Digital Realty Trust Inc (DLR) 2007 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Digital Realty Trust third quarter 2007 earnings conference call.

At this time all participant are in a listen-only mode.

Later we will conduct a question and answer session.

Instructions will be given at that time.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded today, Wednesday, November 7, 2007.

I would now like to turn the conference over to Ms.

Pamela Matthews, Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good morning, or afternoon, 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 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 risk and uncertainties that could cause actual outcomes and results to differ materially from expectations.

Such forward-looking statements include statements related today the company's expected financial results for 2007 and 2008, 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 and 2008, acquisition cap rates, the acquisition mix between vacant properties and income-producing properties, the commencement of leases for turnkey data center space, redevelopment space and basic commercial base, and the expected rents related to those leases, total capital expenditures, total general and administrative expenses and the company's belief that will achieve these objectives.

These risks and uncertainties include adverse economic or real estate developments in the company's market or the technology industry, defaults on or nonrenewal of leases by tenants, increased interest rates and operating costs, the company's ability to manage growth effectively, obtain necessary outside financing, operate acquired property, identify property to acquire and complete acquisition, successfully redevelop properties or lease space that has been redeveloped, decreased rental rates, increased vacancy rates, failure of acquired properties to perform as expected, environmental uncertainties, maintain the company's status as a [re], natural disasters, financial market fluctuations, changes in foreign currency exchange rates, operating in foreign markets, changes in real estate and zoning laws, increase in property taxes and changes in general economic conditions.

For further discussion of these and other risks and uncertainties related to our business, see the report and other filings and by the company with the United States Security and Exchange Commission, including the company's annual report on form 10-K for the year ended December 31, 2006 and subsequent filings.

The company disclaims any intention or obligation to update or advise any forward-looking statements, whether as a 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.

Explanations of such non-GAAP items and reconciliations to net income are contained in the company's supplemental operating and financial data for the third quarter of 2007, as filed with the Security and Exchange Commission.

This information is available on our 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 brief 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.

Thank you, Pamela.

Welcome, everyone.

I will begin by you providing a brief overview of Digital Realty Trust, and then I will discuss new research data on the European market from a survey we recently commissioned similar to the U.S.

market.

Finally I will conclude with a review of our third quarter 2007 accomplishments.

Following my remarks, Bill Stein will address our financial performance, revised guidance for 2007, and new guidance for 2008.

First a brief introduction.

Digital Realty Trust is the leading owner and manager of technology real estate.

Our portfolio currently contains 67 properties, totaling 12 million rentable square feet, excluding one property held as an investment in an unconsolidated joint venture.

The properties are located in 26 metro areas across North America and Europe.

It includes approximately 1.7 million square feet of space held for redevelopment, an important source of growth for the company.

DLR provides turnkey data center and powered-base building facility solutions for domestic and international tenants across a variety of industry vertical markets, including information technology, internet enterprises, financial services, energy, and broadly Fortune 1,000 firms.

Earlier this fall we conducted a new study related to data center operations at large European companies.

The research was conducted for us by Campos Research and Analysis, the same firm that conducted the earlier study for us of corporate data center- related initiatives in the U.S..

The surveyed companies come from a wide range of industries, including financial services, manufacturing, professional services, telecoms, consumer services and information technology.

We will issue a press release later today that outlines these findings.

As background, metrics recorded in this study are derived from web-based surveys of IT decision makers at large corporations in five European counties, the UK, Germany, France, the Netherlands and Ireland.

All survey participants are directly involved in the process of managing corporate data centers, implementing new data centers or expanding existing data centers, and are all senior-level executives including C level in MIS, IS or finance.

Some of the key findings from this research study are as follows.

First more than 80% of respondents have plans to expand their data centers within the next 24 months.

Of the participants who are planning data center expansions, 79% plan to expand in two or more locations, indicating that these expansions will be complex and multi-site initiatives.

The average site of planned expansions is approximately 1,000 square meters or about 11,000 square feet.

Second, disaster-recovery initiatives were cited as the leading reason for the expansions, but also cited as key drivers included the need for additional network connectivity, upgraded cooling, additional raised floor area, additional power and new business applications.

Third, respondents identified the following cities as most their most preferred locations for their expansions.

This in order of ranking are London, Paris, Dublin, Amsterdam and New York.

DLR has significant operations in all of these markets.

Fourth, nearly 60% of the companies have developed a green strategy for their data centers that will impact their future data center decisions.

DLR's green initiatives support these corporate strategies.

This European [diversity] is important because it places the data in an international context and confirms that we can anticipate sustained demand for data center space throughout Europe as well as in the U.S.

as the companies implement their IT expansion plans.

