DIGITAL REALTY TRUST, INC. (DLR) FY 2021 MD&A

ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8 of this report and the matters described under Item 1A. Risk Factors. We make statements in this section that are forward-looking statements within the meaning of the federal securities laws. For a complete discussion of forward-looking statements, see the section in this report entitled “Forward-Looking Statements.”

A discussion regarding our financial condition and results of operations for 2021 as compared to 2020 is presented herein. Information on 2019 is presented in graphs and other tables only to show year-over-year trends in our results of operations and operating metrics. Our financial condition for 2019 and results of operations for 2019 – and also 2019 as compared to 2020 – can be found under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on form 10-K for the fiscal year ended 2020, filed with the SEC on March 1, 2021.

Business Overview and Strategy

Digital Realty Trust, Inc., through its controlling interest in Digital Realty Trust, L.P. and its subsidiaries, delivers comprehensive space, power, and interconnection solutions that enable its customers and partners to connect with each other and service their own customers on a global technology and real estate platform. We are a leading global provider of data center, colocation and interconnection solutions for customers across a variety of industry verticals. Digital Realty Trust, Inc. operates as a REIT for federal income tax purposes, and our Operating Partnership is the entity through which we conduct our business and own our assets.

Our primary business objectives are to maximize:

We expect to accomplish our objectives by achieving superior risk-adjusted returns, prudently allocating capital, diversifying our product offerings, accelerating our global reach and scale, and driving revenue growth and operating efficiencies. A significant component of our current and future internal growth is anticipated through the development of our existing space held for development, acquisition of land for future development, and acquisition of new properties.

We target high-quality, strategically located properties containing the physical and connectivity infrastructure that supports the applications and operations of data center and technology industry customers and properties that may be developed for such use. Most of our data center properties contain fully redundant electrical supply systems, multiple power feeds, above-standard cooling systems, raised floor areas, extensive in-building communications cabling and high-level security systems. We focus exclusively on owning, acquiring, developing and operating data centers because we believe that the growth in data center demand and the technology-related real estate industry generally will continue to outpace the overall economy.

We have developed detailed, standardized procedures for evaluating new real estate investments to ensure that they meet our financial, technical and other criteria. We expect to continue to acquire additional assets as part of our growth strategy. We intend to aggressively manage and lease our assets to increase their cash flow. We may continue to build out our development portfolio when justified by anticipated demand and returns.

We may acquire properties subject to existing mortgage financing and other indebtedness or we may incur new indebtedness in connection with acquiring or refinancing these properties. Debt service on such indebtedness will have a priority over any cash dividends with respect to Digital Realty Trust, Inc.’s common stock and preferred stock. We are committed to maintaining a conservative capital structure. We target a debt-to-Adjusted EBITDA ratio at or less than

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5.5x, fixed charge coverage of greater than three times, and floating rate debt at less than 20% of total outstanding debt. In addition, we strive to maintain a well-laddered debt maturity schedule, and we seek to maximize the menu of our available sources of capital, while minimizing the cost.

Summary of 2021 Significant Activities

We completed the following significant activities in 2021 as described in the Notes to the Consolidated Financial Statements:

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Revenue Base

The majority of our revenue consists of rental income generated by the data centers in our portfolio. Our ability to generate and grow revenue depends on several factors, including our ability to maintain or improve occupancy rates. A summary of our data center portfolio and related square feet occupied (excluding space under development or held for development) is shown below. Unconsolidated portfolios shown below consist of assets owned by unconsolidated entities in which we have invested. We often provide management services for these entities under management agreements and receive management fees. These are shown as Managed Unconsolidated Portfolio. Entities for which we do not provide such services are shown as Non-Managed Unconsolidated Portfolio.

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Leasing Activities

Due to the capital-intensive and long-term nature of the operations we support, our lease terms with customers are generally longer than standard commercial leases. As of December 31, 2021, our average remaining lease term was approximately five years.

Our ability to re-lease expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. The subsequent table summarizes our leasing activity in the year ended December 31, 2021:

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We continue to see strong demand in most of our key metropolitan areas for data center space and, subject to the supply of available data center space in these metropolitan areas, we expect average aggregate rental rates on re-leased or renewed data center leases for 2022 expirations to generally be consistent with the rates currently being paid for the same space on a GAAP basis and on a cash basis. Our past performance may not be indicative of future results, and we cannot assure you that leases will be renewed or that our data centers will be re-leased at all or at rental rates equal to or above the current average rental rates. Further, re-leased/renewed rental rates in a particular metropolitan area may not be consistent with rental rates across our portfolio as a whole and may fluctuate from one period to another due to a number of factors, including local economic conditions, local supply and demand for data center space, competition

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from other data center developers or operators, the condition of the property and whether the property, or space within the property, has been developed.

