Digital Realty Trust Inc (DLR) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Digital Realty Trust first quarter earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference call is being recorded Wednesday, May 9, 2007.

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

Thank you, and good morning to everyone.

By now you should all have 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 expectations, 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, total acquisitions for 2007, acquisition cap rates, the acquisition mix between vacant properties and income-producing properties, the commencement of leases for turn-key datacenter space, redevelopment space and basic commercial space, and the expected rents related to those leases, total capital expenditures, total, general and administrative expenses [inaudible] impact of the Company's convertible preferred stock offering, the leases prospects for the Company's development site located in suburban London, England, the demand and long-term growth prospectus for advanced datacenter facilities, and the expectation that the Company will achieve its performance objectives.

These risks and uncertainties include adverse economic or real estate developments in the Company's market or the 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, successfully redevelop properties acquired for that purpose, 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 rates, 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 December 31, 2006 and subsequent filings.

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 operations or FFO, adjusted funds from operations, or AFFO, and earnings 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 first quarter of 2007 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 Michael Foust, CEO, and Bill Stein, CFO and Chief Investment Officer.

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

I will now turn the call over to Mike.

Great. Thank you, Pamela, and welcome, everyone. I'll begin by providing a brief overview of Digital Realty Trust, then discuss new research data about a number of emerging datacenter trends from a survey we recently commissioned, and we'll conclude with a detailed review of our first quarter 2007 accomplishments. Following my remarks, 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 of 11.8 million square feet, including one property held as an investment in an unconsolidated joint venture. These properties are located in 25 metropolitan areas across North America and Europe. DLR provides real estate solutions for domestic and international tenants' datacenter requirements across a variety of industry verticals ranging from information technology and Internet enterprises to manufacturing and financial services. The portfolio includes approximately 1.7 million square feet of space held for redevelopment, an important source of growth for the Company. That growth was reflected in our strong performance in the first quarter, financially and operationally.

FFO has increased significantly year over year, up 62%, and from the previous quarter up 6%. Leasing is well outpacing last year, and our redevelopment program is in high gear, delivering turnkey and base building datacenter solutions for our tenants. A key initiative for DLR has been to gather and analyze market trends for datacenter demand, an area that is significantly underserved by independent quantitative research. In response we commissioned our own research study that would focus on the key drivers of demand for datacenters, including immediate and longer-term growth prospects. The survey was conducted in March 2007 by Campos Research and Analysis, and it looked at critical issues such as power and cooling, space requirements and the drivers of new expansion. The results not only confirm our understanding of today's market trends; more importantly, they provide specific data from users on the underlying demand characteristics for datacenter space.

[The metrics] reported in the results are based on web-based surveys of over 150 IT decision-makers, a wide range of large corporations in North America with revenues of at least $1 billion or at least 5,000 employees. All survey participants are involved in the process of managing corporate datacenters, implementing new facilities or expanding existing datacenters and are senior level executives including C-level management in MIS, IS or finance. While we plan to release the results of the study in greater detail in a press release later this week, I want to discuss a few key findings with you this morning.

First, five out of six respondents, more than 80%, have plans to expand their datacenters in the near term. One third of those plan to expand within the next 12 months. Nearly 40% are planning expansions that will occur in the next 24 months, and another 12% are planning expansions beyond the 24-month mark. Of those who are planning datacenter expansions, 75% plan to expand in two or more locations. This suggests based on our experience that these expansions will be complex, multi-site initiatives. Only 15% of survey participants have no plans to expand. And the study also determined that the average company surveyed has between three and four major datacenters, and nearly 20% operate six or more major facilities.

The second set of important findings outlined key demand drivers identified by the participants, pushing the need to expand existing facilities and to develop new datacenters. These drivers include new business applications, the need for more square footage to satisfy growth in the scope of corporate operations, disaster recovery initiatives, Sarbanes-Oxley financial compliance requirements, increasing power and cooling requirements, and the growing need for broadband network conductivity.

The results of the survey illustrate that the demand for advanced datacenter facilities is broad-based and has longer-term prospects based on the scope and timeline of the projects described by these companies. They also confirm our belief that the datacenter has become a critical part of business operations that crosses all industry verticals, not just Internet or technology companies. We believe that these important trends, coupled with our unique business model and First Mover advantage, will continue to drive strong long-term FFO growth for DLR.

