0001297996-18-000144.txt : 20181102 0001297996-18-000144.hdr.sgml : 20181102 20181102164146 ACCESSION NUMBER: 0001297996-18-000144 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 103 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181102 DATE AS OF CHANGE: 20181102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Digital Realty Trust, Inc. CENTRAL INDEX KEY: 0001297996 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 260081711 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-32336 FILM NUMBER: 181157599 BUSINESS ADDRESS: STREET 1: FOUR EMBARCADERO CENTER STREET 2: SUITE 3200 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: (415)738-6500 MAIL ADDRESS: STREET 1: FOUR EMBARCADERO CENTER STREET 2: SUITE 3200 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Digital Realty Trust, L.P. CENTRAL INDEX KEY: 0001494877 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 202402955 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-54023 FILM NUMBER: 181157598 BUSINESS ADDRESS: STREET 1: FOUR EMBARCADERO CENTER STREET 2: SUITE 3200 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 415-738-6500 MAIL ADDRESS: STREET 1: FOUR EMBARCADERO CENTER STREET 2: SUITE 3200 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-Q 1 dlr930201810-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
 
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2018
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From              to             .

Commission file number 001-32336 (Digital Realty Trust, Inc.)
000-54023 (Digital Realty Trust, L.P.)
 
 
 
DIGITAL REALTY TRUST, INC.
DIGITAL REALTY TRUST, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland (Digital Realty Trust, Inc.)
Maryland (Digital Realty Trust, L.P.)
 
26-0081711
20-2402955
(State or other jurisdiction of
incorporation or organization)
 
(IRS employer
identification number)
 
 
Four Embarcadero Center, Suite 3200
San Francisco, CA
 
94111
(Address of principal executive offices)
 
(Zip Code)
(415) 738-6500
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Digital Realty Trust, Inc.
  
Yes  x      No   ¨
Digital Realty Trust, L.P.
  
Yes  x      No   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Digital Realty Trust, Inc.
  
Yes  x      No   ¨
Digital Realty Trust, L.P.
  
Yes  x      No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Digital Realty Trust, Inc.:
Large accelerated filer
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
  
Smaller reporting company
¨
 
 
 
 
 
 
 
 
Emerging growth company
¨
Digital Realty Trust, L.P.:
Large accelerated filer
¨
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
x  
  
Smaller reporting company
¨
 
 
 
 
 
 
 
 
Emerging growth company
¨

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Digital Realty Trust, Inc.
  
Yes  ¨   No   x
Digital Realty Trust, L.P.
  
Yes  ¨   No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Digital Realty Trust, Inc.:
Class
  
Outstanding at October 31, 2018
Common Stock, $.01 par value per share
  
206,282,023




EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2018 of Digital Realty Trust, Inc., a Maryland corporation, and Digital Realty Trust, L.P., a Maryland limited partnership, of which Digital Realty Trust, Inc. is the sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our Company” or “the Company” refer to Digital Realty Trust, Inc. together with its consolidated subsidiaries, including Digital Realty Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our Operating Partnership” or “the Operating Partnership” refer to Digital Realty Trust, L.P. together with its consolidated subsidiaries.
Digital Realty Trust, Inc. is a real estate investment trust, or REIT, and the sole general partner of Digital Realty Trust, L.P. As of September 30, 2018, Digital Realty Trust, Inc. owned an approximate 96.1% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 3.9% of the common limited partnership interests of Digital Realty Trust, L.P. are owned by non-affiliated third parties and certain directors and officers of Digital Realty Trust, Inc. As of September 30, 2018, Digital Realty Trust, Inc. owned all of the preferred limited partnership interests of Digital Realty Trust, L.P. As the sole general partner of Digital Realty Trust, L.P., Digital Realty Trust, Inc. has the full, exclusive and complete responsibility for the Operating Partnership’s day-to-day management and control.

