Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2022
☐ 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.)
26-0081711
Maryland (Digital Realty Trust, L.P.)
20-2402955
(State or other jurisdiction of
(IRS employer
incorporation or organization)
identification number)
5707 Southwest Parkway, Building 1, Suite 275
Austin, Texas 78735
(Address of principal executive offices)
(737) 281-0101
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock
DLR
New York Stock Exchange
Series J Cumulative Redeemable Preferred Stock
DLR Pr J
Series K Cumulative Redeemable Preferred Stock
DLR Pr K
Series L Cumulative Redeemable Preferred Stock
DLR Pr L
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 ⌧ No ◻
Digital Realty Trust, L.P.
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).
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 ⌧
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company ☐
Emerging growth company ☐
Digital Realty Trust, L.P.:
Large accelerated filer ◻
Non-accelerated filer ⌧
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.
◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ⌧
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at November 2, 2022
Common Stock, $.01 par value per share
287,522,275
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2022 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, all references to the “Parent” refer to Digital Realty Trust, Inc., and all references to “our Operating Partnership,” “the Operating Partnership” or “the OP” refer to Digital Realty Trust, L.P. together with its consolidated subsidiaries.
The Parent is a real estate investment trust, or REIT, and the sole general partner of the OP. In statements regarding qualification as a REIT, such terms refer solely to Digital Realty Trust, Inc. As of September 30, 2022, the Parent owned an approximate 97.9% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 2.1% 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 the Parent. As of September 30, 2022, the Parent 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., the Parent has the full, exclusive and complete responsibility for the OP’s day-to-day management and control.
We believe combining the quarterly reports on Form 10-Q of the Parent and the OP into this single report results in the following benefits:
It is important to understand the few differences between the Parent and the OP in the context of how we operate the Company. The Parent does not conduct business itself, other than acting as the sole general partner of the OP and issuing public equity from time to time and guaranteeing certain unsecured debt of the OP and certain of its subsidiaries and affiliates. The OP holds substantially all the assets of the business, directly or indirectly. The OP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Parent, which are generally contributed to the OP in exchange for partnership units, the OP generates capital required by the business through the OP’s operations, incurrence of indebtedness and issuance of partnership units to third parties.
The presentation of noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Parent and those of the OP. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity and capital issuances in the Parent and in the OP.
To highlight the differences between the Parent and the OP, separate sections in this report, as applicable, individually discuss the Parent and the OP, including separate financial statements and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure of the Parent and the OP, this report refers to actions or holdings as being actions or holdings of the Company.
As general partner with control of the OP, the Parent consolidates the OP for financial reporting purposes, and it does not have significant assets other than its investment in the OP. Therefore, the assets and liabilities of the Parent and the OP are the same on their respective condensed consolidated financial statements. The separate discussions of the Parent and the OP 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.
2
On August 1, 2022, we completed the acquisition of an indirect controlling interest in Teraco Data Environments (Pty) Ltd (“Teraco”). Certain portfolio information regarding Teraco is excluded from Management’s Discussion and Analysis in this Quarterly Report on Form 10-Q. Specifically, Teraco has been excluded from data regarding: new metropolitan areas in which we do business, the number of data centers we own/operate, square footage, development projects, occupancy percentages, and lease terms. Teraco’s financial information is included in our condensed consolidated financial statements and the associated notes to those financial statements.
3
DIGITAL REALTY TRUST, INC. AND DIGITAL REALTY TRUST, L.P.
FOR THE QUARTER ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS
PageNumber
PART I.
FINANCIAL INFORMATION
ITEM 1.
Condensed Consolidated Financial Statements of Digital Realty Trust, Inc.:
Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021 (unaudited)
5
Condensed Consolidated Income Statements for the three and nine months ended September 30, 2022 and 2021 (unaudited)
6
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021 (unaudited)
7
Condensed Consolidated Statement of Equity for the three and nine months ended September 30, 2022 and 2021 (unaudited)
8
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (unaudited)
12
Condensed Consolidated Financial Statements of Digital Realty Trust, L.P.:
13
14
15
Condensed Consolidated Statement of Capital for the three and nine months ended September 30, 2022 and 2021 (unaudited)
16
20
Notes to Condensed Consolidated Financial Statements of Digital Realty Trust, Inc. and Digital Realty Trust, L.P. (unaudited)
21
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
45
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
67
ITEM 4.
Controls and Procedures (Digital Realty Trust, Inc.)
68
Controls and Procedures (Digital Realty Trust, L.P.)
69
PART II.
OTHER INFORMATION
70
Legal Proceedings
ITEM 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
71
Signatures
74
4
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except per share data)
September 30,
December 31,
2022
2021
ASSETS
Investments in real estate:
Investments in properties, net
$
22,306,537
20,762,241
Investments in unconsolidated entities
1,912,958
1,807,689
Net investments in real estate
24,219,495
22,569,930
Operating lease right-of-use assets, net
1,253,393
1,405,441
Cash and cash equivalents
176,969
142,698
Accounts and other receivables, net
861,117
671,721
Deferred rent, net
556,198
547,385
Goodwill
8,728,105
7,937,440
Customer relationship value, deferred leasing costs and intangibles, net
3,035,861
2,735,486
Other assets
384,079
359,459
Total assets
39,215,217
36,369,560
LIABILITIES AND EQUITY
Global revolving credit facilities, net
2,255,139
398,172
Unsecured term loans, net
729,976
—
Unsecured senior notes, net of discount
12,281,410
12,903,370
Secured and other debt, including premiums
491,984
146,668
Operating lease liabilities
1,363,712
1,512,187
Accounts payable and other accrued liabilities
1,621,406
1,543,623
Deferred tax liabilities, net
1,145,097
666,451
Accrued dividends and distributions
338,729
Security deposits and prepaid rents
341,552
336,578
Total liabilities
20,230,276
17,845,778
Redeemable noncontrolling interests
1,429,920
46,995
Commitments and contingencies
Equity:
Stockholders’ Equity:
Preferred Stock: $0.01 par value per share, 110,000 shares authorized; $755,000 liquidation preference ($25.00 per share), 30,200 shares issued and outstanding as of September 30, 2022 and December 31, 2021
731,690
Common Stock: $0.01 par value per share, 392,000 shares authorized; 287,508 and 284,415 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
2,851
2,824
Additional paid-in capital
21,528,384
21,075,863
Accumulated dividends in excess of earnings
(4,336,201)
(3,631,929)
Accumulated other comprehensive loss, net
(862,804)
(173,880)
Total stockholders’ equity
17,063,920
18,004,568
Noncontrolling interests
491,101
472,219
Total equity
17,555,021
18,476,787
Total liabilities and equity
See accompanying notes to the condensed consolidated financial statements.
CONDENSED CONSOLIDATED INCOME STATEMENTS
Three Months Ended September 30,
Nine Months Ended September 30,
Operating Revenues:
Rental and other services
1,184,165
1,110,904
3,437,252
3,288,205
Fee income and other
7,918
22,232
21,475
28,510
Total operating revenues
1,192,083
1,133,136
3,458,727
3,316,715
Operating Expenses:
Rental property operating and maintenance
477,731
406,329
1,334,826
1,151,324
Property taxes and insurance
43,862
60,633
145,135
161,634
Depreciation and amortization
388,704
369,035
1,147,803
1,107,749
General and administrative
97,447
98,460
301,736
295,946
Transactions and integration
25,862
13,804
51,416
34,999
Other
1,096
510
8,823
2,551
Total operating expenses
1,034,702
948,771
2,989,739
2,754,203
Operating income
157,381
184,365
468,988
562,512
Other Income (Expenses):
Equity in (loss) earnings of unconsolidated entities
(12,254)
40,884
14,616
69,996
Gain (loss) on disposition of properties, net
173,990
(635)
176,760
333,785
Other income (expenses), net
15,752
(2,947)
31,811
(9)
Interest expense
(76,502)
(71,417)
(212,250)
(222,084)
Loss from early extinguishment of debt
(51,135)
(18,347)
Income tax expense
(19,576)
(13,709)
(49,226)
(68,838)
Net income
238,791
136,541
379,564
657,015
Net income attributable to noncontrolling interests
(1,716)
(2,266)
(5,781)
(15,566)
Net income attributable to Digital Realty Trust, Inc.
237,075
134,275
373,783
641,449
Preferred stock dividends
(10,181)
(30,543)
(35,580)
Gain on redemption of preferred stock
18,000
Net income available to common stockholders
226,894
124,094
343,240
623,869
Net income per share available to common stockholders:
Basic
0.79
0.44
1.20
2.21
Diluted
0.75
1.15
Weighted average common shares outstanding:
286,693
283,106
285,312
282,005
296,415
283,800
294,257
282,673
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)
Other comprehensive income (loss):
Foreign currency translation adjustments
(535,246)
(147,120)
(843,036)
(254,444)
Increase in fair value of interest rate swaps
7,154
209
6,166
772
Reclassification to interest expense from interest rate swaps
(1,092)
358
(1,154)
1,070
Other comprehensive loss
(529,184)
(146,553)
(838,024)
(252,602)
Comprehensive (loss) income
(290,393)
(10,012)
(458,460)
404,413
Comprehensive loss (income) attributable to noncontrolling interests
140,225
995
143,319
(9,533)
Comprehensive (loss) income attributable to Digital Realty Trust, Inc.
(150,168)
(9,017)
(315,141)
394,880
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(unaudited, in thousands, except share data)
Accumulated
Redeemable
Number of
Additional
Dividends in
Noncontrolling
Preferred
Common
Paid-in
Excess of
Comprehensive
Three Months Ended September 30, 2022
Interests
Stock
Shares
Capital
Earnings
Loss, Net
Total Equity
Balance as of June 30, 2022
41,047
284,733,922
21,091,364
(4,211,685)
(475,561)
491,587
17,630,219
Conversion of common units to common stock
6,253
503
(503)
Vesting of restricted stock, net
45,630
Partial settlement of forward sale agreements, net of costs
2,658,539
27
399,695
399,722
Shares issued under equity plans, net of share settlement to satisfy tax withholding upon vesting
63,863
11,684
Amortization of unearned compensation regarding share based awards
21,288
Reclassification of vested share based awards
(933)
933
Adjustment to redeemable noncontrolling interests
(4,783)
4,783
Dividends declared on preferred stock
Dividends and distributions on common stock and common and incentive units
(190)
(351,410)
(7,314)
(358,724)
Redeemable noncontrolling interests associated with acquisition of Teraco
1,530,090
Contributions from (distributions to) noncontrolling interests
10,379
Net income/(loss)
(3,423)
5,139
242,214
Other comprehensive loss—foreign currency translation adjustments
(132,821)
(393,166)
(9,259)
(402,425)
Other comprehensive income—fair value of interest rate swaps
7,015
139
Other comprehensive income—reclassification of accumulated other comprehensive income to interest expense
Balance as of September 30, 2022
287,508,207
Nine Months Ended September 30, 2022
Balance as of December 31, 2021
284,415,013
23,550
1,962
(1,962)
305,054
2,700,727
400,851
400,878
4,541
62,253
(29,210)
29,210
(12,124)
12,124
(570)
(1,047,512)
(23,127)
(1,070,639)
1,703
21,906
(3,353)
9,134
382,917
(693,822)
(16,393)
(710,215)
6,050
116
(1,152)
(2)
9
Three Months Ended September 30, 2021
Income (Loss), Net
Balance as of June 30, 2021
41,490
282,603,152
2,806
20,844,834
(4,153,407)
31,733
706,591
18,164,247
562,151
46,509
(46,515)
Issuance of common stock, net of costs
583,181
92,865
92,871
Shares issued under employee stock purchase plan
52,654
6,468
Amortization of share-based compensation
19,427
45,664
Net share settlement to satisfy tax withholding upon vesting
(701)
Reclassification of vested share-based awards
(138)
138
(938)
938
(181)
(329,720)
(7,277)
(336,997)
Contributions from noncontrolling interests in consolidated entities
484
37,380
Deconsolidation of consolidated entities
(197,016)
65
2,201
136,476
(143,847)
(3,273)
204
Other comprehensive loss—reclassification of accumulated other comprehensive loss to interest expense
350
Balance as of September 30, 2021
40,920
283,846,802
2,818
21,010,202
(4,359,033)
(111,560)
492,242
17,766,359
10
Nine Months Ended September 30, 2021
Balance as of December 31, 2020
42,011
950,940
280,289,726
2,788
20,626,897
(3,997,938)
135,010
728,639
18,446,336
1,902,826
19
157,893
(157,912)
Common stock issued in connection with acquisition
125,395
1
18,269
18,270
1,060,943
11
168,298
168,309
82,129
9,895
69,278
385,783
(1)
(16,549)
(16,550)
(23,008)
23,008
Redemption of series C preferred stock
(219,250)
(201,250)
771
(771)
(543)
(984,964)
(23,779)
(1,008,743)
Contributions from (distributions to) noncontrolling interests in consolidated entities
(1,666)
110,115
Deconsolidation of consolidated joint venture
347
15,219
656,668
(248,367)
(6,077)
753
1,044
26
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposition of properties, net
(176,760)
(333,785)
Equity in earnings of unconsolidated entities
(14,616)
(69,996)
Distributions from unconsolidated entities
34,587
62,649
66,036
51,135
18,347
Straight-lined rents and amortization of above and below market leases
(38,190)
5,322
Amortization of deferred financing costs and debt discount / premium
13,764
14,319
Other items, net
14,511
4,191
Changes in assets and liabilities:
Increase in accounts receivable and other assets
(276,953)
(241,104)
Increase (decrease) in accounts payable and other liabilities
5,866
(40,454)
Net cash provided by operating activities
1,202,964
1,250,289
Cash flows from investing activities:
Improvements to investments in real estate
(1,753,520)
(1,748,075)
Cash paid for business combination / asset acquisitions, net of cash acquired
(1,877,092)
(168,439)
(Investment in) proceeds from unconsolidated entities, net
(240,541)
9,306
Proceeds from sale of real estate
203,995
719,764
Other investing activities, net
(60,776)
7,627
Net cash used in investing activities
(3,727,934)
(1,179,817)
Cash flows from financing activities:
Net proceeds from credit facilities
1,968,149
323,441
Borrowings on secured / unsecured debt
2,426,865
1,816,178
Repayments on secured / unsecured debt
(741,347)
(886,968)
Premium paid for early extinguishment of debt
(49,662)
(16,482)
Capital contributions from noncontrolling interests, net
17,977
108,448
Proceeds from issuance of common stock, net
Redemption of preferred stock
Payments of dividends and distributions
(1,440,481)
(1,369,251)
Other financing activities, net
(14,851)
(19,595)
Net cash provided by (used in) financing activities
2,567,528
(77,170)
Net increase (decrease) in cash, cash equivalents and restricted cash
42,558
(6,698)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(8,098)
10,138
Cash, cash equivalents and restricted cash at beginning of period
151,485
123,652
Cash, cash equivalents and restricted cash at end of period
185,944
127,092
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
(unaudited, in thousands, except per unit data)
LIABILITIES AND CAPITAL
Unsecured senior notes, net
Capital:
Partners’ capital:
General Partner:
Preferred units, $755,000 liquidation preference ($25.00 per unit), and 30,200 units issued and outstanding as of September 30, 2022 and December 31, 2021
Common units, 287,508 and 284,415 units issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
17,191,486
17,446,758
Limited Partners, 6,295 and 5,932 units issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
448,876
432,902
Accumulated other comprehensive loss
(886,648)
(181,445)
Total partners’ capital
17,485,404
18,429,905
Noncontrolling interests in consolidated entities
69,617
46,882
Total capital
Total liabilities and capital
Equity in earnings (loss) of unconsolidated entities
Other income (expense), net
Net (income) loss attributable to noncontrolling interests
3,684
734
2,719
434
Net income attributable to Digital Realty Trust, L.P.