Geographic concentration

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We depend on the market for data centers in specific geographic regions and significant changes in these regional or metropolitan areas can impact our future results. The following table shows the geographic concentration of annualized rent from our portfolio, including data centers held as investments in unconsolidated entities.

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Operating expenses

Operating expenses primarily consist of utilities, property and ad valorem taxes, property management fees, insurance and site maintenance costs, and rental expenses on our ground and building leases. Our buildings require significant power to support data center operations and the cost of electric power and other utilities is a significant component of operating expenses.

Many of our leases contain provisions under which tenants reimburse us for all or a portion of property operating expenses and real estate taxes incurred by us. However, in some cases we are not entitled to reimbursement of property operating expenses, other than utility expense, and real estate taxes under our leases for Turn-Key Flex® facilities. We expect to incur additional operating expenses as we continue to expand.

Costs pertaining to our asset management function, legal, accounting, corporate governance, reporting and compliance are categorized as general and administrative costs within operating expenses.

Other key components of operating expenses include: depreciation of our fixed assets, amortization of intangible assets, and transaction and integration costs.

Other Income / (Expenses)

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Equity in earnings of unconsolidated entities, interest expense, and income tax expense make up the majority of other income/(expense). Equity in earnings of unconsolidated entities represents our share of the income/(loss) of entities in which we invest, but do not consolidate under U.S. GAAP. The largest of these investments is currently our investment in Digital Core REIT, which is publicly traded on the Singapore Exchange (“SGX”) and which owns a portfolio of 10 properties operating in the United States and Canada. Our second-largest equity-method investment is in Ascenty which is located primarily in Brazil. Refer to additional discussion of the SREIT and Ascenty in the footnotes to the financial statements.

Results of Operations

As a result of the consistent and significant growth in our business since the first property acquisition in 2002, we evaluate period-to-period results for revenue and property level operating expenses on a stabilized vs. non-stabilized portfolio basis.

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Stabilized: The stabilized portfolio includes properties owned as of the beginning of all periods presented with less than 5% of total rentable square feet under development.

Non-stabilized: The non-stabilized portfolio includes: 1) properties that were undergoing, or were expected to undergo, development activities during any of the periods presented, 2) any properties contributed to joint ventures, sold, or held for sale during the periods presented, and 3) any properties that were acquired or delivered at any point during the periods presented.

Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020

Revenues

Total operating revenues as shown on our consolidated income statements was as follows (in thousands):

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A break-out of rental and other services revenue between stabilized properties and non-stabilized properties is shown in the subsequent table (in thousands). Fee income and other is not broken out between stabilized and non-stabilized categories because it is typically generated by the Company as a whole and not by individual properties.

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Total operating revenues increased by approximately $524.3 million for the year ended December 31, 2021 compared to the same period in 2020 driven primarily by growth in non-stabilized rental and other services revenue. Non-stabilized rental and other services revenue increased $499.5 million for the year ended December 31, 2021, compared to the same period in 2020 primarily due to the completion of global development pipeline and related lease up operating activities and expansion into new markets in EMEA, offset by the impact of properties sold in 2020 and 2021 and due to the Interxion Combination, which contributed $303.8 million to the increase. Stabilized rental and other services revenue increased $9.0 million for the year ended December 31, 2021 compared to the same period in 2020 due to increased tenant reimbursements associated with higher utility costs in Texas due to winter storm Uri less new leasing and renewals, net of expirations.

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Operating Expenses — Property Level

Property level operating expenses as shown in our consolidated income statements were as follows (in thousands):

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A break-out of property level expenses between stabilized properties and non-stabilized properties (all other properties) is shown below (in thousands).

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Property level operating expenses include costs to operate and maintain the locations as well as taxes and insurance. Stabilized property operating and maintenance expenses increased by approximately $64.1 million for the year ended December 31, 2021 compared to the same period in 2020 primarily related to higher utility consumption at certain properties in the stabilized portfolio. Non-stabilized property operating and maintenance expenses increased $174.9 million for the year ended December 31, 2021 compared to the same period in 2020 primarily due to (i) the Interxion Combination, which contributed $127.5 million to the increase, (ii) the completion of global development pipeline and related lease up operating activities and expansion into new markets in EMEA offset by (iii) the impact of properties sold in 2020 and 2021.

