10-K 1 d263690d10k.htm FORM 10-K Form 10-K
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2011

¨ 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)

560 Mission Street, Suite 2900

San Francisco, CA

  94105
(Address of principal executive offices)   (Zip Code)

(415) 738-6500

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

    

Title of each class

 

    Name of each exchange on which registered    

Digital Realty Trust, Inc.   Common stock, $0.01 par value per share   New York Stock Exchange
  Series E cumulative redeemable preferred
stock, $0.01 par value per share
  New York Stock Exchange
Digital Realty Trust, L.P.   None   None

 

Securities registered pursuant to Section 12(g) of the Act:

Digital Realty Trust, Inc.    None
Digital Realty Trust, L.P.    Common Units of
Partnership Interest

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Digital Realty Trust, Inc.

   Yes  x    No   ¨

Digital Realty Trust, L.P.

   Yes  ¨    No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Digital Realty Trust, Inc.

   Yes  ¨    No   x

Digital Realty Trust, L.P.

   Yes  ¨    No   x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

Digital Realty Trust, Inc.:

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

Digital Realty Trust, L.P.:

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

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

Digital Realty Trust, Inc.

   Yes  ¨    No   x

Digital Realty Trust, L.P.

   Yes  ¨    No   x

The aggregate market value of the common equity held by non-affiliates of Digital Realty Trust, Inc. as of June 30, 2011 totaled approximately $6.1 billion based on the closing price for Digital Realty Trust, Inc.’s common stock on that day as reported by the New York Stock Exchange. Such value excludes common stock held by executive officers, directors and 10% or greater stockholders as of June 30, 2011. The identification of 10% or greater stockholders as of June 30, 2011 is based on Schedule 13G and amended Schedule 13G reports publicly filed before June 30, 2011. This calculation does not reflect a determination that such parties are affiliates for any other purposes.

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

Digital Realty Trust, Inc.:

Class

   Outstanding at February 17, 2012  

Common Stock, $.01 par value per share

     107,164,306   

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference portions of Digital Realty Trust, Inc.’s Proxy Statement for its 2012 Annual Meeting of Stockholders which the registrants anticipate will be filed no later than 120 days after the end of its fiscal year pursuant to Regulation 14A.

 

 

 


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EXPLANATORY NOTE

This report combines the annual reports on Form 10-K for the year ended December 31, 2011 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 December 31, 2011, Digital Realty Trust, Inc. owned an approximate 95.6% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 4.4% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of Digital Realty Trust, Inc. As of December 31, 2011, 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 annual reports on Form 10-K of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. into this single report results in the following benefits:

 

   

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

 

   

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

 

   

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

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

The presentation of noncontrolling interests in operating partnership, stockholders’ equity and partners’ capital are the main areas of difference between the 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 consolidated financial statements and as noncontrolling interests in operating partnership within equity in Digital Realty Trust, Inc.’s 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 consolidated financial statements and as preferred stock, common stock, additional paid-in capital and accumulated dividends in excess of earnings within stockholders’


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equity in Digital Realty Trust, Inc.’s consolidated financial statements. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity issued at the Digital Realty Trust, Inc. and the Digital Realty Trust, L.P. levels.

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

 

   

consolidated financial statements;

 

   

the following notes to the consolidated financial statements:

 

   

Debt of the company and Debt of the operating partnership;

 

   

Income per Share and Income per Unit;

 

   

Equity and Accumulated Other Comprehensive Loss, Net of the company and Capital and Accumulated Other Comprehensive Loss of the operating partnership; and

 

   

Quarterly Financial Information;

 

   

Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities; and

 

   

Selected Financial Data.

This report also includes separate Item 9A. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of the company and the operating partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the company and the operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

In order to highlight the differences between the company and the operating partnership, the separate sections in this report for the company and the operating partnership specifically refer to the company and the operating partnership. In the sections that combine disclosure of the company and the operating partnership, this report refers to actions or holdings as being actions or holdings of the company. Although the operating partnership is generally the entity that enters into contracts and joint ventures and holds assets and debt, reference to the company is appropriate because the business is one enterprise and the company operates the business through the operating partnership.

As general partner with control of the operating partnership, Digital Realty Trust, Inc. consolidates the operating partnership for financial reporting purposes, and it does not have significant assets other than its investment in the operating partnership. Therefore, the assets and liabilities of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. are the same on their respective 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-K

FOR THE YEAR ENDED DECEMBER 31, 2011

TABLE OF CONTENTS

 

         PAGE NO.  

PART I.

  

ITEM 1.

 

Business

     1   

ITEM 1A.

 

Risk Factors

     8   

ITEM 1B.

 

Unresolved Staff Comments

     33   

ITEM 2.

 

Properties

     33   

ITEM 3.

 

Legal Proceedings

     41   

ITEM 4.

 

Mine Safety Disclosures

     41   

PART II.

  

ITEM 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     42   

ITEM 6.

 

Selected Financial Data

     45   

ITEM 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     50   

ITEM 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

     83   

ITEM 8.

 

Financial Statements and Supplementary Data

     85   

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     168   

ITEM 9A.

 

Controls and Procedures

     168   

ITEM 9B.

 

Other Information

     169   

PART III.

  

ITEM 10.

 

Directors, Executive Officers and Corporate Governance

     170   

ITEM 11.

 

Executive Compensation

     170   

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     170   

ITEM 13.

 

Certain Relationships and Related Transactions and Director Independence

     170   

ITEM 14.

 

Principal Accounting Fees and Services

     170   

PART IV.

  

ITEM 15.

 

Exhibits and Financial Statement Schedules

     171   
SIGNATURES      177   
EXHIBIT INDEX      181   


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PART I

 

ITEM 1. BUSINESS

General

We own, acquire, develop, redevelop and manage technology-related real estate. We target high-quality, strategically located properties containing applications and operations critical to the day-to-day operations of technology industry tenants and corporate enterprise datacenter users, including the information technology, or IT, departments of Fortune 100 and financial services companies. Our tenant base is diversified within the technology industry and reflects a broad spectrum of regional, national and international tenants that are leaders in their respective areas. Digital Realty Trust, L.P., a Maryland limited partnership, is the entity through which Digital Realty Trust, Inc., a Maryland corporation, conducts its business and owns its assets. Digital Realty Trust, Inc. operates as a REIT for federal income tax purposes.

At December 31, 2011, we owned 101 properties, excluding three properties held as investments in unconsolidated joint ventures, of which 85 are located throughout North America, 15 are located in Europe and one is located in Asia. Our portfolio is diversified in major markets where corporate datacenter and technology tenants are concentrated, including the Boston, Chicago, Dallas, Los Angeles, New York Metro, Northern Virginia, Phoenix, San Francisco and Silicon Valley metropolitan areas in the United States, Amsterdam, Dublin, London and Paris markets in Europe and Singapore, Sydney and Melbourne markets in the Asia Pacific region. Our properties contain a total of approximately 18.3 million net rentable square feet, including approximately 2.4 million square feet held for redevelopment. A significant component of our current and future internal growth is anticipated through the development of our existing space held for redevelopment and through acquisitions of new properties. As of December 31, 2011, our portfolio, excluding space held for redevelopment, was approximately 94.8% leased. The types of properties within our focus include:

 

   

Internet gateway datacenters, which serve as hubs for Internet and data communications within and between major metropolitan areas;

 

   

Corporate datacenters, which provide secure, continuously available environments for the storage and processing of critical electronic information. Data centers are used for disaster recovery purposes, transaction processing and to house corporate IT operations;

 

   

Technology manufacturing properties, which contain highly specialized manufacturing environments for such purposes as semiconductor manufacturing and specialty pharmaceutical manufacturing; and

 

   

Regional or national offices of technology companies that are located in our target markets.

Unlike traditional office and flex/research and development space, the location of and improvements to our facilities are generally essential to our tenants’ businesses, which we believe results in high occupancy levels, long lease terms and low tenant turnover. In addition, many of our properties have tenant improvements that have been installed at our tenants’ expense. The tenant improvements in our facilities are generally readily adaptable for use by similar tenants.

Digital Realty Trust, Inc. was incorporated in the state of Maryland on March 9, 2004. Digital Realty Trust, L.P. was organized in the state of Maryland on July 21, 2004. Our principal executive offices are located at 560 Mission Street, Suite 2900, San Francisco, California 94105. Our telephone number at that location is (415) 738-6500. Our website is located at www.digitalrealty.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this annual report or any other report or document we file with or furnish to the U.S. Securities and Exchange Commission, or the SEC.

Recent Developments

On November 3, 2011, the operating partnership together with its subsidiaries, Digital Realty Datafirm, LLC, Digital Realty Datafirm 2, LLC, Digital Luxembourg II S.a.r.l, Digital Luxembourg III S.a.r.l, Digital

 

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Realty (Paris 2) SCI, and Digital Singapore Jurong East Pte. Ltd, as borrowers, and Digital Realty Trust, Inc. together with the operating partnership as guarantors, the banks, financial institutions and other institutional lenders listed therein, as the initial lenders, each issuing bank and swing line bank as listed therein, Citibank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, Citigroup Global Markets Inc. and Merrill Lynch, Pierce Fenner & Smith Incorporated, as joint lead arrangers and joint book running managers, Credit Suisse AG, Deutsche Bank Securities Inc., Goldman Sachs Bank USA, JP Morgan Chase Bank, N.A., Morgan Stanley Bank, N.A., Royal Bank of Canada and the Royal Bank of Scotland Plc, as co-documentation agents, and Barclays Bank Plc, Compass Bank, Sumitomo Mitsui Banking Corporation, U.S. Bank National Association, The Bank of Nova Scotia and HSBC Bank USA, N.A., as senior managing agents, entered into a Global Senior Credit Agreement for a $1.5 billion unsecured revolving credit facility, which we refer to as the global revolving credit facility, that replaced the $750 million corporate revolving credit facility executed on August 31, 2007, as previously amended, and the $100 million US Dollar equivalent Asia Pacific revolving credit facility executed on August 18, 2011. The global revolving credit facility provides for borrowings in Australian Dollars, British Pounds Sterling, Canadian Dollars, Euros, Hong Kong Dollars, Japanese Yen, Singapore Dollars, Swiss Francs and US Dollars, and includes the ability to add additional currencies in the future. The global revolving credit facility matures in November 2015 with a one-year extension option. In addition, we have the ability from time to time to increase the size of the global revolving credit facility to up to $2.25 billion, subject to receipt of lender commitments and other conditions precedent. The interest rate for borrowings under the expanded facility equals the applicable index plus a margin which is based on the credit rating of our long-term debt and is currently 125 basis points. An annual facility fee on the unused portion of the facility, based on the credit rating of our long-term debt and currently 25 basis points, is payable quarterly. Borrowings under the global revolving credit facility are guaranteed by Digital Realty Trust, Inc. and the operating partnership.

On November 3, 2011, concurrent with the entry into the global revolving credit facility, the operating partnership and Digital Realty Trust, Inc. and the other subsidiary guarantors set forth therein entered into an Amended and Restated Note Purchase and Private Shelf Agreement, which we refer to as the Prudential shelf facility, with Prudential Investment Management, Inc. and certain of its affiliates, or, collectively, Prudential, to conform the restrictive and financial covenants of the original Prudential shelf facility that apply to the outstanding Series B, C, D, E and F Notes under the facility to those in the global revolving credit facility and, subject to the completion of specified conditions, to authorize the potential issuance and sale of up to $50.0 million of additional senior unsecured fixed-rate term notes.

On December 15, 2011, we completed the acquisition of a datacenter in Atlanta, Georgia for approximately $63.0 million. The acquisition was financed with borrowings under our global revolving credit facility.

On December 22, 2011, we completed the acquisition of a property in Northern Virginia for approximately $2.8 million. The property consists of a 100% occupied datacenter along with developable land adjacent to the datacenter. The property was subsequently contributed to a joint venture in February 2012.

On December 28, 2011, we completed the acquisition of a datacenter in San Francisco, California for approximately $85.0 million. The purchase price includes the assumption of a $47.6 million mortgage loan. The acquisition was financed with borrowings under our global revolving credit facility.

On January 18, 2012, we repaid at maturity the secured debt on the 114 Rue Ambroise Croizat and Unit 9, Blanchardstown Corporate Park properties totaling approximately €56.7 million (or $72.9 million based on the rate of exchange on January 18, 2012). We financed the repayment with borrowings under our global revolving credit facility.

On February 14, 2012, Digital Realty Trust, Inc.’s board of directors adopted the Fourth Amended and Restated Bylaws, effective as of that date, which changes the voting standard for an uncontested election of directors from a plurality vote standard to a majority vote standard.

 

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On February 14, 2012, we declared the following dividends per share. The operating partnership will make an equivalent distribution per unit.

 

Share Class

   Series C
Preferred Stock
     Series D
Preferred Stock
     Series E
Preferred Stock
     Common stock
and  common unit
 

Dividend and distribution amount

     $0.273438         $0.343750         $0.437500         $0.730000   

Dividend and distribution payable date

     March 30, 2012         March 30, 2012         March 30, 2012         March 30, 2012   

Dividend payable to shareholders of record on

     March 15, 2012         March 15, 2012         March 15, 2012         March 15, 2012   

Annual equivalent rate of dividend and distribution

     $1.094         $1.375         $1.750         $2.920   

On February 22, 2012, we completed the acquisition of Convergence Business Park in Lewisville, Texas for a purchase price of approximately $123.0 million. The property consists of both income producing and redevelopment buildings along with undeveloped land. The acquisition was funded with borrowings under our global revolving credit facility.

Our Competitive Strengths

We believe we distinguish ourselves from other owners, acquirors and managers of technology-related real estate through our competitive strengths, which include:

 

   

High-Quality Portfolio that is Difficult to Replicate. Our portfolio contains state-of-the-art data center facilities with extensive tenant improvements. Based on current market rents and the estimated replacement costs of our properties and their improvements, we believe that they could not be replicated today on a cost-competitive basis. Our portfolio of corporate and Internet gateway data center facilities is equipped to meet the power and cooling requirements for the most demanding corporate IT applications. Many of the properties in our portfolio are located on major aggregation points formed by the physical presence of multiple major telecommunications service providers, which reduces our tenants’ costs and operational risks and increases the attractiveness of our buildings.

 

   

Presence in Key Markets. Our portfolio is located in 31 metropolitan areas, including the Boston, Chicago, Dallas, Los Angeles, New York Metro, Northern Virginia, Phoenix, San Francisco and Silicon Valley metropolitan areas in the United States, Amsterdam, Dublin, London and Paris markets in Europe and Singapore, and Sydney and Melbourne markets in the Asia Pacific region, and is diversified so that no one market represented more than 13.3% of the aggregate annualized rent of our portfolio as of December 31, 2011. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Revenue Base.”

 

   

Proven Experience Executing New Leases. We have considerable experience in identifying and leasing to new tenants. The combination of our specialized data center leasing team and customer referrals continues to provide a robust pipeline of new tenants. During the year ended December 31, 2011, we commenced new leases totaling approximately 1.2 million square feet, which represent approximately $95.8 million in annualized GAAP rent. These leases were comprised of Powered Base Buildings®, Turn-Key Datacenters®, and ancillary office and other uses.

 

   

Demonstrated Acquisition Capability. As of December 31, 2011, our portfolio consisted of 101 technology-related real estate properties, excluding three properties held as investments in unconsolidated joint ventures, that we or our predecessor acquired beginning in 2002, for an aggregate of 18.3 million net rentable square feet, including approximately 2.4 million square feet held for redevelopment. We have developed detailed, standardized procedures for evaluating acquisitions, including income producing assets and vacant properties suitable for redevelopment, to ensure that they meet our financial, technical and other criteria. These procedures and our in-depth knowledge of the

 

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technology and data center industries allow us to identify strategically located properties and evaluate investment opportunities efficiently and, as appropriate, commit and close quickly. Our broad network of contacts within a highly fragmented universe of sellers and brokers of technology-related real estate enables us to capitalize on acquisition opportunities. As a result, we acquired more than half of our properties before they were broadly marketed by real estate brokers.

 

   

Flexible Datacenter Solutions. We provide flexible, customer oriented solutions designed to meet the needs of technology and corporate data center users, including Turn-Key Datacenter®, Powered Base Building® and build-to-suit options. Our Turn-Key Datacenters® are move-in ready, physically secure facilities with the power and cooling capabilities to support mission-critical IT enterprise applications. We believe our Turn-Key Datacenters® are effective solutions for tenants that lack the expertise, capital budget or desire to provide their own extensive data center infrastructure, management and security. For tenants that possess the ability to build and operate their own facility, our Powered Base Building® solution provides the physical location, required power and network access necessary to support a state-of-the-art data center. Our in-house engineering and design and construction professionals can also provide tenants with customized build-to-suit solutions to meet their unique specifications. Our Critical Facilities Management® services and team of technical engineers and data center operations experts provide 24/7 support for these mission-critical facilities.

 

   

Differentiating Development Advantages. Our extensive development activity, operating scale and process-based approach to data center design, construction and operations result in significant cost savings and added value for our tenants. We have leveraged our purchasing power by securing global purchasing agreements and developing relationships with major equipment manufacturers, reducing costs and shortening delivery timeframes on key components, including major mechanical and electrical equipment. Utilizing our innovative modular data center design referred to as POD Architecture®, we deliver what we believe to be a technically superior data center environment at significant cost savings. In addition, by utilizing our POD Architecture® to develop new Turn-Key Datacenters® in our existing Powered Base Buildings®, on average we are able to deliver a fully commissioned facility in just under 30 weeks. Finally, our access to capital allows us to provide data center solutions for tenants that do not want to invest their own capital.