242,475
137,275
382,283
657,449
Preferred units distributions
Gain on redemption of preferred units
Net income available to common unitholders
232,294
127,094
351,740
639,869
Net income per unit available to common unitholders:
Weighted average common units outstanding:
292,536
289,535
291,084
288,897
302,258
290,229
300,028
289,565
Comprehensive (loss) income attributable to Digital Realty Trust, L.P.
136,505
135,540
(153,888)
(9,278)
(322,920)
404,847
CONDENSED CONSOLIDATED STATEMENT OF CAPITAL
(unaudited, in thousands, except unit data)
General Partner
Limited Partners
Limited Partner
Preferred Units
Common Units
Units
Amount
Total Capital
30,200,000
16,882,503
6,299,478
446,937
(490,285)
59,374
Conversion of limited partner common units to general partner common units
Vesting of restricted common units, net
Issuance of limited partner common units, net
(4,810)
Units issued under equity plans, net of unit settlement to satisfy tax withholding upon vesting
Adjustment to redeemable partnership units
Distributions
(361,591)
(368,905)
5,275
(136)
17,195,034
6,294,668
445,328
5,931,771
(17,297)
Payment of common unit offering costs and other, net
395,909
380,194
106,051
9,510
(1,078,055)
(1,101,182)
136,708
3,030
161,644
829
243,179
17
16,694,233
7,055,409
516,879
28,751
192,694
46,515
(562,151)
Issuance of common units, net of offering costs
Issuance of common units, net of forfeitures
807
Units issued in connection with employee stock purchase plan
Units repurchased and retired to satisfy tax withholding upon vesting
(347,178)
10,181
2,935
(734)
16,653,987
6,494,065
466,160
(117,802)
32,324
18
38,250,000
16,631,747
8,046,267
609,190
134,800
119,659
157,912
(1,902,826)
Common units issued in connection with acquisition
350,624
Redemption of series C preferred units
(8,050,000)
(1,044,323)
Distributions to noncontrolling interests in consolidated entities, net of contributions
35,580
605,869
15,653
(434)
General partner contributions
General partner distributions
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Organization and Description of Business. Digital Realty Trust, Inc. (the Parent), through its controlling interest in Digital Realty Trust, L.P. (the Operating Partnership or the OP) and the subsidiaries of the OP (collectively, we, our, us or the Company), is a leading global provider of data center (including colocation and interconnection) solutions for customers across a variety of industry verticals ranging from cloud and information technology services, social networking and communications to financial services, manufacturing, energy, healthcare, and consumer products. The OP, a Maryland limited partnership, is the entity through which the Parent, a Maryland corporation, conducts its business of owning, acquiring, developing and operating data centers. The Parent operates as a REIT for U.S. federal income tax purposes.
The Parent’s only material asset is its ownership of partnership interests of the OP. The Parent generally does not conduct business itself, other than acting as the sole general partner of the OP, issuing public securities from time to time and guaranteeing certain unsecured debt of the OP and certain of its subsidiaries and affiliates. The Parent has not issued any debt but guarantees the unsecured debt of the OP and certain of its subsidiaries and affiliates.
The OP holds substantially all the assets of the Company. The OP conducts the operations of the business and has no publicly traded equity. Except for net proceeds from public equity issuances by the Parent, which are generally contributed to the OP in exchange for partnership units, the OP generally generates the capital required by the Company’s business primarily through the OP’s operations, by the OP’s or its affiliates’ direct or indirect incurrence of indebtedness or through the issuance of partnership units.
Accounting Principles and Basis of Presentation. The accompanying unaudited interim condensed consolidated financial statements and accompanying notes (the “Financial Statements”) are prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and are presented in our reporting currency, the U.S. dollar. All of the accounts of the Parent, the OP, and the subsidiaries of the OP are included in the accompanying Financial Statements. All material intercompany transactions with consolidated entities have been eliminated. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair statement of the results for the interim periods presented. Interim results are not always indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Form 10-K”), as filed with the U.S. Securities and Exchange Commission (“SEC”), our Quarterly Report on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, as filed with the SEC, and other filings with the SEC.
Management Estimates and Assumptions. U.S. GAAP requires us to make estimates and assumptions that affect reported amounts of revenue and expenses during the reporting period, reported amounts for assets and liabilities as of the date of the financial statements, and disclosures of contingent assets and liabilities as of the date of the financial statements. Although we believe the estimates and assumptions we made are reasonable and appropriate, as discussed in the applicable sections throughout the consolidated financial statements, different assumptions and estimates could materially impact our reported results. Actual results and outcomes may differ from our assumptions.
New Accounting Pronouncements. Recently issued accounting pronouncements that have yet to be adopted by the Company are not expected to have a material impact to the condensed consolidated financial statements.
2. Investments in Properties
A summary of our investments in properties is below (in thousands):
Property Type
As of September 30, 2022
As of December 31, 2021
Land
1,004,328
1,019,723
Acquired ground lease
5,552
6,721
Buildings and improvements
23,113,155
21,914,091
Tenant improvements
753,565
684,915
24,876,600
23,625,450
Accumulated depreciation and amortization
(6,826,918)
(6,210,281)
Investments in operating properties, net
18,049,682
17,415,169
Construction in progress and space held for development
4,222,142
3,213,389
Land held for future development
34,713
133,683
3. Business Combinations
On August 1, 2022, we completed the acquisition of a 61.1% indirect controlling interest in Teraco, a leading carrier-neutral data center and interconnection services provider in South Africa (the “Teraco Acquisition”). The total purchase price was $1.7 billion cash, funded by our Global Revolving Credit Facility and partial settlement of our forward equity sale agreements described under Note 11. “Equity and Capital—Forward Equity Sale.” Teraco controls (and consolidates) the Teraco Connect Trust (“the Trust”) that was created as part of the Broad Based Black Economic Empowerment Program in South Africa. The Trust owns a 10% interest in Teraco’s primary operating company, however, this ownership percentage is not included as part of noncontrolling interest, because Teraco (and the Company) consolidates the Trust. If the Trust was not controlled by Teraco, the Company’s ownership interest in Teraco would have been approximately 55%.
As of September 30, 2022, the fair values of acquired assets, assumed liabilities and redeemable noncontrolling interests were provisional estimates, based on the best information available. Therefore, these provisional estimates are subject to change as we complete all remaining steps in finalizing the purchase price allocation, and it is reasonably possible there could be significant changes to the preliminary values below. We expect to finalize the valuation of all assets and liabilities by December 31, 2022.
22
The following table summarizes the provisional fair value amounts recorded at the acquisition date (in thousands):
Provisional Fair Value
Amounts
Building and improvements
1,376,128
521,153
Operating lease right-of-use assets
2,784
Assumed cash and cash equivalents
5,528
1,625,994
Customer relationship value and other intangibles (weighted-average amortization life of 7 years)
720,126
Debt assumed
(355,688)
(4,031)
(632,841)
(1,530,090)
Working capital assets, net
1,112
Total purchase consideration
1,730,176
Goodwill — The purchase price of the Teraco Acquisition exceeded the fair value of net tangible and intangible assets acquired and liabilities assumed by $1.6 billion. This amount was recorded as goodwill. We believe the strategic benefits of the acquisition support the value of goodwill recorded. Specifically, Teraco has numerous cross-connects, cloud on-ramps and data centers in addition to direct access to multiple subsea cables. The acquisition of Teraco adds South Africa to the Company’s three existing markets on the continent, including Kenya, Mozambique, and Nigeria. The strategic importance of these markets has been enhanced by the recent and ongoing implementation of new subsea cable networks encircling Africa. When combined with the Company’s highly connected facilities in Marseille, France, and across EMEA, our customers will now have a range of strategic connectivity hubs from which to serve all corners of the African market.
Redeemable Noncontrolling Interest (“Redeemable NCI”) — As part of the Teraco Acquisition, the Company and certain of its subsidiaries entered into a put/call agreement with the owners of the interest in Teraco that was not acquired by the Company (the “Put/Call Agreement”). The interest retained by these owners is hereafter referred to as the “Remaining Teraco Interest” and the owners of such interest are hereafter referred to as the “Rollover Shareholders”. Pursuant to the Put/Call Agreement, the Rollover Shareholders have the right to sell all or a portion of the Remaining Teraco Interest to the Company for a two-year period beginning on February 1, 2026, and the Company has the right to purchase all or a portion of the Remaining Teraco Interest from the Rollover Shareholders for a one-year period beginning on February 1, 2028. Per the terms of the agreement, the purchase price of the Remaining Teraco Interest for the put right and the call right can be settled by the Company with cash, shares in the Company, or a combination of cash and shares. In the event the Company elects to settle a put or call in whole or in part with shares of Digital Realty Trust, Inc.’s common stock, such shares will be issued in a private placement transaction with customary accompanying registration rights.
Since the Rollover Shareholders can redeem the put right at their discretion and such redemption, which could be in cash, is outside the Company’s control, the Company recorded the noncontrolling interest as Redeemable NCI and classified it in temporary equity within its condensed consolidated balance sheets. The Redeemable NCI was initially recorded at its acquisition-date fair value and will be adjusted each reporting period for income (or loss) attributable to the noncontrolling interest (a $3.5 million net loss for the period from August 1, 2022 to September 30, 2022). If the contractual redemption value of the Redeemable NCI is greater than its carrying value, an adjustment is made to reflect Redeemable NCI at the higher of its contractual redemption value or its carrying value each reporting period. Changes to the redemption value are recognized immediately in the period the change occurs. If the redemption value of the
23
Redeemable NCI is equal to or less than the fair market value of the Remaining Teraco Interest, the change in the redemption value will be adjusted through Additional Paid in Capital. If the redemption value is greater than the fair market value of the Remaining Teraco Interest, the change in redemption value will be adjusted through Retained Earnings. These adjustments are not reflected on the Company’s income statement, but are instead reflected as adjustments to the net income component of the Company’s earnings per share calculations. When calculating earnings per share attributable to Digital Realty Trust, Inc., the Company adjusts net income attributable to Digital Realty Trust, Inc. to the extent the redemption value exceeds the fair value of the Redeemable NCI on a cumulative basis. For the period from August 1, 2022 to September 30, 2022, no such adjustment was required.
4. Leases
Lessor Accounting
We generate most of our revenue by leasing operating properties to customers under operating lease agreements. We recognize the total minimum lease payments provided for under the leases on a straight-line basis over the lease term if we determine that it is probable that substantially all of the lease payments will be collected over the lease term. Otherwise, rental revenue is recognized based on the amount contractually due. Generally, under the terms of our leases, some of our rental expenses, including common area maintenance, real estate taxes and insurance, are recovered from our customers. We record amounts reimbursed by customers in the period the applicable expenses are incurred, which is generally ratably throughout the term of the lease. Reimbursements are recognized in rental and other services revenue in the condensed consolidated income statements as we are the primary obligor with respect to purchasing and selecting goods and services from third-party vendors and bearing the associated credit risk.
