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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K/A

 

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): January 11, 2005

 

DIGITAL REALTY TRUST, INC.

(Exact name of registrant as specified in its charter)

 

Maryland		001-32336		26-0081711
(State or other jurisdiction of incorporation)		(Commission File Number)		(I.R.S. Employer Identification Number)

 

2730 Sand Hill Road, Suite 280 Menlo Park, California		94025
(Address of principal executive offices)		(Zip Code)

 

(650) 233-3600

(Registrant’s telephone number, including area code)

 

Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

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This Form 8-K/A amends our Form 8-K, dated January 11, 2005, to provide the financial information required in connection with the acquisition of 833 Chestnut Street through Digital Realty Trust, L.P., our operating partnership subsidiary of which we are the general partner. The following financial statements are filed as part of this report:

 

Item 9.01

Financial Statements and Exhibits.

 

		Page
(a)    Financial Statements Under Rule 3-14 of Regulation S-X
833 Chestnut Street
Independent Auditors’ Report		1
Statements of Revenue and Certain Expenses for the nine months ended September 30, 2004 (unaudited) and the year ended December 31, 2003		2
Notes to Statements of Revenue and Certain Expenses		3
(b)    Unaudited Pro Forma Condensed Consolidated Information
Pro Forma Condensed Consolidated Financial Statements		5
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2004		6
Pro Forma Condensed Consolidated Statement of Operations for the nine Months ended September 30, 2004		7
Pro Forma Condensed Consolidated Statement of Operations for the year Ended December 31, 2003		8
Notes to Pro Forma Condensed Consolidated Financial Statements		9

 

(c)

Exhibits

 

Exhibit No.		Description
23.1		Consent of KPMG LLP, Independent Auditors.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

Date: February 1, 2005

 

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Exhibits

 

Exhibit No.		Description
23.1		Consent of KPMG LLP, Independent Auditors.

 

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Independent Auditors’ Report

 

The Board of Directors

Digital Realty Trust, Inc.:

 

We have audited the accompanying statement of revenue and certain expenses of 833 Chestnut Street (the Property) for the year ended December 31, 2003. This statement is the responsibility of the Property’s management. Our responsibility is to express an opinion on this statement based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

The accompanying statement of revenue and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, as described in note 1 to the statement of revenue and certain expenses. It is not intended to be a complete presentation of the Property’s revenue and expenses.

 

In our opinion, the statement referred to above presents fairly, in all material respects, the revenue and certain expenses, as described in note 1, of 833 Chestnut Street for the year ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

 

KPMG LLP

 

Los Angeles, California

January 14, 2005

 

1

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833 CHESTNUT STREET

 

Statements of Revenue and Certain Expenses

(In thousands)

 

		Nine Months Ended September 30, 2004			Year Ended December 31, 2003
		(Unaudited)
Revenue:
Rental		$	6,225		$	7,458
Tenant reimbursements			1,280			1,687
Other			125			42
			7,630			9,187
Certain expenses:
Rental property operating and maintenance			3,098			4,136
Property taxes			343			297
Insurance			217			264
			3,658			4,697
Revenue in excess of certain expenses		$	3,972		$	4,490

 

See accompanying notes to statements of revenue and certain expenses.

 

 

2

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833 CHESTNUT STREET

 

Notes to Statements of Revenue and Certain Expenses

Nine months ended September 30, 2004 (unaudited)

and year ended December 31, 2003

 

(1) Basis of Presentation

 

The accompanying statements of revenue and certain expenses relate to the operations of the property known as 833 Chestnut Street (the Property). The Property is a data center located in Philadelphia, Pennsylvania.

 

The Property is owned by LB 833 Chestnut, LLC (the Owner). A wholly owned subsidiary of Digital Realty Trust, Inc. (the Buyer) entered into an agreement with the Owner to purchase the Property for $59.5 million. The purchase is expected to be consummated during the first quarter of 2005.

 

The accompanying statements of revenue and certain expenses have been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission and, accordingly, are not representative of the actual results of operations of the Property for the year ended December 31, 2003 or the nine months ended September 30, 2004 due to the exclusion of the following expenses, which may not be comparable to the proposed future operations of the Property:

 

•

Depreciation and amortization

 

•

Interest

 

•

Federal and state income taxes

 

•

Other costs not directly related to the proposed future operations of the Property

 

Management is not aware of any material factors relating to the Property other than those already described above that would cause the reported financial information not to be necessarily indicative of future operating results.

 

(2) Summary of Significant Accounting Policies and Practices

 

(a) Revenue Recognition

 

Rental revenue is recognized on a straight line basis over the term of the respective leases.

