Edgar Filing: Digital Realty Trust, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

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

For the Transition Period From to .

Commission file number 001-32336 (Digital Realty Trust, Inc.)

000-54023 (Digital Realty Trust, L.P.)

DIGITAL REALTY TRUST, INC.

DIGITAL REALTY TRUST, L.P.

(Exact name of registrant as specified in its charter)


Maryland (Digital Realty Trust, Inc.) Maryland (Digital Realty Trust, L.P.)		26-0081711 20-2402955
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)

560 Mission Street, Suite 2900 San Francisco, CA		94105
(Address of principal executive offices)		(Zip Code)

(415) 738-6500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Digital Realty Trust, Inc.		Yes x No ¨
Digital Realty Trust, L.P.		Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Digital Realty Trust, Inc.		Yes x No ¨
Digital Realty Trust, L.P.		Yes ¨ No ¨

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

Digital Realty Trust, Inc.:

Digital Realty Trust, L.P.:

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


Digital Realty Trust, Inc.		Yes ¨ No x
Digital Realty Trust, L.P.		Yes ¨ No x

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

Digital Realty Trust, Inc.:


Class		Outstanding at May 3, 2011
Common Stock, $.01 par value per share		95,168,364

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2011 of Digital Realty Trust, Inc., a Maryland corporation, and Digital Realty Trust, L.P., a Maryland limited partnership, of which Digital Realty Trust, Inc. is the sole general partner. Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our company” or “the company” refer to Digital Realty Trust, Inc. together with its consolidated subsidiaries, including Digital Realty Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to “our operating partnership” or “the operating partnership” refer to Digital Realty Trust, L.P. together with its consolidated subsidiaries.

Digital Realty Trust, Inc. is a real estate investment trust, or REIT, and the sole general partner of Digital Realty Trust, L.P. As of March 31, 2011, Digital Realty Trust, Inc. owned an approximate 94.4% common general partnership interest in Digital Realty Trust, L.P. The remaining approximate 5.6% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of Digital Realty Trust, Inc. As of March 31, 2011, Digital Realty Trust, Inc. owned all of the preferred limited partnership interests of Digital Realty Trust, L.P. As the sole general partner of Digital Realty Trust, L.P., Digital Realty Trust, Inc. has the full, exclusive and complete responsibility for the operating partnership’s day-to-day management and control.

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

•

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

•

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

•

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

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

The presentation of noncontrolling interests in operating partnership, stockholders’ equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of Digital Realty Trust, Inc. and those of Digital Realty Trust, L.P. The common limited partnership interests held by the limited partners in Digital Realty Trust, L.P. are presented as limited partners’ capital within partners’ capital in Digital Realty Trust, L.P.’s condensed consolidated financial statements and as noncontrolling interests in operating partnership within equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The common and preferred partnership interests held by Digital Realty Trust, Inc. in Digital Realty Trust, L.P. are presented as general partner’s capital within partners’ capital in Digital Realty Trust, L.P.’s condensed consolidated financial statements and as preferred stock, common stock, additional paid-in capital and accumulated dividends in excess of earnings within stockholders’ equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity issued at the Digital Realty Trust, Inc. and the Digital Realty Trust, L.P. levels.

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

•

condensed consolidated financial statements;

•

the following notes to the condensed consolidated financial statements:

•

Debt;

•

Equity of the company and Capital of the operating partnership; and

•

Income per Share and Income per Unit;

•

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

•

Unregistered Sales of Equity Securities and Use of Proceeds.

This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of the company and the operating partnership in order to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the company and the operating partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

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

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

DIGITAL REALTY TRUST, INC. AND DIGITAL REALTY TRUST, L.P.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2011

TABLE OF CONTENTS


		Page Number
PART I.	FINANCIAL INFORMATION

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

	Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010		5

	Condensed Consolidated Income Statements for the three months ended March 31, 2011 and 2010 (unaudited)		6

	Condensed Consolidated Statement of Equity for the three months ended March 31, 2011 (unaudited)		7

	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010 (unaudited)		8

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)		9

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

	Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010		11

	Condensed Consolidated Income Statements for the three months ended March 31, 2011 and 2010 (unaudited)		12

	Condensed Consolidated Statement of Capital for the three months ended March 31, 2011 (unaudited)		13

	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010 (unaudited)		14

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)		15

	Notes to Condensed Consolidated Financial Statements of Digital Realty Trust, Inc. and Digital Realty Trust, L.P.		17

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		48

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		69

ITEM 4.	Controls and Procedures (Digital Realty Trust, Inc.)		71

	Controls and Procedures (Digital Realty Trust, L.P.)		71

PART II.	OTHER INFORMATION		72

ITEM 1.	Legal Proceedings		72

ITEM 1A.	Risk Factors		72

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		72

ITEM 3.	Defaults Upon Senior Securities		72

ITEM 4.	Removed and Reserved		72

ITEM 5.	Other Information		72

ITEM 6.	Exhibits		73

	Signatures		75

	Exhibit Index		76

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


	March 31, 2011			December 31, 2010
	(unaudited)
ASSETS
Investments in real estate:
Properties:
Land	$	480,788		$	478,629
Acquired ground leases		6,666			6,374
Buildings and improvements		4,662,458			4,459,047
Tenant improvements		287,440			283,492

Total investments in properties		5,437,352			5,227,542
Accumulated depreciation and amortization		(720,610	)		(660,700	)

Net investments in properties		4,716,742			4,566,842
Investment in unconsolidated joint ventures		17,962			17,635

Net investments in real estate		4,734,704			4,584,477
Cash and cash equivalents		44,368			11,719
Accounts and other receivables, net of allowance for doubtful accounts of $2,331 and $3,250 as of March 31, 2011 and December 31, 2010, respectively		78,992			70,337
Deferred rent		203,708			190,067
Acquired above market leases, net		37,421			40,539
Acquired in place lease value and deferred leasing costs, net		327,625			334,366
Deferred financing costs, net		23,836			22,825
Restricted cash		59,836			60,062
Other assets		26,855			15,091

Total assets	$	5,537,345		$	5,329,483

LIABILITIES AND EQUITY
Revolving credit facility	$	209,687		$	333,534
Unsecured senior notes, net of discount		1,465,351			1,066,030
Exchangeable senior debentures, net of discount		318,669			353,702
Mortgage loans, net of premiums		1,051,222			1,043,188
Other secured loan		10,500			10,500
Accounts payable and other accrued liabilities		265,714			237,631
Accrued dividends and distributions		—			51,210
Acquired below market leases, net		89,018			93,250
Security deposits and prepaid rents		88,111			85,775

Total liabilities		3,498,272			3,274,820

Commitments and contingencies

Equity:
Stockholders Equity:
Preferred Stock: $0.01 par value, 30,000,000 authorized:
Series C Cumulative Convertible Preferred Stock, 4.375%, $167,499 and $174,999 liquidation preference, respectively ($25.00 per share), 6,699,955 and 6,999,955 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively		161,822			169,067
Series D Cumulative Convertible Preferred Stock, 5.500%, $341,120 and $344,683 liquidation preference, respectively ($25.00 per share), 13,644,790 and 13,787,300 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively		329,829			333,274
Common Stock: $0.01 par value, 145,000,000 authorized, 92,078,429 and 91,159,221 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively		917			909
Additional paid-in capital		1,854,424			1,849,497
Dividends in excess of earnings		(379,627	)		(348,148	)
Accumulated other comprehensive loss, net		(23,570	)		(42,081	)

Total stockholders’ equity		1,943,795			1,962,518

Noncontrolling Interests:
Noncontrolling interests in operating partnership		55,669			52,436
Noncontrolling interests in consolidated joint ventures		39,609			39,709

Total noncontrolling interests		95,278			92,145

Total equity		2,039,073			2,054,663

Total liabilities and equity	$	5,537,345		$	5,329,483

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

(unaudited, in thousands, except share and per share data)


	Three Months Ended March 31,
	2011			2010
Operating Revenues:
Rental	$	196,795		$	151,306
Tenant reimbursements		51,834			39,059
Construction management		1,817			1,414
Other		295			—

Total operating revenues		250,741			191,779

Operating Expenses:
Rental property operating and maintenance		71,723			52,595
Property taxes		13,471			12,721
Insurance		2,051			1,735
Construction management		1,737			647
Depreciation and amortization		73,918			57,532
General and administrative		12,405			10,519
Transactions		681			833
Other		90			2

Total operating expenses		176,076			136,584

Operating income		74,665			55,195

Other Income (Expenses):
Equity in earnings of unconsolidated joint ventures		1,208			1,978
Interest and other income		264			31
Interest expense		(36,082	)		(30,902	)
Tax expense		(428	)		(716	)
Loss from early extinguishment of debt		(615	)		—

Net income		39,012			25,586

Net income attributable to noncontrolling interests		(1,510	)		(741	)

Net income attributable to Digital Realty Trust, Inc.		37,502			24,845

Preferred stock dividends		(6,522	)		(10,101	)

Net income available to common stockholders	$	30,980		$	14,744

Net income per share available to common stockholders:
Basic	$	0.34		$	0.19
Diluted	$	0.33		$	0.18

Weighted average common shares outstanding:
Basic		91,428,355			77,770,691
Diluted		92,600,215			80,742,110

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(unaudited, in thousands, except share data)


	Preferred Stock			Number of Common Shares		Common Stock		Additional Paid-in Capital			Accumulated Dividends in Excess of Earnings			Accumulated Other Comprehensive Loss, net			Total Stockholders’ Equity			Noncontrolling Interests in Operating Partnership			Noncontrolling Interests in Consolidated Joint Ventures			Total Noncontrolling Interests			Total Equity
Balance as of December 31, 2010	$	502,341			91,159,221	$	909	$	1,849,497		$	(348,148	)	$	(42,081	)	$	1,962,518		$	52,436		$	39,709		$	92,145		$	2,054,663
Conversion of units to common stock		—			164,176		2		1,813			—			—			1,815			(1,815	)		—			(1,815	)		—
Issuance of restricted stock, net of forfeitures		—			84,204		—		—			—			—			—			—			—			—			—
Net proceeds from sale of common stock		—			98,100		1		5,596			—			—			5,597			—			—			—			5,597
Exercise of stock options		—			23,232		—		866			—			—			866			—			—			—			866
Issuance of common stock in exchange for debentures		—			303,073		3		(11,480	)		—			—			(11,477	)		—			—			—			(11,477	)
Conversion of preferred stock		(10,690	)		246,423		2		10,688			—			—			—			—			—			—			—
Amortization of unearned compensation regarding share based awards		—			—		—		3,647			—			—			3,647			—			—			—			3,647
Reclassification of vested share based awards		—			—		—		(6,203	)		—			—			(6,203	)		6,203			—			6,203			—
Dividends declared on preferred stock		—			—		—		—			(6,522	)		—			(6,522	)					—			—			(6,522	)
Dividends and distributions on common stock and common and incentive units		—			—		—		—			(62,459	)		—			(62,459	)		(3,793	)		—			(3,793	)		(66,252	)
Contributions from noncontrolling interests in consolidated joint ventures		—			—		—		—			—			—			—			—			42			42			42
Net income		—			—		—		—			37,502			—			37,502			1,652			(142	)		1,510			39,012
Other comprehensive income - foreign currency translation adjustments		—			—		—		—			—			15,576			15,576			830			—			830			16,406
Other comprehensive income - fair value of interest rate swaps		—			—		—		—			—			1,430			1,430			76			—			76			1,506
Other comprehensive income - reclassification of accumulated other comprehensive loss to interest expense		—			—		—		—			—			1,505			1,505			80			—			80			1,585

Balance as of March 31, 2011	$	491,651			92,078,429	$	917	$	1,854,424		$	(379,627	)	$	(23,570	)	$	1,943,795		$	55,669		$	39,609		$	95,278		$	2,039,073

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)


	Three months ended March 31,
	2011			2010

Net income	$	39,012		$	25,586

Other comprehensive income (loss):
Foreign currency translation adjustments		16,406			(18,287	)
Increase (decrease) in fair value of interest rate swaps		1,506			(4,276	)
Reclassification to interest expense from interest rate swaps		1,585			1,659


Comprehensive income		58,509			4,682

Comprehensive (income) loss attributable to noncontrolling interests		(2,496	)		553


Comprehensive income attributable to Digital Realty Trust, Inc.	$	56,013		$	5,235

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:

Net income	$	39,012		$	25,586
Adjustments to reconcile net income to net cash provided by operating activities

Loss on early extinguishment of debt-non cash portion		519			—
Equity in earnings of unconsolidated joint ventures		(1,208	)		(1,978	)
Distributions from unconsolidated joint ventures		1,000			1,000
Write-off of net assets due to early lease terminations		90			2
Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases		57,559			46,025
Amortization of share-based unearned compensation		3,022			2,695
Allowance for (recovery of) doubtful accounts		(919	)		106
Amortization of deferred financing costs		2,451			2,406
Write-off of deferred financing costs, included in net loss on early extinguishment of debt		79			—
Amortization of debt discount/premium		786			1,095
Amortization of acquired in place lease value and deferred leasing costs		16,359			11,507
Amortization of acquired above market leases and acquired below market leases, net		(1,814	)		(2,283	)
Changes in assets and liabilities:
Restricted cash		381			(1,734	)
Accounts and other receivables		(5,841	)		(9,415	)
Deferred rent		(12,749	)		(11,111	)
Deferred leasing costs		(4,591	)		(5,132	)
Other assets		(10,730	)		(8,179	)
Accounts payable and other accrued liabilities		(20,289	)		(746	)
Security deposits and prepaid rents		1,372			7,356

Net cash provided by operating activities		64,489			57,200

Cash flows from investing activities:

Acquisitions of properties		—			(375,000	)
Investment in unconsolidated joint ventures		(119	)		—
Deposits paid for acquisitions of properties		(1,294	)		—
Receipt of value added tax refund		1,201			916
Refundable value added tax paid		(1,009	)		(1,115	)
Change in restricted cash		(67	)		(588	)
Improvements to investments in real estate		(135,110	)		(66,877	)
Improvement advances to tenants		(1,346	)		(114	)
Collection of advances from tenants for improvements		187			23

Net cash used in investing activities		(137,557	)		(442,755	)

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)


	Three Months Ended March 31,
	2011			2010
Cash flows from financing activities:

Borrowings on revolving credit facility	$	260,873		$	270,000
Repayments on revolving credit facility		(382,500	)		(475,547	)
Borrowings on unsecured senior notes		—			117,000
Borrowings on 5.875% unsecured senior notes due 2020		—			491,480
Borrowings on 5.250% unsecured senior notes due 2021		399,100			—
Principal payments on mortgage loans		(3,900	)		(3,255	)
Principal repayments on 2026 exchangeable senior debentures		(35,850	)		—
Equity component settled associated with exchange of 2026 exchangeable senior debentures		(11,783	)		—
Change in restricted cash		625			(13	)
Payment of loan fees and costs		(3,369	)		(4,944	)
Capital contributions received from noncontrolling interests in joint ventures		42			52
Gross proceeds from the sale of common stock		5,734			55,601
Common stock offering costs paid		(137	)		(977	)
Proceeds from exercise of stock options		866			1,895
Payment of dividends to preferred stockholders		(6,522	)		(10,101	)
Payment of dividends to common stockholders and distributions to noncontrolling interests in operating partnership		(117,462	)		(77,147	)

Net cash provided by financing activities		105,717			364,044

Net increase (decrease) in cash and cash equivalents		32,649			(21,511	)

Cash and cash equivalents at beginning of period		11,719			72,320

Cash and cash equivalents at end of period	$	44,368		$	50,809

Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized	$	45,208		$	22,231
Cash paid for taxes		87			174

Supplementary disclosure of noncash investing and financing activities:

Change in net assets related to foreign currency translation adjustments	$	16,406		$	(18,287	)
Decrease (increase) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps		1,506			(4,276	)
Noncontrolling interests in operating partnership redeemed for or converted to shares of common stock		1,815			1,711
Accrual for additions to investments in real estate and tenant improvement advances included in accounts payable and accrued expenses		134,693			71,527
Issuance of common stock in exchange of 2026 exchangeable senior debentures, net		194			—

Allocation of purchase price of properties/investment in partnership to:
Investments in real estate		—			346,436
Acquired above market leases		—			9,714
Acquired below market leases		—			(26,450	)
Acquired in place lease value and deferred leasing costs		—			45,300

Cash paid for acquisition of properties	$	—		$	375,000

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except unit and per unit data)


	March 31, 2011			December 31, 2010
	(unaudited)
ASSETS
Investments in real estate:
Properties:
Land	$	480,788		$	478,629
Acquired ground leases		6,666			6,374
Buildings and improvements		4,662,458			4,459,047
Tenant improvements		287,440			283,492

Total investments in properties		5,437,352			5,227,542
Accumulated depreciation and amortization		(720,610	)		(660,700	)

Net investments in properties		4,716,742			4,566,842
Investment in unconsolidated joint ventures		17,962			17,635

Net investments in real estate		4,734,704			4,584,477
Cash and cash equivalents		44,368			11,719
Accounts and other receivables, net of allowance for doubtful accounts of $2,331 and $3,250 as of March 31, 2011 and December 31, 2010, respectively		78,992			70,337
Deferred rent		203,708			190,067
Acquired above market leases, net		37,421			40,539
Acquired in place lease value and deferred leasing costs, net		327,625			334,366
Deferred financing costs, net		23,836			22,825
Restricted cash		59,836			60,062
Other assets		26,855			15,091

Total assets	$	5,537,345		$	5,329,483

LIABILITIES AND CAPITAL
Revolving credit facility	$	209,687		$	333,534
Unsecured senior notes, net of discount		1,465,351			1,066,030
Exchangeable senior debentures, net of discount		318,669			353,702
Mortgage loans, net of premiums		1,051,222			1,043,188
Other secured loan		10,500			10,500
Accounts payable and other accrued liabilities		265,714			237,631
Accrued dividends and distributions		—			51,210
Acquired below market leases, net		89,018			93,250
Security deposits and prepaid rents		88,111			85,775

Total liabilities		3,498,272			3,274,820
Commitments and contingencies
Capital:
Partners’ capital:
General Partner:
6,699,955 and 6,999,955 Series C Cumulative Convertible preferred units issued and outstanding, respectively, 13,644,790 and 13,787,300 Series D Cumulative Convertible preferred units issued and outstanding, respectively, all with a $25.00 liquidation preference per preferred unit (liquidation preference of $508,619 and $519,681, respectively)		491,651			502,341
92,078,429 and 91,159,221 common units issued and outstanding, respectively		1,475,714			1,502,258
Limited partners, 3,810,814 and 3,937,827 common units, 1,133,484 and 982,618 profits interest units and 532,510 and 543,004 class C units outstanding as of March 31, 2011 and December 31, 2010, respectively		58,462			56,215
Accumulated other comprehensive loss		(26,363	)		(45,860	)

Total partners’ capital		1,999,464			2,014,954
Noncontrolling interests in consolidated joint ventures		39,609			39,709

Total capital		2,039,073			2,054,663

Total liabilities and capital	$	5,537,345		$	5,329,483

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

(unaudited, in thousands, except unit and per unit data)


	Three Months Ended March 31,
	2011			2010
Operating Revenues:
Rental	$	196,795		$	151,306
Tenant reimbursements		51,834			39,059
Construction management		1,817			1,414
Other		295			—

Total operating revenues		250,741			191,779

Operating Expenses:
Rental property operating and maintenance		71,723			52,595
Property taxes		13,471			12,721
Insurance		2,051			1,735
Construction management		1,737			647
Depreciation and amortization		73,918			57,532
General and administrative		12,405			10,519
Transactions		681			833
Other		90			2

Total operating expenses		176,076			136,584

Operating income		74,665			55,195

Other Income (Expenses):
Equity in earnings of unconsolidated joint ventures		1,208			1,978
Interest and other income		264			31
Interest expense		(36,082	)		(30,902	)
Tax expense		(428	)		(716	)
Loss from early extinguishment of debt		(615	)		—

Net income		39,012			25,586
Net loss attributable to noncontrolling interests in consolidated joint ventures		142			232

Net income attributable to Digital Realty Trust, L.P.		39,154			25,818

Preferred units distributions		(6,522	)		(10,101	)

Net income available to common unitholders	$	32,632		$	15,717

Net income per unit available to common unitholders:
Basic	$	0.34		$	0.19
Diluted	$	0.33		$	0.18

Weighted average common units outstanding:
Basic		96,302,608			83,233,100
Diluted		97,474,468			86,204,519

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CAPITAL

(unaudited, in thousands, except unit data)


	General Partner											Limited Partners						Accumulated Other Comprehensive Loss			Noncontrolling Interests in Consolidated Joint Ventures
	Preferred Units						Common Units					Common Units
	Units			Amount			Units		Amount			Units			Amount									Total Capital
Balance as of December 31, 2010		20,787,255		$	502,341			91,159,221	$	1,502,258			5,463,449		$	56,215		$	(45,860	)	$	39,709		$	2,054,663

Conversion of limited partner common units to general partner common units		—			—			164,176		1,815			(164,176	)		(1,815	)		—			—			—
Issuance of restricted common units, net of forfeitures		—			—			84,204		—			—			—			—			—			—
Net proceeds from issuance of common units		—			—			98,100		5,597			—			—			—			—			5,597
Issuance of common units in connection with the exercise of stock options		—			—			23,232		866			—			—			—			—			866
Issuance of common units		—			—			—		—			177,535			—			—			—			—
Issuance of common units in exchange for debentures		—			—			303,073		(11,477	)		—			—			—			—			(11,477	)
Conversion of preferred units		(442,510	)		(10,690	)		246,423		10,690			—			—			—			—			—
Amortization of unearned compensation regarding share based awards		—			—			—		3,647			—			—			—			—			3,647
Reclassification of vested share based awards		—			—			—		(6,203	)		—			6,203			—			—			—
Distributions		—			(6,522	)		—		(62,459	)		—			(3,793	)		—			—			(72,774	)
Contributions from noncontrolling interests in consolidated joint ventures		—			—			—		—			—			—			—			42			42
Net income		—			6,522			—		30,980			—			1,652			—			(142	)		39,012
Other comprehensive income - foreign currency translation adjustments		—			—			—		—			—			—			16,406			—			16,406
Other comprehensive income - fair value of interest rate swaps		—			—			—		—			—			—			1,506			—			1,506
Other comprehensive income - reclassification of accumulated other comprehensive loss to interest expense		—			—			—		—			—			—			1,585			—			1,585

Balance as of March 31, 2011		20,344,745		$	491,651			92,078,429	$	1,475,714			5,476,808		$	58,462		$	(26,363	)	$	39,609		$	2,039,073

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, in thousands, except unit data)


	Three months ended March 31,
	2011		2010
Net income	$	39,012	$	25,586

Other comprehensive income (loss):
Foreign currency translation adjustments		16,406		(18,287	)
Increase (decrease) in fair value of interest rate swaps		1,506		(4,276	)
Reclassification to interest expense from interest rate swaps		1,585		1,659


Comprehensive income	$	58,509	$	4,682

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	Three Months Ended March 31,
	2011			2010
Cash flows from operating activities:

Net income	$	39,012		$	25,586
Adjustments to reconcile net income to net cash provided by operating activities

Loss on early extinguishment of debt-non cash portion		519			—
Equity in earnings of unconsolidated joint ventures		(1,208	)		(1,978	)
Distributions from unconsolidated joint ventures		1,000			1,000
Write-off of net assets due to early lease terminations		90			2
Depreciation and amortization of buildings and improvements, tenant improvements and acquired ground leases		57,559			46,025
Amortization of share-based unearned compensation		3,022			2,695
Allowance for (recovery of) doubtful accounts		(919	)		106
Amortization of deferred financing costs		2,451			2,406
Write-off of deferred financing costs, included in net loss on early extinguishment of debt		79			—
Amortization of debt discount/premium		786			1,095
Amortization of acquired in place lease value and deferred leasing costs		16,359			11,507
Amortization of acquired above market leases and acquired below market leases, net		(1,814	)		(2,283	)
Changes in assets and liabilities:					—
Restricted cash		381			(1,734	)
Accounts and other receivables		(5,841	)		(9,415	)
Deferred rent		(12,749	)		(11,111	)
Deferred leasing costs		(4,591	)		(5,132	)
Other assets		(10,730	)		(8,179	)
Accounts payable and other accrued liabilities		(20,289	)		(746	)
Security deposits and prepaid rents		1,372			7,356

Net cash provided by operating activities		64,489			57,200

Cash flows from investing activities:

Acquisitions of properties		—			(375,000	)
Investment in unconsolidated joint ventures		(119	)		—
Deposits paid for acquisitions of properties		(1,294	)		—
Receipt of value added tax refund		1,201			916
Refundable value added tax paid		(1,009	)		(1,115	)
Change in restricted cash		(67	)		(588	)
Improvements to investments in real estate		(135,110	)		(66,877	)
Improvement advances to tenants		(1,346	)		(114	)
Collection of advances from tenants for improvements		187			23

Net cash used in investing activities		(137,557	)		(442,755	)

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(unaudited, in thousands)


	Three Months Ended March 31,
	2011			2010
Cash flows from financing activities:

Borrowings on revolving credit facility	$	260,873		$	270,000
Repayments on revolving credit facility		(382,500	)		(475,547	)
Borrowings on unsecured senior notes		—			117,000
Borrowings on 5.875% unsecured senior notes due 2020		—			491,480
Borrowings on 5.250% unsecured senior notes due 2021		399,100			—
Principal payments on mortgage loans		(3,900	)		(3,255	)
Principal repayments on 2026 exchanagable senior debentures		(35,850	)		—
Equity component settled associated with exchange of 2026 exchangeable senior debentures		(11,783	)		—
Change in restricted cash		625			(13	)
Payment of loan fees and costs		(3,369	)		(4,944	)
Capital contributions received from noncontrolling interests in joint ventures		42			52
General partner contributions		6,463			56,519
Payment of distributions to preferred unitholders		(6,522	)		(10,101	)
Payment of distributions to common unitholders		(117,462	)		(77,147	)

Net cash provided by financing activities		105,717			364,044

Net increase (decrease) in cash and cash equivalents		32,649			(21,511	)

Cash and cash equivalents at beginning of period		11,719			72,320

Cash and cash equivalents at end of period	$	44,368		$	50,809

Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized	$	45,208		$	22,231
Cash paid for taxes		87			174

Supplementary disclosure of noncash investing and financing activities:

Change in net assets related to foreign currency translation adjustments	$	16,406		$	(18,287	)
Decrease (increase) in accounts payable and other accrued liabilities related to change in fair value of interest rate swaps		1,506			(4,276	)
Accrual for additions to investments in real estate and tenant improvement advances included in accounts payable and accrued expenses		134,693			71,527
Issuance of common stock in exchange of 2026 exchangeable senior debentures, net		194			—

Allocation of purchase price of properties/investment in partnership to:

Investments in real estate		—			346,436
Other assets		—			—
Acquired above market leases		—			9,714
Acquired below market leases		—			(26,450	)
Acquired in place lease value and deferred leasing costs		—			45,300

Cash paid for acquisition of properties	$	—		$	375,000

See accompanying notes to the condensed consolidated financial statements.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 and 2010

(unaudited)

1. Organization and Description of Business

Digital Realty Trust, Inc. through its controlling interest in Digital Realty Trust, L.P. (the Operating Partnership) and the subsidiaries of the Operating Partnership (collectively, we, our, us or the Company) is engaged in the business of owning, acquiring, developing, redeveloping and managing technology-related real estate. The Company is focused on providing Turn-Key Datacenter^® and Powered Base Building^® datacenter solutions for domestic and international tenants across a variety of industry verticals ranging from information technology and Internet enterprises, to manufacturing and financial services. As of March 31, 2011, our portfolio consisted of 96 properties, excluding two properties held as investments in unconsolidated joint ventures, of which 81 are located throughout North America, 14 are located in Europe and one is located in Asia. Our properties are diversified in major markets where corporate datacenter and technology tenants are concentrated, including the Boston, Chicago, Dallas, Los Angeles, New York Metro, Northern Virginia, Phoenix, San Francisco and Silicon Valley metropolitan areas in the U.S., the Amsterdam, Dublin, London and Paris markets in Europe and Singapore in Asia. The portfolio consists of Internet gateway and corporate datacenter properties, technology manufacturing properties and regional or national headquarters of technology companies.