 

   

Diverse Tenant Base Across a Variety of Industry Sectors. We use our in-depth knowledge of the requirements and trends for Internet and data communications and corporate data center users to market our properties to domestic and international tenants with specific technology needs. At December 31, 2011, we had 535 tenants across a variety of industry sectors, ranging from information technology and Internet enterprises to financial services, energy and manufacturing companies. Our largest tenant, comprised of subsidiaries of CenturyLink, Inc., accounted for approximately 10.2% of the aggregate annualized rent of our portfolio as of December 31, 2011 and no other single tenant accounted for more than approximately 5% of the aggregate annualized rent of our portfolio.

 

   

Experienced and Committed Management Team and Organization. Our senior management team has an average of over 27 years of experience in the technology or real estate industries, including experience as investors in, advisors to and founders of technology companies. We believe that our senior management team’s extensive knowledge of both the real estate and the technology industries provides us with a key competitive advantage. At December 31, 2011, our senior management team and directors collectively owned common equity interests in our company of approximately 1.4%, which aligns their interests with those of our stockholders.

Business and Growth Strategies

Our primary business objectives are to maximize sustainable long-term growth in earnings, funds from operations and cash flow per share and unit and to maximize returns to our stockholders and our operating partnership’s unitholders. Our business strategies to achieve these objectives are:

 

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Achieve Superior Returns on Redevelopment Inventory. At December 31, 2011, we had approximately 2.4 million square feet held for redevelopment, of which approximately 1,192,000 square feet of space was under construction for Turn-Key Datacenter®, Powered Base Building® and Build-to-Suit product, all of which are expected to be income producing when complete, in 12 U.S. domestic markets, one European market, one Australian market and Singapore, consisting of approximately 404,000 square feet of development projects and 788,000 square feet of redevelopment projects.

 

   

Capitalize on Acquisition Opportunities. We believe that acquisitions enable us to increase cash flow and create long-term stockholder value. Our relationships with corporate information technology groups, technology tenants and real estate brokers who are dedicated to serving these tenants provide us with ongoing access to potential acquisitions and often enable us to avoid competitive bidding. Furthermore, the specialized nature of technology-related real estate makes it more difficult for traditional real estate investors to understand, which results in reduced competition for acquisitions relative to other property types. We believe this dynamic creates an opportunity for us to obtain better risk-adjusted returns on our capital.

 

   

Access and Use Capital Efficiently. We believe we can increase stockholder returns by effectively accessing and deploying capital. Since Digital Realty Trust, Inc.’s initial public offering in 2004, our company has raised approximately $7.8 billion of capital through common, preferred and convertible preferred equity offerings, two exchangeable debt offerings, three non-exchangeable bond offerings, our global revolving credit facility, our Prudential shelf facility, secured mortgage financings and refinancings and sales of non-core assets. We will endeavor to maintain financial flexibility while using our liquidity and access to capital to support operations, including our acquisition, leasing, development and redevelopment programs, which are important sources of our growth.

 

   

Maximize the Cash Flow of Our Properties. We aggressively manage and lease our assets to increase their cash flow. We often acquire properties with substantial in-place cash flow and some vacancy, which enables us to create upside through lease-up. Moreover, many of our properties contain extensive in-place infrastructure or buildout that may result in higher rents when leased to tenants seeking these improvements. We control our costs by negotiating expense pass-through provisions in tenant leases for operating expenses, including power costs and certain capital expenditures. Leases covering approximately 73% of the leased net rentable square feet in our portfolio as of December 31, 2011 required tenants to pay all or a portion of increases in operating expenses, including real estate taxes, insurance, common area charges and other expenses.

 

   

Leverage Strong Industry Relationships. We use our strong industry relationships with national and regional corporate enterprise information technology groups and technology-intensive companies to identify and comprehensively respond to their real estate needs. Our company’s leasing and sales professionals are real estate and technology industry specialists who can develop complex facility solutions for the most demanding corporate data center and other technology tenants.

Competition

We compete with numerous developers, owners and operators of real estate and datacenters, many of which own properties similar to ours in some of the same markets in which our properties are located, including DuPont Fabros Technology, Inc., CoreSite Realty Corporation and various local developers in the U.S., and Global Switch, Sentrum and various regional operators in Europe and Asia. If our competitors offer space that our tenants or potential tenants perceive to be superior to ours based on numerous factors, including available power, security considerations, location, or connectivity, or if they offer rental rates below current market rates, or below the rental rates we are offering, we may lose tenants or potential tenants or be required to incur costs to improve our properties or reduce our rental rates. In addition, recently many of our competitors have developed or redeveloped additional datacenter space. If the supply of datacenter space continues to increase as a result of these activities or otherwise, rental rates may be reduced or we may face delays in leasing or be unable to lease our vacant space, including space that we develop or redevelop. Finally, if tenants or potential tenants desire services that we do not offer, we may not be able to lease our space to those tenants. Our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected as a result of any or all of these factors.

 

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Regulation

General

Office properties in our markets are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our properties as of December 31, 2011 has the necessary permits and approvals to operate its business.

Americans With Disabilities Act

Our properties must comply with Title III of the Americans with Disabilities Act of 1990, or the ADA, to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.

Environmental Matters

Under various laws relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances at that property, and may be required to investigate and clean up such contamination at or emanating from that property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and the liability may be joint and several. Previous owners used some of our properties for industrial and retail purposes, and those properties may contain some level of environmental contamination. Fuel storage tanks are present at many of our properties, and if releases were to occur, we may be liable for the costs of cleaning any resulting contamination. The presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability or materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral.

Some of the properties may contain asbestos-containing building materials. Environmental laws require that asbestos-containing building materials be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. These laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

In addition, some of our tenants, particularly those in the biotechnology and life sciences industry and those in the technology manufacturing industry, routinely handle hazardous substances and wastes as part of their operations at our properties, including chemical solvents, medical waste, hydrocarbons, batteries and pesticides. Environmental laws and regulations subject our tenants, and potentially us, to liability resulting from these activities or from previous industrial or retail uses of those properties. Environmental liabilities could also affect a tenant’s ability to make rental payments to us. We require our tenants to comply with these environmental laws and regulations and to indemnify us for any related liabilities.

Independent environmental consultants have conducted Phase I or similar environmental site assessments on all of the properties in our portfolio. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey. None of the recent site

 

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assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, assets, results of operations or our competitive position. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities or compliance concerns may have arisen after the review was completed or may arise in the future; and future laws, ordinances or regulations may impose material additional environmental liability.

Our properties and their uses often require permits from various government agencies, including permits related to zoning and land use, such as permits to operate data center facilities. Certain permits from state or local environmental regulatory agencies, including regulators of air quality, are usually required to install and operate diesel-powered generators, which provide emergency back-up power at some of our facilities. These permits often set emissions limits for certain air pollutants, including oxides of nitrogen. In addition, various federal, state, and local environmental, health and safety requirements, such as fire requirements and treated and storm water discharge requirements, apply to some of our properties. Changes to applicable regulations, such as air quality regulations, or the permit requirements for equipment at our facilities, could hinder or prevent our construction or operation of data center facilities.

The environmental laws and regulations—including those directly regulating our climate change impacts and those which regulate the climate change impacts of companies with which we do business, such as utilities which provide our facilities with electricity—to which our properties are subject may change in the future, and new laws and regulations may be created. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Which May Influence Future Results of Operations—Climate change legislation.” We do not know if or how the requirements will change, but changes may require that we make significant unanticipated expenditures, and such expenditures may materially adversely impact our: financial condition, cash flow, results, cash available for distributions, common stock’s per share trading price, our competitive position and ability to satisfy our debt service obligations.

Insurance

We carry comprehensive liability, fire, extended coverage, earthquake, business interruption and rental loss insurance covering all of the properties in our portfolio under a blanket policy. We select policy specifications and insured limits which we believe to be appropriate given the relative risk of loss, the cost of the coverage and industry practice and, in the opinion of our company’s management, the properties in our portfolio are currently adequately insured. We do not carry insurance for generally uninsured losses such as loss from war or nuclear reaction. In addition, we carry earthquake insurance on our properties in an amount and with deductibles which we believe are commercially reasonable. Certain of the properties in our portfolio are located in areas known to be seismically active. See “Risk Factors—Risks Related to Our Business and Operations—Potential losses may not be covered by insurance.”

Employees

As of December 31, 2011, we had 532 employees. None of these employees are represented by a labor union.

How to Obtain Our SEC Filings

All reports we file with the SEC will be available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. We will also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy Statement, Annual Report and amendments to those documents at no charge to investors upon request and make electronic copies of such reports available through our website at www.digitalrealty.com as soon as reasonably practicable after filing such material with the SEC. The information found on, or otherwise accessible through, our website is not incorporated by reference into, nor does it form a part of, this report or any other document that we file with the SEC.

 

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Offices

Our headquarters are located in San Francisco. We have regional offices in Boston, Chicago, Dallas, Los Angeles, New York, Northern Virginia and Phoenix and international offices in Dublin, London, Paris and Singapore.

Reports to Security Holders

Digital Realty Trust, Inc. is required to send an annual report to its securityholders and to our operating partnership’s unitholders.

 

ITEM 1A. RISK FACTORS

For purposes of this section, the term “stockholders” means the holders of shares of Digital Realty Trust, Inc.’s common stock and preferred stock. Set forth below are the risks that we believe are material to Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders. You should carefully consider the following factors in evaluating our company, our properties and our business. The occurrence of any of the following risks might cause Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders to lose all or a part of their investment. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Forward-Looking Statements” starting on page 31.

Risks Related to Our Business and Operations

Global economic conditions could adversely affect our liquidity and financial condition.

In the United States and globally, market and economic conditions have been unprecedented over the past few years and challenging with tighter credit conditions and slower economic growth in all markets in which we own properties and conduct our operations. The U.S. and global economies have experienced a recession and face continued concerns about the systemic impact of adverse economic conditions, such as high energy costs, geopolitical issues, the availability and cost of credit, unstable global financial and mortgage markets, high corporate, consumer and governmental debt levels, high unemployment and declining residential and commercial real estate markets.

As a result of these conditions, general economic conditions and the cost and availability of capital have been and may again be adversely affected in some or all of the markets in which we own properties and conduct our operations. Renewed or increased turbulence in the U.S., European and other international financial markets and economies may adversely affect our ability, and the ability of our tenants, to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity and capital expenditure requirements and may result in adverse effects on our, and our tenants’, businesses, financial condition and results of operations.

In addition, our access to funds under our global revolving credit facility and other lines of credit depend on the ability of the lenders that are parties to such facilities to meet their funding commitments to us. We cannot assure you that long-term disruptions in the global economy and the return of tighter credit conditions among, and potential failures or nationalizations of, third party financial institutions as a result of such disruptions will not have an adverse effect on our lenders. If our lenders are not able to meet their funding commitments to us, our business, results of operation, cash flows and financial condition could be adversely affected.

If we do not have sufficient cash flow to continue operating our business and are unable to borrow additional funds, access our existing lines of credit or raise equity or debt capital, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, curtailing development or redevelopment activity, disposing of one or more of our properties possibly on disadvantageous terms or entering into or renewing leases on less favorable terms than we otherwise would.

 

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Our properties depend upon the demand for technology-related real estate.

Our portfolio of properties consists primarily of technology-related real estate and datacenter real estate in particular. A decrease in the demand for datacenter space, Internet gateway facilities or other technology-related real estate would have a greater adverse effect on our business and financial condition than if we owned a portfolio with a more diversified tenant base or less specialized use. Our substantial redevelopment activities make us particularly susceptible to general economic slowdowns, including recessions, as well as adverse developments in the corporate datacenter, Internet and data communications and broader technology industries. Any such slowdown or adverse development could lead to reduced corporate IT spending or reduced demand for datacenter space. Reduced demand could also result from business relocations, including to markets that we do not currently serve. Changes in industry practice or in technology, such as virtualization technology, more efficient or miniaturization of computing or networking devices, or devices that require higher power densities than today’s devices, could also reduce demand for the physical datacenter space we provide or make the tenant improvements in our facilities obsolete or in need of significant upgrades to remain viable. In addition, the development of new technologies, the adoption of new industry standards or other factors could render many of our tenants’ current products and services obsolete or unmarketable and contribute to a downturn in their businesses, thereby increasing the likelihood that they default under their leases, become insolvent or file for bankruptcy.

We may be unable to lease vacant or redevelopment space or renew leases, or re-lease space as leases expire.

At December 31, 2011, we owned approximately 2.4 million square feet held for redevelopment. Of this space, we are currently developing / redeveloping approximately 1.2 million square feet. We intend to continue to add new space to our redevelopment inventory and to continue to redevelop additional space from this inventory. A substantial portion of the space that we redevelop is, and will continue to be, redeveloped on a speculative basis, meaning that we do not have a signed lease for the space when we begin the redevelopment process. We also develop or redevelop space specifically for tenants pursuant to leases signed prior to beginning the development or redevelopment process. In those cases, if we fail to meet our development or redevelopment obligations under those leases, these tenants may be able to terminate the leases and we would be required to find a new tenant for this space. In addition, in certain circumstances we lease data center facilities prior to their completion. If we fail to complete the facilities in a timely manner, the tenant may be entitled to terminate its lease, seek damages or penalties against us or pursue other remedies and we may be required to find a new tenant for the space. We cannot assure you that once we have redeveloped a space we will be able to successfully lease it at all, or at rates we consider favorable or expected at the time we commenced redevelopment. If we are not able to successfully lease the space that we redevelop, if redevelopment costs are higher than we currently estimate, or if lease rates are lower than expected when we began the project or are otherwise undesirable, our revenue and operating results could be adversely affected.

In addition, as of December 31, 2011, leases representing 9.2% of the square footage of the properties in our portfolio, excluding space held for redevelopment, were scheduled to expire through 2013, and an additional 5.2% of the net rentable square footage excluding space held for redevelopment was available to be leased. Some of this space may require substantial capital investment to meet the power and cooling requirements of today’s advanced data centers, or may no longer be suitable for this use. In addition, we cannot assure you that leases will be renewed or that our properties will be re-leased at all, or at net effective rental rates equal to or above the current average net effective rental rates. If the rental rates for our properties decrease, our existing tenants do not renew their leases, we do not re-lease our available space, including newly redeveloped space and space for which leases are scheduled to expire, or it takes longer for us to lease or re-lease this space or for rents to commence on this space, our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected.

 

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Our growth depends on external sources of capital which are outside of our control.

In order for Digital Realty Trust, Inc. to maintain its qualification as a REIT, it is required under the Internal Revenue Code of 1986, as amended, which we refer to as the Code, to annually distribute at least 90% of its net taxable income, determined without regard to the dividends paid deduction and excluding any net capital gain. In addition, Digital Realty Trust, Inc. will be subject to income tax at regular corporate rates to the extent that it distributes less than 100% of its net taxable income, including any net capital gains. Digital Realty Trust, L.P. is required to make distributions to Digital Realty Trust, Inc. that will enable the latter to satisfy this distribution requirement and avoid tax liability. Because of these distribution requirements, we may not be able to fund future capital needs, including any necessary acquisition or redevelopment financing, from operating cash flow. Consequently, we rely on third-party sources to fund our capital needs.

Our access to third-party sources of capital depends on a number of factors, including general market conditions, the market’s perception of our business prospects and growth potential, our current and expected future earnings, funds from operations and growth thereof, our cash flow and cash distributions, and the market price per share of Digital Realty Trust, Inc.’s common stock. We cannot assure you that we will be able to obtain equity or debt financing at all or on terms favorable or acceptable to us. Any additional debt we incur will increase our leverage. Further, equity markets have experienced high volatility recently and we cannot assure you that we will be able to raise capital through the sale of equity securities at all or on favorable terms. Sales of equity on unfavorable terms could result in substantial dilution to Digital Realty Trust, Inc.’s common stockholders and Digital Realty Trust, L.P.’s unitholders. In addition, we may be forced to dispose of one or more of our properties, possibly on disadvantageous terms.

If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when strategic opportunities exist, satisfy our debt service obligations, pay cash dividends to Digital Realty Trust, Inc.’s stockholders or make distributions to Digital Realty Trust, L.P.’s unitholders.

Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.

We review each of our properties for indicators that its carrying amount may not be recoverable. Examples of such indicators may include a significant decrease in the market price, a significant adverse change in the extent or manner the property is being used in its physical condition or expected to be used based on the underwriting at the time of acquisition, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development, or a history of operating or cash flow losses. When such impairment indictors exist, we review an estimate of the future undiscounted net cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition and compare to the carrying value of the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our future undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. These losses have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our financial condition, results of operations and cash available for distribution.

 

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We depend on significant tenants, and many of our properties are single-tenant properties or are currently occupied by single tenants.