Now I'll detail highlights from DLR's portfolio operations in the first quarter. Excluding space held for redevelopment, same-store occupancy was a healthy 94.4% at the end of the first quarter 2007, compared to 94.9% for the previous quarter and 93.7% for the same period in 2006. The small reduction from the previous quarter largely reflects the addition of 93,700 square feet of newly built-out turnkey datacenter space that we added from the redevelopment inventory. The new turnkey space represents our value-added redevelopment program in action, and we anticipate that will be leased shortly at premium rates. In addition two stabilized office properties were sold during the quarter, also modifying the designated same-store portfolio. Also for the first quarter same-store total rental revenue increased 17% and NOI increased 15% from the previous year, reflecting growth from our successful leasing activities.

Turning now to our investment program, we acquired five properties during the quarter totaling $160.1 million. As we discussed in our last call, we acquired the Ridgetop Circle property, a vacant 130,000 square foot shell datacenter located in Sterling, Virginia. Shortly after closing we signed a 15-year lease with a leading IT infrastructure services provider for the entire building, demonstrating the strong demand for space in the Northern Virginia market.

Next we acquired 3011 Lafayette Street, a vacant 90,800 square foot shell datacenter building located in high demand Santa Clara, California, which we added to our inventory of redevelopment space. We also acquired a fully improved 95,400 square foot datacenter facility in Ashburn, Virginia, which is fully leased on a long-term basis to a major [core] location services provider.

Since our last call we acquired a leasehold totaling 33,700 square feet of strategic datacenter space located at 111 Eighth Avenue in New York City from NYC Connect. We consider this building to be the primary Internet gateway facility in New York. The space consists of two suites located on the third and seventh floors, bringing our total lease presence at this property to over 120,000 square feet.

In addition we acquired a three-building datacenter property also located in Ashburn, Virginia, bringing our presence in the important Northern Virginia market to approximately 770,000 square feet. This new complex totals 432,000 square feet and is approximately 40% leased to a major aeronautics corporation and to a leading Internet enterprise company. The remaining 262,000 square feet has potential to support up to 160,000 square feet of highly improved datacenter space and has been added to our redevelopment inventory.

Since the end of the quarter we acquired a very strategic development site in suburban London capable of supporting up to 200,000 square feet of new construction. This site is particularly attractive due to the power contract that we negotiated with the regional utility company that provisions the site with greatly expanded electrical service. As a result we are currently negotiating with major potential tenants to construct a state-of-the-art, build-to-suit datacenter facility. In Dublin, Ireland we're moving ahead with the ground-up development of a 120,000 gross square foot datacenter. Dublin is also an important market for DLR, and we have strong interest from several prospective tenants for the facility. The DLR operations and design and construction teams based in London, Dublin and Paris have established a strong reputation in the market with major international customers, and we expect to continue to build our operations and portfolio in Europe.

The investments made year-to-date excluding the vacant Santa Clara building, the vacant portion of the Ashburn property and the London development site reflect an average Year 1 cash cap rate of 8.3% in line with our 2007 guidance. We remain focused on growing our portfolio of datacenter facilities and regularly evaluate our few non-core assets. As a result during the quarter we completed the sale of two office properties, 100 Technology Center Drive, a single-tenant building located in Stoughton, Massachusetts, and 4055 Valleyview Lane, a multi-tenant building in suburban Dallas. The sale of these two assets generated a gain on sales of $18 million which was redeployed to support our acquisition and redevelopment programs.

Our leasing program is progressing well, reflecting the strong demand for our datacenter product. Total leases commenced on over 376,000 square feet during the quarter at an average gross annualized rent of $43 per square foot. Of the commencing leases, 308,000 square feet was datacenter redevelopment space leased at an average annualized rent of $39 per square foot. Approximately 24,000 square feet was turnkey datacenter space at an average annualized rent of $127.50 per square foot. And approximately 11,500 square feet was for non-technical space at an average annualized rent of $13.60 per square foot. Also we signed new leases during the first quarter for nearly 87,000 square feet. Of the new leases signed, approximately 70,000 square feet was datacenter space averaging almost $118 per square foot including nearly 18,000 square feet of redevelopment space.

In addition to our acquisition leasing programs our redevelopment inventory is an important source of growth for us. We are adding space opportunistically in the markets we have identified as having high demand and attractive returns for DLR. During the quarter approximately 491,000 square feet of redev space was [added] in Northern Virginia and in Silicon Valley. At the same time we signed or commenced leases for over 325,000 square feet of redev space including the 135,000 square foot Sterling, Virginia property acquired in January. As discussed previously we currently have underway construction projects in several high demand markets in the US and Europe that will add approximately 500,000 rentable square feet of build-to-suit and turnkey datacenter space. With average available power capacity of 125 to 145 watts per square foot, these facilities will be equipped to meet today's power and cooling requirements for the most demanding corporate IT applications. The redevelopment inventory currently stands at 1.7 million square feet.