Lessee Accounting
We lease space at certain of our data centers from third parties and certain equipment under noncancelable lease agreements. Leases for our data centers expire at various dates through 2069. As of September 30, 2022, certain of our data centers, primarily in Europe and Singapore, are subject to ground leases. As of September 30, 2022, the termination dates of these ground leases generally range from 2049 to 2108. In addition, our corporate headquarters along with several regional office locations are subject to leases with termination dates ranging from 2022 to 2028. The leases generally require us to make fixed rental payments that increase at defined intervals during the term of the lease plus pay our share of common area, real estate and utility expenses as incurred. The leases neither contain residual value guarantees nor impose material restrictions or covenants on us. Further, the leases have been classified and accounted for as either operating or finance leases. Rent expense related to operating leases included in rental property operating and maintenance expense in the condensed consolidated income statements was approximately $36.0 million and $36.9 million for the three months ended September 30, 2022 and 2021, respectively, and approximately $109.0 million and $109.9 million for the nine months ended September 30, 2022 and 2021, respectively.
24
5. Receivables
Accounts and Other Receivables, Net
Accounts and Other Receivables, net - is primarily comprised of contractual rents and other lease-related obligations currently due from customers. These amounts (net of an allowance for estimated uncollectible amounts) are shown in the subsequent table as Accounts receivable – trade, net. Other receivables shown separately from Accounts receivable – trade, net consist primarily of amounts that have not yet been billed to customers, such as for utility reimbursements and installation fees.
Balance as of
(Amounts in thousands):
September 30, 2022
December 31, 2021
Accounts receivable – trade
508,402
393,110
Allowance for doubtful accounts
(36,278)
(28,574)
Accounts receivable – trade, net
472,124
364,536
Accounts receivable – customer recoveries
169,053
131,538
Value-added tax receivables
111,269
104,036
Accounts receivable – installation fees
49,539
43,626
Other receivables
59,132
27,985
Deferred Rent Receivables
Deferred rent receivables represent rental income that has been recognized as revenue under ASC 842, but which is not yet due from customers under their existing rental agreements. The Company recognizes an allowance against deferred rent receivables to the extent it becomes no longer probable that a customer or group of customers will be able to make substantially all of their required cash rental payments over the entirety of their respective lease terms.
Deferred rent receivables
573,378
556,251
Allowance for deferred rent receivables
(17,180)
(8,866)
Deferred rent receivables, net
25
6. Investments in Unconsolidated Entities
A summary of the Company’s investments in unconsolidated entities accounted for under the equity method of accounting is shown below (in thousands):
Year
Metropolitan
Entity
Entity Formed
Area of Properties
% Ownership
Digital Core REIT (DCRU)
U.S. / Canada
35
%
328,094
343,317
Ownership interest in DCRU operating properties
139,223
144,050
Ascenty
2019
Brazil / Chile / Mexico
51
620,068
553,031
Mapletree
Northern Virginia
163,239
172,465
Mitsubishi
Various
Osaka / Tokyo
50
391,859
401,509
Lumen
2012
Hong Kong
69,704
68,854
U.S. / India / Nigeria
200,771
124,463
Total
DCREIT – Digital Core REIT is a standalone real estate investment trust under Singapore law, which is publicly-traded on the Singapore Exchange under the ticker symbol “DCRU”. Digital Core REIT owns 10 operating data center properties. The Company’s ownership interest in the units of DCRU, as well as its ownership interest in the operating properties of DCRU are collectively referred to as the Company’s investment in DCREIT. As of September 30, 2022, the Company held 35% of the outstanding DCRU units and separately owned a 10% retained interest in the underlying operating properties. The Company’s 35% interest in DCRU consisted of 392 million units and 390 million units as of September 30, 2022 and December 31, 2021, respectively. Based on the closing price per unit of $0.70 and $1.16 as of September 30, 2022 and December 31, 2021, the fair value of the units the Company owned in DCRU was approximately $274 million and $453 million as of September 30, 2022 and December 31, 2021, respectively. These values do not include the value of the Company’s 10% interest in the operating properties of DCRU, because the associated ownership interests are not publicly traded. The Company accounts for its investment in DCREIT as an equity method investment (and not at fair value) based on the significant influence it is able to exert on DCREIT. The Company determined that the decline in fair value of the investment in DCRU as compared to the Company’s book basis as of September 30, 2022 was temporary in nature.
Pursuant to contractual agreements with DCRU and its operating properties, the Company will earn fees for asset and property management services as well as fees for aiding in future acquisition, disposition and development activities. Certain of these fees are payable to the Company in the form of additional units in DCRU or in cash. During the three and nine months ended September 30, 2022, the Company earned fees pursuant to these contractual agreements of approximately $1.8 million and $6.9 million, respectively, which is recorded as fee income and other on the condensed consolidated income statement.
Ascenty – The Company’s ownership interest in Ascenty includes an approximate 2% interest held by one of the Company’s non-controlling interest holders. This 2% interest had a carrying value of approximately $19.3 million and $20.9 million as of September 30, 2022 and December 31, 2021, respectively. Ascenty is a variable interest entity (“VIE”) and the Company’s maximum exposure to loss related to this VIE is limited to our equity investment in the entity.
The debt of our unconsolidated entities generally is non-recourse to us, except for customary exceptions pertaining to matters such as intentional misuse of funds, environmental conditions, and material misrepresentations.
7. Goodwill
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination. Changes in the value of goodwill at September 30, 2022 as compared to December 31, 2021 were primarily driven by the acquisition of an indirect majority interest in Teraco in August 2022 and changes in exchange rates associated with goodwill balances denominated in foreign currencies – primarily the devaluation of the Euro as compared to the U.S. dollar.
The following is a summary of goodwill activity for the nine months ended September 30, 2022 (in thousands):
Impact of Change
in Foreign
Merger / Portfolio Acquisition
Acquisition
Adjustments
Exchange Rates
Telx Acquisition
330,845
European Portfolio Acquisition
448,124
(72,250)
375,874
DFT Merger
2,592,147
Interxion Combination
4,547,153
(608,830)
3,938,323
Teraco Acquisition
(141,145)
1,484,849
Other Combination
19,171
(6,633)
(6,471)
6,067
(828,696)
8. Acquired Intangible Assets and Liabilities
The following table summarizes our acquired intangible assets and liabilities:
(Amounts in thousands)
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Customer relationship value
3,168,834
(821,923)
2,346,911
2,838,842
(721,983)
2,116,859
Acquired in-place lease value
1,355,693
(1,018,282)
337,411
1,278,012
(995,883)
282,129
120,099
(21,373)
98,726
101,869
(14,688)
87,181
Acquired above-market leases
261,807
(249,492)
12,315
268,724
(247,135)
21,589
Acquired below-market leases
(341,978)
250,638
(91,340)
(351,052)
247,877
(103,175)
Amortization of customer relationship value, acquired in-place lease value and other intangibles (a component of depreciation and amortization expense) was approximately $65.7 million and $65.2 million for the three months ended September 30, 2022 and 2021 respectively, and approximately $184.6 million and $199.3 million for the nine months ended September 30, 2022 and 2021, respectively.
Amortization of acquired below-market leases, net of acquired above-market leases, resulted in an increase in rental and other services revenue of $1.0 million and a decrease of $(0.7) million for the three months ended September 30, 2022 and 2021, respectively and $1.5 million and $(3.3) million for the nine months ended September 30, 2022 and 2021, respectively.
Estimated annual amortization for each of the five succeeding years and thereafter, commencing October 1, 2022 is as follows:
Other (1)
Remainder of 2022
58,376
15,403
2,662
1,937
(3,253)
2023
232,629
57,553
4,946
4,758
(12,395)
2024
232,049
52,087
3,690
2,584
(11,102)
2025
231,547
49,109
3,653
1,452
(10,117)
2026
231,112
45,103
3,470
684
(8,615)
Thereafter
1,361,198
118,156
41,101
900
(45,858)
59,522
28
9. Debt of the Operating Partnership
All debt is currently held by the OP or its consolidated subsidiaries, and the Parent is the guarantor or co-guarantor of the global revolving credit facilities, the unsecured term loans and the unsecured senior notes. A summary of outstanding indebtedness is as follows (in thousands):
Weighted-
average
interest rate
Outstanding
Global revolving credit facilities
2.76
2,273,172
0.96
415,116
Unsecured term loans
1.34
735,151
Unsecured senior notes
2.34
12,375,590
2.26
13,000,042
Secured and other debt
7.05
492,261
3.47
147,082
2.33
15,876,174
2.23
13,562,240
The weighted-average interest rates shown represent interest rates at the end of the periods for the debt outstanding and include the impact of designated interest rate swaps, which effectively fix the interest rates on certain variable rate debt.
We primarily borrow in the functional currencies of the countries where we invest. Included in the outstanding balances were borrowings denominated in the following currencies (in thousands, U.S. dollars):
Denomination of Draw
% of Total
U.S. dollar ($)
4,275,903
26.9
3,141,951
23.2
British pound sterling (£)
1,754,807
11.1
2,117,758
15.6
Euro (€)
8,390,512
52.8
7,532,057
55.5
1,454,952
9.2
770,474
5.7
The table below summarizes debt maturities and principal payments as of September 30, 2022 (in thousands):
Global Revolving
Unsecured
Secured and
Credit Facilities (1)
Term Loans
Senior Notes
Other Debt
Total Debt
294,060
101,304
9,335
110,639
867,370
9,381
876,751
367,576
1,083,930
215,264
1,666,770
1,332,300
111,479
1,443,779
367,575
8,696,626
146,802
11,484,175
Subtotal
Unamortized net discounts
(33,072)
Unamortized deferred financing costs
(18,033)
(5,175)
(61,108)
(277)
(84,593)
15,758,509
29
Unsecured Senior Notes
The following table provides details of our unsecured senior notes (balances in thousands):
Aggregate Principal Amount at Issuance
Borrowing Currency
USD
Maturity Date
Floating rate notes due 2022
€
300,000
349,800
Sep 23, 2022
341,100
0.125% notes due 2022
332,760
Oct 15, 2022
0.600% notes due 2023
CHF
100,000
108,310
Oct 02, 2023
2.625% notes due 2024
600,000
677,040
Apr 15, 2024
588,120
682,200
2.750% notes due 2024
£
250,000
324,925
Jul 19, 2024
279,250
338,300
4.250% notes due 2025
400,000
634,480
Jan 17, 2025
446,800
541,280
0.625% notes due 2025
650,000
720,980
Jul 15, 2025
637,130
739,050
4.750% notes due 2025
450,000
Oct 01, 2025
2.500% notes due 2026
1,075,000
1,224,640
Jan 16, 2026
1,053,715
1,222,275
0.200% notes due 2026
275,000
298,404
Dec 15, 2026
278,585
301,419
1.700% notes due 2027
150,000
162,465
Mar 30, 2027
151,956
3.700% notes due 2027
1,000,000
Aug 15, 2027
5.550% notes due 2028
550,000
Jan 15, 2028
1.125% notes due 2028
500,000
548,550
Apr 09, 2028
490,100
568,500
4.450% notes due 2028
Jul 15, 2028
0.550% notes due 2029
270,000
292,478
Apr 16, 2029
273,520
295,938
3.600% notes due 2029
900,000
Jul 01, 2029
3.300% notes due 2029
350,000
454,895
Jul 19, 2029
390,950
473,620
1.500% notes due 2030
750,000
831,900
Mar 15, 2030
735,150
852,750
3.750% notes due 2030
719,825
Oct 17, 2030
614,350
744,260
1.250% notes due 2031
560,950
Feb 01, 2031
0.625% notes due 2031
1,220,700
Jul 15, 2031
980,200
1,137,000
1.000% notes due 2032
874,500
Jan 15, 2032
1.375% notes due 2032
849,375
Jul 18, 2032
Unamortized discounts, net of premiums
(33,612)
Deferred financing costs, net
(63,060)
Total unsecured senior notes, net of discount and deferred financing costs
Restrictive Covenants in Unsecured Senior Notes
The indentures governing our senior notes contain certain covenants, including (1) a leverage ratio not to exceed 60%, (2) a secured debt leverage ratio not to exceed 40% and (3) an interest coverage ratio of greater than 1.50. The covenants also require us to maintain total unencumbered assets of not less than 150% of the aggregate principal amount of unsecured debt. At September 30, 2022, we were in compliance with each of these financial covenants.
Early Extinguishment of Unsecured Senior Notes
We recognized the following losses on early extinguishment of unsecured notes:
30
Global Revolving Credit Facility Amendment
On April 5, 2022, the Operating Partnership entered into an amendment (the “Amendment”) to the Second Amended and Restated Global Senior Credit Agreement (the “Credit Agreement”) The Amendment provides for, among other things: (1) an increase in the size of the global revolving credit facility from $3.0 billion to $3.75 billion and (2) the transition from U.S. dollar London Interbank Offered Rate (LIBOR) to Term Secured Overnight Financing Rate (SOFR) for floating rate borrowings denominated in U.S. dollars for all purposes under the Credit Agreement.
Euro Term Loan Agreement
On August 11, 2022, Digital Dutch Finco B.V., a wholly owned subsidiary of the Operating Partnership, entered into a term loan agreement (the “Euro Term Loan Agreement”) which governs (i) a €375.0 million three-year senior unsecured term loan facility (the “2025 Term Facility”), the entire amount of which was funded on the closing date, and (ii) a €375.0 million five-year senior unsecured term loan facility (the “2025-27 Term Facility” and, together with the 2025 Term Facility, the “Euro Term Facilities”), comprised of €125.0 million of initial term loans, the entire amount of which was funded on the closing date, and €250.0 million of delayed draw term loan commitments that were not funded on the closing date, and were funded on September 9, 2022. The Euro Term Facilities provide for borrowings in Euros. The 2025 Term Facility matures on August 11, 2025. The 2025-27 Term Facility matures on August 11, 2025, subject to two maturity extension options of one year each. The interest rate for borrowings under the Euro Term Facilities is based on EURIBO, plus a margin based on the corporate credit rating of our long-term senior unsecured debt of between 0.80% and 1.60% per annum. As of the closing date, the applicable rate for borrowings is EURIBO plus 0.95% per annum. We are also required to pay certain fees to the administrative agent under the Euro Term Facilities. The Euro Term Facilities may be voluntarily prepaid in whole or in part at any time without premium or penalty. Amounts borrowed under the Euro Term Facilities and repaid or prepaid may not be reborrowed.
