Digital Realty Trust Inc (DLR) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Digital Realty Trust fourth quarter earnings conference call. During today's presentation all parties will be on a listen-only mode. Following the presentation the conference will be open for questions. [OPERATOR INSTRUCTIONS] This conference call is being recorded today, Wednesday, February the 28th of 2007.

I would now like to turn the conference over to Pamela Matthews, Director of Investor Relations. Please go ahead, ma'am.

Thank you, and good morning to everyone.

By now you should have all received a copy of the Digital Realty Trust earnings press release. If you have not, you can access one in the Investor Relations section of Digital's website at www.digitalrealtytrust.com, or you may call 415-738-6500 to request a copy.

Before we begin, I would like to remind everyone that the management of Digital Realty Trust may make forward-looking statements on this call that are based on current conditions, forecasts, and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially from expectations.

Such forward-looking statements include statements related to the Company's expected financial results for 2007 including projected FFO per share and unit, projected net income, assumptions relating to the signing and commencement of leases, rental rates and acquisitions and cap rates.

These risks and uncertainties include adverse economic or real estate developments in the Company's market or other technology industry, defaults on or non renewal of leases by tenants, increased interest rates and operating costs, the Company's ability to manage growth effectively, obtain necessary outside financing, operate acquired properties, identify properties to acquire and complete acquisitions, successfully redevelop properties and maintain the Company's status as a REIT.

Decreased rental rates, increased vacancy rates, failure of acquired properties to perform as expected, environmental uncertainties, natural disasters, financial market fluctuations, changes in foreign currency exchange rate, operating in foreign markets, changes in real estate and zoning laws, increases in property taxes and changes in general economic conditions.

For a further discussion of these and other risks and uncertainties related to our business see the report and other filings by the Company with the United States Securities and Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31st, 2005 and subsequent quarterly reports on filings on Form 10-Q.

The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as the result of new information, future events, or otherwise. Additionally, this call will contain non-GAAP financial information, including funds from operation or FFO, adjusted funds from operations, or AFFO, and earnings before taxes, depreciation -- before interest, taxes, depreciation and amortization, or EBITDA.

Digital Realty Trust is providing this information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. Explanation of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental Operating and Financial Data for the fourth quarter of 2006 as filed with the Securities and Exchange Commission, and this information is available on the Company's website at www.digitalrealtytrust.com.

Now, I would like to introduce Rick Magnuson, Chairman, Mike Foust, CEO and Bill Stein, CFO and Chief Investment Officer.

Following management's brief remarks we will open the call to your questions. To manage the call in a timely manner please limit your questions to two per caller. If you have additional questions, feel free to return to the queue.

I will now turn the call over to Rick.

Thank you, Pamela, and welcome, everyone.

I will keep my comments brief today by providing an overview of Digital Realty Trust's accomplishments for the full year 2006 and offer a few observations about the positive macro trends in our specialized sector. Following my remarks, Mike will provide a detailed review of operations and Bill will address our financial performance and discuss guidance for 2007.

First, a brief introduction. Digital Realty Trust is the leading owner and manager of technology related real estate. Our portfolio now totals 63 properties located in 25 different metropolitan areas across North America and Europe. Our portfolio of 11.8 million square feet provides real estate solutions for domestic and international tenant technology requirements across a variety of industry verticals ranging from information technology and enterprise to manufacturing and financial services.

We believe that our unique focus combined with our First Mover advantage has and will continue to translate into strong long-term FFO growth. I would now like to highlight our top five accomplishments in 2006.

First, the Company delivered 19% annual growth in FFO per share ending the year at $1.63 per share. The final quarter of the year exhibited an even faster pace of growth with FFO per share up 17% from the previous quarter and up 33% from the fourth quarter of 2005.

Second highlight is our strong performance in acquisitions. For the year, the Company acquired 17 properties totaling over $552 million, representing 2.5 million square feet. These two properties that were acquired vacant [Indiscernible] was at the high end our guidance range of 8% to 9%.

This significant strategic accomplishment in acquisitions during the year included the purchase of two Internet Gateway properties located in Phoenix and Seattle and a substantial increase in the size of our European portfolio, which has more than doubled in size and now stands at eight properties totaling approximately 866,000 square feet.

Important new markets entered during the year through acquisitions included New York City, Seattle, Houston, Toronto, North Virginia, Paris, France, and Dublin, Ireland.

The third highlight for 2006 is the extraordinary progress we have made in our leasing program. During the year the Company commenced leases on approximately 455,000 square feet at an average gross annualized rent of $68 per square foot. This average rental rate is up 33% from the average rent achieved from leases which commenced in 2005.

Significant leasing accomplishments included our record fourth quarter leasing activity in which leases were signed for 111,000 square feet at an average gross annualized rate of $47.32 per square foot. 75% of these leases will commence in 2007 providing us with a very solid backlog and foundation for achieving our 2007 leasing objectives.