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The cost of electric power comprises a significant component of our operating expenses. Any additional taxation or regulation of energy use, including as a result of (i) new legislation that Congress may pass, (ii) the regulations that the EPA has proposed or finalized, (iii) regulations under legislation that states have passed or may pass, or (iv) any further legislation or regulations in the EU or other regions where we operate could significantly increase our costs, and we may not be able to effectively pass all of these costs on to our customers. These matters could adversely impact our business, results of operations, or financial condition.

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Stabilized property taxes and insurance increased by approximately $7.7 million for the year ended December 31, 2021 compared to the same period in 2020 primarily related to property tax reassessments for certain properties located in Chicago in the stabilized portfolio. Non-stabilized property taxes and insurance increased by approximately $17.5 million for the year ended December 31, 2021 compared to the same period in 2020 primarily related to property tax reassessments for certain properties located in Chicago and Dallas in the non-stabilized portfolio.

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Other Operating Expenses

Other operating expenses include costs which are either non-cash in nature (such as depreciation and amortization) or which do not directly pertain to operation of data center properties. A comparison of other operating expenses for the respective periods is shown below (in thousands). The increases in depreciation and amortization and general and administrative expenses for the 2021 period as compared to 2020 were primarily driven by the Interxion Combination, which closed in March 2020.

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Equity in Earnings (Loss) of Unconsolidated Entities

Equity in earnings (loss) of unconsolidated entities increased approximately $119.9 million for the year ended December 31, 2021, compared to 2020, primarily due to: (i) a $64 million gain we recorded as a component of our share of earnings in the PGIM joint venture which was associated with the joint venture’s sale of a portfolio of 10 data centers in August 2021, and (ii) a $59.3 million increase primarily related to a reduction of the foreign-exchange loss recorded by our Ascenty joint venture associated with re-measurement of its debt denominated in U. S. Dollars to Brazilian Real.

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Gain on Disposition of Properties

Gain on disposition of properties, increased $1,063.9 million for the year ended December 31, 2021 compared to the same period in 2020, due primarily to the approximately $1 billion gain we recorded on disposition of 10 operating properties to the SREIT on December 6, 2021. Refer to additional information in the “Notes to the Consolidated Financial Statements.”

The gain on disposition of properties recorded for the year ended December 31, 2020 consisted of (i) a gain of $10.4 million on sale of Liverpoolweg 10 in Amsterdam for gross proceeds of approximately $21.5 million, and (ii) a gain of $306.5 million on sale of 10 Powered Base Building® properties (which comprised 12 data centers) in North America to Mapletree at a purchase consideration of approximately $557.0 million.

Loss from Early Extinguishment of Debt

Loss from early extinguishment of debt decreased approximately $84.5 million for the year ended December 31, 2021 compared to the same period in 2020, primarily due to the redemption of the 3.950% 2022 Notes and 3.625% 2022 Notes in August 2020, offset by the redemption of the 2.750% 2023 Notes in February 2021.

Income Tax Expense

Income tax expense increased by $34.8 million for the year ended December 31, 2021 compared to the same period in 2020, primarily due to an increase in the corporate tax rate in the United Kingdom from 19% to 25% during the quarter ended June 30, 2021.

Interest Expense

Interest expense decreased by approximately $39.2 million for the year ended December 31, 2021 compared to the same period in 2020. The decrease was primarily due to a decrease in interest expense related to our term loan facility, which was paid off in full in January 2021. In addition, interest expense on our unsecured senior notes decreased as a result of lower rate debt.

Liquidity and Capital Resources

The sections “Analysis of Liquidity and Capital Resources — Parent” and “Analysis of Liquidity and Capital Resources — Operating Partnership” should be read in conjunction with one another to understand our liquidity and capital resources on a consolidated basis. The term “Parent” refers to Digital Realty Trust, Inc. on an unconsolidated basis, excluding our Operating Partnership. The term “Operating Partnership” or “OP” refers to Digital Realty Trust, L.P. on a consolidated basis.

Analysis of Liquidity and Capital Resources — Parent

Our Parent does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time, incurring certain expenses in operating as a public company (which are fully reimbursed by the Operating Partnership) and guaranteeing certain unsecured debt of the Operating Partnership and certain of its subsidiaries and affiliates. If our Operating Partnership or such subsidiaries fail to fulfill their debt requirements, which trigger Parent guarantee obligations, then our Parent will be required to fulfill its cash payment commitments under such guarantees. Our Parent’s only material asset is its investment in our Operating Partnership.

Our Parent’s principal funding requirement is the payment of dividends on its common and preferred stock. Our Parent’s principal source of funding is the distributions it receives from our Operating Partnership.