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

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

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

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

There are a few differences between our Company and our Operating Partnership, which are reflected in the disclosure in this report. We believe it is important to understand the differences between our Company and our Operating Partnership in the context of how we operate as an interrelated consolidated company. Digital Realty Trust, Inc. is a REIT, whose only material asset is its ownership of partnership interests of Digital Realty Trust, L.P. As a result, Digital Realty Trust, Inc. does not conduct business itself, other than acting as the sole general partner of Digital Realty Trust, L.P., issuing public equity from time to time and guaranteeing certain unsecured debt of Digital Realty Trust, L.P. and certain of its subsidiaries and affiliates. Digital Realty Trust, Inc. itself does not issue any indebtedness but guarantees the unsecured debt of Digital Realty Trust, L.P. and certain of its subsidiaries and affiliates, as disclosed in this report. Digital Realty Trust, L.P. holds substantially all the assets of the Company and holds the ownership interests in the Company’s joint ventures. Digital Realty Trust, L.P. conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity issuances by Digital Realty Trust, Inc., which are generally contributed to Digital Realty Trust, L.P. in exchange for partnership units, Digital Realty Trust, L.P. generates the capital required by the Company’s business through Digital Realty Trust, L.P.’s operations, by Digital Realty Trust, L.P.’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.
The presentation of noncontrolling interests in operating partnership, stockholders’ equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of Digital Realty Trust, Inc. and those of Digital Realty Trust, L.P. The common limited partnership interests held by the limited partners in Digital Realty Trust, L.P. are presented as limited partners’ capital within partners’ capital in Digital Realty Trust, L.P.’s condensed consolidated financial statements and as noncontrolling interests in operating partnership within equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The common and preferred partnership interests held by Digital Realty Trust, Inc. in Digital Realty Trust, L.P. are presented as general partner’s capital within partners’ capital in Digital Realty Trust, L.P.’s condensed consolidated financial statements and as preferred stock, common stock, additional paid-in capital and accumulated dividends in excess of earnings within stockholders’ equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity issued at the Digital Realty Trust, Inc. and the Digital Realty Trust, L.P. levels.



2


To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:

Condensed consolidated financial statements;

the following notes to the condensed consolidated financial statements:

"Debt of the Company" and "Debt of the Operating Partnership";

"Income per Share" and "Income per Unit"; and

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

Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources of the Parent Company" and "—Liquidity and Capital Resources of the Operating Partnership"; and

Part II, Item 2. "Unregistered Sales of Equity Securities and Use of Proceeds".
This report also includes separate Part I, Item 4. "Controls and Procedures" sections and separate Exhibit 31 and 32 certifications for each of the Company and the Operating Partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity during the period covered by this report have made the requisite certifications and that the Company and the Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.
In order to highlight the differences between the Company and the Operating Partnership, the separate sections in this report for the Company and the Operating Partnership specifically refer to the Company and the Operating Partnership. In the sections that combine disclosure of the Company and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Company operates the business through the Operating Partnership.

As general partner with control of the Operating Partnership, Digital Realty Trust, Inc. consolidates the Operating Partnership for financial reporting purposes, and it does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. are the same on their respective condensed consolidated financial statements. The separate discussions of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. in this report should be read in conjunction with each other to understand the results of the Company on a consolidated basis and how management operates the Company.

3


DIGITAL REALTY TRUST, INC. AND DIGITAL REALTY TRUST, L.P.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
 
 
 
Page
 Number
PART I.
FINANCIAL INFORMATION




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

























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




























ITEM 2.



ITEM 3.



ITEM 4.







PART II.



ITEM 1.



ITEM 1A. 



ITEM 2.



ITEM 3.



ITEM 4.



ITEM 5.



ITEM 6.






4




DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
 
September 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
1,226,729

 
$
1,136,341

Acquired ground leases
10,762

 
11,150

Buildings and improvements
16,007,132

 
15,215,405

Tenant improvements
566,751

 
553,040

Total investments in properties
17,811,374

 
16,915,936

Accumulated depreciation and amortization
(3,755,596
)
 
(3,238,227
)
Net investments in properties
14,055,778

 
13,677,709

Investments in unconsolidated joint ventures
169,919

 
163,477

Net investments in real estate
14,225,697

 
13,841,186

Cash and cash equivalents
46,242

 
51

Accounts and other receivables, net of allowance for doubtful accounts of $9,060 and $6,737 as of September 30, 2018 and December 31, 2017, respectively
308,709

 
276,347

Deferred rent
454,412

 
430,026

Acquired above-market leases, net
135,127

 
184,375

Goodwill
3,373,342

 
3,389,595

Acquired in-place lease value, deferred leasing costs and intangibles, net
2,734,158

 
2,998,806

Restricted cash
8,068

 
13,130

Assets held for sale

 
139,538

Other assets
176,355

 
131,291

Total assets
$
21,462,110

 
$
21,404,345

LIABILITIES AND EQUITY
 
 
 
Global revolving credit facility, net
$
590,289

 
$
550,946

Unsecured term loans, net
1,352,969

 
1,420,333

Unsecured senior notes, net
7,130,541

 
6,570,757

Mortgage loans, including premiums, net
106,072

 
106,582

Accounts payable and other accrued liabilities
1,059,355

 
980,218

Accrued dividends and distributions

 
199,761

Acquired below-market leases, net
208,202

 
249,465

Security deposits and prepaid rents
233,667

 
217,898

Obligations associated with assets held for sale

 
5,033

Total liabilities
10,681,095

 
10,300,993

 
 