Similar to our survey of the U.S.

market this year, this study illustrates the broad-based demand for data center space from a wide variety of industries.

It is important to note that in both Europe and the U.S., more than 80% of companies surveyed are planning data center expansions.

As the market leader in the U.S.

and Europe, DLR is very well-positioned to meet this growing demand.

Our U.S.

and Europe-based design and construction and technical teams give us a significant competitive advantages we expand our business with major corporate customers and IT service providers.

These results are clearly reflected in our solid third quarter performance, in our revised 2007 guidance and 2008 expectations, which Bill will discuss in his prepared comments.

Turning now to our third quarter accomplishments, leases commencing in our portfolio in the third quarter totaled nearly 192,000 square feet, and an average annualized GAAP rent of $58 per square foot.

Of the commencing leases, 166,000 square feet with data center space, leased an an average annualized rent of $64 per square foot.

Of this, 29,000 was turnkey space, leasing at an average annual rent of $130 per square foot.

Approximately 137,000 square feet was power-based building, leased n an average annualized GAAP rent of $94 per square foot triple net.

Also approximately 25,000 square feet of non-technical space was leased at an average GAAP rent of $18 per square foot.

Year to date as of f the third quarter, nearly 118,000 square feet of turnkey data center leases commenced at an average annualized GAAP rent of $146 per square foot, representing $17.2 million of annualized GAAP revenue.

Additionally, approximately 441,000 square feet of power-based building commenced at an average annualized rent of over $34 triple net, representing $15.1 million in annualized GAAP revenue.

In terms of our leasing pipeline, we've signed new leases during the quarter for nearly 210,000 square feet, which will contribute approximately $12.3 million of revenue on an annualized basis.

Of these new leases signed, approximately 197,000 square feet was data center space, averaging over $61 per square foot.

This data center space includes 75,000 square feet of turnkey space, and an average rental rate of $119 per square foot, and 122,000 square feet of power-based building at an average rent of $26 per square foot.

During the quarter we converted over 187,000 square feet of redevelopment space to our inven- to our operating portfolio, including over 35,000 square feet of turnkey space and over 152,000 square feet of space that was leased on a power-based building basis.

We currently have underway construction projects in several high demand markets in the U.S.

and Europe that will add approximately 298,000 rentable square feet of data center space to the operating portfolio, coming on line through Q1, 2008.

Of this space, 134,000 square feet is turnkey, 39,400 square feet is built to suit data center, and 124,500 is new power-based building under construction in Dublin, Ireland.

Portfolio occupancy, excluding space held for redevelopment, was 95.1% at the end of the third quarter, compared to 94.6% for the previous quarter and 94.7% for the same period in 2006.

We expect the occupancy to fluctuate slightly quarter-to-quarter as we continue to convert redevelopment space into value-added turnkey data centers and power-based building, adding to the operating portfolio.

Also, please note that we have potential utility power capacity of 733 megawatts at our top 15 buildings, sufficient to meet current and future customer requirements.

Turning now to acquisition program, we completed four acquisitions during the third quarter.

On August 10, we acquired 900 Walnut Street and 210 Tucker Boulevard located in St.

Louis, Missouri, for a combined purchase price of $55.3 million, including a $2.3 million earn out payment at closing.

The 7-story 900 Walnut building serves as the premier internet gateway facility for the St.

Louis region, totals approximately 112,300 rentable square feet, and is 99% leased.

The 210 Tucker Boulevard building serves as a multi-tenant data center facility, and contains approximately 201,600 rentable square feet, including 62,000 square feet which was contributed to our inventory of redevelopment space.

Excluding the redevelopment space, the building is approximately 95% leased.

On August 22, we acquired 1 [Savas] Parkway, a 156,000 square foot office building located in suburban St.

Louis.

The purchase price was $27.7 million.

The 5-story building is 100% leased on a triple net basis through June 2017 to [Savas].

The building serves as the Savas' corporate headquarters and national network operations center.

Lastly, on September 5th we acquired a 50% ownership interest in a joint venture partnership that owns 1500 Space Park Drive, a premier data center development projected in the high-demand Santa Clara, California, market.

We acquire this interest for approximately $3.7 million.

The property is next door to our very successful 1100 Space Park Drive project, and this project consists of a 50,000 square foot building which we are currently constructing over 34,000 feet of turnkey data center space.

And we have additional land on the site to support the development of new data center facilities for a potential of up to 290,000 square feet.

This brings our 2007 year-to-date acquisitions to approximately $280 million, totaling 1.3 million square feet and this includes 467,000 square feet which we contributed to our redevelopment program.