 

(b) Use of Estimates

 

Management has made a number of estimates and assumptions relating to the reporting and disclosure of revenue and certain expenses during the reporting period to prepare the statements of revenue and certain expenses in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

 

(c) Unaudited Interim Information

 

The statement of revenue and certain expenses for the nine months ended September 30, 2004 is unaudited. In the opinion of management, such statement reflects all adjustments necessary for a fair presentation of the results of this interim period. All such adjustments are of a normal recurring nature.

 

3

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833 CHESTNUT STREET

 

Notes to Statements of Revenue and Certain Expenses—(Continued)

Nine months ended September 30, 2004 (unaudited)

and year ended December 31, 2003

 

(3) Minimum Future Lease Rentals

 

The Property’s leases are non-cancelable operating leases and generally provide for minimum rent and reimbursement of a portion of Property expenses, including property taxes, insurance and operating and maintenance expenses. Future minimum rentals to be received under the leases in effect as of December 31, 2003 are as follows (in thousands):

 

Year ending December 31:

 

2004		$	6,964
2005			7,008
2006			5,729
2007			5,757
2008			5,223
Thereafter			12,915
		$	43,596

 

(4) Tenant Concentrations

 

The following tenants accounted for more than 10% of the Property’s revenue for the year ended December 31, 2003 (in thousands):

 

Tenant		Rental Revenue
Jefferson University Physicians and Affiliates		$	3,336
Health Partners of Philadelphia, Inc.			1,406
Inflow, Inc.			908
Ballinger Company			760

 

4

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DIGITAL REALTY TRUST, INC.

Pro Forma Condensed Consolidated Financial Statements

(unaudited)

 

The unaudited pro forma condensed consolidated financial statements as of September 30, 2004 and for the nine months ended September 30, 2004 and the year ended December 31, 2003 are presented as if our initial public offering and the related formation and financing transactions, the acquisitions of the properties acquired during 2004 and the properties expected to be acquired in 2005, including the remaining 25% interest in eBay Data Center, along with related financing transactions had occurred on September 30, 2004 or in the case of the properties acquired through September 30, 2004, as of the actual acquisition date, for the pro forma condensed consolidated balance sheet and on the first day of the periods presented for the pro forma condensed consolidated statements of operations.

 

The pro forma condensed consolidated financial statements should be read in conjunction with the combined historical financial statements of the Digital Realty Predecessor, included in the Company’s registration statement for the initial public offering. The pro forma condensed consolidated financial statements do not purport to represent our financial position or the results of operations that would actually have occurred assuming the completion of the initial public offering and the related formation transactions and the acquisitions of additional properties along with the related financing transactions all had occurred by September 30, 2004 or on the first day of the periods presented, nor do they purport to project our financial position or results of operations as of any future date or for any future period.

 

5

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DIGITAL REALTY TRUST, INC

 

Pro Forma Condensed Consolidated Balance Sheet

September 30, 2004

(unaudited)

(In thousands)

 

		Digital Realty Predecessor Historical			Properties Acquired and Expected to be Acquired Subsequent to September 30, 2004			Financing Transactions			Receipt and Use of the Proceeds From Initial Public Offering and Related Transactions			Company Pro Forma
Assets			(A)		(B)			(C)
Investments in real estate, net		$	650,207		202,225			—			—			852,432
Cash and cash equivalents, including restricted cash			12,841		(111,498	)		354,126			229,562	(D)		6,948
					(4,620	)		(243,401	)		(91,862	)(E)
											(138,200	)(I)
Accounts and other receivables			4,203		—			—			—			4,203
Deferred rent			9,616		—			—			—			9,616
Acquired above market leases, net			24,932		22,772			—			—			47,704
Acquired in place lease value and deferred leasing costs, net			111,422		46,020			—			—			157,442
Deferred financing costs, net			3,927		—			6,875 (1,734	)		—			9,068
Prepaid offering costs			4,052		—			—			(4,052	)(J)		—
Other assets			989		—			—			—			989
Total assets		$	822,189		154,899			115,866			(4,552	)		1,088,402
Liabilities and Stockholders’ and Owner’s Equity
Notes payable under line of credit		$	6,117		—			113,550			—			113,550
								(6,117	)
Notes payable under bridge loan			243,686		—			7,950			(138,200	)(I)		7,950
								(105,486	)
Mortgage loans			246,204		73,397			26,001			—			456,984
								58,000
								155,000
								(101,135	)
								(483	)
Other secured loans			51,292		—			(29,292	)		—			22,000
Unsecured note payable to an affiliate			4,052		—			—			(4,052	)(J)		—
Accounts payable and accrued expenses			9,721		—			(1,134	)		—			9,087
								500
Acquired below market leases, net			28,139		13,112			—			—			41,251
Security deposits and prepaid rents			3,692		—			—			—			3,692
Asset management fees payable to related party			796		—			—			—			796
Total liabilities			593,699		86,509			117,354			(142,252	)		655,310
Minority interests in consolidated joint ventures			3,127		(2,968	)		—			—			159
Minority interests in operating partnership			—		75,978			—			(91,862	)(E)		257,768
											17,887	(G)
											255,765	(H)
Owner’s equity, including accumulated other comprehensive income			225,363		(4,620	)		(237	)		(201,368	)(F)		—
								(1,734	)		(17,887	)(G)
								483
Common stock			—		—			—			214	(D)		214
Additional paid in capital			—		—			—			229,348	(D)		174,613
											201,030	(F)
											(255,765	)(H)
Accumulated other comprehensive income			—		—			—			338	(F)		338
Total stockholders’ and owner’s equity			225,363		(4,620	)		(1,488	)		(44,090	)		175,165
		$	822,189		154,899			115,866			(4,552	)		1,088,402