 
 
Redeemable noncontrolling interests – operating partnership
17,553

 
53,902

Commitments and contingencies

 

Equity:
 
 
 
Stockholders’ Equity:
 
 
 
Preferred Stock: $0.01 par value per share, 110,000,000 shares authorized; 50,650,000 and 50,650,000 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
1,249,560

 
1,249,560

Common Stock: $0.01 par value per share, 315,000,000 shares authorized, 206,267,055 and 205,470,300 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
2,049

 
2,044

Additional paid-in capital
11,333,035

 
11,261,461

Accumulated dividends in excess of earnings
(2,455,189
)
 
(2,055,552
)
Accumulated other comprehensive loss, net
(103,201
)
 
(108,432
)
Total stockholders’ equity
10,026,254

 
10,349,081

Noncontrolling Interests:
 
 
 
Noncontrolling interests in operating partnership
671,269

 
698,126

Noncontrolling interests in consolidated joint ventures
65,939

 
2,243

Total noncontrolling interests
737,208

 
700,369

Total equity
10,763,462

 
11,049,450

Total liabilities and equity
$
21,462,110

 
$
21,404,345

See accompanying notes to the condensed consolidated financial statements.

5


DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except share and per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating Revenues:
 
 
 
 
 
 
 
Rental and other services
$
603,833

 
$
500,442

 
$
1,792,457

 
$
1,432,670

Tenant reimbursements
163,104

 
107,613

 
468,906

 
288,243

Fee income
1,469

 
1,662

 
4,945

 
4,986

Other
518

 
208

 
1,903

 
584

Total operating revenues
768,924


609,925


2,268,211


1,726,483

Operating Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
245,971

 
190,061

 
701,933

 
534,116

Property taxes
34,871

 
32,586

 
97,418

 
87,666

Insurance
2,653

 
2,590

 
8,990

 
7,758

Depreciation and amortization
293,957

 
199,914

 
887,534

 
554,491

General and administrative
41,642

 
43,765

 
124,264

 
115,921

Transactions and integration
9,626

 
42,809

 
19,410

 
60,367

Impairment of investments in real estate


28,992



 
28,992

Other
1,139

 
3,051

 
1,722

 
3,075

Total operating expenses
629,859


543,768


1,841,271


1,392,386

Operating income
139,065

 
66,157

 
426,940

 
334,097

Other Income (Expenses):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
8,886

 
5,880

 
23,734

 
19,592

Gain on sale of properties
26,577

 
9,750

 
80,042

 
9,608

Interest and other income (expense)
(981
)
 
2,813

 
2,375

 
3,331

Interest expense
(80,851
)
 
(71,621
)
 
(236,646
)
 
(184,653
)
Tax expense
(2,432
)
 
(2,494
)
 
(7,927
)
 
(7,356
)
Gain from early extinguishment of debt

 
1,990

 

 
1,990

Net income
90,264


12,475


288,518


176,609

Net income attributable to noncontrolling interests
(2,667
)
 
(40
)
 
(8,831
)
 
(1,985
)
Net income attributable to Digital Realty Trust, Inc.
87,597


12,435


279,687


174,624

Preferred stock dividends, including undeclared dividends
(20,329
)
 
(16,575
)
 
(60,987
)
 
(48,473
)
Issuance costs associated with redeemed preferred stock

 

 

 
(6,309
)
Net income (loss) available to common stockholders
$
67,268


$
(4,140
)

$
218,700


$
119,842

Net income (loss) per share available to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.33

 
$
(0.02
)
 
$
1.06

 
$
0.73

Diluted
$
0.33

 
$
(0.02
)
 
$
1.06

 
$
0.73

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
206,118,472

 
170,194,254

 
205,931,031

 
163,481,306

Diluted
206,766,256

 
170,194,254

 
206,555,627

 
164,371,096

See accompanying notes to the condensed consolidated financial statements.

6


DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
90,264

 
$
12,475

 
$
288,518

 
$
176,609

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,368

 
(4,301
)
 
(8,608
)
 
25,954

Increase (decrease) in fair value of interest rate swaps and foreign currency hedges
2,925

 
(2,234
)
 
16,336

 
(8,926
)
Reclassification to interest expense from interest rate swaps
(1,271
)
 
396

 
(2,289
)
 
2,073

Comprehensive income
94,286

 
6,336

 
293,957

 
195,710

Comprehensive (income) loss attributable to noncontrolling interests
(2,820
)
 
76

 
(9,039
)
 
(2,213
)
Comprehensive income attributable to Digital Realty Trust, Inc.
$
91,466

 
$
6,412

 
$
284,918

 
$
193,497

See accompanying notes to the condensed consolidated financial statements.