The Operating Partnership was formed on July 21, 2004 in anticipation of our initial public offering (IPO) on November 3, 2004 and commenced operations on that date. As of March 31, 2011, we own a 94.4% common interest and a 100% preferred interest in the Operating Partnership. As sole general partner, we have control over the Operating Partnership. The limited partners of the Operating Partnership do not have rights to replace us as the general partner nor do they have participating rights, although they do have certain protective rights.

2. Summary of Significant Accounting Policies

(a) Principles of Consolidation and Basis of Presentation

The accompanying interim condensed consolidated financial statements include all of the accounts of Digital Realty Trust, Inc., the Operating Partnership and the subsidiaries of the Operating Partnership. Intercompany balances and transactions have been eliminated.

The accompanying interim condensed consolidated financial statements are unaudited, but have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and in compliance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. All such adjustments are considered to be of a normal recurring nature, except as otherwise indicated. The results of operations for the interim periods are not necessarily indicative of the results to be obtained for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2010.

The notes to the condensed consolidated financial statements of Digital Realty Trust, Inc. and the Operating Partnership have been combined to provide the following benefits:

•

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

•

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

•

creating time and cost efficiencies through the preparation of one set of notes instead of two separate sets of notes.

There are few differences between the Company and the Operating Partnership, which are reflected in these condensed consolidated financial statements. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how Digital Realty Trust, Inc. and the Operating Partnership operate as an interrelated consolidated company. Digital Realty Trust, Inc.’s only material asset is its ownership of partnership interests of the Operating Partnership. As a result, Digital Realty Trust, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing certain unsecured debt of the Operating Partnership. Digital Realty Trust, Inc. itself does not hold any indebtedness but guarantees some of the unsecured debt of the Operating Partnership, as disclosed in these notes. The Operating Partnership holds substantially all the assets of the Company and holds the ownership interests in the Company’s joint ventures. The Operating Partnership conducts the operations of the business and is structured as a

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

partnership with no publicly traded equity. Except for net proceeds from public equity issuances by Digital Realty Trust, Inc., which are generally contributed to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s direct or indirect incurrence of indebtedness or through the issuance of partnership units.

The presentation of noncontrolling interests in operating partnership, stockholder’s equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of Digital Realty Trust, Inc. and those of the Operating Partnership. The common limited partnership interests held by the limited partners in the Operating Partnership are presented as limited partners’ capital within partners’ capital in the Operating Partnership’s condensed consolidated financial statements and as noncontrolling interests in operating partnership within equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The common and preferred partnership interests held by Digital Realty Trust, Inc. in the Operating Partnership are presented as general partner’s capital within partners’ capital in the Operating Partnership’s condensed consolidated financial statements and as preferred stock, common stock, additional paid-in capital and accumulated dividends in excess of earnings within stockholders’ equity in Digital Realty Trust, Inc.’s condensed consolidated financial statements. The differences in the presentations between stockholders’ equity and partners’ capital result from the differences in the equity issued at the Digital Realty Trust, Inc. and the Operating Partnership levels.

To help investors understand the significant differences between the Company and the Operating Partnership, these condensed consolidated financial statements present the following separate sections for each of the Company and the Operating Partnership:

•

condensed consolidated face financial statements; and

•

the following notes to the condensed consolidated financial statements:

•

Debt;

•

Equity of the Company and Capital of the Operating Partnership; and

•

Income per Share and Income per Unit.

In the sections that combine disclosure of Digital Realty Trust, Inc. and the Operating Partnership, these notes refer to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that enters into contracts and joint ventures and holds assets and debt, reference to the Company is appropriate because the business is one enterprise and the Company operates the business through the Operating Partnership.

(b) Cash Equivalents

For the purpose of the condensed consolidated statements of cash flows, we consider short-term investments with original maturities of 90 days or less to be cash equivalents. As of March 31, 2011, cash equivalents consist of investments in money market instruments.

(c) Share Based Compensation

We account for share based compensation using the fair value method of accounting. The estimated fair value of the stock options granted by us is being amortized on a straight-line basis over the vesting period of the stock options. The estimated fair value of the long-term incentive units and Class C Units (discussed in note 12(b)) granted by us is being amortized on a straight-line basis over the expected service period.

For share based compensation awards with performance conditions, we estimate the fair value of the award for each of the possible performance condition outcomes and amortize the compensation cost based on management’s projected performance outcome. In the instance management’s projected performance outcome changes prior to the final measurement date, compensation cost is adjusted accordingly.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

(d) Income Taxes

Digital Realty Trust, Inc. (the Parent Company) has elected to be treated and believes that it has been organized and has operated in a manner that has enabled the Parent Company to qualify as a REIT for federal income tax purposes. As a REIT, the Parent Company generally is not required to pay federal corporate income taxes on its taxable income to the extent it is currently distributed to its stockholders.

However, qualification and taxation as a REIT depend upon the Parent Company’s ability to meet the various qualification tests imposed under the Internal Revenue Code of 1986, as amended (the Code), including tests related to annual operating results, asset composition, distribution levels and diversity of stock ownership. Accordingly, no assurance can be given that the Parent Company has been organized or has operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT. If the Parent Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates.

The Operating Partnership is a partnership and is not required to pay federal income tax. Instead, taxable income is allocated to its partners, who include such amounts on their federal income tax returns. As such, no provision for federal income taxes has been included in the Operating Partnership’s accompanying condensed consolidated financial statements.

Even if the Parent Company and the Operating Partnership are not subject to federal income taxes, they are taxed in certain states in which they operate. The Company is also taxed in non-U.S. countries where it operates that do not recognize U.S. REITs under their respective tax laws. The Company’s consolidated taxable REIT subsidiary is subject to both federal and state income taxes to the extent there is taxable income. Accordingly, the Company recognizes and accrues income taxes for its taxable REIT subsidiary, certain states and non-U.S. jurisdictions, as appropriate.

We assess our significant tax positions in accordance with U.S. GAAP for all open tax years and determine whether we have any material unrecognized liabilities from uncertain tax benefits. If a tax position is not considered “more-likely-than-not” to be sustained solely on its technical merits, no benefits of the tax position are to be recognized (for financial statement purposes). As of March 31, 2011 and December 31, 2010, we have no assets or liabilities for uncertain tax positions. We classify interest and penalties from significant uncertain tax positions as interest expense and operating expense, respectively, in our condensed consolidated statements of operations. For the three months ended March 31, 2011 and 2010, we had no such interest or penalties. The tax years 2007 through 2010 remain open to examination by the major taxing jurisdictions with which the Parent Company and its subsidiaries file tax returns.

See Note 9 for further discussion on income taxes.

(e) Presentation of Transactional-based Taxes

We account for transactional-based taxes, such as value added tax, or VAT, for our international properties on a net basis.

(f) Asset Retirement Obligations

We record accruals for estimated retirement obligations as required by current accounting guidance. The amount of asset retirement obligations relates primarily to estimated asbestos removal costs at the end of the economic life of properties that were built before 1984. As of March 31, 2011 and December 31, 2010, the amount included in accounts payable and other accrued liabilities on our condensed consolidated balance sheets was approximately $1.3 million.

(g) Assets and Liabilities Measured at Fair Value

Fair value under U.S. GAAP is a market-based measurement, not an entity-specific measurement. Therefore, our fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair-value measurements, we use a fair-value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair-value measurement is based on inputs from different levels of the fair-value hierarchy, the level in the fair-value hierarchy within which the entire fair-value measurement falls is based on the lowest level input that is significant to the fair-value measurement in its entirety. Our assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

(h) Construction Management Revenue

Construction management revenue is recognized under the percentage-of-completion method of accounting. Revenues are determined by measuring the percentage of costs incurred to date to estimated total costs for each construction management contract based on current estimates of costs to complete. Contract costs include all labor and benefits, materials, subcontracts, and an allocation of indirect costs related to contract performance. Indirect costs are allocated to projects based upon labor hours charged. As long-term design-build projects extend over one or more years, revisions in cost and estimated earnings during the course of the work are reflected in the accounting period in which the facts which require the revision become known. At the time a loss on a design-build project becomes known, the entire amount of the estimated ultimate loss is recognized in the condensed consolidated financial statements. Change orders are recognized when they are approved by the client.

Costs and estimated earnings in excess of billings on uncompleted construction management projects are included in other assets in the condensed consolidated balance sheets. Billings in excess of costs and estimated earnings on uncompleted construction management projects are included in accounts payable and accrued liabilities in the condensed consolidated balance sheets. Customers are billed on a monthly basis at the end of each month, which can be in advance of work performed. As a result, we typically generate billings in excess of costs and estimated earnings on construction management projects.

(i) Transactions Expense

Transactions expense includes acquisition-related expenses and other business development expenses, which are expensed as incurred. Acquisition-related expenses include closing costs, broker commissions and other professional fees, including legal and accounting fees related to acquisitions and potential acquisitions.

(j) Management’s Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates made. On an on-going basis, we evaluate our estimates, including those related to acquiring, developing and assessing the carrying values of our real estate properties, accrued liabilities, performance-based equity compensation plans, and Digital Realty Trust, Inc.’s qualification as a REIT. We base our estimates on historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could vary under different assumptions or conditions.

(k) Segment Information

All of our properties generate similar revenues and expenses related to tenant rent and reimbursements and operating expenses. The delivery of our products is consistent across all properties and although services are provided to a wide range of customers, the types of services provided to them are limited to a few core principles. As such, the properties in our portfolio have similar economic characteristics and the nature of the products and services provided to our customers and the method to distribute such services are consistent throughout the portfolio. Consequently, our properties qualify for aggregation into one reporting segment.

(l) Reclassifications

Certain reclassifications to prior year amounts have been made to conform to the current year presentation. During the three months ended March 31, 2010, $1.4 million was reclassified from rental revenue to construction management revenue and $0.6 million was reclassified from rental property operating and maintenance expense to construction management expense.

3. Acquisitions

We acquired no real estate properties during the three months ended March 31, 2011.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

4. Acquired Intangible Assets and Liabilities

The following summarizes our acquired intangible assets (acquired in place lease value and acquired above-market lease value) and intangible liabilities (acquired below-market lease value) as of March 31, 2011 and December 31, 2010.


	Balance as of
(Amounts in thousands)	March 31, 2011			December 31, 2010
Acquired in place lease value:
Gross amount	$	517,698		$	515,958
Accumulated amortization		(277,074	)		(261,978	)

Net	$	240,624		$	253,980

Acquired above-market lease value:
Gross amount	$	87,974		$	87,622
Accumulated amortization		(50,553	)		(47,083	)

Net	$	37,421		$	40,539

Acquired below-market lease value:
Gross amount	$	191,370		$	189,990
Accumulated amortization		(102,352	)		(96,740	)

Net	$	89,018		$	93,250

Amortization of acquired below-market lease value, net of acquired above-market lease value, resulted in an increase to rental revenues of $1.8 million and $2.3 million for the three months ended March 31, 2011 and 2010, respectively. The expected average

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

remaining lives for acquired below-market leases and acquired above-market leases is 5.0 years and 3.8 years, respectively, as of March 31, 2011. Estimated annual amortization of acquired below-market lease value, net of acquired above-market lease value, for each of the five succeeding years, commencing January 1, 2012 is as follows:


(Amounts in thousands)
2012	$	6,520
2013		7,090
2014		5,729
2015		5,060
2016		4,180

Costs associated with extending or renewing acquired leases are capitalized as exercised and classified as deferred leasing cost. Amortization of acquired in place lease value (a component of depreciation and amortization expense) was $14.3 million and $9.9 million for the three months ended March 31, 2011 and 2010, respectively. The expected average amortization period for acquired in place lease value is 4.7 years as of March 31, 2011. The weighted average period prior to the next renewal of extension related to remaining contractual life for acquired leases is 4.1 years as of March 31, 2011. Estimated annual amortization of acquired in place lease value for each of the five succeeding years, commencing January 1, 2012 is as follows:


(Amounts in thousands)
2012	$	42,254
2013		37,890
2014		32,970
2015		24,730
2016		16,348

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

5. Debt of the Company

In this Note 5, the “Company” refers only to Digital Realty Trust, Inc. and not to any of its subsidiaries.

The Company itself does not have any indebtedness. All debt is held directly or indirectly by the Operating Partnership.