As of December 31, 2011, the 20 largest tenants in our property portfolio represented approximately 49% of the total annualized rent generated by our properties. Our largest tenants by annualized rent are CenturyLink, Inc. (Savvis/Qwest), Equinix Operating Company, Inc. and Facebook, Inc. In 2011, CenturyLink, Inc. acquired Savvis Communications Corporation, or Savvis, and Qwest Communications International, Inc., or Qwest, which are our direct tenants. Savvis and Qwest are now wholly-owned subsidiaries of CenturyLink, Inc. CenturyLink, Inc. (Savvis/Qwest) leased approximately 2.7 million square feet of net rentable space as of December 31, 2011, representing approximately 10.2% of the total annualized rent generated by our properties. Equinix Operating Company, Inc. leased approximately 878,000 square feet of net rentable space as of December 31, 2011, representing approximately 4.1% of the total annualized rent generated by our properties. Facebook, Inc. leased approximately 242,000 square feet of net rentable space as of December 31, 2011, representing approximately 3.9% of the total annualized rent generated by our properties. In addition, 44 of our 101 properties are occupied by single tenants, including properties occupied solely by CenturyLink, Inc. (Savvis/Qwest), Equinix Operating Company, Inc. and Facebook, Inc. Many factors, including global economic conditions, may cause our tenants to experience a downturn in their businesses or otherwise experience a lack of liquidity, which may weaken their financial condition and result in their failure to make timely rental payments or their default under their leases. If any tenant defaults or fails to make timely rent payments, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.

Our tenants may choose to develop new data centers or expand their own existing data centers, which could result in the loss of one or more key tenants or reduce demand for our newly developed data centers, which could have a material adverse effect on our revenues and results of operations.

Our tenants may choose to develop new data centers or expand or consolidate into data centers that we do not own in the future. In the event that any of our key tenants were to do so, it could result in a loss of business to us or put pressure on our pricing. If we lose a tenant, we cannot assure you that we would be able to replace that tenant at a competitive rate or at all, which could have a material adverse effect on our revenues and results of operations.

The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties.

If any tenant becomes a debtor in a case under the federal Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. In either case, our claim for unpaid rent would likely not be paid in full. As of December 31, 2011, we had no material tenants in bankruptcy.

 

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Our revenue and cash available for distribution could be materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a downturn in its business, or fail to renew its lease or renew on terms less favorable to us than its current terms.

Our portfolio of properties depends upon local economic conditions and is geographically concentrated in certain locations.

Our portfolio is located in 31 metropolitan areas. Many of these markets experienced downturns in recent years and are currently experiencing downturns as a result of the global economic crisis or other factors. We depend upon the local economic conditions in these markets, including local real estate conditions, and our operations, revenue and cash available for distribution could be materially adversely affected by local economic conditions in these markets. Our operations may also be affected if too many competing properties are built in any of these markets or supply otherwise increases or exceeds demand. We cannot assure you that these markets will grow or will remain favorable to technology-related real estate.

As of December 31, 2011, our portfolio was geographically concentrated in the following metropolitan markets.

 

Metropolitan Market

   Percentage of
December 31, 2011
total annualized rent(1)
 

Silicon Valley

     13.3

Northern Virginia

     10.4

San Francisco

     9.8

Dallas

     9.2

New York Metro

     9.2

Chicago

     9.1

Phoenix

     8.4

Boston

     5.7

Los Angeles

     4.7

London, England

     4.2

Dublin, Ireland

     2.5

Paris, France

     2.3

Other

     11.2
  

 

 

 
     100.0
  

 

 

 

 

(1) Annualized rent is monthly contractual rent (defined as cash base rent before abatements) under existing leases as of December 31, 2011, multiplied by 12.

In addition, we are currently developing or redeveloping properties in certain of these markets. Any negative changes in real estate, technology or economic conditions in these markets in particular could negatively impact our performance.

Our growth depends upon the successful development of our existing space held for redevelopment and new properties acquired for redevelopment and any delays or unexpected costs in such development may delay and harm our growth prospects, future operating results and financial condition.

We had approximately 2.4 million square feet held for redevelopment at December 31, 2011, including four vacant properties. We are and intend to continue building out a large portion of this space on a speculative basis at significant cost. Our successful development and redevelopment of these projects is subject to many risks, including those associated with:

 

   

delays in construction;

 

   

budget overruns;

 

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changes to the plans or specifications;

 

   

construction site accidents and other casualties;

 

   

increased prices for raw materials or building supplies;

 

   

lack of availability and/or increased costs for specialized data center components, including long lead time items such as generators;

 

   

financing availability, including our ability to obtain construction financing and permanent financing;

 

   

increases in interest rates or credit spreads;

 

   

labor availability and costs;

 

   

labor disputes and work stoppages with contractors, subcontractors or others that are constructing the project;

 

   

failure of contractors to perform on a timely basis or at all, or other misconduct on the part of contractors;

 

   

timing of the commencement of rental payments;

 

   

access to sufficient power and related costs of providing such power to our tenants;

 

   

environmental issues;

 

   

fire, flooding, earthquakes and other national disasters;

 

   

geological, construction, excavation and equipment problems; and

 

   

delays or denials of entitlements or permits, including zoning and related permits, or other delays resulting from our dependence on the cooperation of public agencies and utility companies.

In addition, while we intend to develop data center properties primarily in markets we are familiar with, we may in the future develop properties in new geographic regions where we expect the development of property to result in favorable risk-adjusted returns on our investment. We may not possess the same level of familiarity with the development of other property types or other markets, which could adversely affect our ability to develop such properties successfully or at all or to achieve expected performance.

Development and redevelopment activities, regardless of whether they are ultimately successful, also typically require a substantial portion of our management’s time and attention. This may distract our management from focusing on other operational activities of our business. If we are unable to complete development or redevelopment projects successfully, our business may be adversely affected.

We may be unable to identify and complete acquisitions on favorable terms or at all.

We continually evaluate the market of available properties and may acquire additional technology-related real estate when opportunities exist. Our ability to acquire properties on favorable terms may be exposed to the following significant risks:

 

   

we may be unable to acquire a desired property because of competition from other real estate investors with significant capital, including both publicly traded REITs and institutional investment funds;

 

   

even if we are able to acquire a desired property, competition from other potential acquirors may significantly increase the purchase price or result in other less favorable terms;

 

   

even if we enter into agreements for the acquisition of technology-related real estate, these agreements are subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction;

 

   

we may be unable to finance acquisitions on favorable terms or at all; and

 

   

we may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities such as liabilities for clean-up of undisclosed environmental contamination, claims by tenants, vendors or other persons dealing with the former owners of the properties and claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.

 

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If we cannot complete property acquisitions on favorable terms, our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected.

We may be unable to successfully integrate and operate acquired properties.

Even if we are able to make acquisitions on advantageous terms, our ability to successfully operate them may be exposed to the following significant risks:

 

   

we may spend more than budgeted amounts to make necessary improvements or renovations to acquired properties;

 

   

we may be unable to integrate new acquisitions quickly and efficiently, particularly acquisitions of operating businesses or portfolios of properties, into our existing operations, and our results of operations and financial condition could be adversely affected;

 

   

acquired properties may be subject to reassessment, which may result in higher than expected property tax payments; and

 

   

market conditions may result in higher than expected vacancy rates and lower than expected rental rates.

If we cannot operate acquired properties to meet our financial expectations, our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected.

We may be unable to source off-market deal flow in the future.

A component of our growth strategy is to continue to acquire additional technology-related real estate. To date, more than half of our acquisitions were acquired before they were widely marketed by real estate brokers, or “off-market.” Properties that are acquired off-market are typically more attractive to us as a purchaser because of the absence of competitive bidding, which could potentially lead to higher prices. We obtain access to off-market deal flow from numerous sources. If we cannot obtain off-market deal flow in the future, our ability to locate and acquire additional properties at attractive prices could be adversely affected.

We have substantial debt and face risks associated with the use of debt to fund our business activities, including refinancing and interest rate risks.

Our total consolidated indebtedness at December 31, 2011 was approximately $2.9 billion, and we may incur significant additional debt to finance future acquisition and development activities. We have a global revolving credit facility, which has a borrowing limit based upon a percentage of the value of our unsecured properties included in the facility’s borrowing base. At December 31, 2011, approximately $1.2 billion was available under this facility, net of outstanding letters of credit. In addition, under our contribution agreement with respect to the 200 Paul Avenue 1-4 and 1100 Space Park Drive properties, we have agreed to make available for guarantee up to $17.8 million of indebtedness and may enter into similar agreements in the future.

Our substantial indebtedness has important consequences in that it currently requires us to dedicate a significant portion of our cash flow from operations to debt service payments, which reduces the availability of our cash flow to fund working capital, capital expenditures, expansion efforts, distributions and other general corporate purposes. Additionally, it could: make it more difficult for us to satisfy our obligations with respect to our indebtedness; limit our ability in the future to undertake refinancings of our debt or obtain financing for expenditures, acquisitions, development or other general corporate purposes on terms and conditions acceptable to us, if at all; or affect adversely our ability to compete effectively or operate successfully under adverse economic conditions.

 

 

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In addition, we may violate restrictive covenants or fail to maintain financial ratios specified in our loan documents, which would entitle the lenders to accelerate our debt obligations, and our secured lenders or mortgagees may foreclose on our properties or our interests in the entities that own the properties that secure their loans and receive an assignment of rents and leases. A foreclosure on one or more of our properties could adversely affect our financial condition, results of operations, cash flow and cash available for distribution. Further, our default under any one of our loans could result in a cross default on other indebtedness. Furthermore, foreclosures could create taxable income without accompanying cash proceeds, a circumstance which could hinder Digital Realty Trust, Inc.’s ability to meet the REIT distribution requirements imposed by the Code.

Additional risks related to our indebtedness are described below.

We may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than the terms of our original indebtedness. It is likely that we will need to refinance at least a portion of our outstanding debt as it matures. If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds of other capital transactions, then our cash flow may not be sufficient in all years to repay all such maturing debt and to pay distributions. Further, if prevailing interest rates or other factors at the time of refinancing (such as the reluctance of lenders to make commercial real estate loans) result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase.

Fluctuations in interest rates could materially affect our financial results and may increase the risk our counterparty defaults on our interest rate hedges. Because a significant portion of our debt bears interest at variable rates, increases in interest rates could materially increase our interest expense. If the United States Federal Reserve increases short-term interest rates, this would have a significant upward impact on shorter-term interest rates, including the interest rates that our variable rate debt is based upon. Potential future increases in interest rates and credit spreads may increase our interest expense and therefore negatively affect our financial condition and results of operations, and reduce our access to capital markets. We have entered into interest rate swap or cap agreements for a significant portion of our floating rate debt. Increased interest rates may increase the risk that the counterparties to our swap agreements will default on their obligations, which could further increase our exposure to interest rate fluctuations. Conversely, if interest rates are lower than our swapped fixed rates, we will be required to pay more for our debt than we would had we not entered into the swap agreements.

Adverse changes in our company’s credit ratings could negatively affect our financing activity. The credit ratings of our senior unsecured long-term debt and Digital Realty Trust, Inc.’s preferred stock are based on our company’s operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of our company. Our company’s credit ratings can affect the amount of capital we can access, as well as the terms and pricing of any debt we may incur. We cannot assure you that our company will be able to maintain our current credit ratings, and in the event our current credit ratings are downgraded, we would likely incur higher borrowing costs and may encounter difficulty in obtaining additional financing. Also, a downgrade in our company’s credit ratings may trigger additional payments or other negative consequences under our current and future credit facilities and debt instruments. For example, if the credit ratings of our senior unsecured long-term debt are downgraded to below investment grade levels, we may not be able to obtain or maintain extensions on certain of our existing debt. Adverse changes in our credit ratings could negatively impact our refinancing and other capital market activities, our ability to manage our debt maturities, our future growth, our financial condition, the market price of Digital Realty Trust, Inc.’s stock, and our development and acquisition activity.

Our global revolving credit facility, Prudential shelf facility, 5.875% notes due 2020, 4.50% notes due 2015 and 5.250% notes due 2021 restrict our ability to engage in some business activities. Our global revolving credit facility and Prudential shelf facility contain negative covenants and other financial and operating covenants that, among other things:

 

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restrict our ability to incur additional indebtedness;

 

   

restrict our ability to make certain investments;

 

   

restrict our ability to merge with another company;

 

   

restrict our ability to create, incur or assume liens; and

 

   

require us to maintain financial coverage ratios, including with respect to unencumbered assets.

In addition, the global revolving credit facility and the Prudential shelf facility restrict Digital Realty Trust, Inc. from making distributions to its stockholders, or redeeming or otherwise repurchasing shares of its capital stock, after the occurrence and during the continuance of an event of default, except in limited circumstances including as necessary to enable Digital Realty Trust, Inc. to maintain its qualification as a REIT and to avoid the payment of income or excise tax.

In addition, our 5.875% notes due 2020, or the 2020 notes, our 4.50% notes due 2015, or the 2015 notes, and our 5.250% notes due 2021, or the 2021 notes, are governed by indentures, which contain various restrictive covenants, including limitations on our ability to incur indebtedness and requirements to maintain a pool of unencumbered assets. These restrictions, and the restrictions in our global revolving credit facility and Prudential shelf facility, could cause us to default on our 2020 notes, 2015 notes, 2021 notes, global revolving credit facility or Prudential shelf facility, as applicable, or negatively affect our operations or our ability to pay dividends to Digital Realty Trust, Inc.’s stockholders or distributions to Digital Realty Trust, L.P.’s unitholders, which could have a material adverse effect on the market value of Digital Realty Trust, Inc.’s common stock and preferred stock.

The exchange and repurchase rights of our exchangeable debentures may be detrimental to Digital Realty Trust, Inc.’s stockholders or Digital Realty Trust, L.P.’s unitholders. As of December 31, 2011, Digital Realty Trust, L.P. had outstanding $266.4 million aggregate principal amount of 5.50% Exchangeable Senior Debentures due 2029, which we refer to as the 2029 debentures. The 2029 debentures are exchangeable for Digital Realty Trust, Inc.’s common stock. The exchange rate of the 2029 debentures is subject to adjustment for certain events, including, but not limited to, certain dividends on Digital Realty Trust, Inc.’s common stock in excess of $0.33 per share per quarter, the issuance of certain rights, options or warrants to holders of Digital Realty Trust, Inc.’s common stock, subdivisions or combinations of Digital Realty Trust, Inc.’s common stock, certain distributions of assets, debt securities, capital stock or cash to holders of Digital Realty Trust, Inc.’s common stock and certain tender or exchange offers. The 2029 debentures are redeemable at our option for cash at any time on or after April 18, 2014 and are subject to repurchase for cash at the option of the holder on April 15 in the years 2014, 2019 and 2024, or upon the occurrence of certain events.

If the 2029 debentures are not exchanged, the repurchase rights of holders of the exchangeable debentures may discourage or impede transactions that might otherwise be in the interest of Digital Realty Trust, Inc.’s stockholders or Digital Realty Trust, L.P.’s unitholders. Further, these exchange or repurchase rights might be triggered in situations where we need to conserve our cash reserves, in which event such repurchase might adversely affect us, Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders.

Failure to hedge effectively against interest rate changes may adversely affect results of operations. We seek to manage our exposure to interest rate volatility by using interest rate hedging arrangements, such as interest cap and interest rate swap agreements. These agreements involve risks, such as the risk that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes and that a court could rule that such an agreement is not legally enforceable. Our policy is to use derivatives only to hedge interest rate risks related to our borrowings, not for speculative or trading purposes, and to enter into contracts only with major financial institutions based on their credit ratings and other factors. However, we may choose to change this policy in the future. Including loans currently subject to interest rate caps and swaps, approximately 91% of our total indebtedness as of December 31, 2011 was subject to fixed interest rates. We do not currently hedge our global revolving credit facility and as our borrowings under our global revolving credit facility increase, so will our

 

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percentage of indebtedness not subject to fixed rates and our exposure to interest rates increase. Hedging may reduce the overall returns on our investments. Failure to hedge effectively against interest rate changes may materially adversely affect our results of operations.

Volatility in and regulation of the commercial mortgage-backed securities market has limited and may continue to impact the pricing of secured debt. As a result of the recent crisis in the residential mortgage-backed securities markets, the recent global recession, and concerns over the ability to refinance or repay existing commercial mortgage-backed securities as they come due, liquidity previously provided by the commercial mortgage-backed securities and collateralized debt obligations markets has significantly decreased. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act imposes significant new regulations related to the mortgage-backed securities industry and market participants, which has contributed to uncertainty in the market. The volatility in the commercial mortgage-backed securities market could result in the following adverse effects on our incurrence of secured debt, which could have a materially negative impact on our financial condition, results of operations, cash flow and cash available for distribution:

 

   

higher loan spreads;

 

   

tighter loan covenants;

 

   

reduced loan to value ratios and resulting borrower proceeds; and

 

   

higher amortization and reserve requirements.

We have owned certain of our properties for a limited time.

We owned 101 properties at December 31, 2011, excluding three properties held as investments in unconsolidated joint ventures. All of our properties have been under our management for less than eight years, and we have owned five of the properties for less than one year at December 31, 2011. The properties may have characteristics or deficiencies unknown to us that could affect their valuation or revenue potential. We cannot assure you that the operating performance of the properties will not decline under our management. In addition, we have a limited history operating Turn-Key Datacenters® that we have developed or redeveloped. Because we generally cannot pass operating expenses (other than energy costs) on to our tenants in Turn-Key Datacenters®, if we incur operating expenses greater than we anticipated based on our limited operating history, our results of operations could be negatively impacted.