7


DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(unaudited, in thousands, except share data)
 
 
 
Redeemable Noncontrolling Interests -- Operating Partnership
 
Preferred
Stock
 
Number of
Common
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Dividends in
Excess of
Earnings
 
Accumulated
Other
Comprehensive
Loss, Net
 
Total
Stockholders’
Equity
 
Noncontrolling
Interests in
Operating
Partnership
 
Noncontrolling
Interests in
Consolidated
Joint Ventures
 
Total
Noncontrolling
Interests
 
Total Equity
Balance as of December 31, 2017
 
$
53,902

 
$
1,249,560

 
205,470,300

 
$
2,044

 
$
11,261,461

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

 
$
698,126

 
$
2,243

 
$
700,369

 
$
11,049,450

Conversion of common units to common stock
 

 

 
567,792

 
6

 
49,690

 

 

 
49,696

 
(49,696
)
 

 
(49,696
)
 

Issuance of unvested restricted stock, net of forfeitures
 

 

 
206,264

 

 

 

 

 

 

 

 

 

Issuance of common stock, net of offering costs
 

 

 

 

 
(1,292
)
 

 

 
(1,292
)
 

 

 

 
(1,292
)
Shares issued under employee stock purchase plan
 

 

 
69,532

 

 
5,874

 

 

 
5,874

 

 

 

 
5,874

Shares repurchased and retired to satisfy tax withholding upon vesting
 

 

 
(46,833
)
 
(1
)
 
(4,951
)
 

 

 
(4,952
)
 

 

 

 
(4,952
)
Amortization of share-based compensation
 

 

 

 

 
25,213

 

 

 
25,213

 

 

 

 
25,213

Reclassification of vested share-based awards
 

 

 

 

 
(3,631
)
 

 

 
(3,631
)
 
3,631

 

 
3,631

 

Adjustment to redeemable noncontrolling interests—operating partnership
 
(36,349
)
 

 

 

 
671

 

 

 
671

 
35,678

 

 
35,678

 
36,349

Dividends declared on preferred stock
 

 

 

 

 

 
(60,987
)
 

 
(60,987
)
 

 

 

 
(60,987
)
Dividends and distributions on common stock and common and incentive units
 

 

 

 

 

 
(624,252
)
 

 
(624,252
)
 
(25,558
)
 

 
(25,558
)
 
(649,810
)
Contributions from noncontrolling interests in consolidated joint ventures, net of distributions
 

 

 

 

 

 

 

 

 

 
63,745

 
63,745

 
63,745

Cumulative effect adjustment from adoption of new accounting standard
 

 

 

 

 

 
5,915

 

 
5,915

 

 

 

 
5,915

Net income
 

 

 

 

 

 
279,687

 

 
279,687

 
8,880

 
(49
)
 
8,831

 
288,518

Other comprehensive loss—foreign currency translation adjustments
 

 

 

 

 

 

 
(8,272
)
 
(8,272
)
 
(336
)
 

 
(336
)
 
(8,608
)
Other comprehensive income—fair value of interest rate swaps
 

 

 

 

 

 

 
15,705

 
15,705

 
631

 

 
631

 
16,336

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

 

 

 

 

 

 
(2,202
)
 
(2,202
)
 
(87
)
 

 
(87
)
 
(2,289
)
Balance as of September 30, 2018
 
$
17,553

 
$
1,249,560

 
206,267,055

 
$
2,049

 
$
11,333,035

 
$
(2,455,189
)
 
$
(103,201
)
 
$
10,026,254

 
$
671,269

 
$
65,939

 
$
737,208

 
$
10,763,462

See accompanying notes to the condensed consolidated financial statements.

8


DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
288,518

 
$
176,609

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of properties
(80,042
)
 
(9,608
)
Unrealized gain on equity investment
(2,005
)
 

Impairment of investments in real estate

 
28,992

Equity in earnings of unconsolidated joint ventures
(23,734
)
 
(19,592
)
Distributions from unconsolidated joint ventures
15,487

 
26,592

Write-off of net assets due to early lease terminations
1,723

 
3,075

Depreciation and amortization of buildings and improvements, tenant improvements
   and acquired ground leases
570,179

 
409,229

Amortization of acquired in-place lease value and deferred leasing costs
317,355

 
145,262

Amortization of share-based compensation
21,177

 
15,590

Non-cash amortization of terminated swaps
858

 
903

Allowance for (recovery of) doubtful accounts
2,594

 
(1,320
)
Amortization of deferred financing costs
8,926

 
7,572

Gain on early extinguishment of debt

 
(1,990
)
Amortization of debt discount/premium
2,590

 
2,156

Amortization of acquired above-market leases and acquired below-market leases, net
20,008