The fourth highlight is the strong performance of two very important operating measurements. Same-store portfolio occupancy and same-store rental rate growth. Excluding space held for redevelopment, same-store occupancy increased from 95% at the beginning of the year to 97% at year's end.

Over this period, same-store rents rose 34%, starting the year at $21.50 and rising to $29 per square foot by year's end. Given our limited lease rollover, this up-lift is fueled by new leasing activity.

The fifth and final highlight is the strengthening of our balance sheet and increased market capitalization. During the year our finance team secured approximately $900 million of debt from -- and equity from the capital markets. Based upon our improving operating performance and strength in financial position we were able to increase our common stock dividend by 8% to $1.15 per share. On behalf of all shareholders I extend our collective appreciation to the management team for their performance in 2006.

I would now like to turn my attention to an industry -- highlighting industry trends which the Company is positioned to benefit from in 2007. The drivers of demand for our property type remain strong in both the U.S. and Europe. The long-term secular trend of the adoption of the Internet and related data storage requirements by both corporate and government users has created sustained demand for our specialized type of buildings.

In numerous U.S. and European markets, demand has outstripped supply giving suppliers such as ourselves pricing power for the first time in five years. Our pricing power is being reflected in the increase in our same-store rents and in the increase in our average rental rates for new leases signed, statistics which I just reviewed with you.

The Company has anticipated the growth in user requirements and as of today has 11 construction projects underway totaling 0.5 million square feet of datacenter space set for delivery in 2007. We also have ample access to two of the components constraining the industry's growth. The availability of backup generator systems and electric power to satisfy the demands of datacenter users.

Early in 2006 we placed orders with the leading manufacturers for generator systems so that we could be assured of timely delivery. We now understand that lead times can extend beyond one year for this type of equipment. With respect to the availability of power, we have grown our portfolio with properties that have immediate access to sufficient amounts of power for datacenter use.

A very small subset of commercial properties have this unique attribute. Identifying these buildings, acquiring and redeveloping them for datacenter use is our specialty. We are proud of what we accomplished in 2006 and believe we are well positioned for the upcoming year.

I will now ask Mike to review the full-year and fourth quarter operating results in greater detail with you.

Mike?

Thank you, Rick.

Again this quarter we were successful in both the acquisitions and leasing fronts exceeding our acquisition targets and datacenter leasing goals for the year. I'll begin by discussing acquisitions which totaled over $552 million, exceeding our guidance for 2006.

Excluding vacant properties the average going in cap rate was at the high end of our guidance of 8% to 9%. During the fourth quarter we acquired seven properties. The first five properties which we discussed in our last call includes the three datacenters we acquired from AboveNet that expanded our presence in the two most important east coast markets, New York City and Northern Virginia.

The datacenters totaled 119,000 square feet and consist of one fee simple interest property in Reston, Virginia and two leaseholds located in New York City and in Vienna, Virginia.

Also announced in our last call was the 2055 East Technology Circle in Tempe, Arizona. The vacant 76,400 square foot two-story office and warehouse facility was add to our inventory of space held for redevelopment is located in a high-demand market with access to the necessary power to convert the facility for datacenter use.

In November, we acquired a 49% interest in 2001 Sixth Avenue, Seattle's primary Internet gateway facility. The 34-story building totals 389,000 square feet and contains 185,000 square feet of technical datacenter space.

As Rick mentioned in his comments, in December we expanded our European footprint with the acquisition of the datacenter facility in Paris, France. This property is in a key underserved market and includes a 151,000 square foot income producing datacenter and over 200,000 square feet available for redevelopment with 36 megawatts of power serving the site.

We also added to our presence in Dublin, Ireland with the acquisition of the 120,000 square foot multi-tenant datacenter facility in the Blanchardstown Corporate Park. To support our European strategy, we now have a team in place which is actively pursuing new acquisitions, leasing, operations, and design and construction opportunities for us including the development of a new 120,000 square foot datacenter at the site of our first Dublin property.

Since the beginning of 2007, we acquired three additional properties in high demand markets. First, we acquired 21110 Ridgetop Circle a vacant 130,000 foot shell datacenter located in Sterling, Virginia. Simultaneous with the closing we signed a 15-year lease with a leading managed service provider for the entire building.

Second, we acquired 3011 Lafayette Street, a vacant 90,800 square foot shell datacenter building located in Santa Clara, California which will be added to our inventory of space held for redevelopment.

Lastly, we acquired a fully improved, fully leased datacenter facility in Ashburn, Virginia. The 95,400 square foot property is leased on long-term basis to a major core location services provider.

The investments made year to date, excluding the vacant Santa Clara building, reflect an average year one cash cap rate of approximately 8.3%, in line with our 2007 guidance, and this should improve significantly in 2008, due to a lease expansion at one of the properties.

Turning to our leasing program, we met the high end of our datacenter leasing goals in 2006 with the commencement of leases for 300,000 square feet of datacenter space at an average annualized GAAP rental rate of $91 per square foot, compared with guidance of $40 per square foot. Keep in mind that these rates reflect a blend of Turn-Key Datacenter and base building space.

