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 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



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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.



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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 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 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)
 
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.

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except share and per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
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.

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DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
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.


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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
 

 

 
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.

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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.












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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.

10

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.


11

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except unit and per unit data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
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.


12

Table of Contents

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
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.


13

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.

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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.

15

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.

16

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.

17

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.

18

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.
(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 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.

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Table of Contents
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 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