,168
Depreciation and amortization	298,788			178,111			593,577			354,577
General and administrative	46,099			37,509			82,622			72,156
Transactions and integration	5,606			14,235			9,784			17,558
Other	152			24			583			24
Total operating expenses	610,857			435,332			1,211,412			848,618
Operating income	144,062			130,657			287,875			267,940
Other Income (Expenses):
Equity in earnings of unconsolidated joint ventures	7,438			8,388			14,848			13,712
Gain (loss) on sale of properties	14,192			380			53,465			(142		)
Interest and other income	3,398			367			3,356			518
Interest expense	(78,810		)	(57,582		)	(155,795		)	(113,032		)
Tax expense	(2,121		)	(2,639		)	(5,495		)	(4,862		)
Net income	88,159			79,571			198,254			164,134
Net (loss) income attributable to noncontrolling interests in consolidated joint ventures	4			(113		)	16			(234		)
Net income attributable to Digital Realty Trust, L.P.	88,163			79,458			198,270			163,900
Preferred units distributions	(20,329		)	(14,505		)	(40,658		)	(31,898		)
Issuance costs associated with redeemed preferred units	—			(6,309		)	—			(6,309		)
Net income available to common unitholders	$	67,834		$	58,644		$	157,612		$	125,693
Net income per unit available to common unitholders:
Basic	$	0.32		$	0.36		$	0.74		$	0.77
Diluted	$	0.32		$	0.36		$	0.73		$	0.77
Weighted average common units outstanding:
Basic	214,288,199			163,077,599			214,149,188			162,280,678
Diluted	214,895,273			164,026,577			214,773,601			163,271,004

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net income	$	88,159		$	79,571		$	198,254		$	164,134
Other comprehensive income (loss):
Foreign currency translation adjustments	(7,233		)	13,677			(10,976		)	30,255
(Decrease) increase in fair value of interest rate swaps and foreign currency hedges	4,795			(2,328		)	13,411			(6,692		)
Reclassification to interest expense from interest rate swaps	(783		)	647			(1,018		)	1,677
Comprehensive income	$	84,938		$	91,567		$	199,671		$	189,374
Comprehensive loss (income) attributable to noncontrolling interests in consolidated joint ventures	4			(113		)	16			(234		)
Comprehensive income attributable to Digital Realty Trust, L.P.	$	84,942		$	91,454		$	199,687		$	189,140

See accompanying notes to the condensed consolidated financial statements.

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	—			—	—			406,639		35,827			(406,639	)	(35,827		)	—			—			—
Issuance of unvested restricted common units	—			—	—			193,118		—			—		—			—			—			—
Issuance of common units, net of offering costs	—			—	—			—		(652		)	—		—			—			—			(652		)
Issuance of common units, net of forfeitures	—			—	—			—		—			415,576		—			—			—			—
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	—			—	—			—		17,458			—		—			—			—			17,458
Reclassification of vested share-based awards	—			—	—			—		(2,847		)	—		2,847			—			—			—
Adjustment to redeemable partnership units	(1,097		)	—	—			—		1,097			—		—			—			—			1,097
Distributions	—			—	(40,658		)	—		(416,086		)	—		(17,120		)	—			—			(473,864		)
Contributions from noncontrolling interests in consolidated joint ventures, net of distributions	—			—	—			—		—			—		—			—			62			62
Cumulative effect adjustment from adoption of new accounting standard	—			—	—			—		5,915			—		—			—			—			5,915
Net income	—			—	40,658			—		151,432			—		6,180			—			(16		)	198,254
Other comprehensive loss—foreign currency translation adjustments	—			—	—			—		—			—		—			(10,976		)	—			(10,976		)
Other comprehensive income—fair value of interest rate swaps and foreign currency hedges	—			—	—			—		—			—		—			13,411			—			13,411
Other comprehensive loss—reclassification of accumulated other comprehensive income to interest expense	—			—	—			—		—			—		—			(1,018		)	—			(1,018		)
Balance as of June 30, 2018	$	52,805		50,650,000	$	1,249,560		206,055,117		$	8,997,888		8,498,032		$	658,659		$	(111,468	)	$	2,289		$	10,796,928