 

See accompanying notes to pro forma condensed consolidated financial statements.

 

6

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DIGITAL REALTY TRUST, INC.

 

Pro Forma Condensed Consolidated Statement of Operations

For the Nine Months Ended September 30, 2004

(unaudited)

(In thousands except per share data)

 

		Digital Realty Trust Predecessor Historical				Properties Acquired and Expected to be Acquired Subsequent to September 30, 2004		Properties Acquired During the Nine Months Ended September 30, 2004		Financing Transactions			Other Pro Forma Adjustments			Company Pro Forma
		(AA)				(BB)		(CC)		(DD)
Revenues:
Rental		$	59,127			23,077		19,576		—			—				101,780
Tenant reimbursements			10,055			4,899		4,399		—			—				19,353
Other			1,734			125		732		—			—				2,591
			70,916			28,101		24,707		—			—				123,724
Expenses:
Rental property operating and maintenance			11,625			6,447		4,788		—			—				22,860
Property taxes			6,250			1,016		1,913		—			—				9,179
Insurance			1,179			507		559		—			—				2,245
Interest			15,804			2,760		736		8,180			—				27,480
Asset management fees to related party			2,389			—		—		—			(2,389	)(FF)			—
Depreciation and amortization			20,822			9,139		7,039		—			—				37,000
General and administrative			243			—		—		—			18,019	(EE)			21,496
													2,026	(FF)
													1,208	(GG)
Other			2,716			9		46		—			—				2,771
			61,028			19,878		15,081		8,180			18,864				123,031
Income before minority interests			9,888			8,223		9,626		(8,180	)		(18,864	)			693
Minority interests in consolidated joint ventures			(28	)		5		—		—			—				(23	)
Minority interests in operating partnership			—			—		—		—			426	(HH)			426
Net income			9,916			8,218		9,626		(8,180	)		(19,290	)			290
Pro Forma earnings per share—basic and diluted																$	0.01	(II)
Pro Forma weighted average shares outstanding—basic and diluted																	21,421

 

See accompanying notes to pro forma condensed consolidated financial statements.

 

7

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DIGITAL REALTY TRUST, INC.

 

Pro Forma Condensed Consolidated Statement of Operations

For the Year Ended December 31, 2003

(unaudited)

(In thousands except per share data)

 

		Digital Realty Trust Predecessor Historical			Properties Acquired in 2004 and Expected to be Acquired in 2005			Properties Acquired in 2003		Financing Transactions			Other Pro Forma Adjustments			Company Pro Forma
		(AA)			(BB)			(CC)		(DD)
Revenues:
Rental		$	50,099		69,822			10,521		—			—				130,442
Tenant reimbursements			8,661		15,741			622		—			—				25,024
Other			4,328		1,662			68		—			—				6,058
			63,088		87,225			11,211		—			—				161,524
Expenses:
Rental property operating and maintenance			8,624		17,330			1,863		—			—				27,817
Property taxes			4,688		5,472			1,423		—			—				11,583
Insurance			626		1,721			244		—			—				2,591
Interest			10,091		5,218			—		21,327			—				36,636
Asset management fees to related party			3,185		—			—		—			(3,185	)(FF)			—
Depreciation and amortization			16,295		27,510			5,065		—			—				48,870
General and administrative			329		—			—		—			18,064	(EE)			22,688
													2,701	(FF)
													1,594	(GG)
Other			2,459		56			183		—			—				2,698
			46,297		57,307			8,778		21,327			19,174				152,883
Income before minority interests			16,791		29,918			2,433		(21,327	)		(19,174	)			8,641
Minority interests			149		(149	)		—		—			5,145	(HH)			5,145
Net income			16,642		30,067			2,433		(21,327	)		(24,319	)			3,496
Pro Forma earnings per share—basic and diluted																$	0.16	(II)
Pro Forma weighted average shares outstanding—basic and diluted																	21,421

 

See accompanying notes to pro forma condensed consolidated financial statements.