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

Bill?

Thanks, Mike.

Good morning, everybody.

First, I would like to review our third quarter financial results, and then discuss revised 2007 guidance as well as our guidance for 2008.

Following my remarks we will open the call to your questions.

FFO was $35.9 million in the third quarter, up 37% from $26.2 million for the third quarter of 2006.

FFO on a diluted share and unit basis was $0.51 in the third quarter of 2007, up 24.4% from $0.41 in the same quarter last year.

Quarter-over-quarter on a diluted share and unit basis, FFO was the same as the second quarter of 2007.

Adjusted FFO -- or AFFO for the third quarter of 2007 was $24.5 million or $0.35 per diluted share and unit.

The AFFO pay out ratio for the third quarter was 81.8%, this compares to second quarter AFFO of $25.6 million or $0.37 per diluted share and unit.

The AFFO payout ratio for the second quarter was 77.4%.

The decrease in third quarter AFFO was primarily attributable to an increase in recurring CapEx and tenant improvements over the second quarter.

EBITDA was $51.8 million for the quarter, up 4.4% from $49.6 million in the second quarter.

Year-over-year EBITDA increased $1.2 million from $50.6 million to the third quarter of 2006, reflecting the increase in third quarter 2007 NOI of $17.7 million, offset by the increases in G&A expenses of $2.8 million and preferred stock dividends of $1.9 million.

Excluding last year's gain on sale of 7979 East Tufts in Denver, EBITDA this year would have increased $11.5 million or 28.5% from $40.3 million in the third quarter of 2006.

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

Total operating revenues for the third quarter were $104.8 million, up 9.6% from $95.6 million in the second quarter of 2007, and up 48.2% from $70.7 million in the third 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 properties that we acquired during the 12-month period and overall leasing activity.

Net income for the third quarter was $5.1 million, down from $7.8 million the second quarter of 2007, and down from $14.8 million for the same period in 2006.

Net loss available to common shareholders for the quarter was $224,000, compared to net income available to common shareholders of $2.6 million or $0.04 per diluted share in second quarter of 2007, and $11.3 million or $0.30 per diluted share for the same period in 2006.

Excluding last year's gain on sale, the Denver asset, third quarter 2006 net income available to shareholders would have been $1 million or $0.03 per diluted share.

Same store, rental and tenant reimbursement revenues increased 22.1% during the third quarter of 2007 to $75.2 million, from $61.6 million in the third quarter of 2006.

Same store NOI also increased 15.2% to $46.9 million in the third quarter of 2007, from $40.7 million in the third quarter of 2006.

Same store cash NOI increased to $40.8 million in the third quarter, up 14.6% to $35.6 million in the third quarter of 2006.

These increases were primarily the result of new leasing in our properties commencing during the 12-month period.

I will now review some of the statement of operations one-time items to provide additional detail on our results for the quarter.

As a result of the lease termination agreement that we executed with the tenant in our Denver data center that was effective August 31, we recognized a one-time non-cash charge of approximately $420,000.

It is important to note that as a result of this termination, we were able to release the space immediately at a significantly higher rent rate.

Also, as a result of refinancing of 2001 6th Avenue located in Seattle, Washington, that was completed during the quarter by our unconsolidated joint venture, we recognized our respective share of prepayment penalty and other one-time write-offs associated with the transaction, which totaled approximately $586,000.

Total operating expenses for the third quarter 2007 were $83.4 million, up 14.2% from $73 million in the second quarter of 2007.

The increase was primarily the result of higher utility expenses related to rate increases, and a spike in seasonal power demand in our Central and East Coast properties, as well as various repair and maintenance, cleaning and other common area expenses in our portfolio.

It is important to note that our tenant reimbursement revenue also increased, mostly offsetting the increases in these expenses.

Additionally, depreciation and amortization increased, which is attributable to newly acquired properties and completed redevelopment space.

G&A, which is a component of total operating expenses, was $7.8 million in the third quarter 2007, down $700,000 from $8.5 million in the previous quarter.

The decrease was due to lower SEC-related costs, legal expenses, and fewer dead deal write-offs.

Year-over-year, total operating expenses were up $31.1 million or 59.8% over the same quarter in 2006, due to new properties acquired during the 12-month period ending September 30, 2007 and higher utility rates at several of our same-store properties.

Also attributed to the overall increase in expenses was the increased appreciation and amortization expense related to new properties acquired and improvements made during the same 12-month period.

Year over year, G&A increased $2.8 million in the third quarter of 2007 from $5 million in the third quarter of 2006, primarily due to higher marketing and travel expenses and the increase in the number of our employees to support the growth of the company.