As the sole general partner of our Operating Partnership, our Parent has the full, exclusive and complete responsibility for our Operating Partnership’s day-to-day management and control. Our Parent causes our Operating Partnership to

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distribute such portion of its available cash as our Parent may in its discretion determine, in the manner provided in our Operating Partnership’s partnership agreement.

As circumstances warrant, our Parent may issue equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing. Any proceeds from such equity issuances would generally be contributed to our Operating Partnership in exchange for additional equity interests in our Operating Partnership. Our Operating Partnership may use the proceeds to acquire additional properties, to fund development opportunities and for general working capital purposes, including potentially for the repurchase, redemption or retirement of outstanding debt or equity securities.

Our Parent and our Operating Partnership are parties to an at-the-market (ATM) equity offering sales agreement dated January 4, 2019, as amended in 2020 (the “Sales Agreement”). In accordance with the Sales Agreement, following the date of the 2020 amendment, Digital Realty Trust, Inc. may offer and sell shares of its common stock having an aggregate offering price of up to $1.0 billion. Prior to the 2020 amendment, Digital Realty Trust, Inc. had offered and sold shares of its common stock having an aggregate gross sales price of approximately $652.2 million. The sales of common stock made under the Sales Agreement will be made in “at the market” offerings as defined in Rule 415 of the Securities Act. For the year ended December 31, 2021, Digital Realty Trust, Inc. issued approximately 1.1 million common shares under the Sales Agreement at an average price of $161.92 per share. As of December 31, 2021, approximately $577.6 million remains available for future sales under the program. Our Parent has used and intends to use the net proceeds from the program to temporarily repay borrowings under our Operating Partnership’s global revolving credit facilities, to acquire additional properties or businesses, to fund development opportunities and for working capital and other general corporate purposes, including potentially for the repayment of other debt or the repurchase, redemption or retirement of outstanding debt securities. For additional information on the Sales Agreement, see our Annual Report on Form 10-K for the year ended December 31, 2020.

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On September 13, 2021, Digital Realty Trust, Inc. completed an underwritten public offering of 6,250,000 shares of its common stock, all of which were offered in connection with forward sale agreements it entered into with certain financial institutions acting as forward purchasers. The forward purchasers borrowed and sold an aggregate of 6,250,000 shares of Digital Realty Trust, Inc.’s common stock in the public offering. Digital Realty Trust, Inc. did not receive any proceeds from the sale of our common stock by the forward purchasers in the public offering. The Company expects to receive net proceeds of approximately $1.0 billion (net of fees and estimated expenses) upon full physical settlement of the forward sale agreements, which is anticipated to be no later than March 13, 2023. Upon physical settlement of the forward sale agreements, the Operating Partnership is expected to issue partnership units to Digital Realty Trust, Inc. in exchange for contribution of the net proceeds.

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We believe our Operating Partnership’s sources of working capital, specifically its cash flow from operations, and funds available under its global revolving credit facility are adequate for it to make its distribution payments to our Parent and, in turn, for our Parent to make its dividend payments to its stockholders. However, we cannot assure you that our Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including making distribution payments to our Parent. The lack of availability of capital could adversely affect our Operating Partnership’s ability to pay its distributions to our Parent, which would in turn, adversely affect our Parent’s ability to pay cash dividends to its stockholders.

Future Uses of Cash — Parent

Our Parent Company may from time to time seek to retire, redeem or repurchase its equity or the debt securities of our Operating Partnership or its subsidiaries through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases, redemptions or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions or other factors. The amounts involved may be material.

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Dividends and Distributions — Parent

Our Parent is required to distribute 90% of its taxable income (excluding capital gains) on an annual basis to continue to qualify as a REIT for federal income tax purposes. Our Parent intends to make, but is not contractually bound to make, regular quarterly distributions to its common stockholders from cash flow from our Operating Partnership’s operating activities. While historically our Parent has satisfied this distribution requirement by making cash distributions to its stockholders, it may choose to satisfy this requirement by making distributions of cash or other property. All such distributions are at the discretion of our Parent’s Board of Directors. Our Parent considers market factors and our Operating Partnership’s performance in addition to REIT requirements in determining distribution levels. Our Parent has distributed at least 100% of its taxable income annually since inception to minimize corporate level federal and state income taxes. Amounts accumulated for distribution to stockholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which are consistent with our intention to maintain our Parent’s status as a REIT.

As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. Our Parent may need to continue to raise capital in the debt and equity markets to fund our Operating Partnership’s working capital needs, as well as potential developments at new or existing properties, acquisitions or investments in existing or newly created joint ventures. In addition, our Parent may be required to use borrowings under the Operating Partnership’s global revolving credit facility (which is guaranteed by our Parent), if necessary, to meet REIT distribution requirements and maintain our Parent’s REIT status.