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net income	$	198,254		$	164,134
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of properties	(53,465		)	142
Unrealized gain on equity investment	(3,136		)	—
Equity in earnings of unconsolidated joint ventures	(14,848		)	(13,712		)
Distributions from unconsolidated joint ventures	10,422			21,376
Write-off of net assets due to early lease terminations	583			24
Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases	378,734			264,125
Amortization of debt discount/premium	1,711			1,363
Amortization of acquired in-place lease value and deferred leasing costs	214,843			90,452
Amortization of share-based compensation	14,828			10,125
Non-cash amortization of terminated swaps	558			602
Allowance for (recovery of) doubtful accounts	2,120			(2,555		)
Amortization of deferred financing costs	6,013			4,956
Amortization of acquired above-market leases and acquired below-market leases, net	13,452			(3,978		)
Changes in assets and liabilities:
Accounts and other receivables	(9,312		)	(23,711		)
Deferred rent	(18,955		)	(6,198		)
Deferred leasing costs	(11,946		)	(8,143		)
Other assets	2,959			(5,357		)
Accounts payable and other accrued liabilities	(50,252		)	17,083
Security deposits and prepaid rents	(9,475		)	8,584
Net cash provided by operating activities	673,088			519,312
Cash flows from investing activities:
Acquisitions of real estate	(76,286		)	(34,829		)
Proceeds from sale of properties, net of sales costs	195,385			—
Excess proceeds from forward contracts	—			51,308
Investments in unconsolidated joint ventures	(348		)	(5,749		)
Prepaid construction costs and other investments	(27,869		)	—
Improvements to investments in real estate	(613,841		)	(476,070		)
Improvement advances to tenants	(25,054		)	(19,929		)
Collection of improvement advances to tenants	22,433			21,805
Net cash used in investing activities	(525,580		)	(463,464		)

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)



	Six Months Ended June 30,
	2018			2017
Cash flows from financing activities:
Borrowings on global revolving credit facility	$	773,811		$	1,141,370
Repayments on global revolving credit facility	(853,697		)	(801,837		)
Repayments on unsecured term loan	(21,376		)	—
Borrowings on unsecured senior notes	649,038			140,463
Repayments on unsecured notes	—			(50,000		)
Principal payments on mortgage loans	(290		)	(268		)
Payment of loan fees and costs	(6,461		)	(777		)
Capital contributions from (distributions paid to) noncontrolling interests in consolidated joint ventures, net	62			(262		)
Taxes paid related to net settlement of stock-based compensation awards	(4,718		)	—
General partner contributions, net	1,857			31,993
Proceeds from forward swap contract	1,560			—
Payment of distributions to preferred unitholders	(40,658		)	(31,898		)
Payment of distributions to common unitholders	(632,967		)	(448,219		)
Net cash used in financing activities	(133,839		)	(19,435		)
Net increase in cash, cash equivalents and restricted cash	13,669			36,413
Effect of exchange rate changes on cash, cash equivalents and restricted cash	182			(17,135		)
Cash, cash equivalents and restricted cash at beginning of period	13,181			22,036
Cash, cash equivalents and restricted cash at end of period	$	27,032		$	41,314



Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized	$	146,650		$	114,352
Cash paid for income taxes	5,510			5,364
Supplementary disclosure of noncash investing and financing activities:
Change in net assets related to foreign currency translation adjustments	$	(10,976	)	$	30,255
Increase (decrease) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps and foreign currency hedges	13,411			(6,692		)
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	202,377			141,590
Addition to leasehold improvements pursuant to capital lease obligation	73,873			—

See accompanying notes to the condensed consolidated financial statements.

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2018 and December 31, 2017 is as follows:



	Data Centers
	As of June 30, 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	132	—	14	146	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	180	—	18	198	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 June 30, 2018, Digital Realty Trust, Inc. owns a 96.0% 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.

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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.

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 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 June 30, 2018, cash equivalents consist of investments in money market instruments.

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 and six months ended June 30, 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.

Table of Contents

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2018 and 2017

During the three months ended June 30, 2018 and 2017, we capitalized interest of approximately $8.2 million and $3.8 million, respectively. We capitalized interest of approximately $15.5 million and $8.4 million during the six months ended June 30, 2018 and 2017, respectively. We capitalized amounts relating to compensation and other overhead expense of employees direct and incremental to construction and successful leasing activities of approximately $17.4 million and $18.9 million during the three months ended June 30, 2018 and 2017, respectively, and approximately $35.7 million and $37.6 million during the six months ended June 30, 2018 and 2017, respectively. In addition to capitalized cash compensation, approximately $5.5 million and $6.1 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 six months ended June 30, 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 six months ended June 30, 2018 (in thousands):

Balance as of December 31, 2017

Impact of Change in Foreign Exchange Rates

Balance as of June 30, 2018

Merger / Portfolio Acquisition