At quarter end, we now have 144 employees compared to 82 at the end of the third quarter 2006.

Turning now to our balance sheet, during the third quarter we capitalized $3.1 million of interest, relating to construction projects, compared to $2.8 million in the second quarter.

In addition, we capitalized approximately $1.2 million in compensation expenses in both the third and second quarters.

On August 31, 2007, the company modified, extended and expanded its unsecured revolving credit facility, increasing the total capacity to $650 million from $500 million.

The purpose of the enhanced credit facility is to provide funds for acquisitions, development, redevelopment, repayment of debt, working capital and general corporate purposes.

The $650 million facility is expandable to $750 million and now has 16 participant banks, up from 13 banks in the previous facility.

The credit facility matures in August 2010, and has two one-year extension options.

The applicable margin ranges from 12.5 to 25 basis points lower than the applicable margin for the earlier facility, and the covenants have been modified to provide Digital with enhanced financial flexibility and increased borrowing capacity.

As I mentioned on our last call, our unconsolidated joint venture completed the refinancing of 2001 6th Avenue located in Seattle, Washington.

The previous $55 million loan on the property had an interest rate of 7.78%.

The new $110 million loan has a 10-year maturity, with three years interest only, amortizing on a 30-year schedule thereafter at an interest of 6.37%.

Essentially, we doubled our loan proceeds and reduced the interest rate by 141 basis points on this financing.

Up to $15 million of the proceeds from the new loan may be used to fund the infrastructure enhancement program at the property.

The balance of the proceeds was distributed on a prorata basis between our partners and DLR.

Our respective share was approximately $20.5 million, which was used to reduce the outstanding balance on our credit facility.

As I mentioned earlier, we recognize our share of the prepayment penalty and other one-time write-offs associated with the transaction which total approximately $586,000.

On September 5, 2007, in conjunction with the acquisition of our 50% ownership interest in the consolidated joint venture that owns 1500 SPace Park in Santa Clara, we along with our joint venture partner guaranteed a secured, floating rate loan in the amount of $5.5 million that encumbers the property.

The loan bears an interest rate of LIBOR plus 275 and matures on April 5 of next year.

Subsequent to quarter end, on October 22nd the company completed a follow-on public offering of 4.025 million primary shares of common stock generating net proceeds of approximately $150.5 million.

We utilized the net proceeds from the offering to repay borrowings under our credit facility.

As of Tuesday, yesterday, we had derived $176.5 million on our credit facility, including outstanding letters of credit.

Based on the covenants in our credit facility, we have total borrowing capacity of over $785 million, consisting of $473.5 million of immediate liquidity under the credit facility and secured debt capacity of approximately $312 million.

If this capacity were fully utilized, our proforma debt to total enterprise value would be approximately 41.3%, and our fixed charge coverage ratio 1.8 times.

Our total debt was $1.3 billion and our ratio debt to total enterprise value was 30.7%.

Our fixed charge coverage ratio was 2.1 times and our debt service coverage was 2.9 times.

Our weighted average cost of debt was 5.8% 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 supplementing operating and financial data furnished to the SEC and available on our website.

With better visible now of our year end results, we are increasing our 2007 FFO guidance to between $2.02 and $2.04 per diluted share and unit.

This increase is due to several factors, including our stronger than previously expected performance for the year, as well as our decision to defer the sale of two non-core assets mentioned in our last call, one of which would have required us to [feed] the loan encumbering the property, resulting in a significant penalty, due to the cost of defeasance collateral required to meet the ongoing debt service obligations.

Moving now to our initial 2008 guidance, FFO per diluted share and unit for the year ending December 31, 2008, is projected to be between $2.30 and $2.40.

This guidance represents projected FFO growth of 12.7% to 18.7% over the 2007 revised FFO range of 2002 to 2004 per diluted share and unit.

This guidance is based on the following assumptions.

Total acquisitions for the full year in the range of $300 million to $350 million, consisting of 100 to $150 million of vacant properties for our redevelopment program, and $200 million of income-producing properties at an average cash cap rate of 8%.

Commencement of leases for approximately 890,000 square feet to 990,000 of both turnkey data center and power-based building space, at an average annualized gross rent of $90 per square foot.

The commencement of leases for 100,000 square feet to125,000 square feet of basic commercial space at an average annualized gross rent of $19 per square foot.

Total capital expenditures of $340 million and total G&A of $440 million, including $2.4 million of acquisition-related costs, which have previously been capitalized and now must be expensed under revised cap -- excuse me, under revised accounting rule FASB 157.