Distributions out of our Parent’s current or accumulated earnings and profits are generally classified as ordinary income whereas distributions in excess of our Parent’s current and accumulated earnings and profits, to the extent of a stockholder’s U.S. federal income tax basis in our Parent’s stock, are generally classified as a return of capital. Distributions in excess of a stockholder’s U.S. federal income tax basis in our Parent’s stock are generally characterized as capital gain. Cash provided by operating activities has been generally sufficient to fund distributions on an annual basis. However, we may also need to utilize borrowings under the global revolving credit facility to fund distributions.

The expected tax treatment of distributions on our Parent’s common stock and preferred stock paid in 2021 is as follows: approximately 9% ordinary income and 91% capital gain distribution. The tax treatment of distributions on our Parent’s common stock and preferred stock paid in 2020 was as follows: approximately 72% ordinary income and 28% capital gain distribution. The tax treatment of distributions on our Parent’s common stock paid in 2019 was as follows: approximately 83% ordinary income and 17% return of capital.

For additional information regarding dividends declared and paid by our Parent on its common and preferred stock for the years ended December 31, 2021, 2020 and 2019, see Item 8, Note 14 in the Notes to the Consolidated Financial Statements contained herein.

Analysis of Liquidity and Capital Resources — Operating Partnership

As of December 31, 2021, we had $142.7 million of cash and cash equivalents, excluding $8.8 million of restricted cash. Restricted cash primarily consists of contractual capital expenditures plus other deposits. Our liquidity requirements primarily consist of:

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On November 18, 2021, we refinanced our global revolving credit facility and Yen revolving credit facility. The global revolving credit facilities provide for borrowings of up to $3.3 billion (including approximately $0.3 billion available to be drawn on the Yen revolving credit facility). The global revolving credit facility provides for borrowings in a variety of currencies and can be increased by an additional $1.5 billion, subject to receipt of lender commitments and other conditions precedent. Both facilities mature on January 24, 2026, with two six-month extension options available. The 2021 global revolving credit facility provides for borrowings in a variety of currencies, and includes the ability to add additional currencies in the future. We have used and intend to use available borrowings under the global revolving credit facility to acquire additional properties, fund development opportunities and for general working capital and other corporate purposes, including potentially for the repurchase, redemption or retirement of outstanding debt or equity securities. For additional information regarding our global revolving credit facility, see Item 8, Note 8 in the Notes to the Consolidated Financial Statements.

Future Uses of Cash

Our properties require periodic investments of capital for customer-related capital expenditures and for general capital improvements. Depending upon customer demand, we expect to incur significant improvement costs to build out and develop additional capacity. At December 31, 2021, we had open commitments, related to construction contracts of approximately $1.3 billion, including amounts reimbursable of approximately $37.8 million.

We currently expect to incur approximately $2.3 billion to $2.5 billion of capital expenditures for our development programs during the year ending December 31, 2022. This amount could go up or down, potentially materially, based on numerous factors, including changes in demand, leasing results and availability of debt or equity capital.

We are party to a definitive agreement under which we committed to acquire approximately 55% of the total equity interest in Teraco, Africa’s leading carrier-neutral colocation provider. The transaction values Teraco at approximately $3.5 billion. Close of the transaction is dependent upon customary closing conditions.

Development Projects

The costs we incur to develop our properties is a key component of our liquidity requirements. The following table summarizes our cumulative investments in current development projects as well as expected future investments in these projects as of the periods presented, excluding costs incurred or to be incurred by unconsolidated entities.

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Land inventory and space held for development reflect cumulative cost spent pending future development. Base building construction consists of ongoing improvements to building infrastructure in preparation for future data center fit-out. Data center construction includes 6.8 million square feet of Turn Key Flex® and Powered Base Building® product. Generally, we expect to deliver the space within 12 months; however, lease commencement dates may significantly impact final delivery schedules. Equipment pool and other inventory represent the value of long-lead equipment and materials required for timely deployment and delivery of data center construction fit-out. Campus, tenant improvements and other costs include the value of development work which benefits space recently converted to our operating portfolio and is composed primarily of shared infrastructure projects and first-generation tenant improvements.