We may have difficulty managing our growth.

We have significantly and rapidly expanded the size of our company. For example, during 2011, we acquired five properties and we increased the number and size of our redevelopment activities. Our growth may significantly strain our management, operational and financial resources and systems. In addition, as a reporting company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. The requirements of these rules and regulations will increase our accounting, legal and financial compliance costs and may strain our management and financial, legal and operational resources and systems. An inability to manage our growth effectively or the increased strain on our management of our resources and systems could result in deficiencies in our disclosure controls and procedures or our internal control over financial reporting and could negatively impact our cash available for distribution.

Tax protection provisions on certain properties could limit our operating flexibility.

We have agreed with the third-party contributors who contributed the direct and indirect interests in the 200 Paul Avenue 1-4 and 1100 Space Park Drive properties to indemnify them against adverse tax consequences if we were to sell, convey, transfer or otherwise dispose of all or any portion of these interests, in a taxable transaction, in these properties. However, we can sell these properties in a taxable transaction if we pay the contributors cash in the amount of their tax liabilities arising from the transaction and tax payments. The 200

 

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Paul Avenue 1-4 and 1100 Space Park Drive properties represented 4.5% of our portfolio’s annualized rent as of December 31, 2011. These tax protection provisions apply for a period expiring on the earlier of November 3, 2013 and the date on which these contributors (or certain transferees) hold less than 25% of the units issued to them in connection with the contribution of these properties to us. Although it may be in the best interest of Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders that we sell a property, it may be economically disadvantageous for us to do so because of these obligations. We have also agreed to make available for guarantee up to $17.8 million of debt for these contributors. We agreed to these provisions in order to assist these contributors in preserving their tax position after their contributions.

Potential losses may not be covered by insurance.

We carry comprehensive liability, fire, extended coverage, earthquake, business interruption and rental loss insurance covering all of the properties in our portfolio under various insurance policies. We select policy specifications and insured limits which we believe to be appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for generally uninsured losses such as loss from riots, terrorist threats, war or nuclear reaction. Most of our policies, like those covering losses due to floods, are insured subject to limitations involving large deductibles or co-payments and policy limits which may not be sufficient to cover losses. A large portion of the properties we own are located in California, an area especially subject to earthquakes. Together, these properties represented approximately 28% of our portfolio’s annualized rent as of December 31, 2011. While we carry earthquake insurance on our properties, the amount of our earthquake insurance coverage may not be sufficient to fully cover losses from earthquakes. The geographic concentration of our properties in the San Francisco Bay Area makes it possible for one catastrophic seismic event to significantly impact multiple properties, which could also severely impact some of our insurers rendering them insolvent or unable to fully pay on claims despite their current financial strength. In addition, we may discontinue earthquake or other insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage relative to the risk of loss.

In addition, many of our buildings contain extensive and highly valuable technology-related improvements. Under the terms of our leases, tenants generally retain title to such improvements and are obligated to maintain adequate insurance coverage applicable to such improvements and under most circumstances use their insurance proceeds to restore such improvements after a casualty. In the event of a casualty or other loss involving one of our buildings with extensive installed tenant improvements, our tenants may have the right to terminate their leases if we do not rebuild the base building within prescribed times. In such cases, the proceeds from tenants’ insurance will not be available to us to restore the improvements, and our insurance coverage may be insufficient to replicate the technology-related improvements made by such tenants. Furthermore, the terms of our mortgage indebtedness at certain of our properties may require us to pay insurance proceeds over to our lenders under certain circumstances, rather than use the proceeds to repair the property.

If we or one or more of our tenants experiences a loss which is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.

We face significant competition, which may decrease or prevent increases of the occupancy and rental rates of our properties.

We compete with numerous developers, owners and operators of real estate and datacenters, many of which own properties similar to ours in the same markets in which our properties are located, including DuPont Fabros Technology, Inc., CoreSite Realty Corporation and various local developers in the U.S., and Global Switch, Sentrum and various regional operators in Europe and Asia. In addition, we may in the future face competition from new entrants into the datacenter market, including new entrants who may acquire our current competitors. Some of our competitors and potential competitors have significant advantages over us, including greater name recognition, longer operating histories, pre-existing relationships with current or potential customers,

 

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significantly greater financial, marketing and other resources and more ready access to capital which allow them to respond more quickly to new or changing opportunities. If our competitors offer space that our tenants or potential tenants perceive to be superior to ours based on numerous factors, including available power, security considerations, location, or connectivity, or if they offer rental rates below current market rates, or below the rental rates we are offering, we may lose tenants or potential tenants or be required to incur costs to improve our properties or reduce our rental rates. In addition, recently many of our competitors have developed or redeveloped additional datacenter space. If the supply of datacenter space continues to increase as a result of these activities or otherwise, rental rates may be reduced or we may face delays in leasing or be unable to lease our vacant space, including space that we develop or redevelop.

Further, if tenants or potential tenants desire services that we do not offer, we may not be able to lease our space to those tenants. Our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected as a result of any or all of these factors.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers.

We currently, and may in the future, co-invest with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In that event, we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present when a third party is not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic, tax or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Our joint venture partners may take actions that are not within our control, which would require us to dispose of the joint venture asset or transfer it to a taxable REIT subsidiary in order for Digital Realty Trust, Inc. to maintain its status as a REIT. Such investments may also lead to impasses, for example, as to whether to sell a property, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our day-to-day business. Consequently, actions by or disputes with partners or co-venturers may subject properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or co-venturers. Finally, we may share information with our third-party partners or co-venturers. Each of these factors may result in returns on these investments being less than we expect or in losses and our financial and operating results may be adversely affected.

Our success depends on key personnel whose continued service is not guaranteed.

We depend on the efforts of key personnel of our company, particularly Michael Foust, Digital Realty Trust, Inc.’s Chief Executive Officer, A. William Stein, Digital Realty Trust, Inc.’s Chief Financial Officer and Chief Investment Officer and Scott Peterson, Digital Realty Trust, Inc.’s Chief Acquisitions Officer. They are important to our success for many reasons, including that each has a national or regional reputation in our industry and the investment community that attracts investors and business and investment opportunities and assists us in negotiations with investors, lenders, existing and potential tenants and industry personnel. If we lost their services, our business and investment opportunities and our relationships with lenders and other capital markets participants, existing and prospective tenants and industry personnel could suffer. Many of our company’s other senior employees also have strong technology, finance and real estate industry reputations. As a result, we have greater access to potential acquisitions, financing, leasing and other opportunities, and are better able to negotiate with tenants. As the number of our competitors increases, it becomes more likely that a competitor would attempt to hire certain of these individuals away from our company. The loss of any of these key personnel would result in the loss of these and other benefits and could materially and adversely affect our results of operations.

 

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Our properties may not be suitable for lease to datacenter or traditional technology office tenants without significant expenditures or renovations.

Because many of our properties contain tenant improvements installed at our tenants’ expense, they may be better suited for a specific corporate enterprise datacenter user or technology industry tenant and could require significant modification in order for us to re-lease vacant space to another corporate enterprise datacenter user or technology industry tenant. The tenant improvements may also become outdated or obsolete as the result of technological change, the passage of time or other factors. In addition, our redevelopment space will generally require substantial improvement to be suitable for datacenter use. For the same reason, our properties also may not be suitable for lease to traditional office tenants without significant expenditures or renovations. As a result, we may be required to invest significant amounts or offer significant discounts to tenants in order to lease or re-lease that space, either of which could adversely affect our financial and operating results.

Ownership of properties located outside of the United States subjects us to foreign currency and related risks which may adversely impact our ability to make distributions.

We owned 17 properties located outside of the United States at December 31, 2011. In addition, we are currently considering, and will in the future consider, additional international acquisitions.

The ownership of properties located outside of the United States subjects us to risk from fluctuations in exchange rates between foreign currencies and the U.S. dollar. We expect that our principal foreign currency exposure will be to the British Pound and the Euro. Changes in the relation of these currencies to the U.S. dollar will affect our revenues and operating margins, may materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt obligations.

We may attempt to mitigate some or all of the risk of currency fluctuation by financing our properties in the local currency denominations, although we cannot assure you that we will be able to do so or that this will be effective. We may also engage in direct hedging activities to mitigate the risks of exchange rate fluctuations, although we cannot assure you that we will be able to do so or that this will be effective.

Our international activities are subject to special risks different than those faced by us in the United States and we may not be able to effectively manage our international business.

We have acquired and developed, and may continue to acquire and develop, properties outside the United States. Our foreign operations involve risks not generally associated with investments in the United States, including:

 

   

our limited knowledge of and relationships with sellers, tenants, contractors, suppliers or other parties in these markets;

 

   

complexity and costs associated with managing international development, redevelopment and operations;

 

   

difficulty in hiring qualified management, sales and construction personnel and service providers in a timely fashion;

 

   

multiple, conflicting and changing legal, regulatory, entitlement and permitting, and tax and treaty environments;

 

   

exposure to increased taxation, confiscation or expropriation;

 

   

currency transfer restrictions and limitations on our ability to distribute cash earned in foreign jurisdictions to the United States;

 

   

difficulty in enforcing agreements in non-U.S. jurisdictions, including those entered into in connection with our acquisitions or in the event of a default by one or more of our tenants, suppliers or contractors; and

 

   

political and economic instability, including sovereign credit risk, in certain geographic regions.

Our inability to overcome these risks could adversely affect our foreign operations and could harm our business and results of operations.

 

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We face risks with our international acquisitions associated with investing in unfamiliar markets.

We have acquired and may continue to acquire properties on a strategic and selective basis in international markets that are new to us. When we acquire properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy and culture, forging new business relationships in the area and unfamiliarity with local government and permitting procedures. In addition, due diligence, transaction and structuring costs may be higher than those we may face in the United States. We work to mitigate such risks through extensive diligence and research and associations with experienced partners; however, we cannot assure you that all such risks will be eliminated.

Future consolidation in the technology industry could materially adversely affect our revenues by eliminating some of our potential tenants and could make us more dependent on a more limited number of tenants.

Mergers or consolidations of technology companies in the future could reduce the number of our tenants and potential tenants. If our tenants merge with or are acquired by other entities that are not our tenants, they may discontinue or reduce the use of our data centers in the future. Any of these developments could have a material adverse effect on our revenues and results of operations.

We depend on third parties to provide Internet connectivity to the tenants in our data centers and any delays or disruptions in connectivity may materially adversely affect our operating results and cash flow.

We are not a telecommunications carrier. Although our tenants are responsible for providing their own network connectivity, we still depend upon the presence of telecommunications carriers’ fiber networks serving the locations of our data centers in order to attract and retain tenants. We believe that the availability of carrier capacity will directly affect our ability to achieve our projected results. Any carrier may elect not to offer its services within our data centers. Any carrier that has decided to provide Internet connectivity to our data centers may not continue to do so for any period of time. Further, some carriers are experiencing business difficulties or have announced consolidations. As a result, some carriers may be forced to downsize or terminate connectivity within our data centers, which could have an adverse effect on the business of our tenants and, in turn, our own operating results.

Our new data centers require construction and operation of a sophisticated redundant fiber network. The construction required to connect multiple carrier facilities to our data centers is complex and involves factors outside of our control, including regulatory requirements and the availability of construction resources. If the establishment of highly diverse Internet connectivity to our data centers does not occur, is materially delayed or is discontinued, or is subject to failure, our operating results and cash flow may be materially adversely affected. Additionally, any hardware or fiber failures on this network may result in significant loss of connectivity to our data centers. This could negatively affect our ability to attract new tenants or retain existing tenants.

Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could harm our business reputation and could adversely affect our earnings and financial condition.

Our business depends on providing customers with highly reliable service, including with respect to power supply and maintenance of environmental conditions. We may fail to provide such service as a result of numerous factors, including mechanical failure, power outage, human error, physical or electronic security breaches, and fire, earthquake, hurricane, flood and other natural disasters. Service interruptions and equipment failures may expose us to legal liability and damage our brand reputation and adversely affect our earnings and financial condition.

We are dependent upon third-party suppliers for power and certain other services, and we are vulnerable to service failures of our third-party suppliers and to price increases by such suppliers.

We rely on third parties to provide power to our data centers, and we cannot ensure that these third parties will deliver such power in adequate quantities or on a consistent basis. If the amount of power available to us is inadequate to support our customer requirements, we may be unable to satisfy our obligations to our customers or grow our business. In addition, our data centers may be susceptible to power shortages and planned or unplanned power outages caused by these shortages. Power outages may last beyond our backup and alternative power arrangements, which would harm our customers and our business. Any loss of services or equipment damage could adversely affect both our ability to generate revenues and our operating results, and harm our reputation.

 

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In addition, we may be subject to risks and unanticipated costs associated with obtaining power from various utility companies. Utilities that serve our data centers may be dependent on, and sensitive to price increases for, a particular type of fuel, such as coal, oil or natural gas. In addition, the price of these fuels and the electricity generated from them could increase as a result of proposed legislative measures related to climate change or efforts to regulate carbon emissions. Increases in the cost of power at any of our data centers would put those locations at a competitive disadvantage relative to data centers served by utilities that can provide less expensive power.

We may be vulnerable to security breaches which could disrupt our operations and have a material adverse effect on our revenues and results of operations.

A security breach could result in the misappropriation of our proprietary information and the information of our customers and cause interruptions or malfunctions in our or our customers’ operations. We may be required to expend significant financial resources to protect against such threats or to alleviate problems caused by security breaches. We may not be able to implement security measures in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, loss of existing or potential customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our revenues and results of operations.

Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid and because there may be even fewer buyers for our specialized real estate, our ability to promptly sell properties in our portfolio in response to adverse changes in their performance may be limited, which may harm our financial condition. Further, Digital Realty Trust, Inc. is subject to provisions in the Code that limit a REIT’s ability to dispose of properties, which limitations are not applicable to other types of real estate companies. In addition, the parties who contributed the 200 Paul Avenue 1-4 and 1100 Space Park Drive properties to us would incur adverse tax consequences upon the sale of these properties. While Digital Realty Trust, Inc. has exclusive authority under Digital Realty Trust, L.P.’s limited partnership agreement to determine whether, when, and on what terms to sell a property, any such decision would require the approval of Digital Realty Trust, Inc.’s board of directors. See “Risks Related to Our Organizational Structure—Tax consequences upon sale or refinancing.” These limitations may affect our ability to sell properties. This lack of liquidity and the Code restrictions may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flow, cash available for distribution and ability to access capital necessary to meet our debt payments and other obligations.

We could incur significant costs related to government regulation and private litigation over environmental matters.

Under various laws relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances at that property, and may be required to investigate and clean up such contamination at or emanating from that property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and the liability may be joint and several. Previous owners used some of our properties for industrial and retail purposes, so those properties may contain some level of environmental contamination. Fuel storage tanks are present at many of our properties, and if releases were to occur, we may be liable for the costs of cleaning any resulting contamination. The presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability or materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral.

 

 

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Some of the properties may contain asbestos-containing building materials. Environmental laws require that asbestos-containing building materials be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements. These laws may also allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

In addition, some of our tenants, particularly those in the biotechnology and life sciences industry and those in the technology manufacturing industry, routinely handle hazardous substances and wastes as part of their operations at our properties. Environmental laws and regulations subject our tenants, and potentially us, to liability resulting from these activities or from previous industrial or retail uses of those properties. Environmental liabilities could also affect a tenant’s ability to make rental payments to us.

Our properties and their uses often require permits from various government agencies, including permits related to zoning and land use, such as permits to operate data center facilities. Certain permits from state or local environmental regulatory agencies, including regulators of air quality, are usually required to install and operate diesel-powered generators, which provide emergency back-up power at some of our facilities. These permits often set emissions limits for certain air pollutants, including oxides of nitrogen. In addition, various federal, state, and local environmental, health and safety requirements, such as fire requirements and treated and storm water discharge requirements, apply to some of our properties. Changes to applicable regulations, such as air quality regulations, or the permit requirements for equipment at our facilities, could hinder or prevent our construction or operation of data center facilities.

Existing conditions at some of our properties may expose us to liability related to environmental matters.

Independent environmental consultants have conducted Phase I or similar environmental site assessments on all of the properties in our portfolio. Site assessments are intended to discover and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil samplings, subsurface investigations or an asbestos survey and the assessments may fail to reveal all environmental conditions, liabilities or compliance concerns. In addition, material environmental conditions, liabilities or compliance concerns may have arisen after these reviews were completed or may arise in the future. Future laws, ordinances or regulations may impose additional material environmental liability.

We cannot assure you that costs of future environmental compliance will not affect our ability to pay dividends to Digital Realty Trust, Inc.’s stockholders and distributions to Digital Realty Trust, L.P.’s unitholders or that such costs or other remedial measures will not have a material adverse effect on our business, assets or results of operations.

Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for adverse health effects and costs to remedy the problem.

When excessive moisture accumulates in buildings or on building materials, mold may grow, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise.

 

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We may incur significant costs complying with the Americans with Disabilities Act and similar laws.

Under the Americans with Disabilities Act of 1990, or the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. We have not conducted an audit or investigation of all of our properties to determine our compliance with the ADA. If one or more of the properties in our portfolio does not comply with the ADA, then we would be required to incur additional costs to bring the property into compliance. Additional federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate our properties. We cannot predict the ultimate cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA and any other similar legislation, our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations could be materially adversely affected.