In August 2007, the Financial Accounting Standards Board, or FASB, issued for comment the proposed FASB staff position APB 14a, entitled "Accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement." The comment deadline for this proposal was October 15, 2007, and if issued would be effective for us on January 1, 2008.

We are currently evaluating the potential impact of this issue on our consolidated statements, in the event this is pronouncement is adopted by FASB.

At this time our guidance for 2008 does not include the potential impact of the pronouncement.

A more complete description of the proposed FASB staff position APB 14a can be found in the form 10-Q for the quarter ending September 30, 2007, which will be filed with the SEC.

This concludes our formal remarks.

We would now be happy to take any questions that you might have.

Thank you, ladies and gentlemen.

At this time, we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS)

Our first call comes from the line of Michael Bilerman with Citigroup.

Please go ahead.

Hi, this is [Irwin Gosman], Michael is on the phone as well.

Regarding your leasing targets for 2008, it looks like you're expecting to lease a little over a million square feet with 400,000 square feet rolling, which leaves about 650,000 square feet.

How much of that remainder is occupancy pickup and how much is leasing and the redevelopment pipeline?

Well, the guidance number reflects new leasing, so new tenants coming in to the portfolio, and it is incremental new leasing to the portfolio.

And largely from space that currently resides in the redevelopment inventory.

So that's in addition to the 400,000 square feet that are rolling?

Yes, it is.

And at that pace, it seems as though -- if that pace of leasing in the redevelopment pipeline were to continue, it seems as though you will essentially deliver the whole pipeline in a little under two years, is that right?

Probably a little longer than that.

Currently we are projecting, you know, probably two to two and a half years.

We are assuming additional acquisitions of vacant properties in 2008, which will continue to feed that pipeline.

So could you quantify specifically how much leasing within the pipeline is in that number?

We are not breaking it out at this time.

Okay.

My second question is about the additional power disclosure that you have for your top 15 assets, which is very helpful.

I was wondering -- I realize you might not want to break this down asset by asset, but just conceptually, how much of that capacity is actually being sold to tenants right now?

And based on that, is there some opportunity to increase density of assets that are theoretically already 100% leased throughout the portfolio?

In many cases, there are building -- and what we try to do in our underwriting, we acquire assets and working with utility companies that have power in reserve, in most cases, so we can add new tenants, expand tenants, add more capacity.

So we won't be breaking that out building by building but we do have a certain amount of flexibility to be able to anticipate future requirements, definitely.

How much of the power of that available capacity is actually currently being sold and what are the incremental costs that are required to increase the actual sellable power?

You know, that varies so much building by building, I doubt if we will break those kind of -- those kind of statistics out, at least in the near future.

You know, there are certain competitive issues around that as well.

All right.

Well, maybe more generally, what would be involved in increasing density within the existing building from a tenant perspective?

In terms of moving cages, et cetera.

Is that something -- how easy is that to do?

You know, you really have to look at every, you know, tenant situation, you know, whether they're, you know, actually utilizing all of their square footage, if they're bringing in, you know, new UPS systems or whether they're, you know, adding.

So it is really hard to -- to tie down a cost, you know, but -- tenant by tenant because it can vary depending on the application and the type of -- the type of electrical engineering and mechanical engineering setup they have.

Okay.

I will jump off.

Thank you.

Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Please go ahead.

Hey, guys.

Just a drilling down on some of the leasing a little bit.

How much space is expected to commence in term terms of leases in the fourth quarter, specifically related to data centers?

You are already at the high end of your full-year guidance of 475 to 600, so, I assume you are going over the high end but I am just curious if the run rate that we saw in this quarter is a good one or what?

I mean certainly, we are on track, you know, to meet all of our lease -- you know, high end of our leasing projections.

You are already there.

Well, not quite.

Well, we will make them though.

We are, you know -- so, you know, I would have to look and see exactly what is commencing since we are working with some tenants now, whether or not they finally commence before the end of the year or flow into the first quarter.

But certainly, revenues that we're projecting are -- we're on track to meet those.

Is it safe to say additional space has commenced in the month of October?

We are already pretty much halfway through the quarter already.

Just trying to get a sense of how -- of where this number is going and what kind of growth in terms of demand the next year's 890 to 990,000 square feet of data center leasing, what kind of growth that represents relative to '07 as a base year.

Well, Jordan, if you look at Q3 signings, roughly a million of the Q3 signings will be recognized in the fourth quarter.

A million.

A million of 12.3 cap annualized signings.

Okay.

And then of the stuff that commenced, of the 160 --

Very little that is signed, very little that is signed at this point gets recognized right in the fourth quarter.

It all slides into 2008.

Okay.