5.550% Notes due 2028
On September 27, 2022, Digital Realty Trust, L.P. completed an underwritten public offering of $550.0 million aggregate principal amount of its 5.550% Notes due 2028. Interest on the 5.550% Notes due 2028 is payable on January 15 and July 15 of each year, beginning on January 15, 2023, until the maturity date of January 15, 2028. Our obligations under the 5.550% Notes due 2028 are fully and unconditionally guaranteed by Digital Realty Trust, Inc. The terms of the 5.550% Notes due 2028 are governed by a base indenture, dated as of June 23, 2015, by and among Digital Realty Trust, L.P., as issuer, Digital Realty Trust, Inc., as guarantor, and Computershare Trust Company, N.A., as successor to Wells Fargo Bank, National Association, as trustee, as supplemented by a supplemental indenture, dated as of September 27, 2022, by and among Digital Realty Trust, L.P., Digital Realty Trust, Inc. and the trustee. Net proceeds from the offering of the 5.550% Notes due 2028 were approximately $544.5 million, after deducting the managers’ commissions and certain offering expenses.
31
10. Earnings per Common Share or Unit
The following is a summary of basic and diluted income per share/unit (in thousands, except per share/unit amounts):
Digital Realty Trust, Inc. Earnings per Common Share
Numerator:
Plus: Loss attributable to redeemable noncontrolling interest
(3,548)
Net income available to common stockholders - diluted EPS
223,346
339,692
Denominator:
Weighted average shares outstanding—basic
Potentially dilutive common shares:
Unvested incentive units
195
217
213
208
Unvested restricted stock
188
53
165
Forward equity offering
44
Market performance-based awards
86
245
112
295
Redeemable noncontrolling interest shares (1)
9,428
8,568
Weighted average shares outstanding—diluted
Income per share:
32
Digital Realty Trust, L.P. Earnings per Unit
Net income available to common unitholders - diluted EPS
228,746
348,192
Weighted average units outstanding—basic
Potentially dilutive common units:
Unvested restricted units
0
Weighted average units outstanding—diluted
Income per unit:
33
The below table shows the securities that would be antidilutive or not dilutive to the calculation of earnings per share and unit. Common units of the Operating Partnership not owned by Digital Realty Trust, Inc. were excluded only from the calculation of earnings per share as they are not applicable to the calculation of earnings per unit. All other securities shown below were excluded from the calculation of both earnings per share and earnings per unit (in thousands).
Shares subject to Forward Equity Offering
3,591
5,364
6,250
Weighted average of Operating Partnership common units not owned by Digital Realty Trust, Inc.
5,843
6,429
5,771
6,892
Potentially dilutive Series C Cumulative Redeemable Perpetual Preferred Stock
722
Potentially dilutive Series J Cumulative Redeemable Preferred Stock
1,932
1,320
1,640
1,366
Potentially dilutive Series K Cumulative Redeemable Preferred Stock
2,032
1,388
1,725
1,437
Potentially dilutive Series L Cumulative Redeemable Preferred Stock
3,333
2,276
2,829
2,357
16,731
11,413
17,329
19,024
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11. Equity and Capital
Equity Distribution Agreement
Digital Realty Trust, Inc. and Digital Realty Trust, L.P. are parties to an at-the-market (ATM) equity offering sales agreement dated April 1, 2022 (the “Sales Agreement”). Pursuant to the Sales Agreement, Digital Realty Trust, Inc. can issue and sell common stock having an aggregate offering price of up to $1.5 billion through various named agents from time to time. For the nine months ended September 30, 2022, we had no sales under the Sales Agreement and $1.5 billion is still available.
Forward Equity Sale
On September 13, 2021, Digital Realty Trust, Inc. completed an underwritten public offering of 6,250,000 shares of its common stock, all of which were offered in connection with forward sale agreements it entered into with certain financial institutions acting as forward purchasers. The forward purchasers borrowed and sold an aggregate of 6,250,000 shares of Digital Realty Trust, Inc.’s common stock in the public offering. Digital Realty Trust, Inc. did not receive any proceeds from the sale of our common stock by the forward purchasers in the public offering. The Company may receive gross proceeds of approximately $1.0 billion (based on the offering price of $155.69 per share) upon full physical settlement of the forward sale agreements, which is to be no later than March 13, 2023. During the three months ended September 30, 2022, we partially settled the forward sale agreements by issuing approximately 2.7 million shares, resulting in proceeds of approximately $400.0 million.
Upon physical settlement of the forward sale agreements, the Operating Partnership is expected to issue general partner common partnership units to Digital Realty Trust, Inc. in exchange for contribution of the net proceeds.
We account for our forward equity sales agreements in accordance with the accounting guidance governing financial instruments and derivatives. As of September 30, 2022, none of our forward equity sales agreements were deemed to be liabilities as they did not embody obligations to repurchase our shares, nor did they embody obligations to issue a variable number of shares for which the monetary value was predominantly fixed, varied with something other than the fair value of our shares, or varied inversely in relation to our shares. We also evaluated whether the agreements met the derivatives and hedging guidance scope exception to be accounted for as equity instruments and concluded that the agreements could be classified as equity contracts based on the following assessment: (i) none of the agreements’ exercise contingencies were based on observable markets or indices besides those related to the market for our own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to our own stock.
Noncontrolling Interests in Operating Partnership
Noncontrolling interests in the Operating Partnership relate to the proportion of entities consolidated by the Company that are owned by third parties. The following table shows the ownership interest in the Operating Partnership as of September 30, 2022 and December 31, 2021 (in thousands):
Percentage of
units
total
287,509
97.9
284,415
98.0
Noncontrolling interests consist of:
Common units held by third parties
4,387
1.5
4,389
Incentive units held by employees and directors (see Note 13 "Incentive Plan")
1,908
0.6
1,543
0.5
293,804
100.0
290,347
Limited partners have the right to require the Operating Partnership to redeem all or a portion of their common units for cash based on the fair market value of an equivalent number of shares of Digital Realty Trust, Inc. common stock at the time of redemption. Alternatively, Digital Realty Trust, Inc. may elect to acquire those common units in exchange for shares of its common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events. The common units and incentive units of the Operating Partnership are classified within equity, except for certain common units issued to certain former DuPont Fabros Technology, L.P. unitholders in the Company’s acquisition of DuPont Fabros Technology, Inc., which are subject to certain restrictions and, accordingly, are not presented as permanent equity in the condensed balance sheet.
The redemption value of the noncontrolling Operating Partnership common units and the vested incentive units was approximately $585.1 million and $1,074.7 million based on the closing market price of Digital Realty Trust, Inc. common stock on September 30, 2022 and December 31, 2021, respectively.
The following table shows activity for the noncontrolling interests in the Operating Partnership for the nine months ended September 30, 2022 (in thousands):
Incentive Units
1,542
5,931
Redemption of common units for shares of Digital Realty Trust, Inc. common stock (1)
Conversion of incentive units held by employees and directors for shares of Digital Realty Trust, Inc. common stock (1)
(21)
Incentive units issued upon achievement of market performance condition
221
Grant of incentive units to employees and directors
169
Cancellation / forfeitures of incentive units held by employees and directors
(3)
6,295
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Dividends and Distributions
Digital Realty Trust, Inc. Dividends
We have declared and paid the following dividends on our common and preferred stock for the nine months ended September 30, 2022 (in thousands, except per share data):
Series J
Series K
Series L
Date dividend declared
Dividend payment date
March 3, 2022
March 31, 2022
2,625
3,071
4,485
348,025
May 24, 2022
June 30, 2022
348,077
August 17, 2022
351,410
7,875
9,213
13,455
1,047,512
Annual rate of dividend per share
1.31250
1.46250
1.30000
4.88000
Digital Realty Trust, L.P. Distributions
All distributions on the Operating Partnership’s units are at the discretion of Digital Realty Trust, Inc.’s Board of Directors. The table below shows the distributions declared and paid by the Operating Partnership on its common and preferred units for the nine months ended September 30, 2022 (in thousands, except for per unit data):
Date distribution declared
Distribution payment date
355,812
355,885
359,207
1,070,904
Annual rate of distribution per unit
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12. Accumulated Other Comprehensive Income (Loss), Net
The accumulated balances for each item within accumulated other comprehensive income (loss) are shown below (in thousands) for Digital Realty Trust, Inc. and separately for Digital Realty Trust, L.P:
Foreign currency
Cash flow
Foreign currency net
Accumulated other
translation
hedge
investment hedge
comprehensive
adjustments
income (loss), net
(212,653)
(107)
38,880
Net current period change
(687,772)
(906,475)
4,791
income (loss)
(219,882)
(1,240)
39,677
(704,049)
(930,097)
3,772
13. Incentive Plans
2014 Incentive Award Plan
The Company provides incentive awards in the form of common stock or awards convertible into common stock pursuant to the Digital Realty Trust, Inc., Digital Services, Inc. and Digital Realty Trust, L.P. 2014 Incentive Award Plan, as amended (the “Incentive Plan”). The major categories of awards that can be issued under the Incentive Plan include:
Long-Term Incentive Units (“LTIP Units”): LTIP Units, in the form of profits interest units of the Operating Partnership, may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. LTIP Units (other than Class D units), whether vested or not, receive the same quarterly per-unit distributions as Operating Partnership common units. Initially, LTIP Units do not have full parity with common units with respect to liquidating distributions. However, if such parity is reached, vested LTIP Units may be converted into an equal number of common units of the Operating Partnership at any time. The awards generally vest over periods between two and four years.
Service-Based Restricted Stock Units: Service-based Restricted Stock Units, which vest over periods between two and four years, convert to shares of Digital Realty Trust, Inc.’s common stock upon vesting.
Performance-Based Awards (“the Performance Awards”): Performance Awards in the form of Class D units of the Operating Partnership and Restricted Stock Units covering shares of Digital Realty Trust, Inc.’s common stock may be issued to officers and employees of the Company. Depending on the award, the total number of units that qualify to fully
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vest is determined based on either a market performance criterion (“Market-Based Performance Awards”) or financial performance criterion (“Financial-Based Performance Awards”).
Market-Based Performance Awards.
The percentage of the total number of units that performance vest for Market-Based Performance Awards is determined by comparing the Company’s total shareholder return (“TSR”) relative to the MSCI US REIT Index (“RMS”) over a three-year period. The awards then have a time-based vesting element that allows for 50% of the performance-vested units to fully vest in the immediately following year and 50% of the performance-vested units to fully vest in the next-subsequent year. The fair value of these awards is determined using a Monte Carlo simulation to estimate the probability of the market vesting condition being satisfied.
Achievement of the market performance condition is measured based on the difference between Digital Realty Trust, Inc.’s TSR percentage and the TSR percentage of the RMS as is shown in the subsequent table (the “RMS Relative Market Performance”).
Market
2021-2022
Performance
RMS Relative
Vesting
Level
Market Performance
Percentage
Below Threshold Level
≤ -500 basis points
Threshold Level
-500 basis points
Target Level
0 basis points
High Level
≥ 500 basis points
100
If the RMS Relative Market Performance falls between the levels specified in the above table, the percentage of the award that will vest with respect to the market condition will be determined using straight-line linear interpolation between such levels.
2019 Awards
Following the completion of the applicable Market Performance Period, in January 2022, the Compensation Committee made the following determinations regarding the vesting of these awards:
The grant date fair value of the Market-Based Performance Awards was approximately $12.3 million and $25.0 million for the nine months ended September 30, 2022 and 2021, respectively. This amount will be recognized as compensation expense on a straight-line basis over the expected service period of approximately four years.
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Financial-Based Performance Awards.
On March 4, 2022, the Company granted Financial-Based Performance Awards, based on growth in core funds from operation (“Core FFO”) during the three-year period commencing on January 1, 2022. The awards have a time-based vesting element consistent with the Market-Based Performance Awards discussed above. For these awards, fair value is based on market value on the date of grant and compensation cost is recognized based on the probable achievement of the performance condition at each reporting period. The grant date fair value of these awards is $12.3 million, based on the Company’s closing stock price at the grant date.
Other Items: In addition to the LTIP Units, service-based Restricted Stock Units and Performance Awards described above, one-time grants of time and/or performance-based Class D units and Restricted Stock Units were issued in connection with the Company’s combination with InterXion Holding N.V. These awards vest over a period of two and three years based on the attainment of performance metrics related to the successful integration of the Interxion business and continued service.
As of September 30, 2022, approximately 5.0 million shares of common stock, including awards that can be converted to or exchanged for shares of common stock, remained available for future issuance under the Incentive Plan.
Each LTIP unit and each Class D unit issued under the Incentive Plan counts as one share of common stock for purposes of calculating the limit on shares that may be issued under the Incentive Plan and the individual award limits set forth therein.
