Digital Realty Trust Inc (DLR) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you standing by.

Welcome to Digital Realty Trust fourth quarter 2007 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 is being recorded Wednesday, February 27, 2008.

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 and 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 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.

You can identify forward-looking statements by the use of forward-looking terminology such as believe, expect, may, will, should or similar words or phrases.

You can also identify forward-looking statements by discussions of future events or trends or discussions that do not relate solely to historical matters, including statements related to the future demand for data center space, access to debt and equity capital, lease commencements, growth driver, availability to achieve financial and performance objectives, the Company's liquidity, redevelopment activities, and the Company's expected financial results for 2008, including projected FFO per share, the signing and commencement of leases, rental rate, 2008 acquisitions and acquisition cap rates, the acquisition mix between (inaudible) properties and income producing properties, total capital expenditures and general and administrative expenses.

For a further discussion of the risks and uncertainties related to our business see the report and other filings by the Company and the United States Securities and Exchange Commission, including the Company's annual report on form 10-K for the year ended December 31, 2006 and subsequent filings and the Company's annual report on form 10-K for the year ended December 31, 2007, which we anticipate filing with the SEC later this week.

The Company disclaims any intention or obligation to update or revise 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 Reality 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 fourth 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 Mike Foust, CEO, and Bill Stein, CFO and Chief Investment Officer.

Following management's brief remarks we will open the call to your questions.

To manage the call in a timely manner, 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.

Good morning and good afternoon and welcome, everyone.

I will begin with a brief overview of Digital Realty Trust.

Then I will discuss the current state of our industry, our strong fourth quarter and full-year 2007 accomplishments.

Following my remarks Bill Stein will address our financial performance and overall liquidity.

First a brief introduction.

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

Our portfolio currently contains 71 properties totaling 12.6 million rentable square feet, excluding one property, the Weston building in Seattle, that's held as an investment in an unconsolidated joint venture.

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

The portfolio now includes approximately 2 million square feet of space held for redevelopment, a very important source of growth for the Company.

DLR provides a variety of data center facilities solutions, including Turn-Key Datacenter, Powered Base Building and build to suit data centers for domestic and international corporate customers.

Our properties serve a wide range of industry vertical markets, including information technology, internet enterprises, financial services, telecom network providers, energy companies and generally Fortune 1000 firms.

DLR has delivered strong earnings growth resulting in attractive shareholder returns and earlier this week DLR was recognized by the Wall Street Journal as a top performing REIT based on the three year average shareholder return.

It is clear that two major concerns face the commercial real estate industry in light of the current economic environment, mainly tenant demand and access to capital to finance growth.

The good news for DLR is that corporate demand for new data center space remains very strong and due to the coordinated efforts of our technical sales, engineering, design and construction, and operations teams, this market demand is being converted into strong absorption of our Turn-Key Datacenter, Powered Base Building and build to suit products.

Representing a variety of industries, DLR tenants continue to take significant amounts of new space in our facilities.

Recent expansions and new customers include Computer Sciences Corp., Face Book, CBS, HSBC and Aircom, Ireland's incumbent telecom service provider.

Contributing to our growing portfolio is the expansion of our European presence.

In January we announced the ground breaking for a major new build to suit facility for HSBC on a development site in suburban London that we acquired in early 2007.

In Dublin, Ireland we recently executed a new lease with Aircom for both Turn-Key Datacenter and Powered Base Building space in the new 124,500 square foot facility that is nearing completion.

In addition, we acquired two new properties in suburban London adding approximately 150,000 gross square feet of redevelopment space in a very important market.

Looking more broadly at DLR customers who are top IP services colocation providers, both SAVVIS and Equinet expressed similarly positive views on the demand outlook for their data center based services.

SAVVIS reported solid revenue growth, expanding margins and strong EBITDA growth.

They expanded their operating footprint significantly in 2007 in DLR owned properties and their customers are absorbing space in their new data centers at a good pace.

Equinet reported strong results for 2007, with over 30% organic growth in revenue, a large increase in EBITDA and strong absorption.