And of the stuff that did commence this quarter, the 166,000 square feet of data center space at $64, would it be safe to assume that that started mid-quarter?

Yes, I think so.

August 15th.

Yeah-ish.

Roughly, again, roughly 40%, I would say, is recognized in '07 with the balance in '08.

Of the commencements?

Oh, I see what you are saying.

Of the commencements, yes because of the partial-year effect.

Okay.

So that -- therein creates a little bit of a quandary for me, because you have done a dollar what in FFO year to date, $1.52 or so?

[Yes].

$1.52.

Your guidance at the midpoint is $2.03 and so you need $0.51 to get there.

Is there any more one-time items that we should anticipate for the fourth quarter that offset it?

I mean because you are basically saying, you have -- two pennies of one-time items in this quarter, so your clean number is $0.53, and you are saying that your FFO is going down to $0.51.

It is a conservative number for the quarter, Jordan.

Okay.

And I guess, maybe looking forward a little bit, talking about the 890 to 990, what is the mix exactly?

I know you gave $90 as the midpoint or the expectation on the rents there, but how does that break out in terms of mix?

I just don't know the rough rents you are using on turnkey versus base building.

Yes, we aren't breaking that out at this point.

There's so many variables that play, you know, in the selling decision, whether a customer goes with turnkey or power-based building, but you know, certainly we are moving much more toward a 50/50 breakout between base building and turnkey.

But we are not going to be that precise in our guidance today.

Okay.

And I guess.

It can shift, as we saw last year.

It just, a customer can change its mind really at the last minute and go one way or the other.

Right but the $340 million of capital spending assumes some mix, obviously.

Yes, it does.

I am just trying to get a sense of -- so what is the average expected spend, maybe I could put it this way, what is the average expected spend on a turnkey build-out versus a shell build-out?

You know, I don't know if we want to break that out at this point.

What are you spending today on turnkey versus shell?

I think I'd rather not comment on that now, especially for competitive reasons.

Jordan, the turnkey varies a lot too, whether it's in an internet gateway or whether it is, you know, green field.

You know, suffice it to say, that on a rentable square foot basis, we are typically around $600 a foot, 6 or $700 a foot on our turnkey spaces, and then as Bill noted, that can vary because in some buildings, you know, especially in the internet gateways, where we already have a lot of that power and cooling infrastructure, that cost can be a lot lost on an incremental basis.

Okay.

Okay, Jordan.

We are going on to the next call.

If you have more questions, can you get back in the cue, please?

Our next question comes from the line of George Auerbach with Merrill Lynch.

Please go ahead.

Hi, good afternoon, everyone.

In terms of the commencement of the roughly 1 million square feet of leases next year, should we expect contribution will be back-end weighted, and if yes, to what degree?

I think it will be back in weighted, at least the second half of the year weighted.

Yes, it is definitely in the back half of the year.

Is that 70 or 80%?

[overspeaking] delivered.

Rev -- in terms of the NOI impact, is that 70 or 80% won't hit until the second half?

I think that's fair.

Okay.

Can you also talk about the demand you are seeing for the space and what percentage of leasing you expect you'll have upon delivery?

We are certainly seeing, you know, very strong levels of demand.

In -- especially in the 11, 12 markets that we have really targeted for the great majority of our capital investment.

You know, it is typical when we are doing our turnkey space, since we are doing it on a spec basis, we have good prospects for the -- in all cases.

Typically we don't have a lease signed for the turnkey until it is completed, after it is completed, but it happens pretty quickly, usually within 30 to 60 days of completion of a turnkey pod, we have a lease signed.

So it is pretty quick, though typically upon delivery we do not have leases signed.

Okay.

And finally, Bill, at the end of the quarter, what was the construction and progress balance?

We don't have that.

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

Okay.

Great.

Thank you.

Our next question question comes from the line of Will [Marks] with J&P Securities.

Please go ahead.

Hello, Mike, hello, Bill.

A question on the $340 million of CapEx next year for developments, can you -- you mentioned a 600 to $700 per square foot number for turnkey space.

Can we apply it to that $340 million?

And then, if so, can you talk a little bit about a return, what kind of rents you expect for that?

You know, that $340 million, you know about 80-90% of that, probably closer to 90%, is building out the redevelopment space, and some of that is turnkey, some of that is power-based building, some of that might be more customized build as well.

That can take the costs up, because the custom builds are higher-power densities and more expensive.

So, I wouldn't -- I wouldn't just take a projection from, you know, the 600, $700 rentable square foot to come up with the amount of square feet because you can come up with -- like I said, a certain amount of that is going to be power-based building as well as turnkey.