Guarantee of Debt

The Company has guaranteed some of the Operating Partnership’s debt. The Company guarantees the Operating Partnership’s obligations with respect to the 2026 Debentures, the 2029 Debentures, the 2015 Notes, the 2020 Notes, the 2021 Notes (each, as defined in Note 6) and its unsecured senior notes sold to Prudential pursuant to the Prudential shelf facility. The Company is also the guarantor of the Operating Partnership’s obligations under its revolving credit facility.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

6. Debt of the Operating Partnership

A summary of outstanding indebtedness of the Operating Partnership as of March 31, 2011 and December 31, 2010, respectively, is as follows (in thousands):


Indebtedness	Interest Rate at March 31, 2011		Maturity Date		Principal Outstanding March 31, 2011			Principal Outstanding December 31, 2010

Revolving credit facility		Various (1)		Aug. 31, 2011 (2)	$	209,687	(3)	$	333,534	(3)

Unsecured senior notes:
Prudential Shelf Facility:
Series A		7.000%		Jul. 24, 2011		25,000			25,000
Series B		9.320%		Nov. 5, 2013		33,000			33,000
Series C		9.680%		Jan. 6, 2016		25,000			25,000
Series D		4.570%		Jan. 20, 2015		50,000			50,000
Series E		5.730%		Jan. 20, 2017		50,000			50,000
Series F		4.500%		Feb. 3, 2015		17,000			17,000

Total Prudential Shelf Facility						200,000			200,000
Senior Notes:
4.50% notes due 2015		4.500%		Jul. 15, 2015		375,000			375,000
5.875% notes due 2020		5.875%		Feb. 1, 2020		500,000			500,000
5.250% notes due 2021		5.250%		Mar. 15, 2021		400,000			—
Unamortized discounts						(9,649	)		(8,970	)

Total senior notes, net of discount						1,265,351			866,030

Total unsecured senior notes, net of discount						1,465,351			1,066,030

Exchangeable senior debentures:
4.125% exchangeable senior debentures due 2026		4.125%		Aug. 15, 2026 (4)		52,908			88,758
5.50% exchangeable senior debentures due 2029		5.50%		Apr. 15, 2029 (5)		266,400			266,400
Unamortized discount						(639	)		(1,456	)

Total exchangeable senior debentures, net of discount						318,669			353,702

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)


Indebtedness	Interest Rate at March 31, 2011		Maturity Date		Principal Outstanding March 31, 2011			Principal Outstanding December 31, 2010

Mortgage loans:
Secured Term Debt (6)(7)		5.65%		Nov. 11, 2014		140,840			141,465
3 Corporate Place (7)(8)		6.72%		Aug. 1, 2011 (9)		80,000			80,000
200 Paul Avenue 1-4 (7)		5.74%		Oct. 8, 2015		75,743			76,179
2045 & 2055 LaFayette Street (7)		5.93%		Feb. 6, 2017		66,207			66,437
Mundells Roundabout		3-month GBP LIBOR + 1.20% (10)		Nov. 30, 2013		68,640	(11)		66,858	(11)
600 West Seventh Street		5.80%		Mar. 15, 2016		53,803			54,157
34551 Ardenwood Boulevard 1-4 (7)		5.95%		Nov. 11, 2016		54,129			54,306
1100 Space Park Drive (7)		5.89%		Dec. 11, 2016		54,118			54,296
1350 Duane Avenue/3080 Raymond Street (7)		5.42%		Oct. 1, 2012		52,800			52,800
150 South First Street (7)		6.30%		Feb. 6, 2017		51,985			52,154
114 Rue Ambroise Croizat		3-month EURIBOR + 1.35% (10)		Jan. 18, 2012		43,652	(12)		41,430	(12)
Clonshaugh Industrial Estate II (8)		3-month EURIBOR + 4.50% (10)		Sep. 4, 2014		42,474	(12)		40,152	(12)
1500 Space Park Drive (7)		6.15%		Oct. 5, 2013		39,428			39,941
2334 Lundy Place (7)		5.96%		Nov. 11, 2016		39,367			39,496
Unit 9, Blanchardstown Corporate Park		3-month EURIBOR + 1.35% (10)		Jan. 18, 2012		37,530	(12)		35,620	(12)
Cressex 1 (14)		5.68%		Oct. 16, 2014		29,021	(11)		28,388	(11)
6 Braham Street (8)		3-month GBP LIBOR + 0.90% (10)		Apr. 10, 2011		19,875	(11)(16)		19,515	(11)
1201 Comstock Street (7)(8)		1-month LIBOR + 3.50% (10)		Jun. 24, 2012 (2)		16,777			16,976
Datacenter Park — Dallas		5.00%		Sep. 15, 2011 (2)		16,150			16,150
Paul van Vlissingenstraat 16		3-month EURIBOR + 1.60% (10)		Jul. 18, 2013		14,727	(12)		13,978	(12)
Chemin de l’Epinglier 2		3-month EURIBOR + 1.50% (10)		Jul. 18, 2013		10,655	(12)		10,113	(12)
800 Central Expressway (7)		1-month LIBOR + 4.75%		Jun. 9, 2013		10,000			10,000
Gyroscoopweg 2E-2F (13)		3-month EURIBOR + 1.50% (10)		Oct. 18, 2013		9,377	(12)		8,900	(12)
1125 Energy Park Drive (7)		7.62%(15)		Mar. 1, 2032		9,020			9,060
Manchester Technopark (14)		5.68%		Oct. 16, 2014		8,829	(11)		8,636	(11)
731 East Trade Street		8.22%		Jul. 1, 2020		5,014			5,080
Unamortized net premiums						1,061			1,101

Total mortgage loans, net of premiums						1,051,222			1,043,188
Other secured loan:
800 Central Expressway Mezzanine (7)		1-month LIBOR + 8.50%		Jun. 9, 2013		10,500			10,500

Total other secured loan						10,500			10,500

Total indebtedness					$	3,055,429		$	2,806,954

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

(1)

The interest rate under our revolving credit facility equals either (i) US LIBOR, EURIBOR and GBP LIBOR (ranging from 1- to 6-month maturities) plus a margin of between 1.10% and 2.00% or (ii) the greater of (x) the base rate announced by the lender and (y) 1/2 of 1% per annum above the federal funds rate, plus a margin of between 0.100%—1.000%. In each case, the margin is based on our total leverage ratio. We incur a fee ranging from 0.125% to 0.20% for the unused portion of our unsecured revolving credit facility.

(2)	A one-year extension is available, which we may exercise if certain conditions are met.

(3)	Balances as of March 31, 2011 and December 31, 2010 are as follows (balances, in thousands):


Denomination of Draw	Balance as of March 31, 2011			Weighted-average interest rate			Balance as of December 31, 2010			Weighted- average interest rate
US ($)	$	165,000			1.35	%	$	312,500			1.40	%
Euro (€)		7,080	(a)		2.01	%		—			—
British Sterling (£)		37,607	(b)		1.72	%		21,034	(b)		1.69	%

Total	$	209,687			1.44	%	$	333,534			1.42	%

(a)

Based on exchange rate of $1.42 to €1.00 as of March 31, 2011.

(b)

Based on exchange rate of $1.60 to £1.00 as of March 31, 2011 and $1.56 to £1.00 as of December 31, 2010.

(4)

The holders of the debentures have the right to require the Operating Partnership to repurchase the debentures in cash in whole or in part for a price of 100% of the principal amount plus accrued and unpaid interest on each of August 15, 2011, August 15, 2016 and August 15, 2021. We have the right to redeem the debentures in cash for a price of 100% of the principal amount plus accrued and unpaid interest commencing on August 18, 2011.

(5)

The holders of the debentures have the right to require the Operating Partnership to repurchase the debentures in cash in whole or in part for a price of 100% of the principal amount plus accrued and unpaid interest on each of April 15, 2014, April 15, 2019 and April 15, 2024. We have the right to redeem the debentures in cash for a price of 100% of the principal amount plus accrued and unpaid interest commencing on April 18, 2014.

(6)	This amount represents six mortgage loans secured by our interests in 36 NE 2nd Street, 3300 East Birch Street, 100 & 200 Quannapowitt Parkway, 300 Boulevard East, 4849 Alpha Road, and 11830 Webb Chapel Road. Each of these loans is cross-collateralized by the six properties.

(7)	The respective borrower’s assets and credit are not available to satisfy the debts and other obligations of affiliates or any other person.

(8)	The Operating Partnership or its subsidiary provides a limited recourse guarantee with respect to this loan.

(9)	Two one-year extensions are available, which we may exercise if certain conditions are met.

(10)	We have entered into interest rate swap or interest rate cap agreements as a cash flow hedge for interest generated by these US LIBOR, EURIBOR and GBP LIBOR based loans. See note 13 for further information.

(11)	Based on exchange rate of $1.60 to £1.00 as of March 31, 2011 and $1.56 to £1.00 as of December 31, 2010.

(12)	Based on exchange rate of $1.42 to €1.00 as of March 31, 2011 and $1.34 to €1.00 as of December 31, 2010.

(13)	This loan is also secured by a €1.3 million letter of credit.

(14)	These loans are also secured by a £7.8 million letter of credit. These loans are cross-collateralized by the two properties.

(15)	If the loan is not repaid by March 1, 2012, the interest rate increases to the greater of 9.62% or the treasury rate then in effect plus 2%. Subject to a prepayment lock-out period through December 2011.

(16)	This mortgage loan was repaid in full in April 2011.

Revolving Credit Facility

As of March 31, 2011, our revolving credit facility had a total capacity of $750.0 million. Effective August 31, 2010, we exercised the first of two one-year extension options to our revolving credit facility, which extended its maturity date from August 31, 2010 to August 31, 2011. The bank group is obligated to grant extension options provided we give proper notice, we make certain representations and warranties and no default exists under the revolving credit facility. On June 28, 2010, we completed an amendment to our revolving credit facility. The amendment to the revolving credit facility provides us with the ability to add eligible unencumbered international assets to the borrowing base in support of our outstanding unsecured debt. International assets include properties located in Canada, England, Ireland, Wales, France, Spain, the Netherlands, Singapore and Australia. Under the new amendment, international assets may comprise up to 25% of the borrowing base, with assets in Spain and Singapore limited to up to 10% of the borrowing base. As of March 31, 2011, borrowings under the revolving credit facility bore interest at a blended rate of 1.35% (U.S), 2.01% (Euro) and 1.72% (GBP), which are based on 1-month LIBOR, 1-month EURIBOR and 1-month GBP LIBOR, respectively, plus a margin of 1.10%. The revolving credit facility has a $515.0 million sub-facility for multicurrency advances in British Pounds Sterling, Canadian Dollars, Euros, and Swiss Francs. We intend to use available borrowings under the revolving credit facility to, among other things, finance the acquisition of additional properties, fund tenant improvements and capital expenditures, fund development and redevelopment activities and to provide for working capital and other corporate purposes, including potentially for the repurchase, redemption or retirement of outstanding debt securities. As of March 31, 2011, approximately $209.7 million was drawn under this facility and $29.9 million of letters of credit were issued.

The credit facility contains various restrictive covenants, including limitations on our ability to incur additional indebtedness, make certain investments or merge with another company, and requirements to maintain financial coverage ratios as well as a pool of unencumbered assets. In addition, a downgrade in Digital Realty Trust, Inc.’s credit rating below investment grade may trigger additional payments or other consequences under our credit facility. In addition, except to enable Digital Realty Trust, Inc. to maintain its status as a REIT for federal income tax purposes or as may otherwise be required to avoid the imposition of income or excise taxes on Digital Reality Trust, Inc., we are not permitted during any four consecutive fiscal quarters to make distributions with respect to common stock or other equity interests in an aggregate amount in excess of 95% of Funds From Operations, as defined in the credit agreement, for such period, subject to certain other adjustments. As of March 31, 2011, we were in compliance with all of such covenants.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

During the three months ended March 31, 2011 and 2010, we capitalized interest of approximately $4.7 million and $1.9 million, respectively.

Unsecured Senior Notes

Prudential Shelf Facility

On January 20, 2010, the Operating Partnership closed the sale of $100.0 million aggregate principal amount of its senior unsecured term notes to Prudential Investment Management, Inc. and certain of its affiliates, or, collectively, Prudential, pursuant to the Prudential shelf facility. The notes were issued in two series referred to as the series D and series E notes. The series D notes have a principal amount of $50.0 million, an interest-only rate of 4.57% per annum and a five-year maturity, and the series E notes have a principal amount of $50.0 million, an interest-only rate of 5.73% per annum and a seven-year maturity. On February 3, 2010, the Operating Partnership closed the sale of an additional $17.0 million aggregate principal amount of its senior unsecured term notes, which we refer to as the series F notes, to Prudential pursuant to the Prudential shelf facility. The series F notes have an interest-only rate of 4.50% per annum and a five-year maturity. We used the proceeds of the series D, series E and series F notes to fund acquisitions, to temporarily repay borrowings under our revolving credit facility, to fund working capital and for general corporate purposes. As of March 31, 2011 and December 31, 2010, there was $200.0 million of unsecured senior notes outstanding. On December 8, 2010, our operating partnership and Prudential entered into an amendment to the Note Purchase and Private Shelf Agreement, increasing the capacity of the Prudential shelf facility from $200.0 million to $250.0 million.

4.500% Notes due 2015

On July 8, 2010, the Operating Partnership issued $375.0 million aggregate principal amount of notes, maturing on July 15, 2015 with an interest rate of 4.500% per annum (the 2015 Notes). The purchase price paid by the initial purchasers was 99.697% of the principal amount. The 2015 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Digital Realty Trust, Inc. Interest on the 2015 Notes is payable on January 15 and July 15 of each year, beginning on January 15, 2011. The net proceeds from the offering after deducting the original issue discount of approximately $1.1 million and underwriting commissions and expenses of approximately $3.1 million was approximately $370.8 million. We used the net proceeds from the offering to fund a portion of the purchase price of the 365 Main Portfolio. The 2015 Notes have been reflected net of discount in the condensed consolidated balance sheet.

The indenture governing the 2015 Notes contains 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, and also requires us to maintain total unencumbered assets of not less than 150% of the aggregate principal amount of unsecured debt. At March 31, 2011, we were in compliance with each of these financial covenants.