We also leased 155,000 square feet of non-technical space in an average annualized GAAP rental rate of $23.50 per square foot, exceeding our 2006 guidance of 100,000 to 125,000 square feet of non-technical space at an average rental rate of $19 per square foot.

We signed new leases during the fourth quarter of 2006 for nearly 411,000 square feet in total including 385,000 square feet of datacenter space at an average annual rental rate of $47.32 per square foot. This includes 324,000 square feet of redevelopment space.

Of the new leases signed, 302,000 square feet of datacenter space and 7700 square feet of non-technical space will commence in 2007. In addition to our acquisition leasing programs, our redevelopment inventory is an important source of growth for us.

We currently have construction projects underway, as Rick mentioned, in 11 high datacenter demand markets in the U.S. and Europe that will add approximately 500,000 of square -- of rentable square feet of build-to-suit and Turn-Key Datacenter space. With average available power capacity of approximately 145 watts per square foot, these facilities are quick to meet today's power and cooling requirements for the most demanding corporate IT applications.

We attribute our success to several key competitive advantages. First is our ability to identify and acquire properties in top markets that have the necessary infrastructure to run today's datacenter applications. Second is the high-level technical expertise within our professional sales, engineering, design and construction, and datacenter operation staff.

And third is our ability to offer corporate enterprise tenants, IT service providers and network carriers with flexible, cost effective and reliable Turn-Key Datacenter solutions as well as more custom solutions in carrier-neutral environments.

Now, I would like to turn the call over to Bill Stein for a detailed discussion of our financial results.

Bill?

Thanks, Mike. Good morning, everybody.

First, I will review our full year and fourth quarter financial results and then go through our 2007 guidance. Following my remarks, we will open the call to your questions.

I would also like to bring to your attention our supplemental package. Our corrected version of this supplemental was posted this morning reflected corrections to the percentage change calculations on Page 13. We apologize for any inconvenience this may have caused. Now, on to our results.

For the year, FFO was $104.2 million, up from $76.5 million in 2005. On a diluted share and unit basis, FFO was $1.63 for the year, up 19% over 2005 FFO of $1.37 per share. FFO was $33 million in the fourth quarter, up nearly 55 million -- up nearly 55% from $21.3 million for the fourth quarter 2005.

FFO on a diluted share and unit basis was $0.48 in the fourth quarter of 2006, up 33% from $0.36 for the same period last year. Quarter over quarter, FFO was up 17% from $0.41 in the third quarter of 2006.

FFO per diluted share and unit for the year included $800,000 of cumulative straight line rent adjustment for periods prior to 2006, a $1 million write-off of certain liabilities related to a former tenant, $544,000 of net expenses related to the termination of certain leases and write-off of certain pre-acquisition costs on a potential acquisition, and $278,000 of net expenses relating to refinancing activities, all of which resulted in $0.02 of incremental FFO for the year.

Similarly, FFO per share and unit fourth quarter included $0.01 of incremental FFO resulting from $1.3 million accumulative straight line rent adjustments for periods prior to the fourth quarter of 2006, a $500,000 write-off of certain pre-acquisition costs related to a potential acquisition. Excluding these items, FFO would have been $1.61 per diluted share and unit for the year and $0.40 -- $0.47 per diluted share and unit for the quarter.

Adjusted FFO or AFFO for the fourth quarter of 2006 was $20.2 million, or $0.29 per diluted share and unit. The AFFO payout ratio for the fourth quarter was 98.7%. This compares to third quarter AFFO of $19.2 million, or $0.30 per diluted share and unit. The AFFO payout ratio for the third quarter was 90%.

EBITDA was $161.7 million in the full year and $45.7 million for the fourth quarter 2006. EBITDA margin was 57.4% for the year and 54.1% for the quarter. The 2006 full-year EBITDA of 106.7 million and EBITDA margin of 57.4% included an $18 million gain from the sale of one of our properties during the third quarter.

EBITDA and EBITDA margin for the full year would have been $151.4 million and 53.7% respectively, excluding the one-time gain from sale adjusted for minority interest. Reconciliations of FFO to net income, AFFO to FFO and EBITDA to net income for these periods are included in our supplemental Operating and Financial Data furnished to the SEC and available on our website.

For the full-year 2006, total operating revenues were $281.9 million, compared to $201.4 million for the full-year 2005. This 40% increase reflects our strong property acquisition and leasing activity.

Total operating revenues for the fourth quarter were $84.5 million, compared to $73.2 million for the third quarter of 2006, up from $60.6 million in the fourth quarter of 2005.

Net income for 2006 was $31.4 million, up from $16.1 million in 2005, net income available to common shareholders per diluted share for the year was $0.47, compared to $0.25 in the previous year. Net income for the fourth quarter was $6.4 million, up from $4.6 million for the same period of 2005, net income available to common shareholders for the quarter was $3 million or $0.06 per diluted share, compared to $1.2 million or $0.04 per diluted share for same period in 2005 and $11.3 million or $0.30 per diluted share for the third quarter of 2006.