We may incur significant costs complying with other regulations.

The properties in our portfolio are subject to various federal, state and local regulations, such as state and local fire and life safety regulations. If we fail to comply with these various regulations, we may have to pay fines or private damage awards. In addition, we do not know whether existing regulations will change or whether future regulations will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flow, cash available for distribution and ability to satisfy our debt service obligations.

The conversion rights of Digital Realty Trust, Inc.’s convertible preferred stock may be detrimental to holders of Digital Realty Trust, Inc.’s common stock.

As of December 31, 2011, Digital Realty Trust, Inc. had 5,126,364 shares of 4.375% series C cumulative convertible preferred stock, or the series C preferred stock, and 6,977,055 shares of 5.500% series D cumulative convertible preferred stock, or the series D preferred stock, outstanding. The convertible preferred stock may be converted into shares of Digital Realty Trust, Inc. common stock subject to certain conditions. The initial conversion rate for the series C preferred stock was 0.5164 shares of Digital Realty Trust, Inc. common stock per $25.00 liquidation preference, which is equivalent to an initial conversion price of $48.41 per share of Digital Realty Trust, Inc. common stock. Effective September 13, 2011, the conversion rate for the series C preferred stock was adjusted to 0.5420 shares of common stock per $25.00 liquidation preference, which is equivalent to a conversion price of $46.13 per share of Digital Realty Trust, Inc. common stock, as a result of the aggregate dividends in excess of the reference dividend that Digital Realty Trust, Inc. declared and paid on its common stock beginning with the quarter ended June 30, 2011 and through the quarter ended September 30, 2011. The initial conversion rate for the series D preferred stock was 0.5955 shares of Digital Realty Trust, Inc. common stock per $25.00 liquidation preference, which is equivalent to an initial conversion price of $41.98 per share of Digital Realty Trust, Inc. common stock. Effective September 13, 2011, the conversion rate for the series D preferred stock was adjusted to 0.6200 shares of common stock per $25.00 liquidation preference, which is equivalent to a conversion price of $40.32 per share of Digital Realty Trust, Inc. common stock, as a result of the aggregate dividends in excess of the reference dividend that Digital Realty Trust, Inc. declared and paid on its common stock beginning with the quarter ended June 30, 2011 and through the quarter ended September 30, 2011. The conversion rates for the convertible preferred stock are subject to adjustment upon the occurrence of specified events, including, but not limited to, increases in dividends on Digital Realty Trust, Inc. common stock, the issuance of certain rights, options or warrants to holders of Digital Realty Trust, Inc. common stock, subdivisions or combinations of Digital Realty Trust, Inc. common stock, certain distributions of assets, debt securities, capital stock or cash to holders of Digital Realty Trust, Inc. common stock and certain tender or exchange offers.

In addition, on or prior to April 10, 2014 (in the case of the series C preferred stock) or February 6, 2015 (in the case of the series D preferred stock) in the event of a fundamental change when the applicable price of Digital Realty Trust, Inc. common stock is less than $40.34 per share (in the case of the series C preferred stock) or $35.73 per share

 

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(in the case of the series D preferred stock), then holders of shares of the series C preferred stock and the series D preferred stock will have a special right to convert some or all of their series of preferred stock into a number of shares of Digital Realty Trust, Inc. common stock per $25.00 liquidation preference equal to such liquidation preference, plus an amount equal to accrued and unpaid dividends to, but not including, the fundamental change conversion date, divided by 98% of the market price of Digital Realty Trust, Inc. common stock. In the event that holders of shares of the convertible preferred stock exercise this special conversion right, Digital Realty Trust, Inc. has the right to repurchase for cash all or any part of the convertible preferred stock as to which the conversion right was exercised at a repurchase price equal to 100% of the liquidation preference of the convertible preferred stock to be repurchased plus an amount equal to accrued and unpaid dividends to, but not including, the fundamental change conversion date. Additionally, Digital Realty Trust, Inc. currently has 11,500,000 shares of 7.000% series E cumulative redeemable preferred stock outstanding, which may be converted into Digital Realty Trust, Inc. common stock upon the occurrence of limited specified change in control transactions.

The conversion of the convertible preferred stock or series E preferred stock for Digital Realty Trust, Inc. common stock would dilute stockholder ownership in Digital Realty Trust, Inc. and unitholder ownership in Digital Realty Trust, L.P., and could adversely affect the market price of Digital Realty Trust, Inc. common stock and could impair our ability to raise capital through the sale of additional equity securities. Any adjustments increasing the conversion rates of the convertible preferred stock would exacerbate their dilutive effect. Further, the fundamental change conversion rights might be triggered in situations where we need to conserve our cash reserves, which may limit our ability to repurchase the shares of convertible preferred stock in lieu of conversion.

Our Digital Design Services® business is subject to risks particular to third-party construction projects.

Our Digital Design Services® business is new and we only have limited experience in providing design and construction services to third parties. By providing these design and construction services to third parties, we become subject to a variety of risks unique to these activities. If construction costs of a project exceed original estimates, such costs may have to be absorbed by us, which would make the project less profitable than originally estimated, or possibly not profitable at all. A construction project may be delayed due to government or regulatory approvals, supply shortages, or other events and circumstances beyond our control, or the time required to complete a construction project may be greater than originally anticipated. In addition, we may be liable for any injuries or damage that arise from worksite accidents, or from the design or construction of the datacenters we build. If any such excess costs, project delays or liabilities were to be material, such events may adversely effect our financial condition, results of operations and cash available for distribution.

Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting.

The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Furthermore, our disclosure controls and procedures and internal control over financial reporting with respect to entities that we do not control or manage may be substantially more limited than those we maintain with respect to the subsidiaries that we have controlled or managed over the course of time. Deficiencies, including any material weakness, in our internal control over financial reporting which may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, a decline in Digital Realty Trust, Inc.’s stock price, or otherwise materially adversely affect our business, reputation, results of operations, financial condition or liquidity.

 

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Risks Related to Our Organizational Structure

Digital Realty Trust, Inc.’s duty to its stockholders may conflict with the interests of Digital Realty Trust, L.P.’s unitholders.

Conflicts of interest may exist or could arise in the future as a result of the relationships between Digital Realty Trust, Inc. and its affiliates, on the one hand, and our operating partnership or any partner thereof, on the other. Digital Realty Trust, Inc.’s directors and officers have duties to Digital Realty Trust, Inc. and its stockholders under Maryland law in connection with their management of our company. At the same time, Digital Realty Trust, Inc., as general partner, has fiduciary duties under Maryland law to our operating partnership and to the limited partners in connection with the management of our operating partnership. Digital Realty Trust, Inc.’s duties as general partner to our operating partnership and its partners may come into conflict with the duties of Digital Realty Trust, Inc.’s directors and officers to Digital Realty Trust, Inc. and its stockholders. Under Maryland law, a general partner of a Maryland limited partnership owes its limited partners the duties of loyalty and care, which must be discharged consistently with the obligation of good faith and fair dealing, unless the partnership agreement provides otherwise. The partnership agreement of our operating partnership provides that for so long as Digital Realty Trust, Inc. owns a controlling interest in our operating partnership, any conflict that cannot be resolved in a manner not adverse to either Digital Realty Trust, Inc.’s stockholders or the limited partners will be resolved in favor of Digital Realty Trust, Inc.’s stockholders.

The provisions of Maryland law that allow the fiduciary duties of a general partner to be modified by a partnership agreement have not been tested in a court of law, and we have not obtained an opinion of counsel covering the provisions set forth in the partnership agreement that purport to waive or restrict Digital Realty Trust, Inc.’s fiduciary duties.

Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders are also subject to the following additional conflicts of interest:

We may pursue less vigorous enforcement of terms of certain agreements because of conflicts of interest with GI Partners. On August 3, 2010, GI Partners Fund III, LLP, or GI Partners III, acquired a controlling interest in SoftLayer Technologies, Inc., or SoftLayer, an on-demand data center services provider that leases 250,767 square feet from us under 8 lease agreements as of December 31, 2011. Richard Magnuson, the Chairman of Digital Realty Trust, Inc.’s board of directors, is and will continue to be the chief executive officer of the advisor to GI Partners III. In the future, we may enter into additional agreements with SoftLayer or other companies owned by GI Partners II, GI Partners III or other GI Partners funds. We may choose not to enforce, or to enforce less vigorously, our rights under these agreements because of our desire to maintain our ongoing relationship with GI Partners funds and Mr. Magnuson.

Tax consequences upon sale or refinancing. Sales of properties and repayment of certain indebtedness will affect holders of common units in our operating partnership and Digital Realty Trust, Inc.’s stockholders differently. The parties who contributed the 200 Paul Avenue 1-4 and 1100 Space Park Drive properties to our operating partnership would incur adverse tax consequences upon the sale of these properties and on the repayment of related debt which differ from the tax consequences to Digital Realty Trust, Inc. and its stockholders. Consequently, these holders of common units in our operating partnership may have different objectives regarding the appropriate pricing and timing of any such sale or repayment of debt. While Digital Realty Trust, Inc. has exclusive authority under the limited partnership agreement of our operating partnership to determine when to refinance or repay debt or whether, when, and on what terms to sell a property, any such decision would require the approval of Digital Realty Trust, Inc.’s board of directors. Certain of Digital Realty Trust, Inc.’s directors and executive officers could exercise their influence in a manner inconsistent with the interests of some, or a majority, of Digital Realty Trust, Inc.’s stockholders, including in a manner which could prevent completion of a sale of a property or the repayment of indebtedness.

 

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Digital Realty Trust, Inc.’s charter, Digital Realty Trust, L.P.’s partnership agreement and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.

Digital Realty Trust, Inc.’s charter and the articles supplementary with respect to the preferred stock contain 9.8% ownership limits. Digital Realty Trust, Inc.’s charter, subject to certain exceptions, authorizes the company’s directors to take such actions as are necessary and desirable to preserve the company’s qualification as a REIT and to limit any person to actual or constructive ownership of no more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of the company’s common stock, 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of any series of preferred stock and 9.8% of the value of the company’s outstanding capital stock. Digital Realty Trust, Inc.’s board of directors, in its sole discretion, may exempt (prospectively or retroactively) a proposed transferee from the ownership limit. However, Digital Realty Trust, Inc.’s board of directors may not grant an exemption from the ownership limit to any proposed transferee whose direct or indirect ownership of more than 9.8% of the outstanding shares of the company’s common stock, more than 9.8% of the outstanding shares of any series of preferred stock or more than 9.8% of the value of the company’s outstanding capital stock could jeopardize the company’s status as a REIT. These restrictions on transferability and ownership will not apply if Digital Realty Trust, Inc.’s board of directors determines that it is no longer in the company’s best interests to attempt to qualify, or to continue to qualify, as a REIT or that compliance is no longer required for REIT qualification. The ownership limit may delay, defer or prevent a transaction or a change of control that might be in the best interest of Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders.

Digital Realty Trust, L.P.’s partnership agreement contains provisions that may delay, defer or prevent a change of control transaction. Digital Realty Trust, L.P.’s partnership agreement provides that Digital Realty Trust, Inc. may not engage in any merger, consolidation or other combination with or into another person, any sale of all or substantially all of its assets or any reclassification, recapitalization or change of its outstanding equity interests unless the transaction is approved by the holders of common units and long term incentive units representing at least 35% of the aggregate percentage interests of all holders of common units and long-term incentive units and either:

 

   

all limited partners will receive, or have the right to elect to receive, for each common unit an amount of cash, securities or other property equal to the product of the number of shares of Digital Realty Trust, Inc. common stock into which a common unit is then exchangeable and the greatest amount of cash, securities or other property paid in consideration of each share of Digital Realty Trust, Inc. common stock in connection with the transaction (provided that, if, in connection with the transaction, a purchase, tender or exchange offer is made to and accepted by the holders of more than 50% of the shares of Digital Realty Trust, Inc. common stock, each holder of common units will receive, or have the right to elect to receive, the greatest amount of cash, securities or other property which such holder would have received if it exercised its right to redemption and received shares of Digital Realty Trust, Inc. common stock in exchange for its common units immediately prior to the expiration of such purchase, tender or exchange offer and thereupon accepted such purchase, tender or exchange offer and the transaction was then consummated); or

 

   

the following conditions are met:

 

   

substantially all of the assets directly or indirectly owned by the surviving entity in the transaction are held directly or indirectly by Digital Realty Trust, L.P. or another limited partnership or limited liability company which is the survivor of a merger, consolidation or combination of assets with Digital Realty Trust, L.P., or the surviving partnership;

 

   

the holders of common units and long-term incentive units own a percentage interest of the surviving partnership based on the relative fair market value of Digital Realty Trust, L.P.’s net assets and the other net assets of the surviving partnership immediately prior to the consummation of such transaction;

 

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the rights, preferences and privileges of the holders of interests in the surviving partnership are at least as favorable as those in effect immediately prior to the consummation of such transaction and as those applicable to any other limited partners or non-managing members of the surviving partnership; and

 

   

the rights of the limited partners or non-managing members of the surviving partnership include at least one of the following: (i) the right to redeem their interests in the surviving partnership for the consideration available to such persons pursuant to Digital Realty Trust, L.P.’s partnership agreement; or (ii) the right to redeem their interests for cash on terms equivalent to those in effect with respect to their common units immediately prior to the consummation of such transaction (or, if the ultimate controlling person of the surviving partnership has publicly traded common equity securities, for such common equity securities, with an exchange ratio based on the determination of relative fair market value of such securities and the shares of Digital Realty Trust, Inc. common stock).

These provisions may discourage others from trying to acquire control of Digital Realty Trust, Inc. and may delay, defer or prevent a change of control transaction that might be beneficial to Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders.

Digital Realty Trust, Inc. could increase or decrease the number of authorized shares of stock and issue stock without stockholder approval. Digital Realty Trust, Inc.’s charter authorizes the company’s board of directors, without stockholder approval, to amend the charter from time to time to increase or decrease the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series, to issue authorized but unissued shares of the company’s common stock or preferred stock and, subject to the voting rights of holders of preferred stock, to classify or reclassify any unissued shares of the company’s common stock or preferred stock and to set the preferences, rights and other terms of such classified or reclassified shares. Although Digital Realty Trust, Inc.’s board of directors has no such intention at the present time, it could establish a class or series of preferred stock that could, depending on the terms of such class or series, delay, defer or prevent a transaction or a change of control that might be in the best interest of Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders.

Certain provisions of Maryland law could inhibit changes in control. Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of impeding a third party from making a proposal to acquire Digital Realty Trust, Inc. or of impeding a change of control under circumstances that otherwise could be in the best interests of Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders, including:

 

   

“business combination” provisions that, subject to limitations, prohibit certain business combinations between Digital Realty Trust, Inc. and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the company’s outstanding shares of voting stock or an affiliate or associate of the company who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the company’s then outstanding shares of stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and supermajority voting requirements on these combinations; and

 

   

“control share” provisions that provide that “control shares” of Digital Realty Trust, Inc. (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding “control shares”) have no voting rights except to the extent approved by the company’s stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.

Digital Realty Trust, Inc. has opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL by resolution of its board of directors, and in the case of the control share provisions of the MGCL pursuant to a provision in its bylaws. However, Digital Realty Trust, Inc.’s board of

 

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directors may by resolution elect to opt in to the business combination provisions of the MGCL and the company may, by amendment to its bylaws, opt in to the control share provisions of the MGCL in the future.

The provisions of Digital Realty Trust, Inc.’s charter on removal of directors and the advance notice provisions of Digital Realty Trust, Inc.’s bylaws could delay, defer or prevent a transaction or a change of control of the company that might be in the best interest of Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders. Likewise, if Digital Realty Trust, Inc.’s board of directors were to opt in to the business combination provisions of the MGCL or the provisions of Title 3, Subtitle 8 of the MGCL not currently applicable to the company, or if the provision in the Digital Realty Trust, Inc.’s bylaws opting out of the control share acquisition provisions of the MGCL were rescinded, these provisions of the MGCL could have similar anti-takeover effects.

Digital Realty Trust, Inc.’s board of directors may change our investment and financing policies without stockholder approval or approval of Digital Realty Trust, L.P.’s other partners and we may become more highly leveraged, which may increase our risk of default under our debt obligations.

Digital Realty Trust, Inc.’s board of directors adopted a policy limiting our indebtedness to 60% of our total enterprise value. Our total enterprise value is defined as the sum of the market value of Digital Realty Trust, Inc.’s outstanding common stock (which may decrease, thereby increasing our debt to total capitalization ratio), excluding options issued under our incentive award plan, plus the aggregate value of Digital Realty Trust, L.P. units not held by Digital Realty Trust, Inc. (with the per unit value equal to the market value of one share of Digital Realty Trust, Inc. common stock and excluding long-term incentive units and Class C units), plus the liquidation preference of Digital Realty Trust, Inc.’s outstanding preferred stock, plus the book value of our total consolidated indebtedness. However, the organizational documents of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. Digital Realty Trust, Inc.’s board of directors may alter or eliminate our current policy on borrowing at any time without stockholder or unitholder approval. If this policy changed, we could become more highly leveraged which could result in an increase in our debt service and which could materially adversely affect our cash flow and our ability to pay dividends to Digital Realty Trust, Inc.’s stockholders or distributions to Digital Realty Trust, L.P.’s unitholders. Higher leverage also increases the risk of default on our obligations.