We entered into a registration rights agreement whereby the Operating Partnership agreed to conduct an offer to exchange the 2015 Notes for a new series of publicly registered notes with substantially identical terms. If the Operating Partnership did not fulfill certain of its obligations under the registration rights agreement, it would have been required to pay liquidated damages to the holders of the 2015 Notes. No separate contingent obligation was recorded as no liquidated damages became probable. We filed a registration statement with the U.S. Securities and Exchange Commission in October 2010 in connection with the exchange offer, which was declared effective in December 2010. We completed the exchange offer on January 19, 2011.

5.875% Notes due 2020

On January 28, 2010, the Operating Partnership issued $500.0 million aggregate principal amount of notes, maturing on February 1, 2020 with an interest rate of 5.875% per annum (the 2020 Notes). The purchase price paid by the initial purchasers was 98.296% of the principal amount. The 2020 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Digital Realty Trust, Inc. Interest on the 2020 Notes is payable on February 1 and August 1 of each year, beginning on August 1, 2010. The net proceeds from the offering after deducting the original issue discount of approximately $8.5 million and underwriting commissions and expenses of approximately $4.4 million was approximately $487.1 million. We used the net proceeds from the offering to temporarily repay our borrowings under our revolving credit facility, fund development and redevelopment opportunities and for general corporate purposes. The 2020 Notes have been reflected net of discount in the condensed consolidated balance sheet.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

The indenture governing the 2020 Notes contains 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, and also requires us to maintain total unencumbered assets of not less than 150% of the aggregate principal amount of unsecured debt. At March 31, 2011, we were in compliance with each of these financial covenants.

We entered into a registration rights agreement whereby the Operating Partnership agreed to conduct an offer to exchange the 2020 Notes for a new series of publicly registered notes with substantially identical terms. If the Operating Partnership did not fulfill certain of its obligations under the registration rights agreement, it would have been required to pay liquidated damages to the holders of the 2020 Notes. No separate contingent obligation was recorded as no liquidated damages became probable. We filed a registration statement with the U.S. Securities and Exchange Commission in June 2010 in connection with the exchange offer, which was declared effective in September 2010. We completed the exchange offer on November 5, 2010.

5.250% Notes due 2021

On March 8, 2011, the Operating Partnership issued $400.0 million aggregate principal amount of notes, maturing on March 15, 2021 with an interest rate of 5.250% per annum (the 2021 Notes). The purchase price paid by the initial purchasers was 99.775% of the principal amount. The 2021 Notes are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Digital Realty Trust, Inc. Interest on the 2021 Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2011. The net proceeds from the offering after deducting the original issue discount of approximately $0.9 million and underwriting commissions and expenses of approximately $3.6 million was approximately $395.5 million. We used the net proceeds from this offering to temporarily repay borrowings under our revolving credit facility, to acquire additional properties, to fund development and redevelopment opportunities and for general working capital purposes, including potentially for the repurchase, redemption or retirement of outstanding debt securities. The 2021 Notes have been reflected net of discount in the condensed consolidated balance sheet.

The indenture governing the 2021 Notes contains 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, and also requires us to maintain total unencumbered assets of not less than 150% of the aggregate principal amount of unsecured debt. At March 31, 2011, we were in compliance with each of these financial covenants.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

Exchangeable Senior Debentures

4.125% Exchangeable Senior Debentures due 2026

On August 15, 2006, the Operating Partnership issued $172.5 million of its 4.125% exchangeable senior debentures due August 15, 2026 (the 2026 Debentures). Costs incurred to issue the 2026 Debentures were approximately $5.4 million, net of the amount allocated to the equity component of the debentures. These costs are being amortized over a period of five years, which represents the estimated term of the 2026 Debentures, and are included in deferred financing costs, net in the condensed consolidated balance sheet. The 2026 Debentures are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Digital Realty Trust, Inc.

Interest is payable on August 15 and February 15 of each year beginning February 15, 2007 until the maturity date of August 15, 2026. The 2026 Debentures bear interest at 4.125% per annum and contain an exchange settlement feature, which provides that the 2026 Debentures may, under certain circumstances, be exchangeable for cash (up to the principal amount of the 2026 Debentures) and, with respect to any excess exchange value, into cash, shares of Digital Realty Trust, Inc. common stock or a combination of cash and shares of Digital Realty Trust, Inc. common stock at an exchange rate that was initially 30.6828 shares per $1,000 principal amount of 2026 Debentures. The exchange rate on the 2026 Debentures is subject to adjustment for certain events, including, but not limited to, certain dividends on Digital Realty Trust, Inc. common stock in excess of $0.265 per share per quarter (the “reference dividend”). Effective December 13, 2010, the exchange rate has been adjusted to 31.8250 shares per $1,000 principal amount of 2026 Debentures as a result of the aggregate dividends in excess of the reference dividend that Digital Realty Trust, Inc. declared and paid on its common stock beginning with the quarter ended December 31, 2006 and through the quarter ended December 31, 2010.

Prior to August 18, 2011, the Operating Partnership may not redeem the 2026 Debentures except to preserve Digital Realty Trust, Inc.’s status as a REIT for U.S. federal income tax purposes. On or after August 18, 2011, at the Operating Partnership’s option, the 2026 Debentures are redeemable in cash in whole or in part at 100% of the principal amount plus unpaid interest, if any, accrued to, but excluding, the redemption date, upon at least 30 days’ but not more than 60 days’ prior written notice to holders of the 2026 Debentures.

The holders of the 2026 Debentures have the right to require the Operating Partnership to repurchase the 2026 Debentures in cash in whole or in part on each of August 15, 2011, August 15, 2016 and August 15, 2021, and in the event of a designated event, for a repurchase price equal to 100% of the principal amount of the 2026 Debentures plus unpaid interest, if any, accrued to, but excluding, the repurchase date. Designated events include certain merger or combination transactions, non-affiliates becoming the beneficial owner of more than 50% of the total voting power of Digital Realty Trust, Inc.’s capital stock, a substantial turnover of Digital Realty Trust, Inc.’s directors within a 12- month period and Digital Realty Trust, Inc. ceasing to be the general partner of the Operating Partnership. Certain events are considered “Events of Default,” which may result in the accelerated maturity of the 2026 Debentures, including a default for 30 days in payment of any installment of interest under the 2026 Debentures, a default in the payment of the principal amount or any repurchase price or redemption price due with respect to the 2026 Debentures and the Operating Partnership’s failure to deliver cash or any shares of Digital Realty Trust, Inc. common stock within 15 days after the due date upon an exchange of the 2026 Debentures, together with any cash due in lieu of fractional shares of common stock.

In addition, the 2026 Debentures are exchangeable (i) prior to July 15, 2026, during any fiscal quarter after the fiscal quarter ended September 30, 2006, if the closing sale price of Digital Realty Trust, Inc. common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the exchange price in effect on the last trading day of the immediately preceding fiscal quarter, (ii) prior to July 15, 2026, during the five business day period after any five consecutive trading day period in which the average trading price per $1,000 principal amount of 2026 Debentures was equal to or less than 98% of the product of the closing sale price of the common stock during such period, multiplied by the applicable exchange rate, (iii) if we call the 2026 Debentures for redemption and (iv) any time on or after July 15, 2026. In January 2011, we gave notice to the holders of the 2026 Debentures that the 2026 Debentures shall be exchangeable during the calendar quarter ending March 31, 2011 pursuant to (i) above. The exchange price in effect as of March 31, 2011 was $31.42 per share.

We entered into a registration rights agreement whereby we agreed to register the shares of common stock which could be issued in the future upon exchange of the 2026 Debentures. If we do not fulfill certain of our obligations under the registration rights agreement, we will be required to pay liquidated damages to the holders of the 2026 Debentures. No separate contingent obligation has been recorded as no liquidated damages have become probable. We filed the shelf registration statement with the U.S. Securities and Exchange Commission in April 2007, which was automatically effective upon filing.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

During the three months ended March 31, 2011, we exchanged approximately $35.9 million aggregate principal amount of our 2026 Debentures for a combination of cash (approximately $47.6 million) and 303,073 restricted shares of Digital Realty Trust, Inc. common stock at the request of holders pursuant to the terms of the indenture governing our 2026 Debentures. There were no exchanges of our 2026 Debentures during the three months ended March 31, 2010. As of March 31, 2011, the remaining $52.9 million face amount of the 2026 Debentures remains outstanding under the original terms. We recorded a loss on exchange of approximately $0.6 million for the three months ended March 31, 2011, determined based on the excess of the fair value of the 2026 Debentures at the exchange date over the carrying value of the exchanged 2026 Debentures along with a write off of a pro rata portion of the associated debt discount on the 2026 Debentures and deferred financing costs. This loss is reported as a loss on early extinguishment of debt in the condensed consolidated income statements.

The following table provides additional information about the 2026 Debentures as of the date presented pursuant to requirements under U.S. GAAP for convertible debt instruments that require the principal amount to be settled in cash upon conversion:


	4.125% Exchangeable Senior Debentures due 2026
($ and shares in thousands, except exchange price)	March 31, 2011			December 31, 2010
Carrying amount of the equity component	$	5,607		$	9,406
Principal amount of the liability component	$	52,908		$	88,758
Unamortized discount of the liability component	$	639		$	1,456
Net carrying amount of the liability component	$	52,269		$	87,302
Remaining amortization period of discount		4 months			7 months
Exchange price	$	31.42		$	31.42
Number of shares to be issued upon exchange (a)		774			1,103
The amount by which the if-exchanged value exceeds the principal amount (a)	$	44,988		$	56,828
Effective interest rate on liability component		6.75	%		6.75	%
Non-cash interest cost recognized for the period ended	$	604		$	1,025	(b)
Coupon rate interest cost recognized for the period ended	$	858		$	1,779	(b)

(a)

In accordance with accounting guidance on convertible debt instruments that require the principal amount to be settled in cash upon conversion, we are required to disclose the exchange price and the number of shares on which the aggregate consideration to be delivered upon exchange is determined (principal plus excess value). The 2026 Debentures require the entire principal amount to be settled in cash, and at our option, any excess value above the principal amount may be settled in cash and/or common shares. Based on the March 31, 2011 and December 31, 2010 closing share prices of Digital Realty Trust, Inc. common stock and the exchange prices in the table above, the excess value was approximately $45.0 million and $56.8 million, respectively; accordingly, approximately 0.8 million and 1.1 million common shares, respectively, would be issued if the 2026 Debentures were settled on these dates and we elected to settle the excess value in shares of Digital Realty Trust, Inc. common stock.

(b)	Amounts are for the three months ended March 31, 2010.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

5.50% Exchangeable Senior Debentures due 2029

On April 20, 2009, the Operating Partnership issued $266.4 million of its 5.50% exchangeable senior debentures due April 15, 2029 (the 2029 Debentures). Costs incurred to issue the 2029 Debentures were approximately $7.8 million. These costs are being amortized over a period of five years, which represents the estimated term of the 2029 Debentures, and are included in deferred financing costs, net in the condensed consolidated balance sheet. The 2029 Debentures are general unsecured senior obligations of the Operating Partnership, rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership and are fully and unconditionally guaranteed by Digital Realty Trust, Inc.

Interest is payable on October 15 and April 15 of each year beginning October 15, 2009 until the maturity date of April 15, 2029. The 2029 Debentures bear interest at 5.50% per annum and may be exchanged for shares of Digital Realty Trust, Inc. common stock at an exchange rate that was initially 23.2558 shares per $1,000 principal amount of 2029 Debentures. The exchange rate on the 2029 Debentures is subject to adjustment for certain events, including, but not limited to, certain dividends on Digital Realty Trust, Inc. common stock in excess of $0.33 per share per quarter (the “reference dividend”). Effective September 13, 2010, the exchange rate has been adjusted to 23.5360 shares per $1,000 principal amount of 2029 Debentures as a result of the aggregate dividends in excess of the reference dividend that Digital Realty Trust, Inc. declared and paid on its common stock beginning with the quarter ended June 30, 2009 and through the quarter ended September 30, 2010. Due to the fact that the exchange feature for the 2029 Debentures must be settled in the common stock of Digital Realty Trust, Inc., new accounting guidance on convertible debt instruments that requires the principal amount to be settled in cash upon conversion does not apply.

Prior to April 18, 2014, the Operating Partnership may not redeem the 2029 Debentures except to preserve Digital Realty Trust, Inc.’s status as a REIT for U.S. federal income tax purposes. On or after April 18, 2014, at the Operating Partnership’s option, the 2029 Debentures are redeemable in cash in whole or in part at 100% of the principal amount plus unpaid interest, if any, accrued to, but excluding, the redemption date, upon at least 30 days’ but not more than 60 days’ prior written notice to holders of the 2029 Debentures.

The holders of the 2029 Debentures have the right to require the Operating Partnership to repurchase the 2029 Debentures in cash in whole or in part on each of April 15, 2014, April 15, 2019 and April 15, 2024, and in the event of a designated event, for a repurchase price equal to 100% of the principal amount of the 2029 Debentures plus unpaid interest, if any, accrued to, but excluding, the repurchase date. Designated events include certain merger or combination transactions, non-affiliates becoming the beneficial owner of more than 50% of the total voting power of Digital Realty Trust, Inc.’s capital stock, a substantial turnover of Digital Realty Trust, Inc.’s directors within a 12-month period without the approval of existing members and Digital Realty Trust, Inc. ceasing to be the general partner of the Operating Partnership. Certain events are considered “Events of Default,” which may result in the accelerated maturity of the 2029 Debentures, including a default for 30 days in payment of any installment of interest under the 2029 Debentures, a default in the payment of the principal amount or any repurchase price or redemption price due with respect to the 2029 Debentures and the Operating Partnership’s failure to deliver shares of Digital Realty Trust, Inc. common stock within 15 days after the due date upon an exchange of the 2029 Debentures, together with any cash due in lieu of fractional shares of common stock.