The third net income included a gain of $18 million on the sale of 7979 East Tufts Avenue in Denver which closed during the quarter. Ignoring this gain, net income available to common shareholders would have been $1 million or $0.03 per diluted share in the third quarter of '06.

I will now review some of the statement of operations line items to provide additional detail on our results for the quarter. Going down the income statement comparing fourth quarter 2006 to fourth quarter 2005, G&A increased to $6.5 million from $4.4 million in fourth quarter 2005.

Fourth quarter 2006 includes an approximate $500,000 writeoff of certain pre-acquisition costs mentioned earlier and $250,000 of non-executive recruiting related expenses. Quarter-over-quarter G&A was up slightly from $5 million in the previous quarter. Other revenues of $197,000 were primarily attributable to small termination fees, other expenses for the quarter were 173,000 and were -- and primarily consisted of ground lease payments.

During the fourth quarter we capitalized $1.1 million of interest related to construction projects. In addition, we capitalized $850,000 in compensation expenses.

Turning now to our balance sheet, overall during 2006 we raised $900.2 million of additional capital. In addition to increasing the credit facility from $350 to $500 million, we amended its financial covenants to enhance financial flexibility and to include redevelopment assets in the borrowing base providing additional financial support for our redevelopment program.

During the year we completed 10 mortgage financings totaling $349.4 million, including $93.6 million of incremental proceeds resulting from refinancings. We issued 172.5 million of convertible debt at 408% and raised $228.3 million in net proceeds from two common stock offerings.

We currently have drawn approximately 139.8 million on the credit facility. We have total borrowing capacity of over 370 million including 143 million of immediate liquidity under our revolving credit facility and secured debt capacity over 227 million. If this capacity were fully utilized, our pro forma of total debt to total enterprise value would be approximately 38%.

Our total debt at year end was 1.12 billion, and our ratio of debt to enterprise value was 31.1%. In the fourth quarter, our fixed charge coverage ratio was 2.9 times and our debt service coverage was four times. Our weighted average cost of debt was 5.69%, and the weighted average maturity was 6.1 years including debt extension options.

A description of how we calculate these ratios can be found in our supplemental Operating and Financial Data furnished to the SEC and available on our website.

During the fourth quarter we completed financings on one property in northern California and two properties in Europe. As we mentioned on our last call on October 24, 2006, we completed the financing of 1100 Space Park Drive in Santa Clara, California. This loan for 55 million has a ten-year maturity with no principal amortization for three years and a fixed rate of 5.89%.

On December 5, 2006, the Company completed the secured financing of 114 Rue Ambroise in Paris. The new loan for for EUR32.8 million, equal to $43.3 million at December 31 closed at the time of the acquisition and has a five-year maturity with a swap fix rate of 5.13%.

On December 20th, 2006, the Company completed the secured financing of Blanchardstown Corporate Park in Dublin. The new loan for EUR28.2 million, equal to $37.2 million at year end, closed at the time of the acquisition and has a five-year maturity at a swapped fix rate of 5.35%.

Subsequent to year end, on January 31, we completed the financing of 2045 and 2055 Lafayette Street in Santa Clara, California. This $68 million loan has a 10-year maturity with no principal amortization for two years and a fixed rate of 5.93%.

On February 2, 2007, we completed the financing of 150 South First Street in San Jose, California. This $53.3 million loan has a 10-year maturity with no principal amortization for two years and a fixed rate of 6.3%.

Finally, as Rick and Mike have said in their comments, as a result of our strong performance in the fourth quarter, we exceeded our 2006 guidance and are on track to meet our goals for 2007. At this time, we are confirming our guidance for 2007 as follows.

FFO per diluted share and unit for the year ending December 31, 2007, is expected to be between $1.85 and $1.95, which represents expected FFO growth of 13.5% to 19.6% over the actual 2006 FFO results of $1.63 per diluted share and unit.

Total acquisitions for the full year in the range of $300 to $400 million consisting of $75 million of vacant properties for our redevelopment program, and between $225 and $325 million of income producing properties at an average cash cap rate of 8.25%.

The commencement of leases for 100,000 square feet to 125,000 square feet of basic commercial space at an average annualized gross rent of $19 per square foot, the commencement of leases for approximately 475,000 square feet to 600,000 square feet of Turn-Key Datacenter and redevelopment space at an average annualized gross rent of $80 per square foot, total capital expenditures for the redevelopment program of $273 million, and finally total G&A of $24 million.

This concludes our formal remarks. We would now be happy to take any questions that you might have.

Thank you.

[OPERATOR INSTRUCTIONS]

And our first question comes from Michael Bilerman with Citigroup. Please go ahead.

Hey, guys. Good morning. John Litt is on the phone with me as well.