I think it is safe to say that in terms of our expected return on invested capital for these, you know, typically a low to mid-teen unlevered return is pretty typical.

And sometimes with the turnkey space, it can be higher than that, in the high teens in many cases.

Okay.

One other, unrelated question.

You mentioned an 8 cap rate for '08 for guidance on acquisitions, and I feel like we have been hearing closer to 9 cap rates from you guys, more recently and with the credit crisis, I would think that would maybe hold.

So any comments on that?

Yes, I think if you look at year-to-date, I think we are probably around in 8.5 cap on our acquisitions on average, our income producing acquisitions.

So -- but some of the European deals we are looking at in our pipeline might be somewhat lower than that.

You know, balance out.

So, we think an 8 cap is -- it can be pretty representative, especially if we have opportunities to create some more value on some of these properties.

I think it assumes a higher mix of European investments, too, on the stabilized front than we have had in the past.

Okay.

Great.

Thanks a lot.

I would like to go back to George's question.

George, the construction work in progress at quarter end is roughly $107 million.

That's a very approximate number.

(OPERATOR INSTRUCTIONS)

We have a follow up from the line of Jordan Sadler.

Please go ahead.

Thanks.

A couple of follow ups just on the -- on the roll next year, can you take a stab at the mark to market?

What should we assume?

You know, I think a really conservative number would be 20 to 25%.

But that's -- you know, that's very approximate.

Because so many of these, it varies a lot.

It is everything from smaller shared environments to, you know, some somewhat larger, you know, more base building-type rents.

So, that's something we might dive into more depth and give more detail on next quarter.

What are retention rates expected to be?

You know, so far it has been, it has been fairly high.

You know especially for these shared environments where, which a lot of these customers are, it is a lot of very small customers in the shared turnkey environments.

So, you know, I don't know at this point if I have got a specific number, but I would say, you know, certainly the large majority will renew.

And in cases -- in most of these, if a tenant doesn't renew, it is an opportunity to raise the rate more than kind of that 20% number.

Did you say that most of it is turnkey space of the 400,000 rolling?

Yes, obvious -- it is folks in shared environments, you know, so more of the, you know, the share turnkey where it is not --it is customers tabbing small cages or cabinets.

Okay.

So there's not a whole lot of shell in that number?

I don't think so.

I have to go back and dig in, but it is --

I am just looking at the rental rates on your lease roll schedule, it's like 53, 54 bucks.

Is that not equivalent to -- and I am just trying to understand the type of space it is, it seems kind of, not one, not the other, in terms of what you would be getting in terms of rental rates from either base building -- and I understand there's a mix in there, but is it similar -- are these shared environments similar to your new turnkey space build-outs?

Yes.

I mean in terms of you know, power and cooling, it is a lot of the more colocations, some people refer to it, where customers are in cages and small cages, cabinets like 100, 200, 400 feet.

So you have got, you know, similar levels of power and cooling, it is just not, it is not dedicated, and it is not demised and dedicated for a particular customer.

And there is a mixture in here, and it can -- you know, the square footages involved if it is larger -- if you have a tenant who is -- a larger more typical stand-alone tenant than is more of a base-building type rent, that can really kind of bring down your weighted average rent overall.

So it is, it is -- it is difficult to peg because it is a mixture of both, the shared turnkey as well as, you know, the more base building type tenants.

Okay.

My second question is, Mike, could you maybe give us an update on what is happening at the spec development in Ireland as well as the potential development in London, suburban London?

Sure.

We are pretty much shell-complete on the Dublin properties.

That's the 124,500 gross square feet.

And we are moving forward with our turnkey components now.

We are pretty far down the road with a potential tenant to take the whole building.

At this point -- it would be a combination of base building as well as turnkey with this particular customer.

We are kind of indifferent at this point because the market is strong enough where -- you know, we are indifferent at the this stage whether or not we go forward with this one tenant or whether we do a multi-tenant scenario.

So that will play itself out here over the next month or so, we think.

In London, we are, in the kind of the -- oh, very far along on the planning, you know, drawing stage on the suburban London build to suit, and that's a single-tenant build to suit and that will be about 120,000-foot building.

I expect we will be breaking ground on that sometime in the second quarter of next year.

Okay.

But that's not showing up in your numbers anywhere yet, right, that 120,000 square feet build to suit?

No, because that wouldn't be delivering revenues until 09.

There's some capital in there for it.

Yes.

In the 340, Bill?

Yes.

Thanks, guys.

Thanks.

Our next question comes from the line of John Stewart with Credit Suisse.

Please go ahead.

Thank you.