Overall we attribute our success to several key competitive advantages. First is the high-level technical expertise within our growing team of professional sales, engineering, design and construction, and datacenter operations staff. This team has established a high level of credibility with corporate IT executives and will drive the leasing and development growth of the DLR program. Second is our ability to identify and acquire properties in top markets that have the necessary infrastructures to run today's datacenter applications. Third is our ability to offer corporate enterprise tenants, IT service providers and network carriers with flexible, cost-effective and reliable turnkey datacenter solutions as well as more custom solutions in carrier-neutral environments in virtually all the major markets in the US and in Europe.

Now I'd like to turn the call over to Bill Stein for a detailed discussion of our financial results and 2007 guidance. Bill?

Thanks, Mike. Good morning, everybody. First I will review our first quarter financial results and then go through our revised 2007 FFO guidance. Following my remarks we will open the call to your questions.

FFO was $35 million in the first quarter, up over 61% from $21.7 million for the first quarter of 2006. FFO on a diluted share and unit basis was $0.50 in the first quarter of 2007, up 39% from $0.36 in the same period last year. Quarter over quarter FFO was up 4% from $0.48 in the fourth quarter of 2006. The increase was primarily due to earnings from new acquisitions and our leasing activities, and a $940,000 gain attributed to the unwind of two interest rate swaps associated with the sale of two properties. FFO per share and unit for the first quarter included $0.02 of incremental FFO resulting from the $940,000 gain on the derivative instruments and $577,000 of net bad debt reversals resulting from cash collections. Excluding these two items, FFO would have been $0.48 per diluted share and unit for the quarter. Let me remind you that FFO in the fourth quarter of 2006 included $0.01 of incremental FFO resulting from certain non-cash adjustments.

Adjusted FFO or AFFO for the first quarter of 2007 was $28.6 million or $0.41 per diluted share and unit. The AFFO payout ratio for the first quarter was 69.8%. This compares to fourth-quarter AFFO of $20.2 million or $0.29 per diluted share and unit. The AFFO payout ratio for the fourth quarter was 98.7%.

EBITDA was $65.7 million, and EBITDA margin was 61.4% for the quarter including the $18 million gain from the sale of two of our properties during the quarter. EBITDA and EBITDA margin would have been $50.7 million and 57% respectively excluding the gain from the sales adjusted for minority interests. EBITDA and EBITDA margin in the previous quarter was $45.7 million and 54.1% respectively.

Reconciliations of FFO to net income, AFFO to FFO and EBITDA to net income for these period are included in our supplemental operating and financial data furnished to the SEC and available on our website.

Total operating revenues for the first quarter were $89 million, up 8.5% from $82 million for the fourth quarter of 2006 and up 55.9% from the $57.1 million in the first quarter of 2006. The increases in rental revenues and tenant reimbursement revenues for the quarter compared to the same period in 2006 were primarily due to the 18 properties that we acquired during the 12 month period. Year-over-year same-store rental revenues as noted by Mike increased 15.8% primarily as a result of new leases at our properties during the 12-month period. Net income for the first quarter was $22.1 million, up from $5.1 million for the same period in 2006. Net income available to common shareholders for the quarter was $18.6 million or $0.32 per diluted share compared to $1.6 million or $0.06 per diluted share for the same period in 2006 and $3 million or $0.06 per diluted share for the fourth quarter of 2006.

Net income included a gain of $18 million on the sale of two non-core assets, 100 Technology Center Drive in Stoughton, Massachusetts and 4055 Valleyview Lane in suburban Dallas which closed during the quarter. Ignoring this gain, net income available to common shareholders would have been $3.6 million or $0.06 per diluted share and unit.

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 first quarter 2007 to first quarter 2006, G&A increased to $7.2 million from $4.2 million in the first quarter of 2006. The year-over-year increase in G&A was driven largely by $1.8 million in costs associated with staffing to support our growth and $400,000 in professional filing fees. At quarter end we had 121 employees compared to 67 at the end of the first quarter of 2006. Quarter over quarter G&A was up slightly from $6.5 million in the previous quarter.

Income from discontinued operations was $1.4 million for the quarter and includes the $940,000 gain attributed to the unwind of the two interest rate swaps. This gain was partially offset by a $312,000 charge to write off loan fees related to the debt that was outstanding on these two properties. Gain on sale of assets and minority interests attributable to discontinued operations reflect the sale of the two properties I mentioned earlier. At quarter end minority interests amounted to 10.6% which consisted of the [Canvay] telecom and DRL management and reflects the sale of the remaining units held by GI Partners.