Below is a summary of our compensation expense and our unearned compensation (in millions):
Expected
period to
Deferred Compensation
Unearned Compensation
recognize
Expensed
Capitalized
As of
unearned
compensation
Type of incentive award
(in years)
Long-term incentive units
5.1
2.8
0.0
28.9
19.8
2.2
Performance-based awards
5.5
6.4
0.1
0.2
41.3
39.2
2.1
Service-based restricted stock units
6.7
4.6
1.4
0.9
61.2
44.5
2.6
Interxion awards
1.6
3.1
3.0
8.5
16.7
8.7
16.1
21.3
0.4
18.9
13.7
3.7
2.3
17.7
Activity for LTIP Units and service-based Restricted Stock Units for the nine months ended September 30, 2022 is shown below.
Weighted-Average
Grant Date Fair
Unvested LTIP Units
Value
Unvested, beginning of period
250,468
132.66
Granted
168,769
150.03
Vested
(129,900)
131.21
Cancelled or expired
Unvested, end of period
289,337
143.44
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Unvested Restricted Stock Units
509,369
129.52
332,758
136.49
(232,883)
132.41
(61,285)
132.06
547,959
132.24
14. Derivative Instruments
Derivatives Designated as Hedging Instruments
Net Investment Hedges
In September 2022, we entered into cross-currency interest rate swaps, which effectively convert a portion of our U.S. dollar-denominated fixed-rate debt to foreign currency-denominated fixed-rate debt in order to hedge the currency exposure associated with our net investment in foreign subsidiaries. As of September 30, 2022, we had cross-currency interest rate swaps outstanding with notional amounts of $1.55 billion and maturity dates ranging through 2028. We had no such instruments outstanding as of December 31, 2021.
The effect of these net investment hedges on accumulated other comprehensive income and the condensed consolidated income statements for the three and nine months ended September 30, 2022 and 2021 was as follows (in thousands):
Cross-currency interest rate swaps (included component) (1)
(26,141)
Cross-currency interest rate swaps (excluded component) (2)
28,849
2,708
Location of gain or (loss)
650
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Cash Flow Hedges
We had no material outstanding derivatives designated as cash flow hedges as of September 30, 2022 or December 31, 2021. Amounts reported in accumulated other comprehensive loss related to interest rate swaps are reclassified to interest expense as interest payments are made on our debt. As of September 30, 2022, we had no material interest rate swap agreements outstanding.
Fair Value of Derivative Instruments
The subsequent table presents the fair value of derivative instruments recognized in our condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021 (in thousands):
Assets (1)
Liabilities (2)
Cross-currency interest rate swaps
19,063
21,771
15. Fair Value of Financial Instruments
There have been no significant changes in our policy for fair value measurements from what was disclosed in our 2021 Form 10-K.
As of September 30, 2022 and December 31, 2021, the carrying amounts for cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and other accrued liabilities, accrued dividends and distributions, security deposits and prepaid rents approximate fair value because of the short-term nature of these instruments. The carrying value of our Global Revolving Credit Facilities approximates estimated fair value, because these liabilities have variable interest rates and our credit ratings have remained stable. Differences between the carrying value and fair value of our unsecured senior notes and secured and other debt are caused by differences in interest rates or borrowing spreads that were available to us on September 30, 2022 and December 31, 2021 as compared to those in effect when the debt was issued or assumed.
We calculate the fair value of our secured and other debt and unsecured senior notes based on currently available market rates assuming the loans are outstanding through maturity and considering the collateral and other loan terms. In determining the current market rate for fixed rate debt, a market spread is added to the quoted yields on federal government treasury securities with similar maturity dates to our debt.
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The aggregate estimated fair value and carrying value of our Global Revolving Credit Facilities, unsecured term loans, unsecured senior notes and secured and other debt as of the respective periods is shown below (in thousands):
Categorization
under the fair value
Estimated Fair
hierarchy
Carrying Value
Level 2
Unsecured senior notes (1)
9,801,701
13,580,262
Secured and other debt (1)
484,991
152,511
13,295,015
14,147,889
16. Commitments and Contingencies
Our properties require periodic investments of capital for tenant-related capital expenditures and for general capital improvements including ground up construction. From time to time in the normal course of our business, we enter into various construction contracts with third parties that may obligate us to make payments. At September 30, 2022, we had open commitments, including amounts reimbursable by customers of approximately $35.5 million, related to construction contracts of approximately $2.6 billion.
In the ordinary course of our business, we may become subject to various legal proceedings. As of September 30, 2022, we were not a party to any legal proceedings which we believe would have a material adverse effect on our operations or financial position.
17. Supplemental Cash Flow Information
Cash, cash equivalents, and restricted cash balances as of September 30, 2022, and December 31, 2021:
Restricted cash (included in other assets)
8,975
8,787
We paid $252.5 million and $240.9 million for interest, net of amounts capitalized, for the nine months ended September 30, 2022 and 2021, respectively.
We paid $29.9 million and $19.6 million for income taxes, net of refunds, for the nine months ended September 30, 2022 and 2021, respectively.
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Accrued construction related costs totaled $441.9 million and $302.8 million as of September 30, 2022 and 2021, respectively.
18. Segment and Geographic Information
Most of the Company’s largest customers are global entities that transact with the Company across multiple geographies worldwide. The Company manages critical decisions around development, operations, and leasing globally based on customer demand considerations to best address the needs of its global customers. In this regard, the Company manages customer relationships on a global basis in order to achieve consistent sales and delivery experience of our products for our customers. In order to best accommodate the needs of our current and potential global customers, the Company manages its operations as a single global business – with one operating segment and, therefore, one reporting segment. A breakout of the Company’s Operating Revenues, Investments in Properties, net, and Operating lease right-of-use assets, net by geography is shown below.
Operating Revenues
(Amounts in millions)
Inside the United States
707.2
710.7
2,052.1
2,087.9
Outside the United States
484.8
422.5
1,406.6
1,228.8
Revenue Outside of U.S. %
40.7
37.3
37.0
Investments in Properties, net
As of September 30,
As of December 31,
11,255.3
11,167.9
688.9
719.1
11,051.2
9,594.3
564.4
686.4
Net Assets in Foreign Operations
5,741.7
3,865.4
19. Gain on Sale of Assets
On August 8, 2022, we sold a non-core building in Dallas for net proceeds of approximately $204 million resulting in a net gain on sale of approximately $174 million. The assets and liabilities sold were not representative of a significant component of our portfolio nor did the sale represent a significant shift in our strategy.
20. Subsequent Events
The Company’s 0.125% Notes due 2022 were repaid at maturity on October 17, 2022. The outstanding balance of the notes was $294 million as of September 30, 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2021, and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, each as filed with the United States (“U.S.”) Securities and Exchange Commission (“SEC”). This report contains forward-looking statements within the meaning of the federal securities laws. In particular, statements pertaining to our capital resources, expected use of borrowings under our credit facilities, expected use of proceeds from our ATM equity program, expected settlement and use of proceeds from our forward sale agreements, litigation matters, portfolio performance, leverage policy, acquisition and capital expenditure plans, capital recycling program, returns on invested capital, supply and demand for data center space, capitalization rates, rents to be received in future periods and expected rental rates on new or renewed data center space 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 discussions 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 that may be incorrect or imprecise and that we may not be able to realize. 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: reduced demand for data centers or decreases in information technology spending; increased competition or available supply of data center space; decreased rental rates, increased operating costs or increased vacancy rates; the impact on our, our customers’ and our suppliers’ operations during a pandemic, such as COVID-19; changes in political conditions, geopolitical turmoil, political instability, civil disturbances, restrictive governmental actions or nationalization in the countries in which we operate; the suitability of our data centers and data center infrastructure, delays or disruptions in connectivity or availability of power, or failures or breaches of our physical and information security infrastructure or services; our dependence upon significant customers, bankruptcy or insolvency of a major customer or a significant number of smaller customers, or defaults on or non-renewal of leases by customers; breaches of our obligations or restrictions under our contracts with our customers; our inability to successfully develop and lease new properties and development space, and delays or unexpected costs in development of properties; the impact of current global and local economic, credit and market conditions, including impacts of inflation; global supply chain or procurement disruptions, or increased supply chain costs; our inability to retain data center space that we lease or sublease from third parties; information security and data privacy breaches; difficulties managing an international business and acquiring or operating properties in foreign jurisdictions and unfamiliar metropolitan areas; our failure to realize the intended benefits from, or disruptions to our plans and operations or unknown or contingent liabilities related to, our recent and future acquisitions; our inability to achieve expected revenue synergies or cost savings as a result of our combination with Interxion; our failure to successfully integrate and operate acquired or developed properties or businesses; difficulties in identifying properties to acquire and completing acquisitions; risks related to joint venture investments, including as a result of our lack of control of such investments; 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; our failure to obtain necessary debt and equity financing, and our dependence on external sources of capital; financial market fluctuations and changes in foreign currency exchange rates; 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 and goodwill and other intangible asset impairment charges; our inability to manage our growth effectively; losses in excess of our insurance coverage; our inability to attract and retain talent; environmental liabilities, risks related to natural disasters and our inability to achieve our sustainability goals; our inability to comply with rules and regulations applicable to our Company; Digital Realty Trust, Inc.’s failure to maintain its status as a REIT for federal income tax purposes; Digital Realty Trust, L.P.’s failure to qualify as a partnership for federal income tax purposes; restrictions on our ability to engage in certain business activities; and changes in local,
state, federal and international laws and regulations, including related to taxation, real estate and zoning laws, and increases in real property tax rates.
While forward-looking statements reflect our good faith beliefs, they are not guarantees 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.
The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in our annual report on Form 10-K for the year ended December 31, 2021 and our quarterly report on Form 10-Q for the three months ended June 30, 2022. 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 identify 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. Given these risks and uncertainties, you should not place undue reliance on forward-looking statements as a prediction of actual results.
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.
As used in this report: “Ascenty entity” refers to the entity, which owns and operates Ascenty, formed with Brookfield Infrastructure.
Business Overview and Strategy
Digital Realty Trust, Inc., through its controlling interest in Digital Realty Trust, L.P. and its subsidiaries, delivers comprehensive space, power, and interconnection solutions that enable its customers and partners to connect with each other and service their own customers on a global technology and real estate platform. We are a leading global provider of data center, colocation and interconnection solutions for customers across a variety of industry verticals. Digital Realty Trust, Inc. operates as a REIT for federal income tax purposes, and our Operating Partnership is the entity through which we conduct our business and own our assets.
Our primary business objectives are to maximize:
We expect to accomplish our objectives by achieving superior risk-adjusted returns, prudently allocating capital, diversifying our product offerings, accelerating our global reach and scale, and driving revenue growth and operating efficiencies. A significant component of our current and future internal growth is anticipated through the development of our existing space held for development, acquisition of land for future development, and acquisition of new properties.
We target high-quality, strategically located properties containing the physical and connectivity infrastructure that supports the applications and operations of data center and technology industry customers and properties that may be developed for such use. Most of our data center properties contain fully redundant electrical supply systems, multiple power feeds, above-standard cooling systems, raised floor areas, extensive in-building communications cabling and high-level security systems. Fundamentally, we bring together foundational real estate and innovative technology expertise around the world to deliver a comprehensive, dedicated product suite to meet customers’ data and connectivity needs. We represent an important part of the digital economy that we believe will benefit from powerful, long-term growth drivers.
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We have developed detailed, standardized procedures for evaluating new real estate investments to ensure that they meet our financial, technical and other criteria. We expect to continue to acquire additional assets as part of our growth strategy. We intend to aggressively manage and lease our assets to increase their cash flow. We may continue to build out our development portfolio when justified by anticipated demand and returns.
We may acquire properties subject to existing mortgage financing and other indebtedness or we may incur new indebtedness in connection with acquiring or refinancing these properties. Debt service on such indebtedness will have a priority over any cash dividends with respect to Digital Realty Trust, Inc.’s common stock and preferred stock. We are committed to maintaining a conservative capital structure. We target a debt-to-Adjusted EBITDA ratio at or less than 5.5x, fixed charge coverage of greater than three times, and floating rate debt at less than 20% of total outstanding debt. In addition, we strive to maintain a well-laddered debt maturity schedule, and we seek to maximize the menu of our available sources of capital, while minimizing the cost.
Summary of 2022 Significant Activities
We completed the following significant activities during the nine months ended September 30, 2022:
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Revenue Base
Most of our revenue consists of rental income generated by the data centers in our portfolio. Our ability to generate and grow revenue depends on several factors, including our ability to maintain or improve occupancy rates. A summary of our data center portfolio and related square feet occupied (excluding space under development or held for development) is shown below. Unconsolidated portfolios shown below consist of assets owned by unconsolidated entities in which we have invested. We often provide management services for these entities under management agreements and receive management fees. These are shown as Managed Unconsolidated Portfolio. Entities for which we do not provide such services are shown as Non-Managed Unconsolidated Portfolio.
Region
Data Center Buildings
Net Rentable Square Feet (1)
Space Under Active Development (2)
Space Held for Development (3)
Occupancy
North America
119
21,856,712
3,459,176
781,944
85.5
114
21,751,638
2,327,121
900,357
85.4
Europe
113
7,930,913
4,125,723
188,153
78.4
107
7,549,209
3,125,451
191,094
74.6
Asia Pacific
1,577,915
495,920
87,660
79.2
1,355,243
806,252
76.2
Africa
25,960
43,885
64.8
25,825
40,965
58.5
Consolidated Portfolio
248
31,391,500
8,124,704
1,057,757
83.4
237
30,681,914
6,299,789
1,091,451
82.5
Managed Unconsolidated Portfolio
2,383,729
95.2
Non-Managed Unconsolidated Portfolio
2,923,627
753,257
1,838,007
87.0
2,565,185
930,670
1,591,004
86.0
Total Portfolio
304
36,698,856
8,877,961
2,895,764
84.7
287
35,630,828
7,230,460
2,682,456
83.6
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Leasing Activities
Due to the capital-intensive and long-term nature of the operations we support, our lease terms with customers are generally longer than standard commercial leases. As of September 30, 2022, our average remaining lease term was approximately five years.