Mike, I was wondering if you could talk about the deal that you have with Savvis for the 180,000 square feet in New York, Atlanta, DC and Santa Clara and how you came to that decision to sort of lease to one tenant, shell, versus sort of building it out for a datacenter where you'd get the higher rents.

Sure. I'll talk in general on those decisions with our tenants.

Typically, across the board the tenants will make a decision whether or not to use -- utilize their capital sources or to utilize our capital and amortize into the lease. We keep a very flexible approach to this for our customers, and it allows us to, I think, capture a pretty broad range, because we don't require them to use our capital but make at choice. And we think that that will pan out about 50% of the time is our guess.

Frankly, it's a very attractive return on investment either way. Whether we're utilizing our capital on the buildout, a fit-out of the datacenter or the tenant is.

And can you talk about, I guess in this case when would those leases commence and at what point will it be pulled out of the redevelopment pool now that they have already announced those leases?

The leases are commencing in the first and second quarters for these sites. And -- so largely be included in 2007.

Okay.

And then my second question, just on -- I guess on an adjusted basis you reported $0.47. You had given guidance back in early December of 42 to 44.

What were the variables that made up that spread in terms of coming in ahead of how you thought you would come in?

Well, I mentioned the straight line rent adjustments, which was about 1.3 million on the quarter, and then Westin deal that Mike described up in Seattle generated some significant incremental FFO as well as some of our European acquisitions.

Yes, so you reported 48 in net down to 47 with the straight line, I guess the dead deal cost was a penny, and the difference you're saying from that, from 47 to 42 to 44 is just driven by the acquisitions and the lease?

Q4 acquisitions.

Okay. Thank you.

Thank you.

Our next question comes from Jordan Sadler with Keybanc Capital Markets. Please go ahead.

Hi, guys. I appreciate the color on what's in the fourth quarter numbers.

I just wanted to dig down a little deeper to get a better sense of really what the run rate is off of that $0.47 based on the timing of the leases that were signed during the quarter, and then the -- I obviously have the timing of the acquisitions, the specific cap rates on the acquisitions done during the quarter, if you could.

Well, in terms of the acquisitions that occurred, over the year, and I think it's consistent with the fourth quarter for the income-producing properties, right about a nine cap, on a cash cap rate going in. And similarly --

Ex Technology Circle were at about a 9 cap on that stuff.

We always talk kind of on a blended basis with all of our investments.

Fourth quarter blended is consistent with that 9 cap.

Yes.

Is that accurate?

Yes, it it will be in that range.

Okay.

And then leases on the quarter, in the press release you said you commenced 113,500 square feet of space in the fourth quarter at $77 rents.

Then on the Page 25, I think it is, of your supplement, it says 114,000 feet at $42 rents. Can you just give me the difference there?

Let's see. The 114,000 feet are we referring to year to date?

I guess that could be, but --

Yes, on the year-to-date basis, the 114,000 feet is our redevelopment space, which is -- so we consider it in the datacenter category because it is space that has been improved for datacenter use. Some of it is base building and some of it is Turn-Key.

In this case, kind of the majority of that category is more the base building, which is reflected in the blended $41, $42.

Okay. And then, on the 113,500 that started in the fourth quarter what was the timing? Beginning of the quarter, middle of the quarter, end of the quarter?

We'd have -- I'd have to go through kind of lease by lease. I think --

It's meaningful.

It's probably -- I would have to look. I wouldn't want to guess. I think it's probably more toward the end of the quarter, but we'd have to verify that.

If you could get back to me on that, that would be great.

Jordan, we're kind of limiting people to two questions.

Well, that was my first question. I'll hop back in the queue.

Okay, thank you.

Thank you.

Your next question comes from Jon Stewart with Credit Suisse. Please go ahead.

Hi, thank you.

Bill, can you give us a sense for where you stand in terms of the -- you referenced leasing objectives for '07 given what you did in the fourth quarter. Where do you stand relative to your goal?

And I guess I'm having a hard time figuring out why you would not have raised guidance for '07 just given the higher starting point at the end of the fourth quarter.

Well, we're still really early in the year, John. We have 310,000 square feet commencing in 2007, and we've said that will commence 475 to 600 over the course of the year.

We'll revisit all these issues midyear.

So you're two-thirds of the way there in February?

Well, we think of ourselves as being half-way there, 300 to 600. It's also a function of when in the year they commence and that sort of thing.

And in terms of the redevelopment capital expenditures, do I understand you correctly to say that given the 273 million you expect to spend in the 500,000 square feet that you expect to deliver this year, you're spending $550 a foot in terms of incremental capital, is that right?

That's roughly correct. And that's spread out.

That can be on a number of different projects, some Turn-Key that we're doing spec, as well as base building.

And the $80, I believe, is a gross rent figure. What's the net rent that you expect to realize on your redevelopment?

You know, your net would be anywhere likely from 60 to 70, depending on the amount of facility management services we might be providing.

Okay. Thank you.

Thank you.

Next question comes from Will Marks with JMP Securities. Please go ahead.