Mike, I was fascinated by the -- your comments about the survey in terms of the top markets for expansion, and I just wanted to get your sense in terms of what is it that is driving the faster growth in Europe than in the U.S.

and how does that affect your investment plans going forward?

Sure.

Certainly, in those, you know, four or five markets, London, Amsterdam, London, Paris, Dublin, New York, which is not Europe but European folks are looking at expansion, you know we're seeing drivers, financial services, especially in London.

You know, we are seeing general tech companies as well as financial services companies in Dublin.

Paris is a pretty broad range of corporate users and a lot of system integrators, IT service providers who are providing services to corporate users, some of the very large numbers in Paris and so forth.

Amsterdam is a pretty broad range of different types of users, a lot of content providers as well.

So I am not sure if the growth is going to be faster in Europe.

It may be faster on a run rate percentage in the short time.

I think in terms of kind of total demand, square footage or by kilowatt, it will be a little less than U.S., but certainly, yes, a very sizable market and as a region probably the second largest region in the world by far after the U.S.

So, you know, good demand and we think can, you know, be similar to the United States.

Okay.

That's helpful.

Thank you.

Bill, I guess just a quick housekeeping item.

The $0.01 charge you took for the Denver termination during quarter, if I recall from the call you had talked about maybe needing to write off $0.03 of straight line rent.

Does this resolve all of that, and we are not going to see any of their impact going forward?

There's no other impact.

Okay.

I know you lay out your guidance assumptions the way you do, but I am just curious, you also do report a same-store growth, and I just wonder r what sort of internal growth rate your guidance for next year would imply?

Well, it will be weighted clearly quite a bit toward internal versus external.

We haven't -- I hesitate to give you a number but I am guessing it is probably at least 3/4 internal.

Okay.

On -- this probably speaks to Jordan's line of questioning but Bill, can you give us -- what would the run rate contribution be in terms of revenues from leases signed during the quarter that have not started yet paying rent?

Leases signed but they haven't paid rent.

Oh, well, I would say probably virtually everything for at least not recognized in Q3.

The 2008 -- the 2008 number is at 11.3, so about 11.3 of the 12.3 is going to be picked up in 2008.

I don't know if that answers your question.

Lastly, Bill, can you kind of speak to the rationale for -- or give us any additional color in terms of future plans for the non-core asset sales that you took off the market?

I think, it is -- a lot of these non-core assets are in a cross-collateralized CMBS pool, and -- several of what's left at least, and as long as Treasuries stay where there are, it is prohibitably expensive to defease.

So we had a very attractive offer on the one asset on the -- from a buyer, but the defeasance cost moved up from $1.5 million when we were first looking at it to $3.5 million.

It was -- yes, it's probably higher today.

So, I think we just really need to wait for these capital markets to settle down.

That's helpful.

Thank you.

Our next question comes from the line of Frank [Raywood] from Reed.

Please go ahead.

hi, guys.

A couple of questions for you, the first is on the interest expense, the interest charge you took, I assume that was in the interest expense line item?

The -- the prepayment on the joint venture?

The charge, yes.

No, that's not in the interest expense line item.

That is in the unconsolidated equity joint venture item.

Was there anything else in the interest expense line?

The interest expense?

Yes.

No.

The revenue charge that was in the --

That was in the other line item under operating expenses.

Okay.

And then finally, turnkey space, can you talk about how much turnkey space was outstanding where the build-out has been complete but yet the -- the space is not yet revenue-producing at quarter end?

Yes.

We have about 95,000 rentable square feet.

Okay.

That represents ab around 50,000 usable raised floor.

Is that in the 166 -- or the amount that was signed during the quarter but not commenced?

No.

That is space that is available for lease.

Okay.

What is the timeframe, and what rents do you expect on the lease with that?

You know, it is in a number of different buildings, it is really spread out throughout the portfolio.

So I would expect that that particular group of spaces will be largely leased up, you know, at the end of the second -- I'm sorry, at the end of the first quarter of '08, though, you know, there might be some pockets that haven't leased yet.

So you are going to see leasing in other buildings, and some of this space, you know, 2,000, 3,000 feet here and there may still be unleased.

So, you know, it is hard to give a specific space-by-space because it is so spread out.

I am assuming that's in what you are provided for guidance, is that true?

It is in our guidance, yes.

Okay.

Thanks, guys.

I am showing no additional questions at this time.

Please continue.

I think that wraps it up for now.

We really appreciate everyone's interest and focus on DLR and looking forward to catching up with you at [Mayreads] and elsewhere.

Thank you.

Ladies and gentlemen, that concludes today's Digital Realty Trust third quarter 2007 earnings conference.

Thank you for your participation.

You may now disconnect.