Our ability to re-lease expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. The subsequent table summarizes our leasing activity in the nine months ended September 30, 2022:
TI’s/Lease
Weighted
Commissions
Average Lease
Rentable
Expiring
New
Rental Rate
Per Square
Terms
Square Feet (1)
Rates (2)
Changes
Foot
(years)
Leasing Activity (3)(4)
Renewals Signed
0 — 1 MW
1,358,734
263.46
272.79
3.5
0.22
> 1 MW
613,701
157.47
163.56
3.9
28.10
Other (6)
726,719
39.24
47.36
20.7
15.92
11.4
New Leases Signed (5)
433,245
238.64
11.26
3.8
2,306,637
129.98
8.3
363,961
48.58
1.76
8.6
Leasing Activity Summary
1,791,979
264.54
2,920,337
137.03
1,090,680
47.76
We continue to see strong demand in most of our key metropolitan areas for data center space and, subject to the supply of available data center space in these metropolitan areas, we expect average aggregate rental rates on renewed data center leases for 2022 expirations to be slightly positive as compared with the rates currently being paid for the same space on a GAAP basis and on a cash basis. Our past performance may not be indicative of future results, and we cannot assure you that leases will be renewed or that our data centers will be re-leased at all or at rental rates equal to or above the current average rental rates. Further, re-leased/renewed rental rates in a particular metropolitan area may not be consistent with rental rates across our portfolio as a whole and may fluctuate from one period to another due to a number of factors, including local economic conditions, local supply and demand for data center space, competition from other data center developers or operators, the condition of the property and whether the property, or space within the property, has been developed.
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Geographic Concentration
We depend on the market for data centers in specific geographic regions and significant changes in these regional or metropolitan areas can impact our future results. The following table shows the geographic concentration of annualized rent from our portfolio, including data centers held as investments in unconsolidated entities.
Metropolitan Area
total annualized rent (1)
19.3
Chicago
New York
6.2
Silicon Valley
5.8
Frankfurt
5.6
Dallas
5.4
Singapore
5.2
London
4.7
Sao Paulo
4.4
Amsterdam
Paris
San Francisco
1.9
Phoenix
Portland
1.8
Atlanta
21.0
Operating Expenses
Operating expenses primarily consist of utilities, property and ad valorem taxes, property management fees, insurance and site maintenance costs, and rental expenses on our ground and building leases. Our buildings require significant power to support data center operations and the cost of electric power and other utilities is a significant component of operating expenses.
Many of our leases contain provisions under which tenants reimburse us for all or a portion of property operating expenses and real estate taxes incurred by us. However, in some cases we are not entitled to reimbursement of property operating expenses, other than utility expense, and real estate taxes under our leases for Turn-Key Flex® facilities. We expect to incur additional operating expenses as we continue to expand.
Costs pertaining to our asset management function, legal, accounting, corporate governance, reporting and compliance are categorized as general and administrative costs within operating expenses.
Other key components of operating expenses include: depreciation of our fixed assets, amortization of intangible assets, and transaction and integration costs.
Other Income / (Expenses)
Equity in earnings of unconsolidated entities, interest expense, and income tax expense make up the majority of other income/(expense). Equity in earnings of unconsolidated entities represents our share of the income/(loss) of entities in which we invest, but do not consolidate under U.S. GAAP. The largest of these investments is currently our investment in Ascenty, which is located primarily in Latin America. Our second-largest equity-method investment is Digital Core REIT, which is publicly traded on the Singapore Exchange (“SGX”) and which owns a portfolio of 10 properties operating in the United States and Canada. Refer to additional discussion of Digital Core REIT and Ascenty in the Notes to the Condensed Consolidated Financial Statements.
Results of Operations
As a result of the consistent and significant growth in our business since the first property acquisition in 2002, we evaluate period-to-period results for revenue and property level operating expenses on a stabilized versus non-stabilized portfolio basis.
Stabilized: The stabilized portfolio includes properties owned as of the beginning of all periods presented with less than 5% of total rentable square feet under development.
Non-stabilized: The non-stabilized portfolio includes: (1) properties that were undergoing, or were expected to undergo, development activities during any of the periods presented; (2) any properties contributed to joint ventures, sold, or held for sale during the periods presented; and (3) any properties that were acquired or delivered at any point during the periods presented.
A roll forward showing changes in the stabilized and non-stabilized portfolios for the nine months ended September 30, 2022 as compared to December 31, 2021 is shown below.
Net Rentable Square Feet
Stabilized
Non-Stabilized
17,095,366
13,586,548
New development and space reconfigurations
7,454
1,095,866
1,103,320
Transfers to stabilized from nonstabilized
6,833,358
(6,861,445)
(28,087)
Dispositions / Sales
(365,647)
-
23,570,531
7,820,969
Comparison of the Three and Nine Months ended September 30, 2022 to The Three and Nine Months Ended September 30, 2021
Revenues
Total operating revenues as shown on our condensed consolidated income statements was as follows (in thousands):
$ Change
% Change
869,966
884,430
(14,464)
(1.6)
2,598,690
2,657,809
(59,119)
(2.2)
314,199
226,474
87,725
38.7
838,562
630,396
208,166
33.0
73,261
6.6
149,047
4.5
(14,314)
(64.4)
(7,035)
(24.7)
58,947
142,012
4.3
Total operating revenues increased by approximately $58.9 million and $142.0 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, driven primarily by growth in non-stabilized rental and other services revenue.
Stabilized rental and other services revenue decreased $14.5 million in the three months ended September 30, 2022, compared to the same period in 2021 primarily due to a $36.1 million unfavorable foreign currency translation effect (primarily related to weaking of the Euro and British pound sterling versus the U.S. dollar) partially offset by a net increase in tenant reimbursements related to higher utility consumption of $23.3 million.
Stabilized rental and other services revenue decreased $59.1 million in the nine months ended September 30, 2022, compared to the same period in 2021, primarily due to a $85.5 million unfavorable foreign currency translation effect (primarily due to the Euro and British pound sterling versus the U.S. dollar), and a $19.6 million increase in bad debt and straight-line rent reserves, partially offset by a net increase in tenant reimbursements related to higher utility consumption of $54.4 million.
Non-stabilized rental and other services revenue increased $87.7 million in the three months ended September 30, 2022, compared to the same period in 2021 driven primarily by:
Non-stabilized rental and other services revenue increased $208.2 million in the nine months ended September 30, 2022, compared to the same period in 2021, driven primarily by:
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Operating Expenses — Property Level
Property level operating expenses as shown in our condensed consolidated income statements were as follows (in thousands):
200,737
172,215
28,522
16.6
552,601
497,338
55,263
71,107
37,370
33,737
90.3
183,908
73,304
110,605
150.9
Total Utilities
271,844
209,585
62,259
29.7
736,509
570,642
165,868
29.1
150,773
147,636
3,137
442,109
454,802
(12,693)
(2.8)
55,113
49,107
6,006
12.2
156,208
125,880
30,328
24.1
Total Rental Property Operating and Maintenance (Excluding Utilities)
205,886
196,743
9,143
598,317
580,682
17,635
Total Rental Property Operating and Maintenance
477,730
71,401
17.6
1,151,323
183,503
15.9
31,498
45,682
(14,184)
(31.0)
112,214
124,410
(12,196)
(9.8)
12,365
14,951
(2,586)
(17.3)
32,921
37,225
(4,304)
(11.6)
43,863
(16,770)
(27.7)
161,635
(16,500)
(10.2)
Total Property Level Expenses
521,593
466,962
54,631
11.7
1,479,961
1,312,958
167,003
12.7
Property level operating expenses include costs to operate and maintain the properties in our portfolio as well as taxes and insurance.
Total stabilized utilities expenses increased by approximately $28.5 million and $55.3 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to an increase in utility consumption and higher rates at certain properties in the stabilized portfolio.
Total non-stabilized utilities expenses increased by approximately $33.7 million and $110.6 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to higher utility consumption in a growing portfolio of recently completed development sites.
Total stabilized rental property operating and maintenance expenses (excluding utilities) increased by approximately $3.1 million in the three months ended September 30, 2022, compared to the same period in 2021 primarily due to an increase in common area maintenance utilities and repairs and maintenance. Total stabilized rental property operating and maintenance expenses (excluding utilities) decreased $12.7 million in the nine months ended September 30, 2022, compared to the same period in 2021 primarily due to a $15.8 million decrease in rental property operating expenses as a result of the expiration of enhanced COVID janitorial and security screening protocols and data center labor.
Total non-stabilized rental property operating and maintenance expenses increased $6.0 million in the three months ended September 30, 2022, compared to the same period in 2021 primarily due to an increase in service installation expenses in the EMEA markets. Total non-stabilized rental property operating and maintenance expenses increased $30.3 million in the nine months ended September 30, 2022, compared to the same period in 2021 primarily due to higher lease and common area maintenance expense in a growing portfolio of recently completed development sites of
approximately $35.9 million offset by an unfavorable foreign currency translation effect primarily due to the Euro versus the U.S. dollar of approximately $14.1 million.
The cost of electric power comprises a significant component of our operating expenses. Any additional taxation or regulation of energy use, including as a result of (i) new legislation that the U.S. Congress may pass, (ii) the regulations that the U.S. EPA has proposed or finalized, (iii) regulations under legislation that states have passed or may pass, or (iv) any further legislation or regulations in the EU, APAC or other regions where we operate could significantly increase our costs, and we may not be able to effectively pass all of these costs on to our customers. These matters could adversely impact our business, results of operations, or financial condition.
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Other Operating Expenses
Other operating expenses include costs which are either non-cash in nature (such as depreciation and amortization), or which do not directly pertain to operation of data center properties. A comparison of other operating expenses for the three and nine months ended September 30, 2022 and 2021 is shown below.
19,669
5.3
40,054
3.6
(1,013)
(1.0)
5,790
2.0
Transaction, integration and other expense
12,058
87.4
16,417
46.9
586
114.9
6,272
245.9
Total Other Operating Expenses
513,109
481,809
31,300
6.5
1,509,778
1,441,245
68,533
4.8
Property level operating expenses
Total Operating Expenses
85,931
9.1
235,536
Equity in earnings (loss) of unconsolidated entities decreased approximately $53.1 million and $55.4 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The foreign exchange remeasurement of debt associated with our unconsolidated Ascenty entity creates volatility in our equity in earnings and drove this fluctuation.
Gain on Disposition of Properties, Net
Gain on disposition of properties increased approximately $174.6 million and decreased $157.0 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increase during the three-month period is due to the disposition of a property in the Dallas market in August 2022, for total net proceeds of approximately $204 million. The decrease during the nine-month period was due to recognizing a gain of approximately $333.3 million in March 2021 associated with sale of a portfolio of 11 data centers in Europe (four in the United Kingdom, three in the Netherlands, three in France and one in Switzerland) to Ascendas Reit, a CapitaLand sponsored REIT, for total purchase consideration of approximately $680.0 million.
Loss from Early Extinguishment of Debt
Loss from early extinguishment of debt increased approximately $32.8 million in the nine months ended September 30, 2022 compared to the same period in 2021. The increase is primarily due to the redemption of the 4.750% Notes due 2025 in February 2022, which resulted in a $51.1 million loss, offset by the redemption 2.750% Notes due 2023 in February 2021, which resulted in a $18.3 million loss.
Income Tax Expense
Income tax expense increased by $5.9 million and decreased by $19.6 million during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increase during the three-month period is due in part to the acquisition of an indirect controlling interest in Teraco in August 2022 along with other increases in various foreign jurisdictions. The decrease during the nine-month period was driven primarily by an increase in the corporate tax rate that increased deferred tax expense in the United Kingdom from 19% to 25% during the quarter ended June 30, 2021.
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Liquidity and Capital Resources
The sections “Analysis of Liquidity and Capital Resources — Parent” and “Analysis of Liquidity and Capital Resources — Operating Partnership” should be read in conjunction with one another to understand our liquidity and capital resources on a consolidated basis. The term “Parent” refers to Digital Realty Trust, Inc. on an unconsolidated basis, excluding our Operating Partnership. The term “Operating Partnership” or “OP” refers to Digital Realty Trust, L.P. on a consolidated basis.
Analysis of Liquidity and Capital Resources — Parent
Our Parent does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time, incurring certain expenses in operating as a public company (which are fully reimbursed by the Operating Partnership) and guaranteeing certain unsecured debt of the Operating Partnership and certain of its subsidiaries and affiliates. If our Operating Partnership or such subsidiaries fail to fulfill their debt requirements, which trigger Parent guarantee obligations, then our Parent will be required to fulfill its cash payment commitments under such guarantees. Our Parent’s only material asset is its investment in our Operating Partnership.
Our Parent’s principal funding requirement is the payment of dividends on its common and preferred stock. Our Parent’s principal source of funding is the distributions it receives from our Operating Partnership.
As the sole general partner of our Operating Partnership, our Parent has the full, exclusive and complete responsibility for our Operating Partnership’s day-to-day management and control. Our Parent causes our Operating Partnership to distribute such portion of its available cash as our Parent may in its discretion determine, in the manner provided in our Operating Partnership’s partnership agreement.
As circumstances warrant, our Parent may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. Any proceeds from such equity issuances would generally be contributed to our Operating Partnership in exchange for additional equity interests in our Operating Partnership. Our Operating Partnership may use the proceeds to acquire additional properties, to fund development opportunities and for general working capital purposes, including potentially for the repurchase, redemption or retirement of outstanding debt or equity securities.