Capital Expenditures (Cash Basis)

The table below summarizes our capital expenditure activity for the year ended December 31, 2021 and 2020 (in thousands):

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For the year ended December 31, 2021, total capital expenditures increased $432.9 million to approximately $2,396.1 million from $1,963.3 million for the same period in 2020. Capital expenditures on our development projects plus our enhancement and improvements projects for the year ended December 31, 2021 were approximately $2,179.0 million, which reflects an increase of approximately 24% from the same period in 2020. This increase was primarily due to development activity at properties acquired in the Interxion Combination. Our development capital expenditures are generally funded by our available cash and equity and debt capital.

Indirect costs, including capitalized interest, capitalized in the years ended December 31, 2021 and 2020 were $124.7 million and $101.0 million, respectively. Capitalized interest comprised approximately $53.5 million and $47.3 million of the total indirect costs capitalized for the years ended December 31, 2021 and 2020, respectively. Capitalized interest in the year ended December 31, 2021 increased, compared to the same period in 2020, due to an increase in qualifying activities. Excluding capitalized interest, indirect costs in the year ended December 31, 2021 increased compared to the same period in 2020 due primarily to capitalized amounts relating to compensation expense of employees directly engaged in construction activities.

Consistent with our growth strategy, we actively pursue potential acquisition opportunities, with due diligence and negotiations often at different stages at different times. The dollar value of acquisitions for the year ending December 31, 2022 will depend upon numerous factors, including customer demand, leasing results, availability of debt or equity capital and acquisition opportunities. Further, the growing acceptance by private institutional investors of the data center asset class has generally pushed capitalization rates lower, as such private investors may often have lower return expectations than us. As a result, we anticipate near-term single asset acquisitions activity to comprise a smaller percentage of our growth while this market dynamic persists.

We may from time to time seek to retire or repurchase our outstanding debt or the equity of our Parent through cash purchases and/or exchanges for equity securities of our Parent in open market purchases, privately negotiated

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transactions or otherwise. Such repurchases or exchanges, if any, will depend upon prevailing market conditions, our liquidity requirements, contractual restrictions or other factors. The amounts involved may be material.

Sources of Cash

We expect to meet our short-term and long-term liquidity requirements, including payment of scheduled debt maturities and funding of acquisitions and non-recurring capital improvements, with net cash from operations, future long-term secured and unsecured indebtedness and the issuance of equity and debt securities and the proceeds of equity issuances by our Parent. We also may fund future short-term and long-term liquidity requirements, including acquisitions and non-recurring capital improvements, using our global revolving credit facilities pending permanent financing. As of February 22, 2022, we had approximately $2.4 billion of borrowings available under our global revolving credit facilities.

Our global revolving credit facility provides for borrowings up to $3.0 billion. We have the ability from time to time to increase the size of the global revolving credit facility by up to $1.5 billion, subject to the receipt of lender commitments and other conditions precedent. The global revolving credit facility matures on January 24, 2026, with two six-month extension options available. We have used and intend to use available borrowings under the global revolving credit facility to fund our liquidity requirements from time to time. For additional information regarding our global revolving credit facility, see Note 11. “Debt of the Operating Partnership” to our condensed consolidated financial statements contained herein.

In connection with the issuance of the Swiss Franc Notes in July 2021, we intend to allocate an amount equal to the net proceeds from the offering of the Swiss Franc Notes to finance or refinance, in whole or in part, recently completed or future green building, energy and resource efficiency and renewable energy projects, including the development and redevelopment of such projects (collectively, “Eligible Green Projects”). Pending the allocation of an amount equal to the net proceeds of the Swiss Franc Notes to Eligible Green Projects, all or a portion of an amount equal to the net proceeds from the Swiss Franc Notes were used to temporarily repay borrowings outstanding under the Operating Partnership’s global credit facility and for other general corporate purposes. For additional information regarding our Swiss Franc Notes, see Note 11. “Debt of the Operating Partnership” to our condensed consolidated financial statements contained herein.

Distributions

All distributions on our units are at the discretion of our Parent’s Board of Directors. For additional information regarding distributions paid on our common and preferred units for the years ended December 31, 2021, 2020 and 2019, see Item 8, Note. 14 in the Notes to the Consolidated Financial Statements.

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Outstanding Consolidated Indebtedness

The below tables summarize our outstanding debt, and also our contractual debt maturities and principal payments as of December 31, 2021 (in thousands):

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Outstanding Debt

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Contractual Debt Maturities and Principal Payments

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Our ratio of debt to total enterprise value was approximately 21% (based on the closing price of Digital Realty Trust, Inc.’s common stock on December 31, 2021 of $176.87. For this purpose, our total enterprise value is defined as the sum of the market value of Digital Realty Trust, Inc.’s outstanding common stock (which may decrease, thereby increasing our debt to total enterprise value ratio), plus the liquidation value of Digital Realty Trust, Inc.’s preferred stock, plus the aggregate value of our Operating Partnership’s units not held by Digital Realty Trust, Inc. (with the per unit value equal to the market value of one share of Digital Realty Trust, Inc.’s common stock and excluding long-term incentive units, Class C units and Class D units), plus the book value of our total consolidated indebtedness.