Turning now to our balance sheet. During the first quarter we capitalized $1.5 million of interest related to construction projects. In addition we capitalized $575,000 in compensation expenses. We completed financing on two properties in Silicon Valley during the first quarter which we mentioned on our last call. To review, on January 31 we completed the financing of 2045 and 2055 Lafayette Street in Santa Clara, California. This $16 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%. On April 10, 2007, we completed an underwritten public offering of 7 million shares of Series C convertible preferred stock with a $25 liquidation preference per share, which generated $169.1 million in net proceeds. Proceeds were used to repay borrowings under our unsecured credit facility. The convertible preferred stock will take quarterly dividends at an annual rate of 4 3/8 per cent of the $25 per share liquidation preference, which is significantly below the unsecured credit facility's interest rate of LIBOR plus 150 basis points, currently 6.82%, which resulted in a transaction that is accretive to earnings. It lowers our cost capital while providing equity to fund our acquisitions and redevelopment programs.

We currently have drawn $93 million on our credit facility including outstanding letters of credit. We have total borrowing capacity of over $785 million consisting of $407 million of immediately liquidity under our credit facility and secured debt capacity of approximately $378 million. If this capacity were fully utilized, our pro forma total debt to total enterprise value would be approximately 40%. Our total debt at quarter end was $1.3 billion and our ratio of debt to enterprise value was 30.7%. Excluding the impact of the gain on sales resulting from dispositions, our fixed charge coverage ratio was 2.4 times and our debt service coverage was 3.1 times. Our weighted average cost of debt was 5.8%, and the weighted average maturity was 6.2 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.

I would like to bring to your attention a few changes in this quarter's supplemental package. First we added a new schedule in our redevelopment activity on Page 24. Second we redefined same-store as properties acquired on or before December 31, 2005. And lastly we updated discontinued operations for properties sold in the first quarter of 2007.

Finally as Mike said in his comments based on our strong performance in the first quarter and the accretive convertible preferred stock transaction, we are revising our 2007 FFO guidance as follows. FFO per diluted share and unit for the year ending December 31, 2007, is expected to be between $1.91 and $1.96, which represents FFO growth of 17.2% to 20.2% over 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 $110 million of vacant properties for our redevelopment program and between $190 and $290 million of income producing properties at an average cap rate of 8.25%. Please note that this is an assumed $35 million increase in vacant properties and an equal decrease in income producing properties. 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 turnkey datacenter and redevelopment space at an average annualized gross rent of $70 per square foot. The $70 per square foot rent assumption amounts to a $10 per square foot reduction and reflects a greater assumed percentage of base building leasing versus turnkey datacenter leasing.

Total capital expenditures for the redevelopment program of $251 million, a reduction of $22 million. And finally G&A is now assumed to total $28.5 million, a $4.5 million increase from our prior guidance. This increase is due to a new long-term incentive program recently approved by the Company's compensation committee and increases in overhead associated with higher staffing, travel costs, professional services and local taxes and business fees.

Before concluding, I'd like to note that several analysts have written comments suggesting that our guidance appears conservative. In response to these comments I would like to point out the following. First we are four months into the year, and a lot can happen between now and the end of the year. Two, the run rate of our Q1 FFO when adjusted for one-time items is $1.92, not $2.00. Three, in addition to the increase in G&A noted in our guidance we are actively considering another asset sale from our non-core portfolio. Four, as noted in our 10-Q which we plan to file tomorrow we are in discussions with the tenant of our Denver datacenter regarding a lease termination and [releasing] alternatives. If we were to agree to a lease termination at this location, there would likely be an effect on our FFO.

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

Thank you, Sir. Ladies and gentlemen, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from Michael Bilerman with Citigroup. Please go ahead.

Hey. [inaudible]'s on the phone with me as well. How much of the [Devon] acquisition was allocated to redevelopment versus the in-service buildings?

I'm sorry, which one? The one in Ashburn?

Yes, the $62.5 million. How much of that is considered--in terms of--when you talk about an [8-3] yield on the acquisitions in the quarter, what is that based on?

Yes, that was--we split out the base building shell space from the lease proportion. And the lease portion was about $23 million.

And so the remaining--?

In our internal allocation.

Roughly one thirds, two thirds, Michael.

One third--two thirds to the redevelopment fees?

Right.