Hey, guys.

Just to do the math on that last question, so at $60 on 550 per square fat of investment you're looking at 11% return on the low end. Is that how we should be thinking about this?

I think probably in a very broad sense, but it varies so much building by building. Each particular project in terms of the returns and the timing of the capital investment.

So typically where we're looking at an unleveraged low to mid teen return on average on our redevelopment portfolio.

Okay.

And then second question is just, can you give me just a bigger picture understanding or update on the industry, datacenter, how maybe the pie is expanding, if it is, and how the supply may be limited? Any thoughts would be appreciated.

Sure.

The kind of secular trends that Rick had mentioned in his comments are really embedded now. We're seeing -- especially in the financial services industries and more broadly in international corporations, the requirement for data backup, regulatory requirements that are driving disaster recovery, financial services, trading and settlement, and the need to have mirrored sites driving a lot of requirements, especially in London and in New York.

So these really embedded trends appear to be in place, and as well as on-line commerce, search, things that we're seeing, Microsoft, Google, eBay, Amazon expanding their businesses. So we think the trends are well in place and reflect the nature of business going forward.

And what's causing a real lack of supply at this point in the cycle is the fact that there's a legacy space that had been available in early in the decade has been entirely absorbed and requires for new uses for space to be developed either in existing facilities that we own or in new redevelopment projects.

Would you say you're occupancy is consistent with the overall industry?

When you say the overall industry, you mean in terms of technology?

I'm saying 95% or so is that the, let's say US or worldwide occupancy rate of these types of buildings.

If you look at a couple of the public companies -- and it's hard to get at that information exactly. But if you look at IT service providers, co-location service providers, and use them as a benchmark, you see in public filings folks like Savvis are 85% or more utilization of their facilities.

You see other companies like Equinex are equally growing quickly in their utilization of their space with their corporate customers. I think those are probably good bell weathers to make the analogy to the broader market. It's definitely -- occupancy is going up and we have new facilities coming online like our redevelopment facilities.

Mike, the other compelling statistics that were being produced during the fourth quarter were announcements by Microsoft and Google and others that they're building very large datacenters in remote locations at costs significantly in excess of what we're spending.

So clearly they don't perceive there to be any additional supply in the market and they are out committing significant capital dollars to building their own campuses because there's just no space available in more primary-type markets.

Great. Thanks, Rick, thanks, Mike.

Thank you.

Your next question comes from Ken Avalos with Raymond James. Please go ahead.

Hey, guys.

I had a question on your expirations in '07. I think you're going to roll about 190,000 square feet, 190 leases, so I'm assuming they're smaller tenants. Is that a fair assumption that most of those are small datacenters?

Many are and are in shared Turn-Key facilities, yes. So which tend to be lower terms.

Okay.

So I guess what I'm trying to get a sense for is, your non-technical center space, your base building datacenter space and then the improved space what is sort of the average rent rollup on those? Or your expected average rental rollup on those mark to market so to speak.

I think we're comfortable in projecting 20%, 25% rollups, especially in the co-location shared services space.

Lastly, you know, obviously, datacenter space, small Turn-Key stuff is so profitable. My question is really how do you think about those tenants and sensitivity to the economic cycle and the risk of those tenants and how volatile do you think that demand really is? That's it for me.

Well, the attractive aspect for those customers is that once they are in your site and you have the proper facility in terms of cooling and power and connectivity, they tend not to move. So as a landlord we have some good pricing power.

The fact that we can put these customers in multiple locations is very attractive across the country. All in all it's an attractive business for us, and we actually see it as pretty stable.

Okay. Thanks a lot.

Thank you.

Your next question comes from Brian Legg, with Millennium Partners. Please go ahead.

Thanks, guys. Good quarter.

Just wanted to get -- looking at your opportunity set, you talk about potential new opportunities. You obviously have this new Savvis deal. I was wondering if there are maybe new opportunities a year ago you weren't looking at and you think are real growth opportunities like new entry into new markets, Asia, maybe, green field developments, large sale lease backs or additional multi-property leases like you did with the Savvis deal.

Can you just talk about those opportunities?

Sure, we can talk in general.

We're starting to see more opportunities that that could become build-to-suit for corporate users, especially in the technology and financial services areas. Looking at opportunities with -- we're certainly on the redevelopment side where folks want a multi-tenant solution because maybe they don't need a 50, 70, or 100,000 foot facility, but they need a 10 or 20 or even smaller. Being able for us to hit those different size requirements in different markets is really attractive.

We're seeing in Europe the opportunity to bring on new space is more leaning toward development out of the ground as indicated as we're doing in Dublin. We're looking at other locations in the U.K. that might be attractive for out of ground development.

And driven by scarcity of power and being nimble and finding the power availability is still key to being successful in acquiring sites that are going to work for the corporate users. So I think more and more focus on the corporate enterprise as we've been doing is a lot of us take advantage of the demand that's growing with those groups.

Last question.