 

8

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DIGITAL REALTY TRUST, INC.

Notes to Pro Forma Condensed Consolidated Financial Statements

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

1.

Adjustments to the Pro Forma Condensed Consolidated Balance Sheet

 

The adjustments to the pro forma condensed consolidated balance sheet as of September 30, 2004 are as follows:

 

(A)

Reflects the Digital Realty Trust, Inc. Predecessor (the Predecessor) historical condensed combined balance sheet as of September 30, 2004. Pursuant to the contribution agreement between the owner of the Predecessor and the Operating Partnership, which was executed in July 2004, the Operating Partnership received a contribution of direct and indirect interests in the properties in our portfolio in exchange for limited partnership interests in the Operating Partnership. The contribution was made in anticipation of the Company’s initial public offering.

 

As of September 30, 2004, Global Innovation Partners, LLC (GI Partners) was the ultimate owner of 100% of the Company and the Predecessor. Upon completion of our initial public offering, GI Partners owns 44.76% of the common units of the Operating Partnership, as a limited partner, and no shares of the Company’s common stock. The exchange of the interests contributed by GI Partners was accounted for as a reorganization of entities under common control; accordingly, the contributed assets and assumed liabilities were recorded at the Predecessor’s historical cost basis.

 

Upon completion of our initial public offering and the formation transactions, the Company, as general partner, owns 40.46% of the common units of the Operating Partnership and has control over major decisions of the Operating Partnership. Additionally, the limited partners do not have rights to replace the general partner, approve the sale or refinancing of the Operating Partnership’s assets or approve the acquisition of Operating Partnership assets, although they do have certain protective rights. Accordingly, the Company consolidated the assets and liabilities of the Operating Partnership in accordance with AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures (SOP 78-9).

 

There are also third parties that contributed their ownership interests in two properties, 200 Paul Avenue and 1100 Space Park Drive, to the Operating Partnership pursuant to the contribution agreements executed in July 2004. These contributors own common units in the Operating Partnership and no shares of the Company’s common stock upon completion of our initial public offering. These two properties are not included in the Predecessor’s combined financial statements. The exchanges of these ownership interests were accounted for as a purchase by the Company and were recorded at fair value, which is equal to the sum of the cash, debt assumed and units exchanged. See pro forma adjustment (B).

 

9

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

(B)

Reflects the acquisition of eBay Data Center, the purchase of 75% of which was consummated on October 14, 2004 and 25% of which was acquired on January 21, 2005, the acquisition of 200 Paul Avenue and 1100 Space Park Drive from third parties in exchange for cash, debt assumed and Operating Partnership common units and the acquisition of our joint venture partner’s 10% interest in Univision Tower in exchange for Operating Partnership common units, all consummated upon completion of our initial public offering. These exchanges were accounted for as purchases based on the sum of cash paid and the fair value of the 6,331,511 Operating Partnership common units issued valued at the public offering price of our common stock. Also reflects the acquisition of Burbank Data Center, consummated on December 21, 2004, and the acquisitions of 833 Chestnut Street and MAPP Building, both of which are currently under purchase contracts. Also reflects a distribution to GI Partners upon completion of our initial public offering intended to approximate a normal real estate proration related to the properties that GI Partners contributed to the Operating Partnership.

 

The pro forma adjustments are comprised of the following:

 

		eBay Data Center		200 Paul Avenue		1100 Space Park Drive		10% Interest in Univision Tower		Burbank Data Center		833 Chestnut Street		MAPP Building		Proration			Total
Assets acquired:
Investments in real estate, net		12,572		89,346		23,299		1,780		14,751		47,094		13,383		—			202,225
Acquired above market leases, net		—		14,194		6,131		—		—		2,447		—		—			22,772
Acquired in place lease value and deferred leasing costs, net		2,333		23,443		1,235		—		3,377		12,274		3,358		—			46,020
Subtract liabilities assumed:
Mortgage loans including debt premium		—		46,908		15,913		—		—		—		10,576		—			73,397
Acquired below market leases, net		625		8,488		109		—		1,493		2,315		82		—			13,112
Add reversal of minority interest in consolidated joint venture		—		—		—		2,968		—		—		—		—			2,968
Net assets acquired		14,280		71,587		14,643		4,748		16,635		59,500		6,083		—			187,476
Subtract:
Units issued in connection with acquisitions		—		70,837		393		4,748		—		—		—		—			75,978
Cash paid to acquire the properties		14,280		750		14,250		—		16,635		59,500		6,083		—			111,498
Cash distributed to GI Partners upon completion of the initial public offering to approximate a normal real estate proration		—		—		—		—		—		—		—		(4,620	)		(4,620	)