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The variable rate debt shown above bears interest based on various one-month LIBOR, EURIBOR, SOR, BBR, HIBOR, JPY LIBOR and CDOR rates, depending on the respective agreement governing the debt, including our global revolving credit facilities and unsecured term loans. As of December 31, 2021 our debt had a weighted average term to initial maturity of approximately 6.0 years (or approximately 6.1 years assuming exercise of extension options).

Off-Balance Sheet Arrangements

As of December 31, 2021, our pro-rata share of secured debt of unconsolidated entities was approximately $675.7 million.

Cash Flows

The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.

Comparison of Year Ended December 31, 2021 to Year Ended December 31, 2020

The following table shows cash flows and ending cash, cash equivalents and restricted cash balances for the respective periods (in thousands).

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The changes in the activities that comprise net cash used in investing activities for the year ended December 31, 2021 as compared to the year ended December 31, 2020 consisted of the following amounts (in thousands).

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The 2021 decrease in net cash used in investing activities was primarily due to an increase in cash provided by proceeds from (i) contribution of properties to the SREIT, (ii) sale of investments related to the sale of 11 data centers in Europe in March 2021 partially offset by the sale of 10 Powered Base Building® properties, which comprise 12 data centers, in North America to Mapletree in January 2020, (iii) an increase in cash used for improvements to investments in real estate and a decrease in cash paid for acquisitions related to the acquisition of an additional 49% ownership interest in the Westin Building Exchange in February 2020, and (iv) partially offset by an increase in cash used for improvements to investments in real estate.

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The decrease in net cash provided by finance activities as compared to the same period in 2020 was primarily due to (i) a decrease of net proceeds from issuance of common stock, due to the full physical settlement of our forward equity agreements in September 2020, (ii) higher activity in the ATM equity offering program in 2020 compared to 2021, (iii) an increase in dividend and distribution payments for the year ended December 31, 2021 due to an increase in the number of shares outstanding subsequent to the Interxion Combination and (iv) offset by an increase in cash proceeds from short-term borrowings.

Noncontrolling Interests in Operating Partnership

Noncontrolling interests relate to the common units in our Operating Partnership that are not owned by Digital Realty Trust, Inc., which, as of December 31, 2021, amounted to 2.0% of our Operating Partnership common units. Historically, our Operating Partnership has issued common units to third party sellers in connection with our acquisition of real estate interests from such third parties.

Limited partners have the right to require our Operating Partnership to redeem part or all of their common units for cash based upon the fair market value of an equivalent number of shares of Digital Realty Trust, Inc. common stock at the time of the redemption. Alternatively, we may elect to acquire those common units in exchange for shares of Digital Realty Trust, Inc. common stock on a one-for-one basis, subject to adjustment in the event of stock splits, stock dividends, issuance of stock rights, specified extraordinary distributions and similar events. As of December 31, 2021, approximately 0.2 million common units of the Operating Partnership that were issued to certain former unitholders of DuPont Fabros Technology, L.P. in connection with the Company’s acquisition of DuPont Fabros Technology, Inc. were outstanding, which are subject to certain restrictions and, accordingly, are not presented as permanent capital in the consolidated balance sheet.

Inflation

Many of our leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above.

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Critical Accounting Policies

A critical accounting policy is one that involves management’s use of judgement regarding expected outcomes of uncertain events in order to make estimates and assumptions that are material to an entity’s financial condition and results of operations. Though we base our estimates and assumptions regarding these matters on historical and current conditions as well as future expectations, these estimates and assumptions are subjective in nature. Changes to the estimates and assumptions we make regarding these matters could affect our financial position and specific items in our results of operations used by stockholders, potential investors, industry analysts and lenders in the evaluation of our performance. Of the significant accounting policies described in Note 2 to the Consolidated Financial Statements, the subsequent items have been identified by us as meeting the criteria to be considered critical accounting policies. Refer to Note 2 for more information on these critical accounting policies.