Digital Realty Trust, Inc.’s rights and the rights of its stockholders to take action against its directors and officers are limited.

Maryland law provides that Digital Realty Trust, Inc.’s directors have no liability in their capacities as directors if they perform their duties in good faith, in a manner they reasonably believe to be in the company’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. As permitted by the MGCL, Digital Realty Trust, Inc.’s charter limits the liability of the company’s directors and officers to the company and its stockholders for money damages, except for liability resulting from:

 

   

actual receipt of an improper benefit or profit in money, property or services; or

 

   

a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, Digital Realty Trust, Inc.’s charter authorizes the company to obligate itself, and the company’s bylaws require it, to indemnify the company’s directors and officers for actions taken by them in those capacities and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the maximum extent permitted by Maryland law and Digital Realty Trust, Inc. has entered into indemnification agreements with its officers and directors. As a result, Digital Realty Trust, Inc. and its stockholders may have more limited rights against its directors and officers than might otherwise exist under common law. Accordingly, in the event that actions taken in good faith by any of Digital Realty Trust, Inc.’s directors or officers impede the performance of the company, the company’s stockholders’ ability to recover damages from that director or officer will be limited.

 

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Risks Related to Digital Realty Trust, Inc.’s Status as a REIT

Failure to qualify as a REIT would have significant adverse consequences to Digital Realty Trust, Inc. and its stockholders and to Digital Realty Trust, L.P. and its unitholders.

Digital Realty Trust, Inc. has operated and intends to continue operating in a manner that it believes will allow it to qualify as a REIT for federal income tax purposes under the Code. Digital Realty Trust, Inc. has not requested and does not plan to request a ruling from the IRS that it qualifies as a REIT. If Digital Realty Trust, Inc. loses its REIT status, it will face serious tax consequences that would substantially reduce its cash available for distribution, including cash available to pay dividends to its stockholders, for each of the years involved because:

 

   

Digital Realty Trust, Inc. would not be allowed a deduction for dividends paid to stockholders in computing its taxable income and would be subject to federal income tax at regular corporate rates;

 

   

Digital Realty Trust, Inc. also could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and

 

   

unless Digital Realty Trust, Inc. is entitled to relief under applicable statutory provisions, it could not elect to be taxed as a REIT for four taxable years following the year during which it was disqualified.

In addition, if Digital Realty Trust, Inc. fails to qualify as a REIT, it will not be required to make distributions to stockholders, and accordingly, distributions Digital Realty Trust, L.P. makes to its unitholders could be similarly reduced. As a result of all these factors, Digital Realty Trust, Inc.’s failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and would materially adversely affect the value of Digital Realty Trust, Inc.’s stock and Digital Realty Trust, L.P.’s units. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury Regulations that have been promulgated under the Code is greater in the case of a REIT that, like Digital Realty Trust, Inc., holds its assets through a partnership. Digital Realty Trust, Inc.’s ability to qualify as a REIT may be affected by facts and circumstances that are not entirely within its control. In order to qualify as a REIT, Digital Realty Trust, Inc. must satisfy a number of requirements, including requirements regarding the composition of its assets and a requirement that at least 95% of its gross income in any year must be derived from qualifying sources, such as “rents from real property.” Also, Digital Realty Trust, Inc. must make distributions to stockholders aggregating annually at least 90% of its net taxable income, excluding net capital gains. In addition, legislation, new regulations, administrative interpretations or court decisions may materially adversely affect its investors, its ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments.

Even if Digital Realty Trust, Inc. qualifies as a REIT for federal income tax purposes, it may be subject to some federal, state and local taxes on its income or property and, in certain cases, a 100% penalty tax, in the event it sells property as a dealer. In addition, our domestic corporate subsidiary, Digital Services, Inc., which is a taxable REIT subsidiary of Digital Realty Trust, Inc., could be subject to federal and state taxes, and our foreign properties and companies are subject to tax in the jurisdictions in which they operate and are located.

To maintain Digital Realty Trust, Inc.’s REIT status, we may be forced to borrow funds during unfavorable market conditions.

To qualify as a REIT, Digital Realty Trust, Inc. generally must distribute to its stockholders at least 90% of its net taxable income each year, excluding capital gains, and Digital Realty Trust, Inc. will be subject to regular corporate income taxes to the extent that it distributes less than 100% of its net taxable income each year. In addition, Digital Realty Trust, Inc. will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions paid by Digital Realty Trust, Inc. in any calendar year are less than the sum of 85% of its ordinary income, 95% of its capital gain net income and 100% of its undistributed income from prior years. While historically Digital Realty Trust, Inc. has satisfied these distribution requirements by making cash

 

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distributions to its stockholders, a REIT is permitted to satisfy these requirements by making distributions of cash or other property. We may need to borrow funds for Digital Realty Trust, Inc. to meet the REIT distribution requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from differences in timing between the actual receipt of cash and inclusion of income for federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required debt or amortization payments.

The power of Digital Realty Trust, Inc.’s board of directors to revoke Digital Realty Trust, Inc.’s REIT election without stockholder approval may cause adverse consequences to Digital Realty Trust, Inc.’s stockholders and Digital Realty Trust, L.P.’s unitholders.

Digital Realty Trust, Inc.’s charter provides that its board of directors may revoke or otherwise terminate its REIT election, without the approval of its stockholders, if it determines that it is no longer in Digital Realty Trust, Inc.’s best interests to continue to qualify as a REIT. If Digital Realty Trust, Inc. ceases to qualify as a REIT, it would become subject to U.S. federal income tax on its taxable income and it would no longer be required to distribute most of its taxable income to its stockholders and accordingly, distributions Digital Realty Trust, L.P. makes to its unitholders could be similarly reduced.

Forward-Looking Statements

We make statements in this report that are forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, portfolio performance including our ability to lease vacant space and space under development, leverage policy and acquisition and capital expenditure plans, as well as our discussion of “Factors Which May Influence Future Results of Operations,” contain forward-looking statements. Likewise, all of our statements regarding anticipated market conditions, demographics and results of operations are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

 

   

the impact of the recent deterioration in global economic, credit and market conditions, including the downgrade of the U.S. government’s credit rating;

 

   

current local economic conditions in our geographic markets;

 

   

decreases in information technology spending, including as a result of economic slowdowns or recession;

 

   

adverse economic or real estate developments in our industry or the industry sectors that we sell to (including risks relating to decreasing real estate valuations and impairment charges);

 

   

our dependence upon significant tenants;

 

   

bankruptcy or insolvency of a major tenant or a significant number of smaller tenants;

 

   

defaults on or non-renewal of leases by tenants;

 

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our failure to obtain necessary debt and equity financing;

 

   

increased interest rates and operating costs;

 

   

risks associated with using debt to fund our business activities, including re-financing and interest rate risks, our failure to repay debt when due, adverse changes in our credit ratings or our breach of covenants or other terms contained in our loan facilities and agreements;

 

   

financial market fluctuations;

 

   

changes in foreign currency exchange rates;

 

   

our inability to manage our growth effectively;

 

   

difficulty acquiring or operating properties in foreign jurisdictions;

 

   

our failure to successfully integrate and operate acquired or redeveloped properties or businesses;

 

   

risks related to joint venture investments, including as a result of our lack of control of such investments;

 

   

delays or unexpected costs in development or redevelopment of properties;

 

   

decreased rental rates or increased vacancy rates;

 

   

increased competition or available supply of data center space;

 

   

our inability to successfully develop and lease new properties and space held for redevelopment;

 

   

difficulties in identifying properties to acquire and completing acquisitions;

 

   

our inability to acquire off-market properties;

 

   

our inability to comply with the rules and regulations applicable to reporting companies;

 

   

Digital Realty Trust, Inc.’s failure to maintain its status as a REIT;

 

   

possible adverse changes to tax laws;

 

   

restrictions on our ability to engage in certain business activities;

 

   

environmental uncertainties and risks related to natural disasters;

 

   

losses in excess of our insurance coverage;

 

   

changes in foreign laws and regulations, including those related to taxation and real estate ownership and operation; and

 

   

changes in local, state and federal regulatory requirements, including changes in real estate and zoning laws and increases in real property tax rates.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report, including under Part I, Item 1A, Risk Factors. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. While forward-looking statements reflect our good faith beliefs, they are not guaranties of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, new information, data or methods, future events or other changes.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

 

ITEM 2. PROPERTIES

Our Portfolio

As of December 31, 2011, we owned 101 properties, excluding three properties held as investments in unconsolidated joint ventures and land held for development. These properties are mainly located throughout the U.S., with 15 properties located in Europe, one property in Asia and one property in Canada, and contain a total of approximately 18.3 million rentable square feet, including 2.4 million square feet held for redevelopment. The following table presents an overview of our portfolio of properties, excluding the three properties held as investments in unconsolidated joint ventures and land held for development, based on information as of December 31, 2011. All properties are held in fee simple except as otherwise indicated. Please refer to note 7 in the notes to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a description of all applicable encumbrances as of December 31, 2011.

 

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Table of Contents

 

Property(1)

  

Acquisition
date

  

Metropolitan Area

   Net
Rentable
Square Feet
Excluding
Redevelopment
Space(2)
     Redevelopment
Space(3)
     Annualized
Rent
($000)(4)
     Percent
Leased(5)
    Annualized
Rent per
Occupied
Square
Foot ($)(6)
 

Internet Gateways

                   

350 East Cermak Road

   May-05    Chicago      1,129,226         4,513         64,927         97.0     59.29   

200 Paul Avenue 1-4

   Nov-04    San Francisco      509,158         18,522         27,908         99.4     55.16   

600 West Seventh Street

   May-04    Los Angeles      480,042         9,680         20,289         98.7     42.80   

120 E. Van Buren Street

   Jul-06    Phoenix      287,514         —           20,012         89.3     77.96   

114 Rue Ambroise Croizat(8)

   Dec-06    Paris, France      332,300         19,846         18,403         91.6     60.44   

2323 Bryan Street

   Jan-02    Dallas      446,044         31,063         14,325         74.8     42.94   

111 Eighth Avenue(7)

   Mar-07    New York Metro      116,843         —           13,453         95.3     120.79   

1100 Space Park Drive

   Nov-04    Silicon Valley      153,205         12,092         7,423         100.0     48.45   

600-780 S. Federal

   Sep-05    Chicago      161,547         —           6,787         63.5     66.19   

36 NE 2nd Street

   Jan-02    Miami      162,140         —           4,887         95.9     31.44   

6 Braham Street(9)

   Jul-02    London, England      63,233         —           4,700         100.0     74.33   

900 Walnut Street

   Aug-07    St. Louis      112,266         —           4,378         99.9     39.04   

125 North Myers

   Aug-05    Charlotte      25,402         —           1,320         100.0     51.96   

731 East Trade Street

   Aug-05    Charlotte      40,879         —           1,273         100.0     31.14   

113 North Myers

   Aug-05    Charlotte      29,218         —           915         100.0     31.32   
        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
           4,049,017         95,716         211,000         92.9     56.07   

Data Centers

                   

2121 South Price Road

   Jul-10    Phoenix      309,244         210,235         35,165         92.9     122.46   

365 Main Street

   Jul-10    San Francisco      222,431         4,550         26,820         80.5     149.81   

128 First Avenue

   Jan-10    Boston      274,750         —           22,228         99.4     81.42   

43881 Devin Shafron Drive

   Mar-07    Northern Virginia      180,000         —           18,130         100.0     100.72   

3 Corporate Place

   Dec-05    New York Metro      276,931         —           17,735         100.0     64.04   

300 Boulevard East

   Nov-02    New York Metro      346,819         22,962         16,336         89.9     52.37   

43915 Devin Shafron Drive

   May-09    Northern Virginia      129,033         3,247         15,413         100.0     119.45   

720 2nd Street

   Jul-10    San Francisco      121,220         —           14,523         86.1     139.18   

2440 Marsh Lane

   Jan-03    Dallas      135,250         —           14,032         100.0     103.75   

365 S. Randolphville Road

   Feb-08    New York Metro      172,044         92,748         12,781         88.6     83.86   

833 Chestnut Street

   Mar-05    Philadelphia      592,295         62,463         12,770         92.0     23.43   

60 & 80 Merritt Parkway

   Jan-10    New York Metro      169,540         —           12,377         100.0     73.00   

55 Middlesex Turnpike

   Jan-10    Boston      106,000         —           11,803         90.6     122.84   

2260 East El Segundo Boulevard

   Jul-10    Los Angeles      132,240         —           11,519         100.0     87.11   

 

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Table of Contents

Property(1)

 

Acquisition
date

 

Metropolitan Area

  Net
Rentable
Square Feet
Excluding
Redevelopment
Space(2)
    Redevelopment
Space(3)
    Annualized
Rent
($000)(4)
    Percent
Leased(5)
    Annualized
Rent per
Occupied
Square
Foot ($)(6)
 

1232 Alma Road

  Sep-09   Dallas     105,726        —          11,167        99.5     106.14   

4849 Alpha Road

  Apr-04   Dallas     125,538        —          10,867        99.7     86.82   

3 St. Anne’s Boulevard(9)

  Dec-07   London, England     96,384        —          10,589        52.4     209.70   

43791 Devin Shafron Drive

  Mar-07   Northern Virginia     132,806        2,194        10,490        100.0     78.99   

1350 Duane & 3080 Raymond

  Oct-09   Silicon Valley     185,000        —          9,987        100.0     53.98   

3011 Lafayette Street

  Jan-07   Silicon Valley     90,780        —          9,948        100.0     109.58   

Unit 9, Blanchardstown Corporate Park(8)

  Dec-06   Dublin, Ireland     120,000        —          9,909        98.8     83.62   

1500 Space Park Drive

  Sep-07   Silicon Valley     51,615        —          9,053        100.0     175.39   

1525 Comstock Street

  Sep-07   Silicon Valley     42,385        —          8,951        100.0     211.18   

4025 Midway Road

  Jan-06   Dallas     90,058        10,532        8,753        100.0     97.19   

Clonshaugh Industrial Estate II(8)

  Feb-06   Dublin, Ireland     124,500        —          8,512        100.0     68.37   

360 Spear Street

  Dec-11   San Francisco     154,950        —          8,028        100.0     51.81   

2055 East Technology Circle(11)

  Oct-06   Phoenix     76,350        —          8,013        100.0     104.95   

Mundells Roundabout(9)

  Apr-07   London, England     113,464        —          7,471        100.0     65.84   

375 Riverside Parkway

  Jun-03   Atlanta     250,191        —          7,434        99.2     29.94   

2045 & 2055 LaFayette Street

  May-04   Silicon Valley     300,000        —          7,020        100.0     23.40   

11830 Webb Chapel Road

  Aug-04   Dallas     365,647        —          6,919        88.1     21.47   

Cressex 1(9)

  Dec-07   London, England     50,847        —          6,906        100.0     135.82   

150 South First Street

  Sep-04   Silicon Valley     179,761        —          6,699        99.0     37.63   

1725 Comstock Street

  Apr-10   Silicon Valley     39,643        —          6,534        100.0     164.82   

760 Doug Davis Road

  Dec-11   Atlanta     334,306        —          6,376        100.0     19.07   

12001 North Freeway

  Apr-06   Houston     246,258        54,447        6,351        88.9     29.00   

100 & 200 Quannapowitt Parkway

  Jun-04   Boston     286,550        100,406        6,108        90.8     23.49   

4030 Lafayette

  Jul-10   Northern Virginia     72,696        —          5,791        100.0     79.66   

Paul van Vlissingenstraat 16(8)

  Aug-05   Amsterdam, Netherlands     112,472        —          5,596        73.7     67.54   

Cateringweg 5(8)

  Jun-10   Amsterdam, Netherlands     55,972        —          5,371        100.0     95.96   

3105 and 3115 Alfred Street

  May-10   Silicon Valley     49,858        —          5,283        58.1     182.50   

14901 FAA Boulevard

  Jun-06   Dallas     263,700        —          4,938        100.0     18.73   

29A International Business Park(13)

  Nov-10   Singapore     125,007        245,493        4,787        55.2     69.40   

45901 & 45845 Nokes Blvd

  Dec-09   Northern Virginia     167,160        —          4,478        100.0     26.79   

1201 Comstock Street

  Jun-08   Silicon Valley     24,000        —          4,465        100.0     186.04   

2334 Lundy Place

  Dec-02   Silicon Valley     130,752        —          4,393        100.0     33.60   

 

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Table of Contents

Property(1)

 

Acquisition
date

 

Metropolitan Area

  Net
Rentable
Square Feet
Excluding
Redevelopment
Space(2)
    Redevelopment
Space(3)
    Annualized
Rent
($000)(4)
    Percent
Leased(5)
    Annualized
Rent per
Occupied
Square
Foot ($)(6)
 

44470 Chilum Place

  Feb-07   Northern Virginia     95,440        —          4,311        100.0     45.17   

115 Second Avenue

  Oct-05   Boston     66,730        —          3,647        100.0     54.65   

2401 Walsh Street

  Jun-05   Silicon Valley     167,932        —          3,614        100.0     21.52   

8534 Concord Center Drive

  Jun-05   Denver     85,660        —          3,567        100.0     41.64   

2 St. Anne’s Boulevard(9)

  Dec-07   London, England     30,612        —          3,321        100.0     108.49   