 

10

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

(C)

Reflects proceeds and related financing costs related to additional borrowings under the bridge facility with an affiliate of Citigroup Global Markets Inc. by the Predecessor subsequent to September 30, 2004, in connection with the acquisition of the 75% interest in eBay Data Center, the secured term debt funded upon completion of our initial public offering and borrowings under our unsecured credit facility in connection with our initial public offering and to acquire the properties acquired after our initial public offering and expected to be acquired in 2005. Also reflects refinancing of the Carrier Center mortgage and mezzanine loan and the Univision Tower mortgage loan with new mortgage loans in November 2004. The financing costs include loan assumption fees related to assuming certain of the Predecessor’s loans. Finally, reflects repayment upon completion of our initial public offering of the 1100 Space Park Drive, ASM Lithography Facility and 36 Northeast Second Street mortgage loans, the Univision Tower mezzanine loan, a portion of the bridge facility (see pro forma adjustment (I) for repayment of the remaining portion), and the outstanding advances allocated to the Predecessor under GI Partners’ line of credit:

 

New Debt		Bridge Facility				Carrier Center Mortgage			Univision Tower Mortgage			Secured Term Debt			Unsecured Credit Facility			Loan Assumption Fees			Total
Borrowings		$	7,950			26,001			58,000			155,000			113,550			—			360,501
Loan costs			(480	)		(370	)		(825	)		(710	)		(2,900	)		(1,590	)		(6,875	)
Loan costs due at a later date			—			—			—			—			500			—			500
Net proceeds		$	7,470			25,631			57,175			154,290			111,150			(1,590	)		354,126

 

Repayment of Debt		1100 Space Park Drive Mortgage			ASM Lithography Facility Mortgage		36 Northeast Second Street Mortgage		Univision Tower Mortgage and Mezzanine		Carrier Center Mortgage and Mezzanine		Bridge Facility		GI Partners’ Line of Credit		Total
Notes payable under line of credit		$	—		—		—		—		—		—		6,117		6,117
Notes payable under bridge loan			—		—		—		—		—		105,486		—		105,486
Mortgage loans			15,913		13,984		17,826		39,148		14,264		—		—		101,135
Other secured loans			—		—		—		17,500		11,792		—		—		29,292
Prepayment costs			10		10		55		10		152		—		—		237
Accrued interest payable			—		55		59		476		—		544		—		1,134
Total payments		$	15,923		14,049		17,940		57,134		26,208		106,030		6,117		243,401
Write-off of remaining loan premium		$	—		—		—		323		160		—		—		483
Write-off of unamortized deferred loan costs		$	—		191		62		36		66		1,379		—		1,734

 

11

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

 

(D)

Reflects the sale of 21,421,300 shares of common stock in the Company’s initial public offering:

 

 

 

(F)

Reflects reclassification of owner’s equity to common stock and additional paid in capital and accumulated other comprehensive income:

 

 

 

12

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

(H)

Reflects recording of minority interests in the Operating Partnership as a result of an aggregate of 30,030,870 limited partnership common units in the Operating Partnership held by the owner of the Predecessor, the owners of 200 Paul Avenue and 1100 Space Park Drive and the Predecessor’s joint venture partner in Univision Tower and 1,490,561 fully-vested long-term incentive units held by our employees and our executive chairman:

 

 

 

2.	Adjustments to Pro Forma Condensed Consolidated Statements of Operations

 

The adjustments to the pro forma condensed consolidated statements of operations for the nine months ended September 30, 2004, and the year ended December 31, 2003 are as follows:

 

(AA)

Reflects the Predecessor’s historical condensed combined statements of operations for the nine months ended September 30, 2004 and the year ended December 31, 2003. As discussed in note (A), the real estate properties and interests therein contributed by the owner of the Predecessor to the Operating Partnership in exchange for common units in the Operating Partnership were recorded at the Predecessor’s historical cost. Expenses such as depreciation and amortization to be recognized by the Operating Partnership related to the contributed interests are based on the Predecessor’s historical cost of related assets.

 

13

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

As discussed in note (A), upon completion of the initial public offering and the formation transactions, the Company, as general partner, owns 40.46% of the common units of the Operating Partnership; however the Company has control over all major decisions of the Operating Partnership. Accordingly, the Company consolidates the revenues and expenses of the Operating Partnership. See note (HH) for the pro forma adjustment to allocate 59.54% of the income (loss) of the Operating Partnership to the limited partners of the Operating Partnership.