Fair Value Measurements. Fair value is intended to reflect the price that would be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants at the measurement date (the exit price). We use fair value measurements to enable us to determine the fair value of a variety of items. Fair value measurements are most significant to our financial statements in the following areas: 1) evaluation of recoverability of real estate and intangible assets (which involves comparison of fair value of the assets to net book value to quantify any potential impairments), 2) accounting for assets held for sale (which involves recording assets qualifying for held for sale treatment at the lower of book value or fair value less costs to sell), and 3) determination of fair value of assets and liabilities acquired in connection with business combinations or asset acquisitions as well as certain equity interests in unconsolidated entities.

We estimate fair value using available market information and valuation methods we believe to be appropriate for these purposes. Given the significant amount of judgement and subjectivity involved in the determination of fair value, estimated fair value is not necessarily indicative of amounts that would be realized on disposition. Refer to Note 2. “Summary of Significant Accounting Policies” the Consolidated Financial Statements for additional information.

Recoverability of Real Estate Assets. We assess the carrying value of our properties whenever events or circumstances indicate carrying amounts of these assets may not be fully recoverable (“triggering events"). Triggering events typically relate to a change in the expected holding period of a property, an adverse change in expected future cash flows of the property, or a trend of past cash flow losses that is expected to continue in the future. If our assessment of triggering events indicates the carrying value of a property or asset group might not be recoverable, we estimate the future undiscounted net cash flows expected to be generated by the assets and compare that amount to the book value of the assets. If our future undiscounted net cash flow evaluation indicates we are unable to recover the carrying value of a property or asset group, we record an impairment loss to the extent the carrying value of the property or asset group exceeds fair value. Refer to Note 2. “Summary of Significant Accounting Policies” of the Consolidated Financial Statements for additional information.

Consolidation. We consolidate all entities that are wholly owned as well as all partially-owned entities that we control. In addition, we consolidate any variable interest entities (“VIEs”) for which we are the primary beneficiary. We evaluate whether or not an entity is a VIE (and we are the primary beneficiary) through consideration of substantive terms in the arrangement to identify which enterprise has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and the obligation to absorb losses/receive benefits from the entity.

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For entities that do not meet the definition of VIEs, we first consider if we are the general partner or a limited partner (or the equivalent in investments not structured as partnerships). We consolidate entities in which we are the general partner and the limited partners do not have rights that would preclude control. For entities in which we are the general partner, but the limited partners hold substantive participating or kick-out rights that prohibit our ability to control the entity, we apply the equity method of accounting since, as the general partner, we have the ability to exercise significant influence over the operating and financial policies of the entities. For entities in which we are a limited partner, or that are not structured similar to a partnership, we consider factors such as ownership interest, voting control, authority to make decisions and contractual and substantive participating rights of the partners. When factors indicate we have a controlling financial interest in an entity, we consolidate the entity. Refer to Note 8. “Investments in Unconsolidated Entities” of the Consolidated Financial Statements for additional information.

Revenue Recognition. We generate the majority of our revenue by leasing our properties to customers under operating lease agreements, which are accounted for under Accounting Standards Codification 842, Leases (“ASC 842”). We recognize the total minimum lease payments provided for under the leases on a straight-line basis over the lease term if we determine it is probable that substantially all of the lease payments will be collected over the lease term.

We estimate the probability of collection of lease payments based on customer creditworthiness, outstanding accounts receivable balances, and historical bad debts – as well as current economic trends. If collection of substantially all lease payments over the lease term is not probable, rental revenue is recognized when payment is received, and we record a full valuation allowance on the balance of any rent receivable, less the balance of any security deposits or letters of credit. If collection is subsequently determined to be probable, we: 1) resume recognizing rental revenue on a straight-line basis, 2) record incremental revenue such that the cumulative amount recognized is equal to the amount that would have been recorded on a straight-line basis since inception of the lease, and 3) reverse the allowance for bad debt recorded on outstanding receivables. Refer to Note 5. “Receivables” of the Consolidated Financial Statements for additional information.

New Accounting Pronouncements

See Note 2. “Summary of Significant Accounting Policies” of the Consolidated Financial Statements.

Funds From Operations

We calculate funds from operations, or FFO, in accordance with the standards established by the National Association of Real Estate Investment Trusts (Nareit) in the Nareit Funds From Operations White Paper - 2018 Restatement. FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, a gain from a pre-existing relationship, impairment charges and real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions and after adjustments for unconsolidated partnerships and joint ventures, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited. Other REITs may not calculate FFO in accordance with the Nareit definition and, accordingly, our FFO may not be comparable to other REITs’ FFO. FFO should be considered only as a supplement to net income computed in accordance with GAAP as a measure of our performance.

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Reconciliation of Net Income Available to Common Stockholders to Funds From Operations (FFO)

(in thousands, except per share and unit data)

(unaudited)

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