We entered into a registration rights agreement whereby we must register the shares of common stock which could be issued in the future upon exchange of the 2029 Debentures. If we do not fulfill certain of our obligations under the registration rights agreement, we will be required to pay liquidated damages to the holders of the 2029 Debentures. No separate contingent obligation has been recorded as no liquidated damages have become probable. We filed the shelf registration statement with the U.S. Securities and Exchange Commission in December 2009, which was automatically effective upon filing.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

The table below summarizes our debt maturities and principal payments as of March 31, 2011 (in thousands):


	Revolving Credit Facility ⁽¹⁾		Unsecured Senior Notes		Senior Notes			Exchangeable Senior Debentures			Mortgage Loans ⁽²⁾		Other Secured Loan		Total Debt
Remainder of 2011	$	209,687	$	25,000	$	—		$	52,908	⁽³⁾	$	127,286	$	—	$	414,881
2012		—		—		—			—			162,780		—		162,780
2013		—		33,000		—			—			159,654		10,500		203,154
2014		—		—		—			266,400	⁽⁴⁾		219,907		—		486,307
2015		—		67,000		375,000			—			75,436		—		517,436
Thereafter		—		75,000		900,000			—			305,098		—		1,280,098

Subtotal	$	209,687	$	200,000	$	1,275,000		$	319,308		$	1,050,161	$	10,500	$	3,064,656
Unamortized discount		—		—		(9,649	)		(639	)		—		—		(10,288	)
Unamortized premium		—		—		—			—			1,061		—		1,061

Total	$	209,687	$	200,000	$	1,265,351		$	318,669		$	1,051,222	$	10,500	$	3,055,429

⁽¹⁾	Subject to a one-year extension option exercisable by us. The bank group is obligated to grant the extension option provided we give proper notice, we make certain representations and warranties and no default exists under the revolving credit facility.

⁽²⁾

Our mortgage loans are generally non-recourse to us, subject to carve outs for specified actions by us or specified undisclosed environmental liabilities. As of March 31, 2011, we had provided limited recourse guarantees with respect to approximately $159.1 million principal amount of the outstanding mortgage indebtedness, and partial letter of credit support with respect to approximately an additional $47.2 million of the outstanding mortgage indebtedness.

⁽³⁾	Assumes maturity of the 2026 Debentures at first redemption date in August 2011.

⁽⁴⁾	Assumes maturity of the 2029 Debentures at first redemption date in April 2014.

7. Income per Share

The following is a summary of basic and diluted income per share (in thousands, except share and per share amounts):


	Three Months Ended March 31,
	2011		2010
Net income available to common stockholders	$	30,980	$	14,744

Weighted average shares outstanding—basic		91,428,355		77,770,691
Potentially dilutive common shares:
Stock options		202,038		195,652
Class C Units (2007 Grant)		92,795		581,052
Unvested incentive units		153,066		129,450
Excess exchange value of the 2026 Debentures		723,961		2,065,265

Weighted average shares outstanding—diluted		92,600,215		80,742,110

Income per share:
Basic	$	0.34	$	0.19

Diluted	$	0.33	$	0.18

On or after July 15, 2026, the 2026 Debentures may be exchanged at the then-applicable exchange rate for cash (up to the principal amount of the 2026 Debentures) and, with respect to any excess exchange value, into cash, shares of Digital Realty Trust, Inc. common stock or a combination of cash and shares of Digital Realty Trust, Inc. common stock. The 2026 Debentures are also

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

exchangeable prior to July 15, 2026, but only upon the occurrence of certain specified events. During the three months ended March 31, 2011, the weighted average common stock price exceeded the strike price as of March 31, 2011 of $31.42. Therefore, using the treasury method, 723,961 shares of common stock contingently issuable upon settlement of the excess exchange value were included as potentially dilutive common shares in determining diluted earnings per share for the three months ended March 31, 2011. During the three months ended March 31, 2010, the weighted average common stock price exceeded the strike price as of March 31, 2010 of $31.84. Therefore, using the treasury method, 2,065,265 shares of common stock contingently issuable upon settlement of the excess exchange value were included as potentially dilutive common shares in determining diluted earnings per share for the three months ended March 31, 2010.

We have excluded the following potentially dilutive securities in the calculations above as they would be antidilutive or not dilutive:


	Three Months Ended March 31,
	2011		2010
Weighted average of Operating Partnership common units not owned by us		4,874,253		5,462,409
Potentially dilutive outstanding stock options		—		6,284
Potentially dilutive 2029 Debentures		6,269,990		6,195,345
Potentially dilutive Series C Cumulative Convertible Preferred Stock		3,652,324		3,657,477
Potentially dilutive Series D Cumulative Convertible Preferred Stock		8,333,421		8,215,221

		23,129,988		23,536,736

8. Income per Unit

The following is a summary of basic and diluted income per unit (in thousands, except unit and per unit amounts):


	Three Months Ended March 31,
	2011		2010
Net income available to common unitholders	$	32,632	$	15,717

Weighted average units outstanding—basic		96,302,608		83,233,100
Potentially dilutive common units:
Stock options		202,038		195,652
Class C Units (2007 Grant)		92,795		581,052
Unvested incentive units		153,066		129,450
Excess exchange value of the 2026 Debentures		723,961		2,065,265

Weighted average units outstanding—diluted		97,474,468		86,204,519

Income per unit:
Basic	$	0.34	$	0.19

Diluted	$	0.33	$	0.18

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

Operating Partnership’s agreement of limited partnership, the Operating Partnership will deliver to Digital Realty Trust, Inc. one common unit for each share of common stock issuable upon exchange of the 2026 Debentures. The 2026 Debentures are also exchangeable prior to July 15, 2026, but only upon the occurrence of certain specified events. During the three months ended March 31, 2011, the weighted average common stock price exceeded the strike price as of March 31, 2011 of $31.42. Therefore, using the treasury method, 723,961 common units contingently issuable upon settlement of the excess exchange value were included as potentially dilutive common units in determining diluted earnings per unit for the three months ended March 31, 2011. During the three months ended March 31, 2010, the weighted average common stock price exceeded the strike price as of March 31, 2010 of $31.84. Therefore, using the treasury method, 2,065,265 common units contingently issuable upon settlement of the excess exchange value were included as potentially dilutive common units in determining diluted earnings per unit for the three months ended March 31, 2010.

We have excluded the following potentially dilutive securities in the calculations above as they would be antidilutive or not dilutive:


	Three Months Ended March 31,
	2011		2010
Potentially dilutive outstanding stock options		—		6,284
Potentially dilutive 2029 Debentures		6,269,990		6,195,345
Potentially dilutive Series C Cumulative Convertible Preferred Units		3,652,324		3,657,477
Potentially dilutive Series D Cumulative Convertible Preferred Units		8,333,421		8,215,221

		18,255,735		18,074,327

9. Income Taxes

Digital Realty Trust, Inc. (the Parent Company) elected to be taxed as a REIT and believes that it has complied with the REIT requirements of the Code. As a REIT, the Parent Company is generally not subject to corporate level federal income taxes on taxable income to the extent it is currently distributed to its stockholders. Since inception, the Parent Company has distributed 100% of its taxable income and intends to do so for the tax year ending December 31, 2011. As such, no provision for federal income taxes has been included in the accompanying condensed consolidated financial statements for the three months ended March 31, 2011 and 2010.

We have elected taxable REIT subsidiary (TRS) status for some of our consolidated subsidiaries. In general, a TRS may provide services that would otherwise be considered impermissible for REITs and hold assets that REITs cannot hold directly. A TRS is subject to federal income tax as a regular C corporation. Income taxes for TRS entities are accrued, as necessary, for the three months ended March 31, 2011 and 2010.

For our TRS entities and foreign subsidiaries that are subject to U.S. federal, state and foreign income taxes, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe it is more likely than not that the deferred tax asset may not be realized, based on available evidence at the time the determination is made. An increase or decrease in the valuation allowance that results from the change in circumstances that causes a change in our judgment about the realizability of the related deferred tax asset is included in income. Deferred tax assets (net of valuation allowance) and liabilities for our TRS entities and foreign subsidiaries are accrued, as necessary, for the three months ended March 31, 2011 and 2010.

10. Equity and Accumulated Other Comprehensive Loss, Net

(a) Equity Distribution Agreements

On December 31, 2009, Digital Realty Trust, Inc. entered into equity distribution agreements, which we refer to as the Original Equity Distribution Agreements, with each of Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse Securities (USA) LLC, or the Original Agents, under which it could issue and sell shares of its common stock having an

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

aggregate offering price of up to $400,000,000 from time to time through, at its discretion, any of the Original Agents as its sales agents. On January 22, 2010, Digital Realty Trust, Inc. amended and restated each Original Equity Distribution Agreement with the applicable Original Agent, and also entered into a new equity distribution agreement with Morgan Stanley & Co. Incorporated, or collectively the Equity Distribution Agreements, under which it may issue and sell shares of its common stock having an aggregate offering price of up to $400,000,000 (including the approximately 1.1 million shares of common stock having an aggregate offering price of approximately $54.3 million sold pursuant to the Original Equity Distribution Agreements as of January 22, 2010), from time to time through, at its discretion, any of the Original Agents or Morgan Stanley & Co. Incorporated as its sales agents. On March 2, 2011, the Equity Distribution Agreements were amended to amend certain representations. The sales of common stock made under the Equity Distribution Agreements will be made in “at the market” offerings as defined in Rule 415 of the Securities Act. For the three months ended March 31, 2011, Digital Realty Trust, Inc. generated net proceeds of approximately $5.6 million from the issuance of approximately 0.1 million common shares under the Equity Distribution Agreements at an average price of $58.44 per share after payment of approximately $0.1 million of commissions to the sales agents.

(b) Noncontrolling Interests in Operating Partnership

Noncontrolling interests in the Operating Partnership relate to the interests that are not owned by Digital Realty Trust, Inc. The following table shows the ownership interest in the Operating Partnership as of March 31, 2011 and December 31, 2010:


	March 31, 2011					December 31, 2010
	Number of units		Percentage of total			Number of units		Percentage of total
Digital Realty Trust, Inc.		92,078,429		94.4	%		91,159,221		94.3	%
Noncontrolling interests consist of:
Common units held by third parties		3,810,814		3.9			3,937,827		4.1
Incentive units held by employees and directors (see note 12)		1,665,994		1.7			1,525,592		1.6

		97,555,237		100.0	%		96,622,640		100.0	%

Limited partners have the right to require the Operating Partnership to redeem part or all 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 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. Pursuant to authoritative accounting guidance, Digital Realty Trust, Inc. evaluated whether it controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement of the noncontrolling Operating Partnership common and incentive units. Based on the results of this analysis, we concluded that the common and incentive Operating Partnership units met the criteria to be classified within equity.

The redemption value of the noncontrolling Operating Partnership common units and the vested incentive units was approximately $276.7 million and $244.5 million based on the closing market price of Digital Realty Trust, Inc. common stock on March 31, 2011 and December 31, 2010, respectively.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

The following table shows activity for the noncontrolling interests in the Operating Partnership for the three months ended March 31, 2011:


	Common Units			Incentive Units			Total
As of December 31, 2010		3,937,827			1,525,622			5,463,449

Redemption of common units for shares of Digital Realty Trust, Inc. common stock ⁽¹⁾		(127,013	)		—			(127,013	)
Conversion of incentive units held by employees and directors for shares of Digital Realty Trust, Inc. common stock ⁽¹⁾		—			(37,163	)		(37,163	)
Grant of incentive units to employees and directors		—			177,535			177,535

As of March 31, 2011		3,810,814			1,665,994			5,476,808

(1)	This redemption was recorded as a reduction to noncontrolling interests in the Operating Partnership and an increase to common stock and additional paid in capital based on the book value per unit in the accompanying condensed consolidated balance sheet of Digital Realty Trust, Inc.

Under the terms of certain third parties’ (the eXchange parties) contribution agreements signed in the third quarter of 2004, we have agreed to indemnify each eXchange party against adverse tax consequences in the event the Operating Partnership directly or indirectly sells, exchanges or otherwise disposes of (whether by way of merger, sale of assets or otherwise) in a taxable transaction any interest in 200 Paul Avenue 1-4 or 1100 Space Park Drive until the earlier of November 3, 2013 and the date on which these contributors or certain transferees hold less than 25% of the Operating Partnership common units issued to them in the formation transactions consummated concurrently with the IPO. Under the eXchange parties’ amended contribution agreement, the Operating Partnership has agreed to make approximately $17.8 million of indebtedness available for guaranty by the eXchange parties until the earlier of November 3, 2013 and the date on which these contributors or certain transferees hold less than 25% of the Operating Partnership common units issued to them in the formation transactions consummated concurrently with the IPO, and we have agreed to indemnify each eXchange party against adverse tax consequences if the Operating Partnership does not provide such indebtedness to guarantee.

(c) Dividends

We have declared the following dividends on our common and preferred stock for the three months ended March 31, 2011 (in thousands):


Date dividend declared	Dividend payable date		Series C Preferred Stock ⁽¹⁾		Series D Preferred Stock ⁽²⁾		Common Stock ⁽³⁾
February 10, 2011		March 31, 2011	$	1,832	$	4,690	$	62,459

			$	1,832	$	4,690	$	62,459

(1)	$1.094 annual rate of dividend per share.

(2)	$1.375 annual rate of dividend per share.

(3)	$2.720 annual rate of dividend per share.