 
(4,857
)
Changes in assets and liabilities:
 
 
 
Accounts and other receivables
(37,498
)
 
(41,713
)
Deferred rent
(29,474
)
 
(7,873
)
Deferred leasing costs
(18,986
)
 
(14,847
)
Other assets
(20,794
)
 
(1,635
)
Accounts payable and other accrued liabilities
3,671

 
(52,597
)
Security deposits and prepaid rents
(6,704
)
 
21,603

Net cash provided by operating activities
1,033,849

 
681,551

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(116,990
)
 
(44,354
)
Proceeds from sale of properties, net of sales costs
286,204

 
20,200

Excess proceeds from forward contracts

 
63,956

Investments in unconsolidated joint ventures
(463
)
 
(7,614
)
Prepaid construction costs and other investments
(13,514
)
 

Improvements to investments in real estate
(946,118
)
 
(763,877
)
Improvement advances to tenants
(35,223
)
 
(37,271
)
Collection of improvement advances to tenants
32,328

 
30,340

Cash assumed in DFT merger

 
20,650

Net cash used in investing activities
(793,776
)
 
(717,970
)
 See accompanying notes to the condensed consolidated financial statements.









9




DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Borrowings on global revolving credit facility
$
1,079,673

 
$
1,499,691

Repayments on global revolving credit facility
(1,045,816
)
 
(2,035,808
)
Repayments on unsecured term loans
(39,095
)
 
(354,000
)
Borrowings on unsecured senior notes
649,038

 
2,265,060

Repayments on unsecured senior notes


(669,109
)
Principal payments on mortgage loans
(440
)
 
(105,406
)
Borrowings on mortgage loans

 
104,000

Payment of loan fees and costs
(6,272
)
 
(15,643
)
Capital contributions from (distributions paid to) noncontrolling interests in consolidated joint ventures, net
63,745


(365
)
Taxes paid related to net settlement of stock-based compensation awards
(4,952
)


Proceeds from common and preferred stock offerings, net
(1,292
)

405,237

Redemption of preferred stock

 
(182,500
)
Proceeds from equity plans
5,874


5,872

Proceeds from forward swap contract
1,560

 

Payment of dividends to preferred stockholders
(60,987
)

(46,268
)
Payment of dividends to common stockholders and distributions to
    noncontrolling interests in operating partnership
(849,571
)

(647,217
)
Net cash (used in) provided by financing activities
(208,535
)
 
223,544

Net increase in cash, cash equivalents and restricted cash
31,538

 
187,125

Effect of exchange rate changes on cash, cash equivalents and restricted cash
9,591

 
1,170

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

 
22,036

Cash, cash equivalents and restricted cash at end of period
$
54,310

 
$
210,331

 
See accompanying notes to the condensed consolidated financial statements.












10




DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)

 
Nine Months Ended September 30,
 
2018
 
2017
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
247,652

 
$
167,148

Cash paid for income taxes
7,861

 
8,454

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
$
(8,608
)
 
$
25,954

Increase (decrease) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps and foreign currency hedges
16,336

 
(8,926
)
Acquisition measurement period adjustment to goodwill and accounts payable and
other accrued liabilities

 
2,162

Noncontrolling interests in operating partnership converted to shares of common stock
49,696

 
6,915

Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
193,615

 
232,459

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

 

Allocation of purchase price of real estate/investment in partnership to:
 
 
 
Investments in real estate
$
116,990

 
$
43,585

Acquired below-market leases

 
(684
)
Acquired in-place lease value and deferred leasing costs

 
1,453

Cash paid for acquisition of real estate
$
116,990

 
$
44,354

 
 
 
 
Assets and liabilities assumed in DFT merger:
 
 
 
  Cash assumed in merger
$

 
$
20,650

  Land

 
312,579

  Building and improvements

 
3,677,497

  Accounts and other receivables

 
10,978

  Acquired above-market leases

 
162,333

  Intangibles

 
1,582,385

  Goodwill

 
2,592,181

  Revolving credit facility

 
(450,697
)
  Unsecured term loan

 
(250,000
)
  Unsecured notes

 
(884,841
)
  Mortgage notes payable and unsecured debt

 
(105,000
)
  Accounts payable and other accrued liabilities

 
(248,259
)
  Acquired below-market leases

 
(185,543
)
  Other working capital, net

 
(24,630
)
  Redeemable noncontrolling interests -- operating partnership

 
(66,259
)
  Common stock issued in connection with merger

 
(5,247,558
)
  Common units issued in connection with merger

 
(676,566
)
  Issuance of preferred stock in connection with merger

 
(219,250
)
See accompanying notes to the condensed consolidated financial statements.