Our Parent and our Operating Partnership are parties to an at-the-market (ATM) equity offering sales agreement dated April 1, 2022 (the “Sales Agreement”). Pursuant to the Sales Agreement, Digital Realty Trust, Inc. can issue and sell common stock having an aggregate offering price of up to $1.5 billion through various named agents from time to time. The sales of common stock made under the Sales Agreement will be made in “at the market” offerings as defined in Rule 415 of the Securities Act. Our Parent has used and intends to use the net proceeds from the program to temporarily repay borrowings under our Operating Partnership’s Global Revolving Credit Facilities, to acquire additional properties or businesses, to fund development opportunities and for working capital and other general corporate purposes, including potentially for the repayment of other debt or the repurchase, redemption or retirement of outstanding debt securities.
On September 13, 2021, Digital Realty Trust, Inc. completed an underwritten public offering of 6,250,000 shares of its common stock, all of which were offered in connection with forward sale agreements it entered into with certain financial institutions acting as forward purchasers. The forward purchasers borrowed and sold an aggregate of 6,250,000 shares of Digital Realty Trust, Inc.’s common stock in the public offering. Digital Realty Trust, Inc. did not receive any proceeds from the sale of our common stock by the forward purchasers in the public offering. During the three months ended September 30, 2022, we partially settled the forward sale agreements by issuing approximately 2.7 million shares, resulting in proceeds of approximately $400.0 million. Forward sale agreements representing approximately 3.6 million shares remain outstanding, and the Company may receive gross proceeds of approximately $0.6 billion (based on the offering price of $155.69 per share) upon full physical settlement of the outstanding forward sale agreements, which is to be no later than March 13, 2023. Upon physical settlement of the forward sale agreements, the Operating Partnership has issued and is expected to issue general partner common partnership units to Digital Realty Trust, Inc. in exchange for contribution of the net proceeds.
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We believe our Operating Partnership’s sources of working capital, specifically its cash flow from operations, and funds available under its global revolving credit facility are adequate for it to make its distribution payments to our Parent and, in turn, for our Parent to make its dividend payments to its stockholders. However, we cannot assure you that our Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including making distribution payments to our Parent. The lack of availability of capital could adversely affect our Operating Partnership’s ability to pay its distributions to our Parent, which would in turn, adversely affect our Parent’s ability to pay cash dividends to its stockholders.
Future Uses of Cash — Parent
Our Parent may from time to time seek to retire, redeem or repurchase its equity or the debt securities of our Operating Partnership or its subsidiaries through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases, redemptions or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions or other factors. The amounts involved may be material.
Dividends and Distributions — Parent
Our Parent is required to distribute 90% of its taxable income (excluding capital gains) on an annual basis to continue to qualify as a REIT for [U.S.] federal income tax purposes. Our Parent intends to make, but is not contractually bound to make, regular quarterly distributions to its common stockholders from cash flow from our Operating Partnership’s operating activities. While historically our Parent has satisfied this distribution requirement by making cash distributions to its stockholders, it may choose to satisfy this requirement by making distributions of cash or other property. All such distributions are at the discretion of our Parent’s Board of Directors. Our Parent considers market factors and our Operating Partnership’s performance in addition to REIT requirements in determining distribution levels. Our Parent has distributed at least 100% of its taxable income annually since inception to minimize corporate level federal and state income taxes. Amounts accumulated for distribution to stockholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which are consistent with our intention to maintain our Parent’s status as a REIT.
As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. Our Parent may need to continue to raise capital in the debt and equity markets to fund our Operating Partnership’s working capital needs, as well as potential developments at new or existing properties, acquisitions or investments in existing or newly created joint ventures. In addition, our Parent may be required to use borrowings under the Operating Partnership’s global revolving credit facility (which is guaranteed by our Parent), if necessary, to meet REIT distribution requirements and maintain our Parent’s REIT status.
Distributions out of our Parent’s current or accumulated earnings and profits are generally classified as ordinary income whereas distributions in excess of our Parent’s current and accumulated earnings and profits, to the extent of a stockholder’s U.S. federal income tax basis in our Parent’s stock, are generally classified as a return of capital. Distributions in excess of a stockholder’s U.S. federal income tax basis in our Parent’s stock are generally characterized as capital gain. Cash provided by operating activities has been generally sufficient to fund distributions on an annual basis. However, we may also need to utilize borrowings under the global revolving credit facility to fund distributions.
For additional information regarding dividends declared and paid by our Parent on its common and preferred stock for the nine months ended September 30, 2022, see Note 11. “Equity and Capital” to our condensed consolidated financial statements contained herein.
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Analysis of Liquidity and Capital Resources — Operating Partnership
As of September 30, 2022, we had $177.0 million of cash and cash equivalents, excluding $9.0 million of restricted cash. Restricted cash primarily consists of contractual capital expenditures plus other deposits. Our liquidity requirements primarily consist of:
Future Uses of Cash
Our properties require periodic investments of capital for customer-related capital expenditures and for general capital improvements. Depending upon customer demand, we expect to incur significant improvement costs to build out and develop additional capacity. At September 30, 2022, we had open commitments, related to construction contracts of approximately $2.6 billion, including amounts reimbursable of approximately $35.5 million.
We currently expect to incur approximately $0.6 billion to $0.8 billion of capital expenditures for our development programs during the three months ending December 31, 2022. This amount could go up or down, potentially materially, based on numerous factors, including changes in demand, leasing results and availability of debt or equity capital.
On August 1, 2022, we completed the acquisition of a 61.1% controlling interest in Teraco, a leading carrier-neutral data center and interconnection services provider in South Africa. The total purchase price was $1.7 billion cash, funded by our global revolving credit facility and partial settlement of our forward equity sale agreements. The transaction is expected to position Digital Realty as the premier data center and connectivity provider in South Africa. A consolidated trust created as part of the Broad Based Black Economic Empowerment initiative in South Africa owns 10% of Teraco’s primary operating entity. The portion owned by the Trust does not dilute the Company’s ownership of Teraco because the Company consolidates the Trust. Consolidating the Trust, the Company’s ownership percentage in Teraco would be approximately 55%.
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Development Projects
The costs we incur to develop our properties is a key component of our liquidity requirements. The following table summarizes our cumulative investments in current development projects as well as expected future investments in these projects as of the periods presented, excluding costs incurred or to be incurred by unconsolidated entities.
Development Lifecycle
Net Rentable
Current
Future
(dollars in thousands)
Investment (2)
Investment (3)
Total Cost
Investment (4)
Land held for future development (5)
N/A
Construction in Progress and Space Held for Development
Land - Current Development (5)
1,062,251
974,464
Space Held for Development (6)
1,057,758
188,837
210,903
Base Building Construction
3,725,823
576,726
742,205
1,318,931
3,319,999
545,529
460,595
1,006,124
Data Center Construction
4,398,881
1,780,581
3,112,143
4,892,724
2,979,791
1,409,403
1,825,369
3,234,772
Equipment Pool and Other Inventory
26,849
7,881
Campus, Tenant Improvements and Other
100,018
182,602
282,620
65,209
99,118
164,327
Total Construction in Progress and Land Held for Future Development
9,182,462
3,769,975
4,036,950
7,806,925
7,391,241
3,347,072
2,385,082
5,732,154
Land inventory and space held for development reflect cumulative cost spent pending future development. Base building construction consists of ongoing improvements to building infrastructure in preparation for future data center fit-out. Data center construction includes 8.1 million square feet of Turn Key Flex® and Powered Base Building® product. We expect to deliver the space within 12 months; however, lease commencement dates may significantly impact final delivery schedules. Equipment pool and other inventory represent the value of long-lead equipment and materials required for timely deployment and delivery of data center construction fit-out. Campus, tenant improvements and other costs include the value of development work which benefits space recently converted to our operating portfolio and is composed primarily of shared infrastructure projects and first-generation tenant improvements.
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Capital Expenditures (Cash Basis)
The table below summarizes our capital expenditure activity for the nine months ended September 30, 2022 and 2021 (in thousands):
Development projects
1,480,449
1,527,588
Enhancement and improvements
10,268
571
Recurring capital expenditures
156,467
129,553
Total capital expenditures (excluding indirect costs)
1,647,184
1,657,712
Our development capital expenditures are generally funded by our available cash and equity and debt capital.
Indirect costs, including interest, capitalized in the nine months ended September 30, 2022 and 2021 were $109.7 million and $90.4 million, respectively. Capitalized interest comprised approximately $46.2 million and $38.1 million of the total indirect costs capitalized for the nine months ended September 30, 2022 and 2021, respectively. Capitalized interest in the nine months ended September 30, 2022 increased, compared to the same period in 2021, due to an increase in qualifying activities.
Excluding capitalized interest, indirect costs in the nine months ended September 30, 2022 increased compared to the same period in 2021 due primarily to capitalized amounts relating to compensation expense of employees directly engaged in construction activities. See “Future Uses of Cash” for a discussion of the amount of capital expenditures we expect to incur during the year ending December 31, 2022.
Consistent with our growth strategy, we actively pursue potential acquisition opportunities, with due diligence and negotiations often at different stages at different times. The dollar value of acquisitions for the year ending December 31, 2022 will depend upon numerous factors, including customer demand, leasing results, availability of debt or equity capital and acquisition opportunities. Further, the growing acceptance by private institutional investors of the data center asset class has generally pushed capitalization rates lower, as such private investors may often have lower return expectations than us. As a result, we anticipate near-term single asset acquisitions activity to comprise a smaller percentage of our growth while this market dynamic persists.
We may from time to time seek to retire or repurchase our outstanding debt or the equity of our Parent through cash purchases and/or exchanges for equity securities of our Parent in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions or other factors. The amounts involved may be material.
Sources of Cash
We expect to meet our short-term and long-term liquidity requirements, including payment of scheduled debt maturities and funding of acquisitions and non-recurring capital improvements, with net cash from operations, future long-term secured and unsecured indebtedness, non-core asset sales and/or contributions to capital partner vehicles and the issuance of equity and debt securities and the proceeds of equity issuances by our Parent. We also may fund future short-term and long-term liquidity requirements, including acquisitions and non-recurring capital improvements, using our Global Revolving Credit Facilities pending permanent financing. As of November 2, 2022, we had approximately $1.1 billion of borrowings available under our Global Revolving Credit Facilities.
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Our Global Revolving Credit Facilities provide for borrowings up to approximately $3.9 billion (including approximately $0.2 billion available to be drawn on the Yen revolving credit facility). We have the ability from time to time to increase the size of the global revolving credit facility by up to $750 million, subject to the receipt of lender commitments and other conditions precedent. Both facilities mature on January 24, 2026, with two six-month extension options available. These facilities also feature a sustainability-linked pricing component, with pricing subject to adjustment based on annual performance targets, further demonstrating our continued leadership and commitment to sustainable business practices. We have used and intend to use available borrowings under the Global Revolving Credit Facilities to fund our liquidity requirements from time to time.
On October 25, 2022, the Company, the Operating Partnership, and certain of the Operating Partnership’s subsidiaries entered into an escrow agreement (the “Escrow Agreement”) with Bank of America, N.A., as administrative agent (the “Administrative Agent”), certain lenders (the “Lenders”), and Arnold & Porter Kaye Scholer LLP, as escrow agent (the “Escrow Agent”), pursuant to which the Operating Partnership, the Company, the Administrative Agent and the Lenders delivered executed signature pages to a new term loan (the “Term Loan Agreement”) to be held in escrow by the Escrow Agent and released by the Escrow Agent upon satisfaction of the terms and conditions described in the Escrow Agreement. The Term Loan Agreement provides for a $660 million senior unsecured term loan facility (the “Term Loan Facility”). The Term Loan Facility provides for borrowings in U.S. dollars and will mature on March 31, 2025, subject to one twelve-month extension option at the Operating Partnership’s option; provided, that the Operating Partnership must pay a 0.1875% extension fee based on the then-outstanding principal amount of the term loans under the Term Loan Facility. While there can be no assurance in this regard, the parties expect to close the Term Loan Agreement on or prior to January 23, 2023.
All distributions on our units are at the discretion of our Parent’s Board of Directors. For additional information regarding distributions paid on our common and preferred units for the nine months ended September 30, 2022, see Note 11. “Equity and Capital” to our condensed consolidated financial statements contained herein.
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Outstanding Consolidated Indebtedness
The table below summarizes our outstanding debt as of September 30, 2022 (in millions):
Debt Summary:
Fixed rate
12,518.4
Variable rate debt subject to interest rate swaps
233.1
Total fixed rate debt (including interest rate swaps)
12,751.5
Variable rate—unhedged
3,124.7
15,876.2
Percent of Total Debt:
Fixed rate (including swapped debt)
80.3
Variable rate
19.7
Effective Interest Rate as of September 30, 2022
Fixed rate (including hedged variable rate debt)
2.65
Effective interest rate
Our ratio of debt to total enterprise value was approximately 35% (based on the closing price of Digital Realty Trust, Inc.’s common stock on September 30, 2022 of $99.18). For this purpose, 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 enterprise value ratio), plus the liquidation value of Digital Realty Trust, Inc.’s preferred stock, plus the aggregate value of Digital Realty Trust, L.P.’s 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.’s common stock and excluding long-term incentive units, Class C units and Class D units), plus the book value of our total consolidated indebtedness.
The variable rate debt shown above bears interest based on various one-month USD LIBOR, EURIBOR, SONIA, SORA, BBR, HIBOR, TIBOR, CDOR, JIBAR, and for Korean Won the base CD rates, depending on the respective agreement governing the debt, including our Global Revolving Credit Facilities. As of September 30, 2022, our debt had a weighted average term to initial maturity of approximately 5.2 years (or approximately 5.4 years assuming exercise of extension options).