43790 Devin Shafron Drive

  May-09   Northern Virginia     152,138        —          3,043        100.0     20.00   

210 N. Tucker Boulevard

  Aug-07   St. Louis     161,549        175,867        3,024        74.9     24.98   

2950 Zanker Road

  Aug-10   Silicon Valley     69,700        —          2,970        100.0     42.61   

21110 Ridgetop Circle

  Jan-07   Northern Virginia     135,513        —          2,822        100.0     20.82   

21561 & 21571 Beaumeade Circle

  Dec-09   Northern Virginia     164,453        —          2,763        100.0     16.80   

11085 Sun Center Drive

  Sep-11   Sacramento     69,048        —          2,712        100.0     39.28   

43830 Devin Shafron Drive

  May-09   Northern Virginia     49,759        63,491        2,547        42.2     121.19   

Naritaweg 52(8)(10)

  Dec-07   Amsterdam, Netherlands     63,260        —          2,546        100.0     40.25   

200 North Nash Street

  Jun-05   Los Angeles     113,606        —          2,445        100.0     21.52   

2403 Walsh Street

  Jun-05   Silicon Valley     103,940        —          2,237        100.0     21.52   

4050 Lafayette

  Jul-10   Northern Virginia     42,374        —          2,203        34.2     152.08   

21551 Beaumeade Circle

  Dec-09   Northern Virginia     152,504        —          2,027        100.0     13.29   

6800 Millcreek Drive

  Apr-06   Toronto, Canada     83,758        —          1,985        100.0     23.70   

Manchester Technopark(9)

  Jun-08   Manchester, England     38,016        —          1,973        100.0     51.90   

4700 Old Ironsides Drive

  Jun-05   Silicon Valley     90,139        —          1,940        100.0     21.52   

444 Toyama Drive

  Sep-09   Silicon Valley     42,083        —          1,830        100.0     43.49   

4650 Old Ironsides Drive

  Jun-05   Silicon Valley     84,383        —          1,816        100.0     21.52   

1807 Michael Faraday Court

  Oct-06   Northern Virginia     19,237        —          1,796        100.0     93.36   

7505 Mason King Court

  Nov-08   Northern Virginia     109,650        —          1,777        100.0     16.21   

Chemin de l’Epinglier 2(8)

  Nov-05   Geneva, Switzerland     59,190        —          1,642        100.0     27.74   

3015 Winona Avenue

  Dec-04   Los Angeles     82,911        —          1,640        100.0     19.78   

251 Exchange Place

  Nov-05   Northern Virginia     70,982        —          1,640        100.0     23.10   

900 Dorothy Drive

  Aug-10   Dallas     56,176        —          1,520        100.0     27.06   

43831 Devin Shafron Drive

  Mar-07   Northern Virginia     117,071        —          1,504        100.0     12.85   

3300 East Birch Street

  Aug-03   Los Angeles     68,807        —          1,502        100.0     21.83   

Clonshaugh Industrial Estate I(8)

  Feb-06   Dublin, Ireland     20,000        —          1,443        100.0     72.15   

1125 Energy Park Drive

  Mar-05   Minneapolis/St. Paul     112,827        —          1,437        100.0     12.74   

101 Aquila Way

  Apr-06   Atlanta     313,581        —          1,411        100.0     4.50   

 

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Table of Contents

Property(1)

 

Acquisition
date

 

Metropolitan Area

  Net
Rentable
Square Feet
Excluding
Redevelopment
Space(2)
    Redevelopment
Space(3)
    Annualized
Rent
($000)(4)
    Percent
Leased(5)
    Annualized
Rent per
Occupied
Square
Foot ($)(6)
 

Gyroscoopweg 2E-2F(8)

  Jul-06   Amsterdam, Netherlands     55,585        —          1,193        100.0     21.46   

8100 Boone Boulevard(7)

  Oct-06   Northern Virginia     17,015        —          881        100.0     51.78   

600 Winter Street

  Sep-06   Boston     30,400        —          826        100.0     27.17   

2300 NW 89th Place

  Sep-06   Miami     64,174        —          654        100.0     10.19   

7620 Metro Center Drive

  Dec-05   Austin     45,000        —          605        100.0     13.44   

3065 Gold Camp Drive

  Oct-04   Sacramento     13,309        49,648        289        100.0     21.71   

1 St. Anne’s Boulevard(9)

  Dec-07   London, England     20,219        —          273        100.0     13.50   

1506 Moran Road

  Dec-11   Northern Virginia     13,626        —          180        100.0     13.21   

4040 Lafayette

  Jul-10   Northern Virginia     —          30,333        —          0.0     —     

905 Security Row

  Sep-09   Dallas     —          249,657        —          0.0     —     

1400 N. Bowser Road

  Sep-09   Dallas     —          246,940        —          0.0     —     

800 Central Expressway

  Aug-10   Silicon Valley     —          150,000        —          0.0     —     

650 Randolph Road

  Jun-08   New York Metro     —          127,790        —          0.0     —     

900 Quality Way

  Sep-09   Dallas     —          112,253        —          0.0     —     

7500 Metro Center Drive

  Dec-05   Austin     —          74,962        —          0.0     —     

Fountain Court

  Jul-11   London, England     —          131,771        —          0.0     —     

904 Quality Way

  Sep-09   Dallas     —          46,750        —          0.0     —     

1301 International Parkway

  Sep-09   Dallas     —          20,500        —          0.0     —     
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        11,084,530        2,289,239        560,375        95.1     53.19   

Technology Manufacturing

             

34551 Ardenwood Boulevard 1-4

  Jan-03   Silicon Valley     307,657        —          6,816        100.0     22.15   

47700 Kato Road & 1055 Page Avenue

  Sep-03   Silicon Valley     183,050        —          4,146        100.0     22.65   

2010 East Centennial Circle(12)

  May-03   Phoenix     113,405        —          2,852        100.0     25.15   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        604,112        —          13,814        100.0     22.86   

Technology Office

             

1 Savvis Parkway

  Aug-07   St. Louis     156,000        —          2,644        100.0     16.95   

908 Quality Way

  Sep-09   Dallas     14,400        —          24        100.0     1.67   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        170,400        —          2,668        100.0     15.66   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio Total/Weighted Average

        15,908,059        2,384,955      $ 787,857        94.8     52.27   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We have categorized the properties in our portfolio by their principal use based on annualized rent. However, many of our properties support multiple uses.

 

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(2) Net rentable square feet at a building represents the current square feet at that building under lease as specified in the lease agreements plus management’s estimate of space available for lease based on engineering drawings. Net rentable square feet includes tenants’ proportional share of common areas but excludes space held for redevelopment.
(3) Redevelopment space is unoccupied space that requires significant capital investment in order to develop datacenter facilities that are ready for use. Most often this is shell space. However, in certain circumstances this may include partially built datacenter space that was not completed by previous ownership or tenants and requires a large capital investment in order to build out the space.
(4) Annualized rent represents the monthly contractual rent (defined as cash base rent before abatements) under existing leases as of December 31, 2011 multiplied by 12.
(5) Excludes space held for redevelopment. Includes unoccupied space for which we are receiving rent and excludes space for which leases had been executed as of December 31, 2011, but for which we are not receiving rent. We estimate the total square feet available for lease based on a number of factors in addition to contractually leased square feet, including available power, required support space and common area.
(6) Annualized rent per square foot represents annualized rent as computed above, divided by the total square footage under lease as of the same date.
(7)

111 Eighth Avenue (2nd and 6th floors), 8100 Boone Boulevard and 111 Eighth Avenue (3rd and 7th floors) are leased by us pursuant to leases that expire in June 2014, September 2017 and February 2022, respectively. The lease at 111 Eighth Avenue (2nd and 6th floors) has an option to extend the lease until June 2019 and the lease at 111 Eighth Avenue (3rd and 7th floors) has an option to extend the lease until February 2032.

(8) Rental amounts for Unit 9, Blanchardstown Corporate Park, 114 Rue Ambroise Croizat, Naritaweg 52, Paul van Vlissingenstraat 16, Chemin de l’Epinglier 2, Clonshaugh Industrial Estate I and II, Gyroscoopweg 2E-2F and Cateringweg 5 were calculated based on the exchange rate in effect on December 31, 2011 of $1.30 to €1.00. Paul Van Vlissingenstraat 16, Chemin de l’Epinglier 2, Clonshaugh Industrial Estate I and II and Cateringweg 5 are subject to ground leases, which expire in the years 2054, 2074, 2981 and 2059, respectively.
(9) Rental amounts for 6 Braham Street, Mundells Roundabout, Cressex 1, Manchester Technopark, 1 St. Anne’s Boulevard, 2 St. Anne’s Boulevard and 3 St. Anne’s Boulevard were calculated based on the exchange rate in effect on December 31, 2011 of $1.55 to £1.00. Manchester Technopark is subject to a ground lease, which expires in the year 2125.
(10) We are party to a ground sublease for this property. This is a perpetual ground sublease. Lease payments were prepaid by the prior owner of this property through December 2036.
(11) We are party to a ground sublease for this property. The term of the ground sublease expires in September 2083. All of the lease payments were prepaid by the prior owner of this property.
(12) We are party to a ground sublease for this property. The term of the ground sublease expires in the year 2082.
(13) Rental amounts for 29A International Business Park were calculated based on the exchange rate in effect on December 31, 2011 of $0.77 to S$1.00. 29A International Business Park is subject to a ground lease, which expires in the year 2038. Net rentable square feet excluding redevelopment space includes approximately 50,000 square feet of support space.

 

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Table of Contents

Tenant Diversification

As of December 31, 2011, our portfolio was leased to approximately 535 companies, many of which are nationally recognized firms. The following table sets forth information regarding the 20 largest tenants in our portfolio based on annualized rent as of December 31, 2011 (dollar amounts in thousands).

 

    

Tenant

   Number
of
Locations
     Total
Occupied
Square
Feet(1)
     Percentage
of Net
Rentable
Square
Feet
    Annualized
Rent(2)
     Percentage
of
Annualized
Rent
    Weighted
Average
Remaining
Lease
Term in
Months
 

1

   CenturyLink, Inc.(3)      33         2,696,292         16.9   $ 80,233         10.2     88   

2

   Equinix Operating Company, Inc.      9         878,062         5.5     32,524         4.1     86   

3

   Facebook, Inc.      4         241,865         1.5     30,624         3.9     77   

4

   TelX Group, Inc.      11         254,314         1.6     26,890         3.4     171   

5

   Morgan Stanley      5         182,592         1.1     26,621         3.4     34   

6

   SoftLayer Technologies, Inc.      6         250,767         1.6     24,774         3.1     117   

7

   Verizon Communications, Inc.      20         307,890         1.9     18,486         2.3     78   

8

   AT & T      18         615,267         3.9     18,310         2.3     82   

9

   NTT Communications Company      5         309,759         1.9     18,000         2.3     84   

10

   Level 3 Communications, LLC      30         339,223         2.1     13,504         1.7     95   

11

   Amazon      6         448,895         2.8     12,723         1.6     110   

12

   Pfizer, Inc.      1         87,049         0.5     11,201         1.4     72   

13

   Yahoo! Inc.      2         110,847         0.7     10,357         1.3     70   

14

   TATA Communications (UK)      2         105,366         0.7     10,252         1.3     72   

15

   BT Americas, Inc.      3         67,685         0.4     9,578         1.2     65   

16

   Microsoft Corporation      3         322,587         2.0     9,447         1.2     46   

17

   Sprint Communications Co., LP      6         173,319         1.1     9,433         1.2     33   

18

   JPMorgan Chase & Co.      2         117,953         0.7     9,387         1.2     125   

19

   eircom Limited      1         124,500         0.8     8,512         1.1     91   

20

   T-Systems North America, Inc.      2         77,610         0.5     8,377         1.1     27   
        

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   Total/Weighted Average         7,711,842         48.2   $ 389,233         49.3     87   
        

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Occupied square footage is defined to include leases that have commenced on or before December 31, 2011. For some of our properties, we calculate occupancy based on factors in addition to contractually leased square feet, including available power, required support space and common area. We estimate the total net rentable square feet available for lease based on a number of factors in addition to contractually leased square feet, including available power, required support space and common area.
(2) Annualized rent represents the monthly contractual rent (defined as cash base rent before abatements) under existing leases as of December 31, 2011 multiplied by 12.
(3) Represents leases with Savvis Communications Corporation, or Savvis, and Qwest Communications International, Inc., or Qwest, (or affiliates thereof), which are our direct tenants. CenturyLink, Inc. acquired Qwest in the three months ended June 30, 2011 and Savvis in the three months ended September 30, 2011, and Qwest and Savvis are now wholly-owned subsidiaries of CenturyLink, Inc.

 

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Table of Contents

Lease Distribution

The following table sets forth information relating to the distribution of leases in the properties in our portfolio, based on net rentable square feet (excluding approximately 2.4 million square feet held for redevelopment at December 31, 2011) under lease as of December 31, 2011.

 

Square Feet Under Lease

   Number
of
Leases(1)
     Percentage
of All
Leases
    Total Net
Rentable
Square
Feet(2)
     Percentage
of Net
Rentable
Square
Feet(2)
    Annualized
Rent
($000)(3)
     Percentage
of
Annualized
Rent
 

Available

          834,522         5.2   $ —           0.0

2,500 or less

     1,052         64.2     503,776         3.2     49,863         6.3

2,501 - 10,000

     276         16.9     1,657,735         10.4     140,879         17.9

10,001 - 20,000

     138         8.4     2,137,764         13.4     176,605         22.4

20,001 - 40,000

     85         5.2     2,476,159         15.6     156,638         19.9

40,001 - 100,000

     58         3.5     3,816,799         24.0     152,064         19.3

Greater than 100,000

     30         1.8     4,481,304         28.2     111,805         14.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Portfolio Total

     1,639         100.0     15,908,059         100.0   $ 787,854         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Includes license and similar agreements that upon expiration will be automatically renewed, primarily on a month-to-month basis. Number of leases represents the leased-unit count; a lease could include multiple units.
(2) For some of our properties, we calculate total net rentable square feet available for lease based on factors in addition to contractually leased square feet, including available power, required support space and common area.
(3) Annualized rent represents the monthly contractual rent (defined as cash base rent before abatements) under existing leases as of December 31, 2011 multiplied by 12.

 

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Table of Contents

Lease Expirations

The following table sets forth a summary schedule of the lease expirations for leases in place as of December 31, 2011 plus available space for ten calendar years at the properties in our portfolio, excluding approximately 2.4 million square feet held for redevelopment at December 31, 2011. Unless otherwise stated in the footnotes, the information set forth in the table assumes that tenants exercise no renewal options and all early termination rights.

 

Year

  Number
of Leases
Expiring(1)
    Square
Footage of
Expiring
Leases(2)
    Percentage
of Net
Rentable
Square
Feet(2)
    Annualized
Rent
($000)(3)
    Percentage
of
Annualized
Rent
    Annualized
Rent Per
Occupied
Square
Foot
    Annualized
Rent Per
Occupied
Square
Foot at
Expiration
    Annualized
Rent at
Expiration
($000)
 

Available

      834,522        5.2   $ —          0.0      

2012

    377        510,232        3.2     46,670        5.9   $ 91.47      $ 91.37        46,618   

2013

    256        939,317        6.0     63,964        8.1     68.10        70.61        66,325   

2014

    226        1,400,169        8.8     100,164        12.7     71.54        76.23        106,735   

2015

    134        1,884,022        11.8     82,130        10.4     43.59        47.27        89,067   

2016

    140        1,636,710        10.3     68,951        8.8     42.13        46.59        76,261   

2017

    60        932,046        5.9     42,303        5.4     45.39        51.06        47,590   

2018

    84        1,086,360        6.8     53,544        6.8     49.29        58.87        63,955   

2019

    77        1,599,876        10.1     96,559        12.3     60.35        73.20        117,105   

2020

    76        913,795        5.7     55,452        7.0     60.68        75.94        69,390   

2021

    56        1,032,780        6.5     50,093        6.4     48.50        63.25        65,324   

Thereafter

    153        3,138,230        19.7     128,024        16.2     40.79        59.15        185,627   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Portfolio Total / Weighted Average

    1,639        15,908,059        100.0   $ 787,854        100.0   $ 52.27      $ 61.96      $ 933,997   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes license and similar agreements that upon expiration will be automatically renewed, primarily on a month-to-month basis. Number of expiring leases represents the expiring leased-unit count; a lease could include multiple units.
(2) For some of our properties, we calculate square footage and total net rentable square feet available for lease based on factors in addition to contractually leased square feet, including available power, required support space and common area.
(3) Annualized rent represents the monthly contractual rent (defined as cash base rent before abatements) under existing leases as of December 31, 2011 multiplied by 12. We estimate the total net rentable square feet available for lease based on a number of factors in addition to contractually leased square feet, including available power, required support space and common area.

 

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of our business, we may become subject to tort claims, breach of contract and other claims and administrative proceedings. As of December 31, 2011, we were not a party to any legal proceedings which we believe would have a material adverse effect on us.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Digital Realty Trust, Inc.’s common stock has been listed and is traded on the NYSE under the symbol “DLR” since October 29, 2004. The following table sets forth, for the periods indicated, the high, low and last sale prices in dollars on the NYSE for our common stock and the distributions we declared with respect to the periods indicated.