And then I guess tying into that when I look at the run rate NOI on Page 11 to get about $7.6 million, and I guess that an 8-3 yield you'd come up with a much higher NOI, so I was just trying to figure out what the difference is? So if your base acquisition is about let's call it around $107 million, an 8-3 yield would give you almost $9 million of NOI, but your run rate here annualized out only gives you $7.6 million.

Yes, that's a cash number, and one of the interesting things about this property is the existing rents are far under market. And in the future there'll be opportunity to roll up rents in the short term with one of the--shorter term with one of the tenants. So that might be the difference you're looking at.

Shouldn't the [GAAP] be higher than the cash in that case, then?

The GAAP would be higher than the cash typically, yes. I think--we had this issue on the last call, Michael. And one of the things going on is that the NOI from our Westin property in Seattle which is a joint venture is not being picked up here, I believe.

[The last quarter. Not this quarter.]

We can follow up after the call if you want.

Okay.

The second question is just on when I look at Saavis and Equinex, you did some leasing, and I wasn't sure if that was direct leasing out of the redevelopment or part of the acquisitions? But looking at Saavis specifically, it looked like you leased about 275,000 square feet at about $22 a foot relative to their in-place average at about $21, which seemed pretty light relative to where they were. On the Equinex side it looks like about 100,000 square feet at about $41 relative to their $21 average. Can you talk a little bit about what's going on?

Well, in terms of--both of those--the leasing is partially existing facilities with leases in place. So we acquired a facility with a lease in place as well as new leasing of base building. Especially in the case of Saavis, they leased all of their space at a base building rate that varies pretty widely from mid-$30 in New Jersey to mid to high teens for base building in some of the other parts of the country that they might be in. So that's where you get kind of the variation.

But you would think--I mean, you look at Saavis paying $21 net--or, gross. Where do you think that [mark to] market is on those leases?

Actually, those rents I believe are net [rental] rates.

Oh, it says "gross" in the [sub].

We can take a look at that, but I think that's probably due to the convention of how the rental rates are averaged in the supplemental.

And you think that there's mark to market even though you're signing leases at the same rate today?

No. I would say that the leases that we've signed with Saavis currently are within market for those particular locations. We have not come out for reasons of a lot of this information in terms of sites are proprietary, so we don't go into a lot of detail on specific individual sites with the tenants, whether it's Saavis or Equinex or others. So we don't break that out for security reasons, for their physical security concerns.

Okay. Thank you.

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

Good morning, guys. Could you--leasing that commenced during the quarter, can you give us a sense as to what the timing of those commencements were?

Let's see. A good portion of them were I believe March 1 with the Saavis leases.

Okay. A "good portion" being two-thirds, 75%, thereabouts?

Yes, I think probably about 80% or so.

About 80%. Okay. I guess my follow-up to that, Bill, would be how would if you--what would your quarter's run rate be if you had a full quarter of those rents in there versus sort of the $0.48 number you laid out?

Well, I mean, I'm looking at the [GAAP] rents right now on these. But I don't have NOI for these properties; I just have the gross rents, so.

Most of them were Saavis, right? Isn't Saavis--?

There's some turnkey in here, too.

Okay. But Saavis is mostly a net rent, right?

Saavis is net rent, yes.

Okay. But it would be fair to say that it would something higher than the $0.48, just because they were March 1 signings rather than January 1?

Right. But keep in mind that we sold two properties into the quarter, too.

Sure, sure. That makes sense.

That goes the other way.

Okay. And then in terms of the turnkey space on the new disclosure, I think it's Page 24, just a point of clarification. It says at the bottom there that the redevelopment under construction in the quarter is about 278,000 square feet. Is that right? Is that--what was that last quarter, and how--and what does that relate to? Does that mean you currently have 278,000 under construction that's turnkey space, and was any part of that related to acquisition you might have done? Or did you just start an extra couple hundred thousand feet?

That's space in existing buildings that we've started building out the turnkey space. So it's--I don't recall exactly where we were the previous quarter in terms of the timing, but we expect to bring on board by the end of the year, first quarter of next year, about 500,000 in total of rentable square feet.

Okay. I remember you saying something about five or six 20,000 square foot pods that you had started on spec? Is some of this stuff pre-leased?

A certain amount of the space has leased upon completion. So I believe we have about 93,000 feet that went into the inventory--came out of redevelopment inventory as turnkey. So we built out the turnkey space, and now it's in the building portfolio. And so that's available. It's about 93,000 feet or so that we expect to have leased pretty quickly.

Okay. Thank you.