11



DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
September 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
Investments in real estate:
 
 
 
Properties:
 
 
 
Land
$
1,226,729

 
$
1,136,341

Acquired ground leases
10,762

 
11,150

Buildings and improvements
16,007,132

 
15,215,405

Tenant improvements
566,751

 
553,040

Total investments in properties
17,811,374

 
16,915,936

Accumulated depreciation and amortization
(3,755,596
)
 
(3,238,227
)
Net investments in properties
14,055,778

 
13,677,709

Investments in unconsolidated joint ventures
169,919

 
163,477

Net investments in real estate
14,225,697

 
13,841,186

Cash and cash equivalents
46,242

 
51

Accounts and other receivables, net of allowance for doubtful accounts of $9,060 and $6,737 as of September 30, 2018 and December 31, 2017, respectively
308,709

 
276,347

Deferred rent
454,412

 
430,026

Acquired above-market leases, net
135,127

 
184,375

Goodwill
3,373,342

 
3,389,595

Acquired in-place lease value, deferred leasing costs and intangibles, net
2,734,158

 
2,998,806

Restricted cash
8,068

 
13,130

Assets held for sale

 
139,538

Other assets
176,355

 
131,291

Total assets
$
21,462,110

 
$
21,404,345

LIABILITIES AND CAPITAL
 
 
 
Global revolving credit facility, net
$
590,289

 
$
550,946

Unsecured term loans, net
1,352,969

 
1,420,333

Unsecured senior notes, net
7,130,541

 
6,570,757

Mortgage loans, including premiums, net
106,072

 
106,582

Accounts payable and other accrued liabilities
1,059,355

 
980,218

Accrued dividends and distributions

 
199,761

Acquired below-market leases, net
208,202

 
249,465

Security deposits and prepaid rents
233,667

 
217,898

Obligations associated with assets held for sale

 
5,033

Total liabilities
10,681,095

 
10,300,993

Redeemable limited partner common units
17,553

 
53,902

Commitments and contingencies

 

Capital:
 
 
 
Partners’ capital:
 
 
 
General Partner:
 
 
 
Preferred units, 50,650,000 and 50,650,000 units issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
1,249,560

 
1,249,560

Common units, 206,267,055 and 205,470,300 units issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
8,879,895

 
9,207,953

Limited Partners, 8,340,587 and 8,489,095 units issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
675,514

 
702,579

Accumulated other comprehensive loss
(107,446
)
 
(112,885
)
Total partners’ capital
10,697,523

 
11,047,207

Noncontrolling interests in consolidated joint ventures
65,939

 
2,243

Total capital
10,763,462

 
11,049,450

Total liabilities and capital
$
21,462,110

 
$
21,404,345

See accompanying notes to the condensed consolidated financial statements.


12


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited, in thousands, except unit and per unit data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating Revenues:
 
 
 
 
 
 
 
Rental and other services
$
603,833

 
$
500,442

 
$
1,792,457

 
$
1,432,670

Tenant reimbursements
163,104

 
107,613

 
468,906

 
288,243

Fee income
1,469

 
1,662

 
4,945

 
4,986

Other
518

 
208

 
1,903

 
584

Total operating revenues
768,924

 
609,925

 
2,268,211

 
1,726,483

Operating Expenses:
 
 
 
 
 
 
 
Rental property operating and maintenance
245,971

 
190,061

 
701,933

 
534,116

Property taxes
34,871

 
32,586

 
97,418

 
87,666

Insurance
2,653

 
2,590

 
8,990

 
7,758

Depreciation and amortization
293,957

 
199,914

 
887,534

 
554,491

General and administrative
41,642

 
43,765

 
124,264

 
115,921

Transactions and integration
9,626

 
42,809

 
19,410

 
60,367

Impairment of investments in real estate

 
28,992

 

 
28,992

Other
1,139

 
3,051

 
1,722

 
3,075

Total operating expenses
629,859

 
543,768

 
1,841,271

 
1,392,386

Operating income
139,065

 
66,157

 
426,940

 
334,097

Other Income (Expenses):
 
 
 
 
 
 
 
Equity in earnings of unconsolidated joint ventures
8,886

 
5,880

 
23,734

 
19,592

Gain on sale of properties
26,577

 
9,750

 
80,042

 
9,608

Interest and other income (expense)
(981
)
 
2,813

 
2,375

 
3,331

Interest expense
(80,851
)
 
(71,621
)
 
(236,646
)
 
(184,653
)
Tax expense
(2,432
)
 
(2,494
)
 
(7,927
)
 
(7,356
)
Gain from early extinguishment of debt

 
1,990

 