When you see how successful you have been over the last several years and you see the growth trajectory of this business, are you seeing any real competition other than what you have talked about in the past, very localized competition, are you seeing other players trying to build their own facilities other than an Equinex or Microsoft and Google doing it for themselves?

Certainly there are two or three good regional developers who have done a good job in this space, and they continue to be active.

Otherwise, it's still really fragmented market by market where you might have some more entrepreneurial and opportunistic folks looking maybe to convert buildings, but really no one on any kind of a institutional or a geographic scale. And really we don't see anyone that has the technical professional staff that we have.

That's a big differentiator for us when we're front of these larger corporate users.

Just to follow up on that, you said there are some people that are doing it on an opportunistic basis.

You're not seeing a real increase in supply with people trying to convert existing office industrial type of buildings into datacenters, are you?

We've seen people talk about it and maybe hold out as one potential use for a property, but at this point we're not seeing wholesale redevelopment at all.

Okay. Great. Thank you, guys.

Thank you.

Next question comes from Dan Weissman with Merrill Lynch. Please go ahead.

Hi. It's Ian Weissman.

Mike, I was wondering if you can help me back into your cap rate assumption of 9%, which you quoted for the acquisitions in the fourth quarter. On page, I think it's 11 of your supplemental,I you give a run rate of what the pro rata full quarter NOI would be, which is about 12.2 million.

If I look at that on top of the -- call it it $175 million cost for you guys, your pro rata costs for the quarter, that's closer to a 7, call it 7.25, 7.5 cap.

What am I missing to get to the 9 cap?

I was backing out the vacant redevelopment property.

But that's just -- that's the $9 million property?

A little more than that, yes. Closer to 10 million.

That still gets you only to 7.5. Is that a going in yield?

Are you looking at the lease roll for the year to get to you that 9%? In those properties.

We'll have to go back and take a look at that, it should be -- based on what I'm looking at between definitely between 8.5 and 9.

Okay. And also --

Hey, Ian, it's Bill.

When you're look at those operating expenses in the fourth quarter some of pick up is due to Q3 acquisitions, not Q4 acquisitions.

I'm just looking at page 11 where you try to get to the run rate, and you give the rent and the occupancy -- the operating expenses to get to an NOI which is about $12 million on an annualized basis for those properties. We could talk about this off-line. I just saw a discrepancy that maybe you could address.

Mike, on a separate note, I think we've talked in the past. I've seen reports out recently about new technologies specifically from Intel looking at chips that outact and operate like datacenters, although much more efficiently. Can you maybe talk about some of the new technology that might impact demand in your space?

Sure.

These tend to be very specialized, whether it's new rack cooling chips like the very exotic Intel chips that you mentioned there, and really, at this point, we see that technological developments that lower -- really lower power consumption is actually being a real benefit because it allows our customers more flexibility in expanding their datacenter requirements, and allows us to be able to be more flexible.

But with that said, really what we're not seeing those technologies being adopted at this point, or even in the near future, and they're typically for more specialized very high density uses that really don't apply to the great majority of the corporate IT requirements that we're targeting.

So they're interesting to look at, and our folks keep close tabs, especially with the manufacturers of a lot of the HVAC and power equipment, but we see this as trends off more on the horizon that will provide more flexibility for us to deliver solutions.

Okay. Thank you.

Thank you.

Your next question comes from [Frank Greywood] with [REIT Capital] Please go ahead.

Hey, guys.

Getting back to an earlier question, $0.47 was the run rate for the quarter, multiplying that by 4 is 188. Sounds like you are moving along with your execution for this year. Barring any unforeseen things occurring, how do you -- I mean, am I missing anything? Is the run rate $1.88, or is their something coming out of the numbers?

Well, I guess, Frank, the one thing you have to keep in mind is, when we acquire redevelopment assets, and we've bought some of those now early in the year, those are a drag on earnings, for two reasons. One, to the extent we haven't started construction right away, we can't capitalize interest or operating costs.

And even when we can capitalize we'd have the opportunity costs associated with those assets. So those deals, while they're accretive when they're stabilized, near term they're dilutive.

Okay.

Moving on, at quarter end, you did talk about how much Turn-Key space that you had in inventory that was leased but not rent paying, and also how much Turn-Key space that you had that was vacant.

Yes, Frank, I can tell you -- what I can tell you off the cuff is that we added about 400,000 square feet of new redevelopment space in the fourth quarter, and that included new acquisitions and existing property that --

Is that Turn-Key, though?

No, not Turn-Key.

Okay.

This is redevelopment. Went into the redevelopment inventory. Over the past year or so we've leased about 450,000 to 500,000 square feet of that redevelopment space.

So that's why it looks like we may be running in place a little bit, but the fact is that we have been able to add -- we're still about that 1.5, 1.6 million in our inventory, but I think we've established a pretty good process here of leasing that space. Some of it base building, some of it Turn-Key.

And I just don't have that breakdown in front of me in terms of how much was Turn-Key versus how much was base building.