Digital Realty Trust, Inc.

 

     High      Low      Last      Dividends
Declared
 

First Quarter 2010

   $ 56.60       $ 46.21       $ 54.20       $ 0.48000   

Second Quarter 2010

   $ 64.17       $ 51.77       $ 57.68       $ 0.48000   

Third Quarter 2010

   $ 64.06       $ 56.23       $ 61.70       $ 0.53000   

Fourth Quarter 2010

   $ 62.40       $ 47.42       $ 51.54       $ 0.53000   

First Quarter 2011

   $ 59.34       $ 50.63       $ 58.14       $ 0.68000   

Second Quarter 2011

   $ 64.25       $ 56.34       $ 61.78       $ 0.68000   

Third Quarter 2011

   $ 64.09       $ 50.63       $ 55.16       $ 0.68000   

Fourth Quarter 2011

   $ 67.83       $ 51.75       $ 66.67       $ 0.68000   

Digital Realty Trust, Inc. intends to continue to declare quarterly dividends on its common stock. The actual amount, form and timing of dividends, however, will be at the discretion of the board of directors and will depend upon Digital Realty Trust, Inc.’s financial condition in addition to the requirements for qualification as a REIT under the Code, and no assurance can be given as to the amounts, form or timing of future dividends. The exchange rates on the 2029 debentures and the conversion rates on Digital Realty Trust, Inc.’s series C cumulative convertible preferred stock and series D cumulative convertible preferred stock are each subject to adjustment for certain events, including, but not limited to, certain dividends on Digital Realty Trust, Inc.’s common stock in excess of $0.33 per share per quarter, $0.28625 per share per quarter and $0.31 per share per quarter, respectively. Therefore, the declaration and payment of quarterly dividends by Digital Realty Trust, Inc. in excess of these thresholds may increase the dilutive impact of our operating partnership’s exchangeable debentures and Digital Realty Trust, Inc.’s convertible preferred stock on Digital Realty Trust, Inc.’s common stockholders. See Part I, Item 1A, Risk Factors, “Risks Related to Our Business and Operations—We have substantial debt and face risks associated with the use of debt to fund our business activities, including refinancing and interest rate risks—The exchange and repurchase rights of our exchangeable debentures may be detrimental to Digital Realty Trust, Inc.’s stockholders or Digital Realty Trust, L.P.’s unitholders” and “Risks Related to Our Business and Operations—The conversion rights of Digital Realty Trust, Inc.’s convertible preferred stock may be detrimental to holders of Digital Realty Trust, Inc.’s common stock.”

Subject to the distribution requirements applicable to REITs under the Code, Digital Realty Trust, Inc. intends, to the extent practicable, to invest substantially all of the proceeds from sales and refinancings of its assets in real estate-related assets and other assets. Digital Realty Trust, Inc. may, however, under certain circumstances, make a dividend of capital or of assets. Such dividends, if any, will be made at the discretion of the board of directors.

As of February 17, 2012, there were approximately 91 holders of record of Digital Realty Trust, Inc.’s common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

 

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Table of Contents

Digital Realty Trust, L.P.

There is no established trading market for Digital Realty Trust, L.P.’s common units of limited partnership. As of February 17, 2012, there were 34 holders of record of common units, including Digital Realty Trust, L.P.’s general partner, Digital Realty Trust, Inc.

The following table sets forth, for the periods indicated, the distributions per common unit that our operating partnership declared with respect to the periods indicated.

 

     Distributions
Declared
 

First Quarter 2010

   $ 0.48000   

Second Quarter 2010

   $ 0.48000   

Third Quarter 2010

   $ 0.53000   

Fourth Quarter 2010

   $ 0.53000   

First Quarter 2011

   $ 0.68000   

Second Quarter 2011

   $ 0.68000   

Third Quarter 2011

   $ 0.68000   

Fourth Quarter 2011

   $ 0.68000   

Digital Realty Trust, L.P. currently intends to continue to make regular quarterly distributions to holders of its common units. Any future distributions will be declared at the discretion of the board of directors of Digital Realty Trust, L.P.’s general partner, Digital Realty Trust, Inc., and will depend on our actual cash flow, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code, and such other factors as the board of directors may deem relevant.

STOCK PERFORMANCE GRAPH

The following graph compares the yearly change in the cumulative total stockholder return on Digital Realty Trust, Inc.’s common stock during the period from December 31, 2006 through December 31, 2011, with the cumulative total return on the MSCI US REIT Index (RMS) and the S&P 500 Market Index. The comparison assumes that $100 was invested on December 31, 2006 in Digital Realty Trust, Inc.’s common stock and in each of these indices and assumes reinvestment of dividends, if any.

 

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Table of Contents

COMPARISON OF CUMULATIVE TOTAL RETURN

AMONG DIGITAL REALTY TRUST, INC., S&P 500 INDEX AND RMS INDEX

Assumes $100 invested on December 31, 2006

Assumes dividends reinvested

To fiscal year ending December 31, 2011

 

LOGO

 

Pricing Date

   DLR($)      S&P 500($)      RMS($)  

December 31, 2006

     100.0         100.0         100.0   

December 31, 2007

     115.5         105.5         83.2   

December 31, 2008

     102.5         66.5         51.6   

December 31, 2009

     162.8         84.1         66.4   

December 31, 2010

     172.8         96.7         85.3   

December 31, 2011

     234.0         98.8         92.7   

 

 

This graph and the accompanying text are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any filing by us under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.

 

The stock price performance shown on the graph is not necessarily indicative of future price performance.

 

The hypothetical investment in Digital Realty Trust, Inc.’s common stock presented in the stock performance graph above is based on the price on December 31, 2006.

 

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Table of Contents

SALES OF UNREGISTERED EQUITY SECURITIES

Digital Realty Trust, Inc.

All sales of unregistered equity securities of Digital Realty Trust, Inc. during the year ended December 31, 2011 have previously been disclosed in filings with the SEC.

Digital Realty Trust, L.P.

During the year ended December 31, 2011, our operating partnership issued partnership units in private placements in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, in the amounts and for the consideration set forth below:

 

   

During the year ended December 31, 2011, Digital Realty Trust, Inc. issued an aggregate of 123,777 shares of its common stock upon the exercise of stock options. Digital Realty Trust, Inc. contributed the proceeds of approximately $4.8 million to our operating partnership in exchange for an aggregate of 123,777 common units, as required by our operating partnership’s partnership agreement.

 

   

During the year ended December 31, 2011, Digital Realty Trust, Inc. issued, net of forfeitures, an aggregate of 79,119 shares of its common stock in connection with restricted stock awards for no cash consideration. For each share of common stock issued by Digital Realty Trust, Inc. in connection with such an award, our operating partnership issued a restricted common unit to Digital Realty Trust, Inc. as required by its partnership agreement, for an aggregate of 79,119 units during the year ended December 31, 2011.

All other issuances of unregistered equity securities of our operating partnership during the year ended December 31, 2011 have previously been disclosed in filings with the SEC. For all issuances of units to Digital Realty Trust, Inc., our operating partnership relied on Digital Realty Trust, Inc.’s status as a publicly traded NYSE-listed company with over $6 billion in total consolidated assets and as our operating partnership’s majority owner and general partner as the basis for the exemption under Section 4(2) of the Securities Act.

REPURCHASES OF EQUITY SECURITIES

Digital Realty Trust, Inc.

None.

Digital Realty Trust, L.P.

None.

 

ITEM 6. SELECTED FINANCIAL DATA

SELECTED COMPANY FINANCIAL AND OTHER DATA (Digital Realty Trust, Inc.)

The following table sets forth selected consolidated financial and operating data on an historical basis for Digital Realty Trust, Inc.

 

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Table of Contents

The following data should be read in conjunction with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included below in this Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

    Year Ended December 31,  
    2011     2010     2009     2008     2007  
    (Amounts in thousands, except share and per share data)  

Statement of Operations Data:

         

Operating Revenues:

         

Rental

  $ 820,711      $ 682,026      $ 507,545      $ 401,401      $ 320,416   

Tenant reimbursements

    211,811        178,081        125,136        106,754        74,190   

Construction management

    29,286        4,923        3,399        3,907        —     

Other

    902        371        1,062        15,383        641   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    1,062,710        865,401        637,142        527,445        395,247   

Operating Expenses:

         

Rental property operating and maintenance

    307,922        250,225        174,038        150,054        109,225   

Property taxes

    49,946        44,432        36,004        31,102        27,181   

Insurance

    8,024        8,133        6,111        4,988        5,527   

Construction management

    22,715        1,542        2,200        1,093        —     

Depreciation and amortization

    310,425        263,903        198,052        172,378        134,419   

General and administrative

    53,624        47,196        39,988        37,652        30,012   

Transactions

    5,654        7,438        2,177        739        774   

Other

    90        226        783        1,084        431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    758,400        623,095        459,353        399,090        307,569   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    304,310        242,306        177,789        128,355        87,678   

Other Income (Expenses):

         

Equity in earnings of unconsolidated joint ventures

    4,952        5,254        2,172        2,369        449   

Interest and other income

    3,260        616        753        2,106        2,287   

Interest expense

    (149,350     (137,384     (88,442     (63,621     (67,054

Tax expense

    42        (1,851     (1,038     (1,109     (814

Loss from early extinguishment of debt

    (1,088     (3,529     —          (182     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    162,126        105,412        91,234        67,918        22,546   

Net income from discontinued operations

    —          —          —          —          1,395   

Gain on sale of discontinued operations

    —          —          —          —          18,049   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    162,126        105,412        91,234        67,918        41,990   

Net income attributable to noncontrolling interests

    (5,861     (3,118     (3,572     (2,664     (3,753
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Digital Realty Trust, Inc.

    156,265        102,294        87,662        65,254        38,237   

Preferred stock dividends

    (25,397     (37,004     (40,404     (38,564     (19,330

Costs on redemption of preferred stock

    —          (6,951     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

  $ 130,868      $ 58,339      $ 47,258      $ 26,690      $ 18,907   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Data:

         

Basic income per share available to common stockholders

  $ 1.33      $ 0.69      $ 0.62      $ 0.39      $ 0.31   

Diluted income per share available to common stockholders

  $ 1.32      $ 0.68      $ 0.61      $ 0.38      $ 0.30   

Cash dividend per common share

  $ 2.72      $ 2.02      $ 1.47      $ 1.26      $ 1.17   

Weighted average common shares outstanding:

         

Basic

    98,405,375        84,275,498        75,950,370        68,829,267        60,527,625   

Diluted

    99,169,749        86,013,471        77,020,890        70,435,760        62,572,937   

 

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Table of Contents
    December 31,  
    2011     2010     2009     2008     2007  

Balance Sheet Data:

         

Net investments in real estate

  $ 5,242,515      $ 4,584,477      $ 3,157,193      $ 2,748,220      $ 2,302,500   

Total assets

    6,098,566        5,329,483        3,745,059        3,281,045        2,809,791   

Revolving credit facility

    275,106        333,534        205,547        138,579        299,731   

Unsecured senior notes, net of discount

    1,441,072        1,066,030        83,000        58,000        —     

Exchangeable senior debentures, net of discount

    266,400        353,702        432,234        161,901        158,224   

Mortgages and other secured loans, net of premiums

    947,132        1,043,188        1,063,663        1,026,594        895,507   

Total liabilities

    3,518,155        3,274,820        2,110,258        1,705,969        1,673,361   

Total stockholders equity

    2,522,917        1,962,518        1,558,995        1,503,921        1,057,167   

Noncontrolling interests in operating partnership

    45,057        52,436        58,192        66,797        74,335   

Noncontrolling interests in consolidated joint ventures

    12,437        39,709        17,614        4,358        4,928   

Total liabilities and equity

  $ 6,098,566      $ 5,329,483      $ 3,745,059      $ 3,281,045      $ 2,809,791   
    Year ended December 31,  
    2011     2010     2009     2008     2007  

Cash flows from (used in):

         

Operating activities

  $ 400,956      $ 359,029      $ 283,809      $ 217,808      $ 105,655   

Investing activities

    (830,802     (1,737,700     (519,909     (647,751     (537,427

Financing activities

    458,758        1,318,070        235,086        471,925        440,863   

 

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Table of Contents

SELECTED COMPANY FINANCIAL AND OTHER DATA (Digital Realty Trust, L.P.)

The following table sets forth selected consolidated financial and operating data on an historical basis for our operating partnership.

 

    Year Ended December 31,  
    2011     2010     2009     2008     2007  
    (Amounts in thousands, except unit and per unit data)  

Statement of Operations Data:

         

Operating Revenues:

         

Rental

  $ 820,711      $ 682,026      $ 507,545      $ 401,401      $ 320,416   

Tenant reimbursements

    211,811        178,081        125,136        106,754        74,190   

Construction management

    29,286        4,923        3,399        3,907        —     

Other

    902        371        1,062        15,383        641   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    1,062,710        865,401        637,142        527,445        395,247   

Operating Expenses:

         

Rental property operating and maintenance

    307,922        250,225        174,038        150,054        109,225   

Property taxes

    49,946        44,432        36,004        31,102        27,181   

Insurance

    8,024        8,133        6,111        4,988        5,527   

Construction management

    22,715        1,542        2,200        1,093        —     

Depreciation and amortization

    310,425        263,903        198,052        172,378        134,419   

General and administrative

    53,624        47,196        39,988        37,652        30,012   

Transactions

    5,654        7,438        2,177        739        774   

Other

    90        226        783        1,084        431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    758,400        623,095        459,353        399,090        307,569   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    304,310        242,306        177,789        128,355        87,678   

Other Income (Expenses):

         

Equity in earnings of unconsolidated joint ventures

    4,952        5,254        2,172        2,369        449   

Interest and other income

    3,260        616        753        2,106        2,287   

Interest expense

    (149,350     (137,384     (88,442     (63,621     (67,054

Tax expense

    42        (1,851     (1,038     (1,109     (814

Loss from early extinguishment of debt

    (1,088     (3,529     —          (182     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    162,126        105,412        91,234        67,918        22,546   

Net income from discontinued operations

    —          —          —          —          1,395   

Gain on sale of discontinued operations

    —          —          —          —          18,049   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    162,126        105,412        91,234        67,918        41,990   

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

    324        288        (140     (335     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    162,450        105,700        91,094        67,583        41,990   

Preferred units distributions

    (25,397     (37,004     (40,404     (38,564     (19,330

Costs on redemption of preferred units

    —          (6,951     —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common unitholders

  $ 137,053      $ 61,745      $ 50,690      $ 29,019      $ 22,660   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Unit Data:

         

Basic income per unit available to common unitholders

  $ 1.33      $ 0.69      $ 0.62      $ 0.39      $ 0.33   

Diluted income per unit available to common unitholders

  $ 1.32      $ 0.68      $ 0.61      $ 0.38      $ 0.32   

Cash distributions per common unit

  $ 2.72      $ 2.02      $ 1.47      $ 1.26      $ 1.17   

Weighted average common units outstanding:

         

Basic

    103,053,004        89,261,172        81,715,226        75,160,263        68,754,024   

Diluted

    103,817,378        90,999,145        82,785,746        76,766,756        70,799,336   

 

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Table of Contents
    December 31,  
    2011     2010     2009     2008     2007  

Balance Sheet Data:

         

Net investments in real estate

  $ 5,242,515      $ 4,584,477      $ 3,157,193      $ 2,748,220      $ 2,302,500   

Total assets

    6,098,566        5,329,483        3,745,059        3,281,045        2,809,791   

Revolving credit facility

    275,106        333,534        205,547        138,579        299,731   

Unsecured senior notes, net of discount

    1,441,072        1,066,030        83,000        58,000        —     

Exchangeable senior debentures, net of discount

    266,400        353,702        432,234        161,901        158,224   

Mortgages and other secured loans, net of premiums

    947,132        1,043,188        1,063,663        1,026,594        895,507   

Total liabilities

    3,518,155        3,274,820        2,110,258        1,705,969        1,673,361   

General partner’s capital

    2,578,797        2,004,599        1,586,942        1,553,424        1,053,788   

Limited partners’ capital

    49,240        56,215        60,875        71,041        74,356   

Accumulated other comprehensive income (loss)

    (60,063     (45,860     (30,630     (53,747     3,358   

Noncontrolling interests in consolidated joint ventures

    12,437        39,709        17,614        4,358        4,928   

Total liabilities and capital

  $ 6,098,566      $ 5,329,483      $ 3,745,059      $ 3,281,045      $ 2,809,791   
    Year ended December 31,  
    2011     2010     2009     2008     2007  

Cash flows from (used in):

         

Operating activities

  $ 400,956      $ 359,029      $ 283,809      $ 217,808      $ 105,655   

Investing activities

    (830,802     (1,737,700     (519,909     (647,751     (537,427

Financing activities

    458,758        1,318,070        235,086        471,925        440,863   

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.” Certain risk factors may cause our actual results, performance or achievements to differ materially from those expressed or implied by the following discussion. For a discussion of such risk factors, see the sections in this report entitled “Risk Factors” and “Forward-Looking Statements.”

Occupancy percentages included in the following discussion, for some of our properties, are calculated based on factors in addition to contractually leased square feet, including available power, required support space and common area.

Overview

Our company. Digital Realty Trust, Inc. completed its initial public offering of