 
1,990

Net income
90,264

 
12,475

 
288,518

 
176,609

Net (loss) income attributable to noncontrolling interests in consolidated joint ventures
33

 
(119
)
 
49

 
(353
)
Net income attributable to Digital Realty Trust, L.P.
90,297

 
12,356

 
288,567

 
176,256

Preferred units distributions, including undeclared distributions
(20,329
)
 
(16,575
)
 
(60,987
)
 
(48,473
)
Issuance costs associated with redeemed
preferred units

 

 

 
(6,309
)
Net income (loss) available to common unitholders
$
69,968

 
$
(4,219
)
 
$
227,580

 
$
121,474

Net income (loss) per unit available to common unitholders:
 
 
 
 
 
 
 
Basic
$
0.33

 
$
(0.02
)
 
$
1.06

 
$
0.73

Diluted
$
0.33

 
$
(0.02
)
 
$
1.06

 
$
0.73

Weighted average common units outstanding:
 
 
 
 
 
 
 
Basic
214,289,384

 
173,460,704

 
214,199,414

 
166,048,072

Diluted
214,937,168

 
173,460,704

 
214,824,010

 
166,937,862

See accompanying notes to the condensed consolidated financial statements.


13


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
90,264

 
$
12,475

 
$
288,518

 
$
176,609

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,368

 
(4,301
)
 
(8,608
)
 
25,954

(Decrease) increase in fair value of interest rate swaps and foreign currency hedges
2,925

 
(2,234
)
 
16,336

 
(8,926
)
Reclassification to interest expense from interest rate swaps
(1,271
)
 
396

 
(2,289
)
 
2,073

Comprehensive income
$
94,286


$
6,336


$
293,957


$
195,710

Comprehensive loss (income) attributable to noncontrolling interests in consolidated joint ventures
33

 
(119
)
 
49

 
(353
)
Comprehensive income attributable to Digital Realty Trust, L.P.
$
94,319

 
$
6,217

 
$
294,006

 
$
195,357

See accompanying notes to the condensed consolidated financial statements.


14


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CAPITAL
(unaudited, in thousands, except unit data)
 
Redeemable Limited Partner Common Units
 
General Partner
 
Limited Partners
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests in
Consolidated Joint
Ventures
 
Total Capital
 
 
Preferred Units
 
Common Units
 
Common Units
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
Units
 
Amount
 
 
 
Balance as of December 31, 2017
$
53,902

 
50,650,000

 
$
1,249,560

 
205,470,300

 
$
9,207,953

 
8,489,095

 
$
702,579

 
$
(112,885
)
 
$
2,243

 
$
11,049,450

Conversion of limited partner common units to general partner common units

 

 

 
567,792

 
49,696

 
(567,792
)
 
(49,696
)
 

 

 

Issuance of unvested restricted common units

 

 

 
206,264

 

 

 

 

 

 

Issuance of common units, net of offering costs

 

 

 

 
(1,292
)
 

 

 

 

 
(1,292
)
Issuance of common units, net of forfeitures

 

 

 

 

 
419,284

 

 

 

 

Units issued in connection with employee stock purchase plan

 

 

 
69,532

 
5,874

 

 

 

 

 
5,874

Units repurchased and retired to satisfy tax withholding upon vesting

 

 

 
(46,833
)
 
(4,952
)
 

 

 

 

 
(4,952
)
Amortization of share-based compensation

 

 

 

 
25,213

 

 

 

 

 
25,213

Reclassification of vested share-based awards

 

 

 

 
(3,631
)
 

 
3,631

 

 

 

Adjustment to redeemable partnership units
(36,349
)
 

 

 

 
671

 

 
35,678

 

 

 
36,349

Distributions

 

 
(60,987
)
 

 
(624,252
)
 

 
(25,558
)
 

 

 
(710,797
)
Contributions from noncontrolling interests in consolidated joint ventures, net of distributions

 

 

 

 

 

 

 

 
63,745

 
63,745

Cumulative effect adjustment from adoption of new accounting standard

 

 

 

 
5,915

 

 

 

 

 
5,915

Net income

 

 
60,987

 

 
218,700

 

 
8,880

 

 
(49
)
 
288,518

Other comprehensive loss—foreign currency translation adjustments

 

 

 

 

 

 

 
(8,608
)
 

 
(8,608
)
Other comprehensive income—fair value of interest rate swaps

 

 

 

 

 

 

 
16,336

 

 
16,336

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

 

 

 

 

 

 

 
(2,289
)
 

 
(2,289
)
Balance as of September 30, 2018
$
17,553

 
50,650,000

 
$
1,249,560

 
206,267,055

 
$
8,879,895

 
8,340,587

 
$
675,514

 
$
(107,446
)
 
$
65,939

 
$
10,763,462


See accompanying notes to the condensed consolidated financial statements.