So you don't have at the end of the quarter what that.

I guess if it stays -- you've got 100,000 square feet of space, you've already put the money in it or you bought it vacant and you can get $100 per square foot rents on it, that's a lot of money. That's the reason for my question.

Yes. And some of that -- you're exactly right.

Our history has been that we have a certain percentage, say around half has been more base building, that might be in more of that $20 to $30 rate versus Turn-Key which on a rentable square foot basis you are up at $150, even $200 a foot.

Okay. I will requeue.

Thank you.

Next question is a follow-up from Michael Bilerman. Please go ahead.

How much capital do you have invested in the redevelopment in that 1.6 million square feet? So how much drag in terms of capital is there right now?

I would to have swing back and look at that.

I mean, do we have a sense of is it 300 million? 400 million? Is there some sort of range that you can sort of think about?

I mean, right now it seems like you're only capitalizing $75 million worth of from development just from using your 1.1 million cap interest, but I'm not sure how much more on top of that is really acting as a drag on earnings.

Yes, I would not want to just guess at that number.

Okay.

What I can say is our -- the base buildings, when we've acquired them, have been anywhere from $50 a foot to 150 a foot typically upon acquisition, and then we're investing anywhere from another $50 to $100 to get to the base building, and then the very large $700, $800 datacenter investment over and above that base building.

Why don't we follow up on the redevelopment.

The other question I had was, what's your cash same-store NOI for the fourth quarter?

We'll take a look at that. Do we have that handy?

We're not going to have cash.

Do we have that accrual number handy? We'll get back to you on that.

Okay. Thank you.

Thank you.

Next question is a follow-up from Jordan Sadler. Please go ahead.

Hi, guys.

Mike, can you maybe talk a little bit about the Turn-Key datacenter space leasing prospects for the back half of this year? I know of the 300,000, or at least a lot of the Savvis space, that's mostly shell, seemingly.

Can you talk about what the prospects look like for getting sort of -- for putting the $273 million of CapEx out the door, if you will?

Sure.

We're working on several prospects in the redevelopment that combination where we're actually building out Turn-Key space ourselves on a spec basis in five or six locations, and those are typically about 20,000 square foot of rentable pods. And we expect those typically get leased up readily.

So -- and then over and above that, we've got several customers who are kind of weighing between utilizing our capital, utilizing their capital, so I think we'll see a greater percentage than what we've experienced so far the beginning of this year in terms of more Turn-Key leasing occurring.

I can't give you an exact breakdown on that by the end of the year, but I think it's going to swing more toward that 50/50, that we've been projecting.

So the 20,000 square foot pods, there's five or six of them, you're building them spec initially but you think they will lease up quickly, is that right?

Yes.

What's the time frame on those, do you think?

Those come on line in -- actually, second, third, and fourth quarters. They're spread out.

But there's nothing chunky, right?

There's nothing like a 100,000 square foot Turn-Key space or anything larger than these 20,000 pieces that are going to get you toward the, I guess, 250,000 to 300,000 feet it seems like you've got in your guidance?

Not that we can talk about now other than in general we are talking customers who like that opportunity, for us to invest the capital.

My second question is, a company by the name of Cyber put out a press release that they signed up a datacenter with you guys in Phoenix.

Can you talk about that, the size of that lease and what they expect the timing is on that?

Can't give you the details on that. Confidentiality with the customers.

But that is a Turn-Key space that I believe will be commencing in the second quarter. It's a smaller Turn-Key space, under 10,000 feet.

Thank you.

Thank you.

And our last question is a follow-up from Frank Greywood. Please go ahead.

The 310 of datacenter that's supposed to be commencing in '07, I don't think you've given what the commencement schedule was there on this call.

Can you kind of lay that out, when you think that's going to be delivering?

Yes, those leases are in the first and second quarter this year.

All of them?

Yes.

The 135,000 square foot Sterling, Virginia, property, I'm assuming that that wasn't in your leasing numbers, or is it?

It's in our numbers, yes.

That 135 in the 310?

Yes.

What is the -- what are the -- what's the yield on this deal, and what are your improvements?

That particular deal is a base building, so we're putting some investment into the base building, and the tenant will be putting in the bulk of the datacenter improvements.

And so we haven't broken that out on an individual basis, though, for the deal terms.

Do you have the yield, though?

We haven't broken that one out, but it's definitely in our kind of mid-teen range.

It's consistent.

Yes, it's consistent.

Okay.

And then can you talk about your marked to market on your total portfolio, what you think -- sounds like rents have moved. Where you think you are.

We haven't looked at that in-depth at this point, so I'd hesitate to give a number, even a range at this stage, until we sat down and really looked at it.

Okay. Great, thank you.

Thank you.

Management, at this time, I will turn the conference back to you for any closing comments you may have.

Appreciate everyone's participation on the call and your interest in DLR. We look forward to following up with you in the future.

Thank you, very much.

Thanks, everybody.

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