 

(BB)

Reflects the acquisition of eBay Data Center, 75% of which was acquired on October 14, 2004 and the remaining 25% of which was acquired on January 21, 2005. Reflects the Company’s acquisitions of 200 Paul Avenue and 1100 Space Park Drive from third parties in exchange for cash, debt assumed and Operating Partnership common units and our joint venture partner’s 10% interest in Univision Tower in exchange for Operating Partnership common units, all upon completion of our initial public offering. Also reflects the acquisition of Burbank Data Center consummated on December 21, 2004, and the acquisition of 833 Chestnut Street and MAPP Building, both of which are under purchase contracts.

 

The purchase method of accounting is used to reflect the acquisition of these properties and the 10% interest. For the pro forma condensed consolidated income statement for the year ended December 31, 2003, also reflects the Predecessor’s acquisition of 100 Technology Center Drive, consummated on February 17, 2004, Siemens Building, consummated on April 23, 2004, Savvis Data Center, consummated on May 24, 2004, Carrier Center, consummated on May 25, 2004, Comverse Technology Building, consummated on June 16, 2004, Webb at LBJ consummated on August 25, 2004, and Abovenet consummated on September 17, 2004. The pro forma adjustments are comprised of the following:

 

Nine Months Ended September 30, 2004
		Combined Historical Revenues and Certain Expenses(1)			Adjustments Resulting from Purchasing the Properties			Pro Forma Adjustments
Revenues:
Rental		$	21,366		1,711	(2)		23,077
Tenant reimbursements			4,899		—			4,899
Other			125		—			125
			26,390		1,711			28,101
Expenses:
Rental property operating and maintenance			6,447		—			6,447
Property taxes			1,016		—			1,016
Insurance			507		—			507
Interest			2,760		—			2,760
Depreciation and amortization			—		9,139	(3)		9,139
Other			9		—			9
			10,739		9,139			19,878
Income before minority interests			15,651		(7,428	)		8,223
Minority interests in consolidated joint ventures			—		5			5
Net income		$	15,651		(7,433	)		8,218

 

 

14

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

Year Ended December 31, 2003
		Combined Historical Revenues and Certain Expenses(1)			Adjustments Resulting from Purchasing the Properties			Pro Forma Adjustments
Revenues:
Rental		$	67,309		2,513	(2)		69,822
Tenant reimbursements			15,741		—			15,741
Other			1,662		—			1,662
			84,712		2,513			87,225
Expenses:
Rental property operating and maintenance			17,330		—			17,330
Property taxes			5,472		—			5,472
Insurance			1,721		—			1,721
Interest			5,218		—			5,218
Depreciation and amortization			—		27,510	(3)		27,510
Other			56		—			56
			29,797		27,510			57,307
Income before minority interests			54,915		(24,997	)		29,918
Minority interests in consolidated joint ventures			—		(149	)		(149	)
Net income		$	54,915		(24,848	)		30,067

---

(1)

The combined properties’ historical revenues and expenses are as follows:

 

Nine Months Ended September 30, 2004
		200 Paul Avenue		1100 Space Park Drive		eBay Data Center		Burbank Data Center		833 Chestnut Street		MAPP Building		Combined Historical Revenues and Certain Expenses
Revenues:
Rental		9,257		2,853		909		1,117		6,225		1,005		21,366
Tenant reimbursements		2,236		458		—		—		1,280		925		4,899
Other		—		—		—		—		125		—		125
		11,493		3,311		909		1,117		7,630		1,930		26,390
Expenses:
Rental property operating and maintenance		2,344		467		—		—		3,098		538		6,447
Property taxes		216		148		—		—		343		309		1,016
Insurance		219		34		—		—		217		37		507
Interest		1,501		699		—		—		—		560		2,760
Other		3		6		—		—		—		—		9
		4,283		1,354		—		—		3,658		1,444		10,739
Net income		7,210		1,957		909		1,117		3,972		486		15,651

 

 

15

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

Year Ended December 31, 2003
		100 Technology Center Drive			Siemens Building		Savvis Data Center		Carrier Center		Comverse Technology Building		AboveNet Data Center		Webb at LBJ		200 Paul Avenue		1100 Space Park Drive		eBay Data Center		Burbank Data Center		833 Chestnut Street		MAPP Building		Combined Historical Revenues and Certain Expenses
Revenues:
Rental		$	3,795		2,510		6,341		9,688		7,048		5,994		5,000		11,980		3,753		942		1,460		7,458		1,340		67,309
Tenant reimbursements			368		266		901		2,768		3,269		1,394		369		3,095		575		—		—		1,687		1,049		15,741
Other			2		2		52		948		5		532		79		—		—		—		—		42		—		1,662
			4,165		2,778		7,294		13,404		10,322		7,920		5,448		15,075		4,328		942		1,460		9,187		2,389		84,712
Expenses:
Rental property operating and maintenance			102		335		149		3,161		2,945		1,136		904		3,081		654		—		—		4,136		727		17,330
Property taxes			384		418		495		683		1,209		528		602		204		379		—		—		297		273		5,472
Insurance			—		26		257		453		101		239		44		254		34		—		—		264		49		1,721
Interest			—		—		—		1,077		—		—		—		2,530		857		—		—		—		754		5,218
Other			—		—		—		—		46		—		—		5		5		—		—		—		—		56
			486		779		901		5,374		4,301		1,903		1,550		6,074		1,929		—		—		4,697		1,803		29,797
Net income		$	3,679		1,999		6,393		8,030		6,021		6,017		3,898		9,001		2,399		942		1,460		4,490		586		54,915