As of September 30, 2022, our pro-rata share of secured debt of unconsolidated entities was approximately $794.1 million.
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Cash Flows
The following summary discussion of our cash flows is based on the condensed consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.
Comparison of Nine Months Ended September 30, 2022 to Nine Months Ended September 30, 2021
The following table shows cash flows and ending cash, cash equivalents and restricted cash balances for the respective periods (in thousands).
Change
(47,325)
(2,548,117)
2,644,698
Net increase in cash, cash equivalents and restricted cash
49,256
The changes in the activities that comprise the increase in net cash used in investing activities for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 consisted of the following amounts (in thousands).
Increase in cash used for business combination / assets acquired
(1,708,653)
Increase in cash used for improvements to investments in real estate
(5,445)
Increase in cash contributed to investments in unconsolidated entities
(249,847)
Decrease in net cash provided by proceeds from sale of real estate
(515,769)
Other changes
(68,403)
Increase in net cash used in investing activities
The increase in net cash used in investing activities was primarily due to:
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Increase in cash used in/provided by short-term borrowings
1,644,708
Increase in cash provided by proceeds from secured / unsecured debt
610,687
Decrease in cash used for repayment on secured / unsecured debt
145,621
Increase in cash provided by proceeds from issuance of common stock, net of costs
232,569
Increase in cash used for dividend and distribution payments
(71,230)
82,343
Increase in net cash provided by financing activities
The increase in net cash provided by financing activities was primarily due to:
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Noncontrolling interests relate to the common units in Digital Realty Trust, L.P. that are not owned by Digital Realty Trust, Inc., which, as of September 30, 2022, amounted to 2.1% of Digital Realty Trust, L.P. common units. Historically, Digital Realty Trust, L.P. has issued common units to third party sellers in connection with our acquisition of real estate interests from such third parties.
Limited partners have the right to require Digital Realty Trust, L.P. to redeem part or all of their common units for cash based upon the fair market value of an equivalent number of shares of Digital Realty Trust, Inc. common stock at the time of the redemption. Alternatively, we may elect to acquire those common units in exchange for shares of Digital Realty Trust, Inc. common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events. As of September 30, 2022, approximately 0.2 million common units of Digital Realty Trust, L.P. that were issued to certain former unitholders of DuPont Fabros Technology, L.P. in connection with the Company’s acquisition of DuPont Fabros Technology, Inc. were outstanding, which are subject to certain restrictions and, accordingly, are not presented as permanent capital in the condensed consolidated balance sheet.
Inflation
Many of our leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above.
Funds from Operations
We calculate funds from operations, or FFO, in accordance with the standards established by the National Association of Real Estate Investment Trusts (Nareit) in the Nareit Funds From Operations White Paper - 2018 Restatement. FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, a gain from a pre-existing relationship, impairment charges and real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions and after adjustments for unconsolidated partnerships and joint ventures, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited. Other REITs may not calculate FFO in accordance with the Nareit definition and, accordingly, our FFO may not be comparable to other REITs’ FFO. FFO should be considered only as a supplement to net income computed in accordance with GAAP as a measure of our performance.
Reconciliation of Net Income Available to Common Stockholders to Funds From Operations (FFO)
(unaudited, in thousands, except per share and unit data)
Net Income Available to Common Stockholders
Adjustments:
Non-controlling interests in operating partnership
5,400
3,000
8,500
16,000
Real estate related depreciation and amortization (1)
381,425
362,728
1,124,914
1,091,065
Depreciation related to non-controlling interests
(8,254)
Unconsolidated JV real estate related depreciation and amortization
30,831
21,293
89,172
61,654
Gain on real estate transactions
(173,990)
(63,799)
(177,904)
(398,219)
FFO available to common stockholders and unitholders (2)
462,306
447,316
1,379,668
1,394,369
Basic FFO per share and unit
1.58
1.54
4.74
4.83
Diluted FFO per share and unit (2)
1.55
4.61
4.82
Weighted average common stock and units outstanding
Diluted (2)
(1) Real estate related depreciation and amortization was computed as follows:
Depreciation and amortization per income statement
Non-real estate depreciation
(7,279)
(6,307)
(22,889)
(16,684)
Add: Effect of dilutive securities
9,722
694
8,944
668
Weighted average common stock and units outstanding—diluted
66
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to financial instruments depend upon prevalent market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit ratings and other factors.
Analysis of Debt between Fixed and Variable Rate
We use interest rate swap agreements and fixed rate debt to reduce our exposure to interest rate movements. As of September 30, 2022, our consolidated debt was as follows (in millions):
Fixed rate debt
9,937.2
10,170.3
Variable rate debt
Total outstanding debt
13,295.0
Sensitivity to Changes in Interest Rates
The following table shows the effect if assumed changes in interest rates occurred, based on fair values and interest expense as of September 30, 2022:
Assumed event
($ millions)
Increase in fair value of interest rate swaps following an assumed 10% increase in interest rates
(0.1)
Decrease in fair value of interest rate swaps following an assumed 10% decrease in interest rates
Increase in annual interest expense on our debt that is variable rate and not subject to swapped interest following a 10% increase in interest rates
7.1
Decrease in annual interest expense on our debt that is variable rate and not subject to swapped interest following a 10% decrease in interest rates
(7.1)
Increase in fair value of fixed rate debt following a 10% decrease in interest rates
120.2
Decrease in fair value of fixed rate debt following a 10% increase in interest rates
(113.9)
Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
Foreign Currency Exchange Risk
We are subject to risk from the effects of exchange rate movements of a variety of foreign currencies, which may affect future costs and cash flows. Our primary currency exposures are to the Euro, Japanese yen, British pound sterling and Singapore dollar. As a result of the Ascenty entity and deconsolidation of Ascenty, our exposure to foreign exchange risk related to the Brazilian real is limited to the impact that currency has on our share of the Ascenty entity’s operations and financial position. We attempt to mitigate a portion of the risk of currency fluctuations by financing our investments in local currency denominations in order to reduce our exposure to any foreign currency transaction gains or losses resulting from transactions entered into in currencies other than the functional currencies of the associated entities. In addition, we may also hedge well-defined transactional exposures with foreign currency forwards or options, although there can be no assurances that these will be effective. As a result, changes in the relation of any such foreign currency to U.S. dollar may affect our revenues, operating margins and distributions and may also affect the book value of our assets and the amount of stockholders’ equity.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures (Digital Realty Trust, Inc.)
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including its chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and its management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities, which are accounted for using the equity method of accounting. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities may be substantially more limited than those it maintains with respect to its consolidated subsidiaries.
As required by Rule 13a-15(b) or Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended, management of the Company carried out an evaluation, under the supervision and with participation of its chief executive officer and chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures that were in effect as of the end of the quarter covered by this report. Based on the foregoing, the Company’s chief executive officer and chief financial officer concluded that its disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during its most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures (Digital Realty Trust, L.P.)
The Operating Partnership maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to its management, including the chief executive officer and chief financial officer of its general partner, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Operating Partnership’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and its management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Operating Partnership has investments in certain unconsolidated entities, which are accounted for using the equity method of accounting. As the Operating Partnership does not control or manage these entities, its disclosure controls and procedures with respect to such entities may be substantially more limited than those it maintains with respect to its consolidated subsidiaries.
As required by Rule 13a-15(b) or Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended, management of the Operating Partnership carried out an evaluation, under the supervision and with participation of the chief executive officer and chief financial officer of its general partner, of the effectiveness of the design and operation of its disclosure controls and procedures that were in effect as of the end of the quarter covered by this report. Based on the foregoing, the chief executive officer and chief financial officer of the Operating Partnership’s general partner concluded that its disclosure controls and procedures were effective at the reasonable assurance level.
There have been no changes in the Operating Partnership’s internal control over financial reporting during its most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 1A. RISK FACTORS.
The risk factors discussed under the heading “Risk Factors” and elsewhere in the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2021 and the Company’s and the Operating Partnership’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 continue to apply to our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
During the three months ended September 30, 2022, Digital Realty Trust, L.P. issued partnership units in private placements in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act, in the amounts and for the consideration set forth below:
During the three months ended September 30, 2022, Digital Realty Trust, Inc. issued an aggregate of 20,514 shares of its common stock in connection with restricted stock unit awards for no cash consideration. For each share of common stock issued by Digital Realty Trust, Inc. in connection with such an award, Digital Realty Trust, L.P. issued a restricted common unit to Digital Realty Trust, Inc. During the three months ended September 30, 2022, Digital Realty Trust, L.P. issued an aggregate of 20,514 common units to Digital Realty Trust, Inc., as required by Digital Realty Trust, L.P.’s partnership agreement. During the three months ended September 30, 2022, an aggregate of 16,457 shares of its common stock were forfeited to Digital Realty Trust, Inc. in connection with restricted stock unit awards for a net issuance of 4,057 shares of common stock.
For these issuances of common units to Digital Realty Trust, Inc., Digital Realty Trust, L.P. relied on Digital Realty Trust, Inc.’s status as a publicly traded NYSE-listed company with approximately $39.2 billion in total consolidated assets and as Digital Realty Trust, L.P.’s majority owner and general partner as the basis for the exemption under Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
Incorporated by
Reference
ExhibitNumber
Description
Form
File Number
Date
Number
Filed Herewith
Amendment No. 1 to Purchase Agreement dated as of January 23, 2020, by and among Digital Realty Trust, Inc., Digital Intrepid Holding B.V. and InterXion Holding N.V.
8-K
001-32336
01/27/2020
Articles of Amendment and Restatement of Digital Realty Trust, Inc., as amended
10-Q
001-32336 and 000-54023
05/11/2020
3.2
Eighth Amended and Restated Bylaws of Digital Realty Trust, Inc.
10-K
02/25/2019
3.02
3.3
Certificate of Limited Partnership of Digital Realty Trust, L.P.
000-54023
06/25/2010
3.4
Nineteenth Amended and Restated Agreement of Limited Partnership of Digital Realty Trust, L.P.
10/10/2019
4.1
Supplemental Indenture No. 5, dated as of September 27, 2022, among Digital Realty Trust, L.P., as issuer, Digital Realty Trust, Inc., as guarantor, and Computershare Trust Company, N.A., as successor to Wells Fargo Bank, National Association, as trustee, including the form of 5.550% Notes due 2028 and the guarantee.
09/27/2022
4.2
10.1*
Term Loan Agreement, dated as of August 11, 2022, among Digital Dutch Finco B.V., and the other initial borrowers named therein and additional borrowers party thereto, as borrowers, Digital Realty Trust, L.P, Digital Euro Finco LLC and Digital Realty Trust, L.P. as guarantors, the subsidiary borrowers and additional guarantors named therein, the initial lenders and issuing banks named therein, Citibank, N.A., as administrative agent, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as syndication agents, BofA Securities, Inc., Citibank, N.A., JPMorgan Chase Bank, N.A., Deutsche
08/17/2022
10.1
Bank Securities Inc., PNC Bank, National Association, The Bank of Nova Scotia, Bank of China, Los Angeles Branch, Oversea-Chinese Banking Corporation, Limited – Los Angeles Agency, Raymond James Bank, Sumitomo Mitsui Banking Corporation, DBS Bank LTD., TD Securities (USA) LLC and U.S. Bank National Association, as joint lead arrangers, BofA Securities, Inc., Citibank, N.A. and JPMorgan Chase Bank, N.A., as joint bookrunners, and the other agents and lenders named therein.
10.2†
Amendment to Employment Agreement, dated as of September 7, 2022, by and among Digital Realty Trust, Inc., DLR LLC and Greg Wright.
X
10.3†
Amendment to Employment Agreement, dated as of September 7, 2022, by and among Digital Realty Trust, Inc., DLR LLC and Andrew P. Power.
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer for Digital Realty Trust, Inc.
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer for Digital Realty Trust, Inc.
31.3
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer for Digital Realty Trust, L.P.
31.4
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer for Digital Realty Trust, L.P.
32.1
18 U.S.C. § 1350 Certification of Chief Executive Officer for Digital Realty Trust, Inc.
32.2
18 U.S.C. § 1350 Certification of Chief Financial Officer for Digital Realty Trust, Inc.
32.3
18 U.S.C. § 1350 Certification of Chief Executive Officer for Digital Realty Trust, L.P.
32.4
18 U.S.C. § 1350 Certification of Chief Financial Officer for Digital Realty Trust, L.P.
101
The following financial statements from Digital Realty Trust, Inc.’s and Digital Realty Trust, L.P.’s Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL interactive data files: (i) Condensed Consolidated Balance Sheets as of September 30, 2022
72
and December 31, 2021; (ii) Condensed Consolidated Income Statements for the three and nine months ended September 30, 2022 and 2021; (iii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021; (iv) Condensed Consolidated Statements of Equity/Capital for the three and nine months ended September 30, 2022 and 2021; (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021; and (vi) Notes to Condensed Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
Portions of this exhibit have been omitted because such portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
†
Management contract or compensatory plan or arrangement.
73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 4, 2022
/S/ A. WILLIAM STEIN
A. William SteinChief Executive Officer(principal executive officer)
/S/ ANDREW P. POWER
Andrew P. PowerPresident & Chief Financial Officer(principal financial officer)
/S/ CAMILLA A. HARRIS
Camilla A. HarrisChief Accounting Officer(principal accounting officer)
By:
Its general partner
/s/ CAMILLA A. HARRIS