Our next question comes from John Stewart with Credit Suisse. Please go ahead.

Thank you. Bill, can you kind of amplify your last two qualifiers on the guidance, specifically if we assume that this third non-core asset sale happens, what's the total expected dilution for the year? And likewise, can you give us a sense for how this Denver lease termination may affect the numbers? I would assume you would take whatever the lease termination was into the current year results?

Yes, let me--I'll start with the second one first. This is a--you'll see in the queue, I mean, this is a credit situation so we're not expecting any termination fee at this point on this property. There would be some non-cash implications to our FFO, specifically the straight line rent that's been booked for this tenant would have to be reversed.

How big would that be?

That's a moving target. But let's call it a half million dollars just to be conservative. And then there's potentially some FAS 141 reversals, and that's going to be a function of how a new lease is structured. So that one's real--that accounts for some of the bracketing on the guidance because as I said it's really very much a function of how we structure a new lease if we do. And then you've got issues of downtime which can affect obviously your FFO. Now, we believe that the contract rent here is below market, substantially below market, so at the end of the day we think that there will be upside when we get this back. But it's--obviously it's speculative as to when a new lease would commence. So that's the final item. The third item again, I mean, I can't give you specifics on dilution there. It's going to be a function of what we get for the asset and when it sells.

How about--what would the total NOI have been for the three properties had they been contributing for the full year?

We'd have to get back to you on that.

Okay. Fair enough. And then can you--you obviously spoke to kind of the operating assumptions, but your previous guidance obviously included $19 million of preferred stock dividends, and I'm assuming that the convertible preferred kind of presupposes that. And likewise there was a common equity offering essentially contemplated in the previous guidance. What are--what is baked into your revised guidance in terms of capital raising?

The revised guidance assumes no additional capital at this point. But if you were to see our capital budget increase, I mean, we're actively going after some build-to-suits right now which are not in the capital budget. So if we were to win those deals, our capital budget would be higher and we'd issue new guidance at the next quarter. And depending upon how much higher it is, we might have to come out with a capital raise towards the end of the year. But at this point nothing's planned.

Okay. And then just lastly, Mike, could you speak to the London build-to-suit that you referenced? Can you give us a sense specifically what sort of rents are being contemplated and also when we could potentially see an announcement?

Sure. It's a great site in a real limited supply market right now and a lot of demand being driven by international financial service companies. So we have a few folks that were in active discussion with--on that site, as I think I've mentioned before, looking at in general kind of cash yields on unlevered yields on costs. For a build-to-suit like that it would probably be somewhere between 8% and 8.5% going in, would be a likely range. And then it's--right now it's hard to give a dollar amount in that depending on who the customer is, the size of the building could vary in terms of their particular specifications . But it would certainly be a situation where we'd have a tenant with a desirable return and an asset that would be very easily financed with attractive secured debt.

Okay. Thank you.

Our next question comes from Sri Nagarajan with RBC Capital Markets. Please go ahead.

Thanks. A couple of broad macro questions. Thanks first for sharing the survey results with us, especially the interest in datacenters across several verticals. We are hearing commentary that companies have now started to in-source their datacenter needs rather than going to your main tenants like Saavis or Equinex. Can you generally comment on how in-sourcing trends would propel demand for your space or perhaps cause some companies to build server farms on their own?

Well, we see a pretty broad range. I mean, you do have companies like Microsoft and Google building very large server farms, and that tends to be the Internet service providers who are really focused on content distribution. On the more corporate application side, we see a combination even within the same company between developing their own and out-sourcing either to an IT service provider like Saavis. We see out-sourcing continuing to companies like IBM and EDF and SFC, and in those cases we're oftentimes a good channel partner for those major outsourcings. And there are a lot of individual applications that require 10,000, 20,000, 30,000 feet that we're a very good source for, where it doesn't make sense to go out and try to find a separate building that can accommodate the infrastructure, and we can provide that in a very short period of time.

Okay. Second question is in terms of tenant churn, again your major tenants seem to suggest that they're simply obviously churning some tenants out in order to bring in new tenants with higher rents. Are you seeing the benefits of this downstream? I mean, we also talked about some Denver lease termination here. Are you also filtering out some of the lower-paying tenants from your space at this point to aggressively push rents?

We're always looking to take advantage of increasing rents, especially in relation to the turnkey datacenter product that we have that's already built out. We wish we had more rollover in the near term than we have, but we're pretty confident that conservatively on average that we would have at least a 20% uplift in rents. And in a situation like in the Denver building, it would be considerably higher than that, comparing market to where the current tenant is. So we see the Denver opportunity as very attractive for us.

