Derivative Instruments

6 Months Ended

Jun. 30, 2013

Derivative Instruments

13. Derivative Instruments

Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  

To comply with the provisions of fair value accounting guidance, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of December 31, 2012, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2013 or December 31, 2012.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements related to US LIBOR, GBP LIBOR and EURIBOR based mortgage loans as well as the U.S. LIBOR and SGD-SOR based tranches of the unsecured term loan. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

We record all our interest rate swaps on the condensed consolidated balance sheet at fair value. In determining the fair value of our interest rate swaps, we consider the credit risk of our counterparties. These counterparties are generally larger financial institutions engaged in providing a variety of financial services. These institutions generally face similar risks regarding adverse changes in market and economic conditions, including, but not limited to, fluctuations in interest rates, exchange rates, equity and commodity prices and credit spreads. [The current and pervasive disruptions in the financial markets have heightened the risks to these institutions].

Our agreements with some of our derivative counterparties provide that (1) we could be declared in default on our derivative obligations if repayment of any of our indebtedness over $75.0 million is accelerated by the lender due to our default on the indebtedness and (2) we could be declared in default on a certain derivative obligation if we default on any of our indebtedness, including a default where repayment of underlying indebtedness has not been accelerated by the lender.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2013 and 2012, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The fair value of these derivatives was $1.3 million and ($8.7) million at June 30, 2013 and December 31, 2012, respectively. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2013 and 2012, there were no ineffective portions to our interest rate swaps.

Amounts reported in accumulated other comprehensive loss related to interest rate swaps will be reclassified to interest expense as interest payments are made on our debt. As of June 30, 2013, we estimate that an additional $3.7 million will be reclassified as an increase to interest expense during the twelve months ending June 30, 2014, as the hedged forecasted transactions impact earnings.  

As of June 30, 2013 and December 31, 2012, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands):

Notional Amount									Fair Value at Significant Other Observable Inputs (Level 2)
As of June 30, 2013		As of December 31, 2012		Type of Derivative	Strike Rate	Effective Date	Expiration Date		As of June 30, 2013	As of December 31, 2012
$     65,150	(1)	$     69,612	(1)	Swap	2.980	April 6, 2009	Nov. 30, 2013		$            (660)	$         (1,552)
13,041	(2)	13,335	(2)	Swap	3.981	May 17, 2006	Jul. 18, 2013		(23)	(275)
9,436	(2)	9,649	(2)	Swap	4.070	Jun. 23, 2006	Jul. 18, 2013		(17)	(203)
8,305	(2)	8,492	(2)	Swap	3.989	Jul. 27, 2006	Oct. 18, 2013		(94)	(255)
-		39,579	(2)	Swap	2.703	Dec. 3, 2009	Sep. 4, 2014	(5)	-	(1,617)
410,905	(3)	410,905	(3)	Swap	0.717	Various	Various		1,121	(3,642)
149,460	(4)	155,099	(4)	Swap	0.925	Jul. 6, 2012	Apr. 18, 2017		937	(1,131)
$   656,297		$   706,671							$         1,264	$         (8,675)

(1) Translation to U.S. dollars is based on exchange rate of $1.52 to £1.00 as of June 30, 2013 and $1.63 to £1.00 as of December 31, 2012.

(2) Translation to U.S. dollars is based on exchange rate of $1.30 to €1.00 as of June 30, 2013 and $1.32 to €1.00 as of December 31, 2012.

(3) Represents the U.S. dollar tranche of the unsecured term loan.

(4)	Represents the Singapore dollar tranche of the unsecured term loan.  Translation to U.S. dollars is based on exchange rate of $0.79 to 1.00 SGD as of June 30, 2013 and $0.82 to 1.00 SGD as of December 31, 2012.
(5)	The swap agreement was terminated as the mortgage loan was paid in full in June 2013.

Digital Realty Trust, L.P. [Member]

Derivative Instruments

13. Derivative Instruments

Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.  

To comply with the provisions of fair value accounting guidance, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of December 31, 2012, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2013 or December 31, 2012.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements related to US LIBOR, GBP LIBOR and EURIBOR based mortgage loans as well as the U.S. LIBOR and SGD-SOR based tranches of the unsecured term loan. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

We record all our interest rate swaps on the condensed consolidated balance sheet at fair value. In determining the fair value of our interest rate swaps, we consider the credit risk of our counterparties. These counterparties are generally larger financial institutions engaged in providing a variety of financial services. These institutions generally face similar risks regarding adverse changes in market and economic conditions, including, but not limited to, fluctuations in interest rates, exchange rates, equity and commodity prices and credit spreads. [The current and pervasive disruptions in the financial markets have heightened the risks to these institutions].

Our agreements with some of our derivative counterparties provide that (1) we could be declared in default on our derivative obligations if repayment of any of our indebtedness over $75.0 million is accelerated by the lender due to our default on the indebtedness and (2) we could be declared in default on a certain derivative obligation if we default on any of our indebtedness, including a default where repayment of underlying indebtedness has not been accelerated by the lender.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2013 and 2012, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The fair value of these derivatives was $1.3 million and ($8.7) million at June 30, 2013 and December 31, 2012, respectively. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2013 and 2012, there were no ineffective portions to our interest rate swaps.

Amounts reported in accumulated other comprehensive loss related to interest rate swaps will be reclassified to interest expense as interest payments are made on our debt. As of June 30, 2013, we estimate that an additional $3.7 million will be reclassified as an increase to interest expense during the twelve months ending June 30, 2014, as the hedged forecasted transactions impact earnings.  

As of June 30, 2013 and December 31, 2012, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands):

Notional Amount									Fair Value at Significant Other Observable Inputs (Level 2)
As of June 30, 2013		As of December 31, 2012		Type of Derivative	Strike Rate	Effective Date	Expiration Date		As of June 30, 2013	As of December 31, 2012
$     65,150	(1)	$     69,612	(1)	Swap	2.980	April 6, 2009	Nov. 30, 2013		$            (660)	$         (1,552)
13,041	(2)	13,335	(2)	Swap	3.981	May 17, 2006	Jul. 18, 2013		(23)	(275)
9,436	(2)	9,649	(2)	Swap	4.070	Jun. 23, 2006	Jul. 18, 2013		(17)	(203)
8,305	(2)	8,492	(2)	Swap	3.989	Jul. 27, 2006	Oct. 18, 2013		(94)	(255)
-		39,579	(2)	Swap	2.703	Dec. 3, 2009	Sep. 4, 2014	(5)	-	(1,617)
410,905	(3)	410,905	(3)	Swap	0.717	Various	Various		1,121	(3,642)
149,460	(4)	155,099	(4)	Swap	0.925	Jul. 6, 2012	Apr. 18, 2017		937	(1,131)
$   656,297		$   706,671							$         1,264	$         (8,675)

(1) Translation to U.S. dollars is based on exchange rate of $1.52 to £1.00 as of June 30, 2013 and $1.63 to £1.00 as of December 31, 2012.

(2) Translation to U.S. dollars is based on exchange rate of $1.30 to €1.00 as of June 30, 2013 and $1.32 to €1.00 as of December 31, 2012.

(3) Represents the U.S. dollar tranche of the unsecured term loan.

(4)	Represents the Singapore dollar tranche of the unsecured term loan.  Translation to U.S. dollars is based on exchange rate of $0.79 to 1.00 SGD as of June 30, 2013 and $0.82 to 1.00 SGD as of December 31, 2012.
(5)	The swap agreement was terminated as the mortgage loan was paid in full in June 2013.