Distributions out of Digital Realty Trust, Inc.’s current or accumulated earnings and profits are generally classified as dividends whereas distributions in excess of its current and accumulated earnings and profits, to the extent of a stockholder’s U.S. federal income tax basis in Digital Realty Trust, Inc.’s stock, are generally classified as a return of capital. Distributions in excess of a stockholder’s U.S. federal income tax basis in Digital Realty Trust, Inc.’s stock are generally characterized as capital gain. Cash provided by operating activities has been sufficient to fund all distributions.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

(d) Accumulated Other Comprehensive Loss, Net

The accumulated balances for each classification of other comprehensive loss, net as of March 31, 2011 are as follows (in thousands):


	Foreign currency translation adjustments			Cash flow hedge adjustments			Accumulated other comprehensive loss, net
Balance as of December 31, 2010	$	(33,175	)	$	(8,906	)	$	(42,081	)
Net current period change		15,576			1,430			17,006
Reclassification to interest expense from interest rate swaps		—			1,505			1,505

Balance as of March 31, 2011	$	(17,599	)	$	(5,971	)	$	(23,570	)

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

11. Capital and Comprehensive Income

(a) Allocations of Net Income and Net Losses to Partners

Except for special allocations to holders of profits interest units described below in note 12(a) under the heading “Incentive Plans-Long-Term Incentive Units,” the Operating Partnership’s net income will generally be allocated to Digital Realty Trust, Inc. (the General Partner) to the extent of the accrued preferred return on its preferred units, and then to the General Partner and the Operating Partnership’s limited partners in accordance with the respective percentage interests in the common units issued by the Operating Partnership. Net loss will generally be allocated to the General Partner and the Operating Partnership’s limited partners in accordance with the respective common percentage interests in the Operating Partnership until the limited partner’s capital is reduced to zero and any remaining net loss would be allocated to the General Partner. However, in some cases, losses may be disproportionately allocated to partners who have guaranteed our debt. The allocations described above are subject to special allocations relating to depreciation deductions and to compliance with the provisions of Sections 704(b) and 704(c) of the Code, and the associated Treasury Regulations.

(b) Partnership Units

Limited partners have the right to require the Operating Partnership to redeem part or all of their common units for cash based on the fair market value of an equivalent number of shares of the General Partner’s common stock at the time of redemption. Alternatively, the General Partner may elect to acquire those common units in exchange for shares of the General Partner’s 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. Pursuant to authoritative accounting guidance, the Operating Partnership evaluated whether it controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement of the limited partners’ common units and the vested incentive units. Based on the results of this analysis, the Operating Partnership concluded that the common and vested incentive Operating Partnership units met the criteria to be classified within capital.

The redemption value of the limited partners’ common units and the vested incentive units was approximately $276.7 million and $244.5 million based on the closing market price of Digital Realty Trust, Inc.’s common stock on March 31, 2011 and December 31, 2010, respectively.

(c) Distributions

All distributions on our units are at the discretion of Digital Realty Trust, Inc.’s board of directors. As of March 31, 2011, the Operating Partnership declared the following distributions (in thousands):


Date distribution declared	Distribution payable date		Series C Preferred Units ⁽¹⁾		Series D Preferred Units ⁽²⁾		Common Units ⁽³⁾
February 10, 2011		March 31, 2011	$	1,832	$	4,690	$	66,252

			$	1,832	$	4,690	$	66,252

(1)	$1.094 annual rate of distribution per unit.

(2)	$1.375 annual rate of distribution per unit.

(3)	$2.720 annual rate of distribution per unit.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

(d) Accumulated Other Comprehensive Loss

The accumulated balances for each classification of other comprehensive loss as of March 31, 2011 are as follows (in thousands):


	Foreign currency translation adjustments			Cash flow hedge adjustments			Accumulated other comprehensive loss
Balance as of December 31, 2010	$	(36,051	)	$	(9,809	)	$	(45,860	)
Net current period change		16,406			1,506			17,912
Reclassification to interest expense from interest rate swaps		—			1,585			1,585

Balance as of March 31, 2011	$	(19,645	)	$	(6,718	)	$	(26,363	)

12. Incentive Plan

Our 2004 Incentive Award Plan provides for the grant of incentive awards to employees, directors and consultants. Awards issuable under the 2004 Incentive Award Plan include stock options, restricted stock, dividend equivalents, stock appreciation rights, long-term incentive units, cash performance bonuses and other incentive awards. Only employees are eligible to receive incentive stock options under the 2004 Incentive Award Plan. Initially, we had reserved a total of 4,474,102 shares of common stock for issuance pursuant to the 2004 Incentive Award Plan, subject to certain adjustments set forth in the 2004 Incentive Award Plan. On May 2, 2007, Digital Realty Trust, Inc.’s stockholders approved the First Amended and Restated Digital Realty Trust, Inc., Digital Realty Services, Inc. and Digital Realty Trust, L.P. 2004 Incentive Award Plan (as amended, the Amended and Restated 2004 Incentive Award Plan). The Amended and Restated 2004 Incentive Award Plan increases the aggregate number of shares of stock which may be issued or transferred under the plan by 5,000,000 shares to a total of 9,474,102 shares, and provides that the maximum number of shares of stock with respect to awards granted to any one participant during a calendar year will be 1,500,000 and the maximum amount that may be paid in cash during any calendar year with respect to any performance-based award not denominated in stock or otherwise for which the foregoing limitation would not be an effective limitation for purposes of Section 162(m) of the Code will be $10.0 million.

As of March 31, 2011, 3,681,173 shares of common stock or awards convertible into or exchangeable for common stock remained available for future issuance under the Amended and Restated 2004 Incentive Award Plan. Each long-term incentive and Class C unit issued under the Amended and Restated 2004 Incentive Award Plan will count as one share of common stock for purposes of calculating the limit on shares that may be issued under the Amended and Restated 2004 Incentive Award Plan and the individual award limit discussed above.

(a) Long-Term Incentive Units

Long-term incentive units, which are also referred to as profits interest units, may be issued to eligible participants for the performance of services to or for the benefit of the Operating Partnership. Long-term incentive units, whether vested or not, will receive the same quarterly per unit distributions as Operating Partnership common units, which equal per share distributions on Digital Realty Trust, Inc. common stock. Initially, long-term incentive units do not have full parity with common units with respect to liquidating distributions. If such parity is reached, vested long-term incentive units may be converted into an equal number of common units of the Operating Partnership at any time, and thereafter enjoy all the rights of common units of the Operating Partnership, including redemption rights.

In order to achieve full parity with common units, long-term incentive units must be fully vested and the holder’s capital account balance in respect of such long-term incentive units must be equal to the capital account balance of a holder of an equivalent number of common units. The capital account balance attributable to each common unit is generally expected to be the same, in part because of the amount credited to a partner’s capital account upon the partner’s contribution of property to the Operating Partnership, and in part because the partnership agreement provides, in most cases, that allocations of income, gain, loss and deduction (which will adjust the partner’s capital accounts) are to be made to the common units on a proportionate basis. As a result, with respect to a number of long-term incentive units, it is possible to determine the capital account balance of an equivalent number of common units by multiplying the number of long-term incentive units by the capital account balance with respect to a common unit.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

A partner’s initial capital account balance is equal to the amount the partner paid (or contributed to the Operating Partnership) for the partner’s units and is subject to subsequent adjustments, including with respect to the partner’s share of income, gain or loss of the Operating Partnership. Because a holder of long-term incentive units generally will not pay for the long-term incentive units, the initial capital account balance attributable to such long-term incentive units will be zero. However, the Operating Partnership is required to allocate income, gain, loss and deduction to the partner’s capital accounts in accordance with the terms of the partnership agreement, subject to applicable Treasury Regulations. The partnership agreement provides that holders of long-term incentive units will receive special allocations of gain in the event of a sale or “hypothetical sale” of assets of the Operating Partnership prior to the allocation of gain to Digital Realty Trust, Inc. or other limited partners with respect to their common units. The amount of such allocation will, to the extent of any such gain, be equal to the difference between the capital account balance of a holder of long-term incentive units attributable to such units and the capital account balance attributable to an equivalent number of common units. If and when such gain allocation is fully made, a holder of long-term incentive units will have achieved full parity with holders of common units. To the extent that, upon an actual sale or a “hypothetical sale” of the Operating Partnership’s assets as described above, there is not sufficient gain to allocate to a holder’s capital account with respect to long-term incentive units, or if such sale or “hypothetical sale” does not occur, such units will not achieve parity with common units.

The term “hypothetical sale” refers to circumstances that are not actual sales of the Operating Partnership’s assets but that require certain adjustments to the value of the Operating Partnership’s assets and the partners’ capital account balances. Specifically, the partnership agreement provides that, from time to time, in accordance with applicable Treasury Regulations, the Operating Partnership will adjust the value of its assets to equal their respective fair market values, and adjust the partners’ capital accounts, in accordance with the terms of the partnership agreement, as if the Operating Partnership sold its assets for an amount equal to their value. Times for making such adjustments generally include the liquidation of the Operating Partnership, the acquisition of an additional interest in the Operating Partnership by a new or existing partner in exchange for more than a de minimis capital contribution, the distribution by the Operating Partnership to a partner of more than a de minimis amount of partnership property as consideration for an interest in the Operating Partnership, in connection with the grant of an interest in the Operating Partnership (other than a de minimis interest) as consideration for the performance of services to or for the benefit of the Operating Partnership (including the grant of a long-term incentive unit), and at such other times as may be desirable or required to comply with the Treasury Regulations.

During the three months ended March 31, 2011 and 2010, certain employees were granted an aggregate of 78,903 and 86,393 long-term incentive units, respectively. The grant date fair values, which equal the market price of Digital Realty Trust, Inc. common stock, are being expensed on a straight-line basis over the vesting period of the long-term incentive units, which is four years. During the three months ended March 31, 2011 and 2010, certain employees were also granted an aggregate of 98,632 and 107,993 long-term incentive units, respectively, which, in addition to a service condition, are subject to a performance condition that impacts the number of units in which the employee ultimately vests. The performance condition is based upon our achievement of the respective fiscal years’ Funds From Operations per share targets. Upon evaluating the results of the performance condition, the final number of units is determined and such units vest based on satisfaction of the service conditions. The service conditions of the awards provide for 20% vesting on each of the first and second anniversaries of the grant date and 30% vesting on each of the third and fourth anniversaries of the grant date, provided the grantee continues employment on each anniversary date. Based on our 2010 FFO per diluted share and unit, all of the 2010 long-term incentive units satisfied the performance condition. The grant date fair values, which equal the market price of Digital Realty Trust, Inc. common stock, are being expensed on a straight-line basis over the vesting period of the long-term incentive units, which ranges from four to five years.

The expense recorded for the three months ended March 31, 2011 and 2010 related to long-term incentive units was approximately $1.9 million and $1.2 million, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $0.2 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively. Unearned compensation representing the unvested portion of the long-term incentive units totaled $20.6 million and $12.9 million as of March 31, 2011 and December 31, 2010, respectively. We expect to recognize this unearned compensation over the next 3.1 years on a weighted average basis.

(b) Class C Profits Interest Units

On May 2, 2007, we granted awards of Class C Profits Interest Units of the Operating Partnership or similar stock-based performance awards, which we refer to collectively as the Class C Units, under the Amended and Restated 2004 Incentive Award Plan (2007 Grant) to each of our named executive officers and certain other officers and employees.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

The Class C Units subject to this award were subject to vesting based on the achievement of a total stockholder return (which we refer to as the market condition) as measured on November 1, 2008 (which we refer to as the first measurement date) and May 1, 2010 (which we refer to as the second measurement date). If:

•

with respect to the first measurement date, we achieved a total shareholder return equal to at least 18% over the period commencing on May 2, 2007 and ending on November 1, 2008; and

•

with respect to the second measurement date, we achieved a total shareholder return equal to at least 36% over a period commencing on May 2, 2007 and ending on the earlier of May 1, 2010 and the date of a change in control of our company,

the aggregate amount of the 2007 Grant award was equal to 8% of the excess shareholder value, as defined, created during the applicable performance period, but in no event in excess of:

•

$17 million for the first measurement date; or

•

$40 million (less the amount of the award pool as of the first measurement date) for the second measurement date.

We previously determined that the market condition with respect to the first measurement date was not achieved. On May 1, 2010, we determined that 613,485 of the Class C Units subject to the 2007 Grant satisfied the market condition on the second measurement date (May 1, 2010), with the value of these units equal to the maximum amount of the award pool payable pursuant to the 2007 Grant on the second measurement date. Of the Class C Units that satisfied the market condition on May 1, 2010, 60% vested on May 1, 2010 and the remaining 40% will vest ratably each month thereafter for 24 months.

The fair value of the 2007 Grant was measured on the grant date using a Monte Carlo simulation to estimate the probability of the multiple market conditions being satisfied. The Monte Carlo simulation uses a statistical formula underlying the Black-Scholes and binomial formulas, and such simulation was run approximately 100,000 times. For each simulation, the value of the payoff was calculated at the settlement date and was then discounted to the grant date at a risk-free interest rate. The expected value of the Class C units on the grant date was determined by multiplying the average of the values over all simulations by the number of outstanding shares of Digital Realty Trust, Inc. common stock and Operating Partnership units. The valuation was performed in a risk-neutral framework, so no assumption was made with respect to an equity risk premium. Other significant assumptions used in the valuation included an expected term of 36 months, expected stock price volatility of 23%, a risk-free interest rate of 4.6%, and a dividend growth rate of 5.0 percent. The fixed award limit under the plan is $17 million for the first market condition and $40 million for the second market condition, and there were 69.2 million shares of Digital Realty Trust, Inc. common stock and Operating Partnership units outstanding as of the 2007 grant date. The grant date fair value of these awards of approximately $11.8 million will be recognized as compensation expense on a straight-line basis over the expected service period of five years. The unearned compensation as of March 31, 2011 and December 31, 2010 was $2.4 million and $2.9 million, respectively. As of March 31, 2011 and December 31, 2010, 469,320 and 439,653, respectively, of the Class C Units subject to the 2007 Grant had vested. We recognized compensation expense related to the Class C Units subject to the 2007 Grant of $0.5 million and $0.5 million for the three months ended March 31, 2011 and 2010, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of $0.1 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively.