 

(2)

Reflects increase in rental revenues for straight line rent amounts and amortization of acquired below market leases, net of amortization of acquired above market leases, all resulting from purchase accounting.

 

(3)

Reflects depreciation and amortization of the buildings and improvements, tenant improvements and acquired in-place lease values.

 

16

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

(CC)

For the pro forma condensed consolidated income statement for the nine months ended September 30, 2004, reflects pro forma revenues and expenses for the period from January 1, 2004 through the date of acquisition of the applicable properties by the Predecessor for all properties acquired during the nine months ended September 30, 2004 based on historical revenues and expenses, as adjusted for purchase accounting. For the pro forma condensed consolidated income statement for the year ended December 31, 2003, reflects pro forma revenues and expenses for the period from January 1, 2003 to the date of acquisition of the applicable property by the Predecessor for all properties acquired during 2003 based on historical revenues and expenses, as adjusted for purchase accounting:

 

Nine Months Ended September 30, 2004
		100 Technology Center Drive			Siemens Building		Savvis Data Center		Carrier Center		Comverse Technology Building		Webb at LBJ		AboveNet Data Center		Pro Forma Adjustments
Revenues:
Rental		$	431		970		2,890		4,001		3,232		3,648		4,404		19,576
Tenant reimbursements			47		35		301		1,110		1,691		218		997		4,399
Other			—		—		1		297		10		63		361		732
			478		1,005		3,192		5,408		4,933		3,929		5,762		24,707
Expenses:
Rental property operating and maintenance			14		104		31		1,510		1,489		744		896		4,788
Property taxes			47		129		160		211		585		412		369		1,913
Insurance			—		8		110		180		48		27		186		559
Interest			—		—		—		736		—		—		—		736
Depreciation and amortization			310		346		1,188		907		1,988		1,637		663		7,039
Other			—		—		—		—		46		—		—		46
			371		587		1,489		3,544		4,156		2,820		2,114		15,081
Net income		$	107		418		1,703		1,864		777		1,109		3,648		9,626

 

Year Ended December 31, 2003
		VarTec Building			Ardenwood Corporate Park		ASM Lithography Facility		AT&T Web Hosting Facility		Brea Data Center		Granite Tower		Maxtor Manufacturing Facility			Stanford Place II		Pro Forma Adjustments
Revenues:
Rental		$	—		340		1,154		667		846		3,675		—			3,839		10,521
Tenant reimbursements			9		39		5		75		62		356		—			76		622
Other			—		—		—		—		—		—		—			68		68
			9		379		1,159		742		908		4,031		—			3,983		11,211
Expenses:
Rental property operating and maintenance			1		16		10		29		21		752		26			1,008		1,863
Property taxes			7		20		—		75		35		439		223			624		1,423
Insurance			—		2		9		10		3		45		107			68		244
Interest			—		—		—		—		—		—		—			—		—
Depreciation and amortization			—		130		299		196		268		1,601		599			1,972		5,065
Other			—		—		130		—		—		36		17			—		183
			8		168		448		310		327		2,873		972			3,672		8,778
Net income (loss)		$	1		211		711		432		581		1,158		(972	)		311		2,433

 

17

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

(DD)

Reflects the net increase in interest expense as a result of the financing related pro forma adjustments. The following outlines the loans to be outstanding upon completion of this offering and the acquisition of 833 Chestnut Street, MAPP Building and the remaining 25% interest in eBay Data Center and the corresponding interest expense that would have been recorded had these loans been outstanding as of the beginning of the periods presented:

 