Okay. Thanks a lot.

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

Thanks, guys. I was hoping you could spend a minute just talking about the supply side of the equation. Obviously it sounds like demand is quite robust, but can you spend a minute just talking about supply and maybe your outlook there, how you track it? And then if you're pretty comfortable, which I imagine you are at this point, what do you think are the key sort of barriers to entry keeping you feeling comfortable at this point on the supply side? Thanks.

Sure. It's really from the research that our team does market by market. And these days we're really focused on seven or eight, nine, markets here and in Europe that are the markets with the highest demand. The good news is from our perspective is that the competitions very fragmented. It tends to be focused around some local developers who have one-off opportunities. There are folks who focus on Northern Virginia who do a real good job. But nobody is as broadly focused on different markets like we are. And some of the barriers that we see is first finding sites that have sufficient utility service, electrical service as well as network conductivity that's required by the corporate users. And it's real detective work to find those sites and spend a lot of time with utility companies to be identify--be able to identify the buildings that are readily adaptable and to look at sites where you may build out of the ground. Also to build out turnkey space is very expensive, and costs are not coming down by any means. So that creates a certain barrier as well. You can look at $800 to $1,200 a foot to build out 10,000, 15,000 foot raised-floor facility with the adequate power. So that creates a certain barrier in and of itself for folks going out and specing that kind of expenditure over and above your base building costs. So that's helping to keep supply in check to a large extent.

Thanks. That's helpful.

(OPERATOR INSTRUCTIONS) Our next question is a follow-up from Jordan Sadler. Please go ahead.

Hi. Just to come back to the leasing again very quickly. How much of leases have been signed but not yet commenced as of March 31?

Yes, that's a good question. On backlog right now we have about 86,000 feet that are signed but not yet commenced. And that includes about 80,000 feet of datacenter space.

Hey, Jordan?

Yes.

I'd like to get back to one of your questions.

Sure.

And actually it's another--it's a question that John Stewart raised, too, and that's on asset sales.

Sure.

Just so that you're aware, the two properties that sold pretty much at the end of the first quarter, so we have the benefit for the full quarter. The second thing is the NOI on the two assets plus the one we're contemplating for sale, John--I know you're not on. It's Jordan here. But it was about $10.5 million.

That's the full [inaudible]?

That's the full-year NOI.

[inaudible]

So everybody has that information.

And--

I'm sorry to interrupt you, Jordan, but I just wanted to get that out.

No, that's perfect. What's the size of that next disposition that you're contemplating, roughly?

What's the--?

Volume? Is it a $20 million deal or--?

Between $35 and $40.

$35 to $40.

I mean, obviously it's a function of what we get for the asset, but.

Just coming back to Mike on the leasing, that 80,000 square feet that's signed but not yet commenced, what's the commencing timing look like on that?

About 74,000 feet of that commences in the second quarter, and then there's another 12,500 or so that's in the third and fourth quarters.

And that's shell datacenter or turnkey?

It's about almost 50/50 turnkey and shell base building. I'm sorry, I take that back. It's about a third turnkey.

Okay. [Third-ish]. Okay. And then just coming back to Page 25, I just had a question about some of the turnkey space that was leased during the quarter. It looked like about 20--that commenced, at least--it was 26,000 square feet and you spent $644 a foot in improvement for $158 rent. The average lease term there is about 5 1/2 years, and I was just curious if you could comment on that, what the expectation or the longevity or life of those improvements is really like?

Yes, those are--represent turnkey improvements for the power infrastructure, cooling infrastructure. So those have a long life, 15, 20 years easily. So it's pretty typical with the turnkey space that we've been developing and very reusable for other tenants.

Okay. Great. Last question, was any of the development opportunities factored into guidance here at all, Bill? Or is it just too soon to really realize anything?

Well, we have spec leasing in guidance.

No, not redevelopment. Not redevelopment, but the ground-up stuff.

No. No. Because of the timing. I mean, none of that's going to come online this year.

It's going to hit next year.

Yes.

Perfect. Thank you.

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

Yes, just on the sales. So it's about a 9 to 9 1/4 cap rate effectively then?

Yes, that sounds right.

Okay. And then just on the build-to-suit opportunities, what's the magnitude and number that you're targeting?

There's a--that's a wide range, Michael. It's a really wide range.

Yes, and the reason that it's a wide range is because it could be a combination of datacenter base building as well as internal turnkey improvements. And a lot will come out in terms of the particular specs for whichever tenant we end up signing with.