(c) Stock Options

The fair value of each option granted under the 2004 Incentive Award Plan is estimated on the date of the grant using the Black-Scholes option-pricing model. For the three months ended March 31, 2011 and 2010, no stock options were granted. The fair values are being expensed on a straight-line basis over the vesting period of the options, which ranges from four to five years. The expense recorded for the three months ended March 31, 2011 and 2010, respectively was approximately $0.2 million and $0.2 million, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $0.1 million and $0.1 million for the three months ended March 31, 2011 and 2010, respectively. Unearned compensation representing the unvested portion of the stock options totaled $1.0 million and $1.3 million as of March 31, 2011 and December 31, 2010, respectively. We expect to recognize this unearned compensation over the next 1.0 year on a weighted average basis.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

The following table summarizes the 2004 Incentive Award Plan’s stock option activity for the three months ended March 31, 2011:


	Period ended March 31, 2011
	Shares			Weighted average exercise price
Options outstanding, beginning of period		470,264		$	28.35
Exercised		(23,232	)		37.27
Cancelled / Forfeited		(2,334	)		41.73

Options outstanding, end of period		444,698		$	27.82

Exercisable, end of period		353,621		$	24.38

The following table summarizes information about stock options outstanding and exercisable as of March 31, 2011:


Options outstanding									Options exercisable
Exercise price	Number outstanding		Weighted average remaining contractual life (years)		Weighted average exercise price		Aggregate intrinsic value		Number exercisable		Weighted average remaining contractual life (years)		Weighted average exercise price		Aggregate intrinsic value
$12.00-13.02		182,369		3.58	$	12.01	$	8,413,231		182,369		3.58	$	12.01	$	8,413,231
$20.37-28.09		25,973		4.74		23.61		896,839		25,639		4.74		23.57		886,362
$33.18-41.73		236,356		6.02		40.48		4,173,675		145,613		5.99		40.01		2,640,004

		444,698		4.94	$	27.82	$	13,483,745		353,621		4.66	$	24.38	$	11,939,597

(d) Restricted Stock

During the three months ended March 31, 2011 and 2010, certain employees were granted an aggregate of 40,807 and 30,329 shares of restricted stock, respectively. The grant date fair values, which equal the market price of Digital Realty Trust, Inc. common stock, are being expensed on a straight-line basis over the vesting period of the restricted stock, which is four years. During the three months ended March 31, 2011 and 2010, certain employees were also granted an aggregate of 50,999 and 37,914 shares of restricted stock, respectively, which, in addition to a service condition, are subject to a performance condition that impacts the number of shares in which the employee ultimately vests. The performance condition is based upon our achievement of the respective year’s FFO per share targets. Upon evaluating the results of the performance condition, the final number of shares is determined and such shares vest based on satisfaction of the service conditions. The service conditions of the awards provide for 20% vesting on each of the first and second anniversaries of the grant date and 30% vesting on each of the third and fourth anniversaries of the grant date provided the grantee continues employment on each anniversary date. Based on our 2010 FFO per diluted share and unit, all of the 2010 restricted stock satisfied the performance condition.

The expense recorded for the three months ended March 31, 2011 and 2010 related to grants of restricted stock was approximately $0.4 million and $0.3 million, respectively. We capitalized amounts relating to compensation expense of employees direct and incremental to construction and successful leasing activities of approximately $0.3 million and $0.2 million for the three months ended March 31, 2011 and 2010, respectively. Unearned compensation representing the unvested portion of the restricted stock totaled $8.2 million and $4.2 million as of March 31, 2011 and December 31, 2010, respectively. We expect to recognize this unearned compensation over the next 3.4 years on a weighted average basis.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

13. Derivative Instruments

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

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

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of December 31, 2010, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements related to US LIBOR, GBP LIBOR and EURIBOR based mortgage loans. To accomplish this objective, we primarily use interest rate swaps and caps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Under an interest rate cap, if the reference interest rate, such as one-month LIBOR, increases above the cap rate, the holder of the instrument receives a payment based on the notional value of the instrument, the length of the period, and the difference between the current reference rate and the cap rate. If the reference rate increases above the cap rate, the payment received under the interest rate cap will offset the increase in the payments due under the variable rate notes payable.

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

Interest rate caps are viewed as a series of call options or caplets which exist for each period the cap agreement is in existence. As each caplet expires, the related cost of the expired caplet is amortized to interest expense with the remaining caplets carried at fair value. The value of interest rate caps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero. The purchase price of an interest rate cap is amortized to interest expense over the contractual life of the instrument. For interest rate caps that are designated as cash flow hedges under accounting guidance as it relates to derivative instruments, the change in the fair value of an effective interest rate cap is recorded to accumulated other comprehensive income in equity. Amounts we are entitled to under interest rate caps, if any, are recognized on an accrual basis, and are recorded to as a reduction against interest expense in the accompanying consolidated statements of operations.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

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

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2011, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The fair value of these derivatives was ($4.9) million and ($8.0) million at March 31, 2011 and December 31, 2010, respectively. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2011 and 2010, respectively, there were no ineffective portions to our interest rate swaps.

Amounts reported in accumulated other comprehensive loss related to interest rate swaps will be reclassified to interest expense as interest payments are made on our debt. As of March 31, 2011, we estimate that an additional $4.1 million will be reclassified as an increase to interest expense during the twelve months ending March 31, 2012, when the hedged forecasted transactions impact earnings.

As of March 31, 2011 and December 31, 2010, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands):


Notional Amount														Fair Value at Significant Other Observable Inputs (Level 2)
As of March 31, 2011			As of December 31, 2010			Type of Derivative		Strike Rate		Effective Date		Expiration Date		As of March 31, 2011			As of December 31, 2010
$	19,875	(1)	$	19,515	(1)		Swap		4.944		Jul. 10, 2006		Apr. 10, 2011	$	(23	)	$	(231	)
	68,640	(1)		66,858	(1)		Swap		2.980		April 6, 2009		Nov. 30, 2013		(1,810	)		(2,471	)
	14,727	(2)		13,978	(2)		Swap		3.981		May 17, 2006		Jul. 18, 2013		(561	)		(828	)
	10,655	(2)		10,113	(2)		Swap		4.070		Jun. 23, 2006		Jul. 18, 2013		(427	)		(621	)
	9,377	(2)		8,900	(2)		Swap		3.989		Jul. 27, 2006		Oct. 18, 2013		(378	)		(557	)
	43,652	(2)		41,430	(2)		Swap		3.776		Dec. 5, 2006		Jan. 18, 2012		(761	)		(1,129	)
	37,530	(2)		35,620	(2)		Swap		4.000		Dec. 20, 2006		Jan. 18, 2012		(722	)		(1,054	)
	42,474	(2)		40,152	(2)		Swap		2.703		Dec. 3, 2009		Sep. 4, 2014		(225	)		(1,139	)
	16,778			16,976			Cap		4.000		June 24, 2009		June 25, 2012		1			3
	20,500			20,500			Cap		4.000		Aug. 4, 2010		June 15, 2013		25			30

$	284,208		$	274,042										$	(4,881	)	$	(7,997	)

(1)	Translation to U.S. dollars is based on exchange rate of $1.60 to £1.00 as of March 31, 2011 and $1.56 to £1.00 as of December 31, 2010.

(2)	Translation to U.S. dollars is based on exchange rate of $1.42 to €1.00 as of March 31, 2011 and $1.34 to €1.00 as of December 31, 2010.

We do not have any fair value measurements using significant unobservable inputs (Level 3) as of March 31, 2011 or December 31, 2010.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

14. Fair Value of Instruments

We disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value.

Current accounting guidance requires the Company to disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value. The Company’s disclosures of estimated fair value of financial instruments at March 31, 2011 and December 31, 2010 were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The carrying amounts for cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable and other accrued liabilities, security deposits and prepaid rents approximate fair value because of the short-term nature of these instruments. As described in note 13, the interest rate cap and interest rate swaps are recorded at fair value.

We calculate the fair value of our mortgage loans, unsecured senior notes and exchangeable senior debentures based on currently available market rates assuming the loans are outstanding through maturity and considering the collateral and other loan terms, including excess exchange value which exists related to our 2026 Debentures. 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 debt. The carrying value of our revolving credit facility approximates fair value, due to the short-term nature of this instrument along with the variability of interest rates.

As of March 31, 2011 and December 31, 2010, the aggregate estimated fair value and carrying value of our revolving credit facility, unsecured senior notes, exchangeable senior debentures, mortgage loans and other secured loan were as follows (in thousands):


	As of March 31, 2011				As of December 31, 2010
	Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value
Revolving credit facility ⁽¹⁾	$	209,687	$	209,687	$	333,534	$	333,534
Unsecured senior notes ⁽²⁾⁽³⁾		1,517,657		1,465,351		1,103,983		1,066,030
Exchangeable senior debentures ⁽²⁾⁽³⁾		483,356		318,669		504,241		353,702
Mortgage loans ⁽²⁾		1,085,768		1,051,222		1,078,220		1,043,188
Other secured loan		10,700		10,500		10,720		10,500

	$	3,307,168	$	3,055,429	$	3,030,698	$	2,806,954

(1)	The carrying value of our revolving credit facility approximates estimated fair value, due to the short-term nature of this instrument along with the variability of interest rates.

(2)	Valuations for our unsecured senior notes and mortgage loans are determined based on the expected future payments discounted at risk-adjusted rates. The 2015 Notes, 2020 Notes and 2021 Notes and exchangeable senior debentures are valued based on quoted market prices.

(3)

The carrying value of the 2015 Notes, 2020 Notes and 2021 Notes are net of discount of $9,649 and $8,970 in the aggregate as of March 31, 2011 and December 31, 2010, respectively. The carrying values of our exchangeable senior debentures are net of discount of $639 and $1,456 as of March 31, 2011 and December 31, 2010, respectively, related to our 2026 Debentures.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

15. Related Party Transactions

In December 2006, we entered into ten leases with tel(x), pursuant to which tel(x) provides enhanced meet-me-room services to our customers. The initial terms of these leases expire in 2026, and tel(x) has options to extend them through 2046. tel(x) was acquired by GI Partners Fund II, LLP in November 2006. Richard Magnuson, our Chairman, is also the chief executive officer of the advisor to GI Partners Fund II, LLP. Our condensed consolidated statements of operations include rental revenues of approximately $8.8 million and $5.1 million from tel(x) for the three months ended March 31, 2011 and 2010, respectively. In connection with the lease agreements, we entered into an operating agreement with tel(x), effective as of December 1, 2006, with respect to joint sales and marketing efforts, designation of representatives to manage the national relationship between us and tel(x) and future meet-me-room facilities. Under the operating agreement, tel(x) has a sixty-day option to enter into a meet-me-room lease for certain future meet-me-room buildings acquired by us or any buildings currently owned by us that are converted into a meet-me-room building. As of March 31, 2011 and December 31, 2010, tel(x) leases 202,987 square feet from us under 31 lease agreements.

We also entered into an agreement with tel(x), effective as of December 1, 2006, with respect to percentage rent arising out of potential future lease agreements for rentable space in buildings covered by the meet-me-room lease agreements. Percentage rent earned during the three months ended March 31, 2011 and 2010 amounted to approximately $79,000 and $11,000, respectively.

In addition, in connection with the lease agreements, we entered into a management agreement with tel(x), effective as of December 1, 2007, pursuant to which tel(x) agreed to provide us with certain management services in exchange for a management fee of one percent of rents actually collected by tel(x).

We are party to seven leases with SoftLayer, of which five are in place as of March 31, 2011 and the remaining two will commence in future periods. The initial terms of these leases expire from 2013 to 2025, and SoftLayer has options to extend them from 2018 through 2035. On August 3, 2010, GI Partners Fund III, L.P. acquired a controlling interest in SoftLayer. Richard Magnuson, our Chairman, is also a manager of the general partner to GI Partners Fund III, L.P. Our condensed consolidated statements of operations include rental revenues of approximately $2.3 million from SoftLayer for the three months ended March 31, 2011. No rental revenues were earned from SoftLayer for the three months ended March 31, 2010.

16. Commitments and Contingencies

We have agreed with the seller of 350 East Cermak Road to share a portion, not to exceed $135,000 per month, of rental revenue, adjusted for our costs to lease the premises, from the leases of the 192,000 square feet of space held for redevelopment. This revenue sharing agreement will terminate in May 2012. We made payments of approximately $0.4 million and $10,000 to the seller during the three months ended March 31, 2011 and 2010, respectively. We have recorded approximately $1.9 million and $2.3 million for this contingent liability on our consolidated balance sheet at March 31, 2011 and December 31, 2010, respectively.

As part of the acquisition of Clonshaugh Industrial Estate I, we entered into an agreement with the seller whereby the seller is entitled to receive 40% of the net rental income generated by the existing building after we have received a 9% return on all capital invested in the property. As of February 6, 2006, the date we acquired this property, we have estimated the present value of these expected payments over the 10 year lease term to be approximately $1.1 million and this value has been recorded as a component of the purchase price. Accounts payable and other liabilities include $1.4 million and $1.3 million for this liability as of March 31, 2011 and December 31, 2010, respectively. There were no payments made to the seller during the three months ended March 31, 2011 and 2010.

Our properties require periodic investments of capital for tenant-related capital expenditures and for general capital improvements and 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 March 31, 2011, we had open commitments related to construction contracts of approximately $102.2 million.

As part of the acquisition of 29A International Business Park, the seller could earn additional consideration based on future net operating income growth in excess of certain performance targets, as defined. As of March 31, 2011, construction is not complete and there have been no leases executed that would cause an amount to become probable of payment and therefore no amount is accrued as of March 31, 2011. The maximum amount that could be earned by the seller is S$50.0 million (or approximately $39.7 million based on the exchange rate as of March 31, 2011). The earnout contingency expires in November 2020.

DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES

DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2011 and 2010

(unaudited)

17. Subsequent Events

On April 25, 2011, we declared the following dividends per share and the Operating Partnership declared an equivalent distribution per unit:

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