		Loans Payable as of September 30, 2004				Interest Rate(1)		Interest Expense
								Nine Months Ended September 30, 2004				Year Ended December 31, 2003
100 Technology Center Drive—Mortgage		$	20,000			LIBOR + 1.70%		$	647				862
200 Paul Avenue—Mortgage			46,908			LIBOR + 3.17%			1,970				2,627
Ardenwood Corporate Park, NTT/Verio Premier Data Center and VarTec Building—Mortgage			43,000			LIBOR + 1.59%			1,297				1,729
Ardenwood Corporate Park, NTT/Verio Premier Data Center and VarTec Building— Mezzanine			22,000			LIBOR + 5.75%			1,349				1,799
AT&T Web Hosting Facility—Mortgage			8,775			LIBOR + 1.85%			293				391
Camperdown House—Mortgage			23,079	(2)		6.85%			1,352				1,802	(2)
Carrier Center—Mortgage			26,001			LIBOR + 4.25%(3)			1,316				1,755
Granite Tower—Mortgage			21,645			LIBOR + 1.20%			619				825
MAPP Building—Mortgage(5)			9,717			7.62%			555				740
Maxtor Manufacturing Facility—Mortgage			18,000			LIBOR + 2.25%			687				916
Stanford Place II—Mortgage			26,000			5.14%			1,002				1,336
Univision Tower—Mortgage			58,000			6.04%			2,627				3,503
eBay Bridge Loan			7,950			LIBOR + 2.00%			264				352
Secured Term Debt			155,000			5.65%			6,567				8,756
Unsecured credit facility			113,550			LIBOR + 1.75%			3,560				4,746
Additional interest from interest rate swaps(4)									946				1,261
Amortization of loan costs									2,525				3,365
Amortization of loan premiums									(96	)			(129	)
Total Pro Forma Principal Outstanding			599,625						27,480				36,636
Loan Premium(5)			859
Total		$	600,484
Historical interest expense for the Predecessor, Carrier Center, 200 Paul Avenue, 1100 Space Park Drive, and the MAPP Building									(19,300	)			(15,309	)
								$	8,180			$	21,327

 

(1)

We calculated pro forma interest expense for loans with variable interest rates using current LIBOR rates (2.43% for one-month LIBOR to 2.84% for six-month LIBOR as of January 7, 2005).

(2)

The Camperdown House mortgage is denominated in pounds sterling. The loan payable has been converted to U.S. dollars using the exchange rates of our foreign currency forward contract whereas current exchange rate has been used for the interest expense.

(3)

The interest rate on the Carrier Center mortgage loan is subject to a 2.50% LIBOR floor.

(4)

We entered into swap agreements to swap variable interest rates for fixed rates for a notional amount of principal totaling approximately $140.3 million. The strike rates on the swap agreements range from 3.18% to 3.82%.

(5)

Represents principal balance or premium, as applicable, pertaining to debt that we plan to assume in connection with the acquisition of the MAPP Building, which is currently under purchase contract.

 

18

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

(EE)

Reflects compensation expense related to awards of 1,490,561 fully-vested long-term incentive units granted in connection with the initial public offering to employees and our executive chairman, based on the number of units specified by employment agreements and our executive chairman’s agreement and utilizing the initial public offering price of our common stock as the value of such units. Also reflects compensation expense related to awards of an aggregate of 783,902 stock options, which vest over a four-year period, granted to employees and our executive chairman upon completion of the initial public offering:

 

 

(FF)

Reflects reclassification of asset management fees to general and administrative expense. Although such asset management fees are not payable subsequent to the completion of the initial public offering, the asset management fees incurred historically have been replaced with direct payments of compensation expense, rent and other general and administrative expenses that were paid for indirectly prior to the completion of the initial public offering by paying the asset management fees. Also reflects removing the asset manager’s estimated profit that was included in the asset management fee:

 

 

(GG)

Reflects increases in general and administrative expense as a result of becoming a public company:

 

 

19

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DIGITAL REALTY TRUST, INC.

 

Notes to Pro Forma Condensed Consolidated Financial Statements—(Continued)

(unaudited)

(Dollar amounts in thousands, except per share amounts)

 

(HH)		Reflects allocation of minority interests in net income (loss) of the Operating Partnership as a result of common units in the Operating Partnership held by the previous owner of the Predecessor (44.76%), the previous owners of 200 Paul Avenue and 1100 Space Park Drive (collectively 11.21%), management (2.82%) and the previous owner of the 10% interest in Univision Tower (0.75%):
				Nine Months Ended September 30, 2004				Year Ended December 31, 2003
		Total income (loss) after minority interests in consolidated joint ventures but before allocation to minority interest in operating partnership		$	716			$	8,641
		Percentage allocable to minority interest			59.54	%			59.54	%
				$	426			$	5,145
(II)		Pro forma earnings (loss) per share—basic and diluted are calculated by dividing pro forma consolidated net income (loss) by the number of shares of common stock issued in our initial public offering. The stock options issued by the Company do not have a dilutive effect on earnings per share because the market value of the stock for pro forma purposes is equal to the initial public offering price which is equal to the exercise price for the stock options.

 

20