15


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
288,518

 
$
176,609

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of properties
(80,042
)
 
(9,608
)
Unrealized gain on equity investment
(2,005
)
 

Impairment of investments in real estate

 
28,992

Equity in earnings of unconsolidated joint ventures
(23,734
)
 
(19,592
)
Distributions from unconsolidated joint ventures
15,487

 
26,592

Write-off of net assets due to early lease terminations
1,723

 
3,075

Depreciation and amortization of buildings and improvements, tenant improvements
   and acquired ground leases
570,179

 
409,229

Amortization of acquired in-place lease value and deferred leasing costs
317,355

 
145,262

Amortization of share-based compensation
21,177

 
15,590

Non-cash amortization of terminated swaps
858

 
903

Allowance for (recovery of) doubtful accounts
2,594

 
(1,320
)
Amortization of deferred financing costs
8,926

 
7,572

Gain on early extinguishment of debt

 
(1,990
)
Amortization of debt discount/premium
2,590

 
2,156

Amortization of acquired above-market leases and acquired below-market leases, net
20,008

 
(4,857
)
Changes in assets and liabilities:
 
 
 
Accounts and other receivables
(37,498
)
 
(41,713
)
Deferred rent
(29,474
)
 
(7,873
)
Deferred leasing costs
(18,986
)
 
(14,847
)
Other assets
(20,794
)
 
(1,635
)
Accounts payable and other accrued liabilities
3,671

 
(52,597
)
Security deposits and prepaid rents
(6,704
)
 
21,603

Net cash provided by operating activities
1,033,849

 
681,551

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(116,990
)
 
(44,354
)
Proceeds from sale of properties, net of sales costs
286,204

 
20,200

Excess proceeds from forward contracts

 
63,956

Investments in unconsolidated joint ventures
(463
)
 
(7,614
)
Prepaid construction costs and other investments
(13,514
)
 

Improvements to investments in real estate
(946,118
)
 
(763,877
)
Improvement advances to tenants
(35,223
)
 
(37,271
)
Collection of improvement advances to tenants
32,328

 
30,340

Cash assumed in DFT merger

 
20,650

Net cash used in investing activities
(793,776
)
 
(717,970
)
 See accompanying notes to the condensed consolidated financial statements.

16


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Borrowings on global revolving credit facility
$
1,079,673

 
$
1,499,691

Repayments on global revolving credit facility
(1,045,816
)
 
(2,035,808
)
Repayments on unsecured term loans
(39,095
)
 
(354,000
)
Borrowings on unsecured senior notes
649,038

 
2,265,060

Repayments on unsecured senior notes

 
(669,109
)
Principal payments on mortgage loans
(440
)
 
(105,406
)
Borrowings on mortgage loans

 
104,000

Payment of loan fees and costs
(6,272
)
 
(15,643
)
Capital contributions from (distributions paid to) noncontrolling interests in consolidated joint ventures, net
63,745

 
(365
)
Taxes paid related to net settlement of stock-based compensation awards
(4,952
)
 

General partner contributions, net
4,582

 
228,609

Proceeds from forward swap contract
1,560

 

Payment of distributions to preferred unitholders
(60,987
)
 
(46,268
)
Payment of distributions to common unitholders
(849,571
)
 
(647,217
)
Net cash (used in) provided by financing activities
(208,535
)
 
223,544

Net increase in cash, cash equivalents and restricted cash
31,538

 
187,125

Effect of exchange rate changes on cash, cash equivalents and restricted cash
9,591

 
1,170

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

 
22,036

Cash, cash equivalents and restricted cash at end of period
$
54,310

 
$
210,331


See accompanying notes to the condensed consolidated financial statements.












17


DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(unaudited, in thousands)

 
Nine Months Ended September 30,
 
2018
 
2017
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest, net of amounts capitalized
$
247,652

 
$
167,148

Cash paid for income taxes
7,861

 
8,454

Supplementary disclosure of noncash investing and financing activities:
 
 
 
Change in net assets related to foreign currency translation adjustments
$
(8,608
)
 
$
25,954

Increase (decrease) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps and foreign currency hedges
16,336

 
(8,926
)
Acquisition measurement period adjustment to goodwill and accounts payable and
other accrued liabilities

 
2,162

Accrual for additions to investments in real estate and tenant improvement advances
   included in accounts payable and accrued expenses
193,615

 
232,459

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

 

Allocation of purchase price of real estate/investment in partnership to:
 
 
 
Investments in real estate
$
116,990

 
$
43,585

Acquired below-market leases

 
(684
)
Acquired in-place lease value and deferred leasing costs

 
1,453