I mean, how many different opportunities are you looking at?

Oh, of group-up development?

Yes.

I mean, there's several right now. I mean, I wouldn't want to be specific because opportunities are coming in and out. But there are definitely several build-to-suit with specific customers that we're talking to right now.

Is there land that you have under option today?

It's either land that we own or we have identified.

And how much--the land that you own today, what's sort of the value and what can it support in terms of development?

I'm sorry, I--the value of--?

The land that you have today that you're holding for development, what's the value of that, and how much development could that support?

I don't have our carrying value off the top of my head for the two together that we currently own that are ground-up. We'll have to get back to you on that one.

Okay. And the returns, when you're going out and doing ground-up development, how do those returns compare to what you're going to get within your sort of acquisitions and within the redevelopment pipeline?

If we're going on a spec basis, especially multi-tenant, it'll look very similar to redevelopment where we're looking for unlevered, stabilized, low to mid teens. If it's a build-to-suit situation, depending on the credit then it could look more like an 8% to 9% going in, certainly with [inaudible].

And you--

[inaudible] long term lease so it streamlines quite nicely.

Okay. Thank you.

Our next question is a follow-up from John Stewart. [Please] go ahead.

Thanks. Bill, I presume the 15.4% same-store NOI, that's a GAAP number. Do you have the cash?

We don't have the cash.

Okay. Mike, could you comment on the returns, I guess your return on invested capital, on turnkey versus shell leasing?

Yes. On the turnkey, it tends to be higher. It tends to be more in the high teens unleveraged. Sometimes especially in existing operating buildings, it can be well into the 20s if it's an already income-producing building that--based on the incremental investment. In the more stand-alone vacant buildings that we're redeveloping, you're probably looking more at a low teen, low to mid teen, unlevered return on cost.

How does that compare to just shell space?

Oh, yes. So I was thinking in terms of the shell space and that as I [inaudible]. On the stand-alone--

Low to mid teens?

Yes. And the stand-alone redevelopment buildings where we are leasing shell, it's looking more like low to mid teen.

Okay. And then lastly could you just speak to the acquisition pipeline? We haven't talked about that much this quarter.

Yes. We've got pretty good activity. It'll probably slow down a bit in the second quarter compared to the first, but we're confident that we're going to easily hit the goals that we've got set out in our guidance for ourselves and--

In terms of income producing?

Yes. Yes, it's certainly--there's fewer than last year, and we're putting a lot of the emphasis on FFO growth in the leasing and the redevelopment portfolio.

But we're getting to the point in the year, John, where the acquisitions aren't going to affect this year's numbers so much.

Right. Well, I know you're not prepared to give '08 guidance, but what sort of contribution could we expect to see next year?

Boy, I don't think we're ready to--I mean, we've got projections, but it'd be too early to put those out there at this point.

When do you expect to give '08 guidance?

Same time as we gave '07 last year [inaudible] this year.

Okay. Thank you.

Our next question comes from Josh [Cayhill] with [Borderline] Capital. Please go ahead.

Good afternoon. Thanks for taking my question. I'm just curious as for the 80% of these respondents that are planning new builds, is there some percentage that you consider to be future customers? These builds seem to be more difficult to execute, and so I'm just wondering if you feel they might struggle to achieve these plans and then potentially become your tenants? Or is the study just an indicator of market demand?

Yes. I mean, that's a good question. We think that these are great target customers for us. You're always going to have situations where companies execute internally, but even some of the larger financial services companies who have a lot of experience building these facilities see that with the amount and the geographic diversity that they require, working with DLR is a really great solution for them.

Thanks very much.

At this time I'm showing no further questions in the queue. I'd like to turn the call back over to management for their concluding remarks.

One more item relative to cash same-store, that number is 13.5%. I think John Stewart raised that question. And you can actually pick that out of the supplemental if you look at the same-store GAAP numbers on Page 13. And then we've got the straight line rent numbers on Page 9 in the [inaudible] reconciliation.

Great. Thank you, Bill. And thank you, everyone, for participating. We appreciate the support and the comments, and we'll continue moving ahead in our very exciting sector here.

Ladies and gentlemen, this does conclude the Digital Realty Trust first quarter earnings conference call. A replay of this call will be available by dialing 800-405-2236, or internationally 303-590-3000, and entering passcode 11086695 followed by the "#" sign. Once again the dial numbers for the replay are 800-405-2236, or 303-590-3000. The passcode is 11086695. Thank you for participating in today's call. Thank you for using [ACT] teleconferencing. You may now disconnect.