The Company increased its 2008 guidance based on its outlook for continued customer demand in the U.S.

and internationally.

Both companies appear to have experienced little impact to date from the current capital markets challenges.

In fact, some of our customers report increased interest in potential cost savings and enhanced productivity from outsourcing data facilities.

In addition, fundamental business needs drive demand for expanding IT services and corporate data center facilities.

These include the complexity and cost to build new facilities, regulatory and securities compliance requirements, and the increase in adoption of online applications, including securities and commodities trading, risk management analysis, content distribution social networking and web hosting in general.

Further underscoring the steady demand for data center space was the pace of our leasing activity during the fourth quarter with over 429,000 square feet of new leases signed, our biggest quarter to date.

These leases include 245,000 square feet of Turn-Key Datacenter, 112,000 square feet of Powered Base Building and over 72,000 square feet of nontechnical space.

For the full year 2007, we signed leases totaling 998,000 square feet including 435,000 square feet of Turn-Key Datacenter space, 419,000 square feet of Powered Base Building, and 144,000 square feet of nontechnical space.

Note that our leasing shifted toward a more even mix of turn-key and Powered Base Building in the second half of the year and we expect that trend to continue into the first half of 2008.

Leases commencing in the portfolio in the fourth quarter totaled over 150,000 square feet, of which over 125,000 square feet was data center space, including 16,000 square feet of turn-key and approximately 109,000 square feet of Powered Base Building.

The remaining 25,000 square feet was nontechnical space.

For the full year, leases commenced on approximately 761,000 square feet including nearly 134,000 square feet of turn-key space, over 550,000 square feet of Powered Base Building and 77,000 square feet of nontechnical space.

Key to our success is our proven ability to identify and acquire value add opportunities in top tier markets and convert the redevelopment inventory into high quality turn-key and Powered Base Building data centers.

We currently are under way on construction projects and high demand markets in the U.S.

and Europe that will add approximately 637,000 rentable square feet of additional space to our operating portfolio and this space will come online through the third quarter of 2008.

Of this space, approximately 533,000 square feet is Turn-Key Datacenter and 104,000 square feet is build to suit data center space.

In addition, the HSBC build to suit of 120,000 square feet is projected to come online mid-2009.

Portfolio occupancy excluding space held for redevelopment was 94.7% at the end of the fourth quarter compared to 95.1% for the previous quarter and 95% for the same period in 2006.

As of February 25 this month, occupancy was back up to 95%.

We expect the occupancy to fluctuate slightly quarter to quarter primarily due to the lag in commencement after lease execution as we convert redevelopment space into value add turn-key and Powered Base Building data centers and add it to the operating portfolio out of the redevelopment inventory.

At times, facilities will be completed during a quarter, added to the portfolio and then leases might commence in the next quarter.

Turning now to our acquisition program.

During the fourth quarter 2007 we acquired three properties in Europe totaling $83.5 million.

On December 10 we acquired Cressex 1, located in suburban London.

This property totals approximately 52,000 square feet of redevelopment space, of which 21,000 feet will be converted into Turn-Key Datacenter.

On December 12 we acquired Naritaweg 52, a fully leased 63,000 square foot data center facility in Amsterdam.

On December 21 we acquired units 1, 2, 3 in the Foxboro Business Park, a three building complex also located in suburban London.

Unit 1 consists of a 20,000 square foot data center facility fully leased to a global geophysical Company.

Unit two is fully leased, a 31,000 square foot warehouse.

And unit three consists of over 96,000 square feet of redevelopment space, capable of supporting about 58,000 square feet of Turn-Key Datacenter.

This brings our 2007 full year acquisitions to $363 million, which added 1.6 million square feet to our portfolio, including 615,000 square feet of redevelopment space.

The weighted average cap rate for the income producing properties was 8.52%, slightly higher than our 2007 guidance of 8.25%.

Subsequent to the end of the year and February, we acquired 365 Randolphville Road, a 270,000 square foot redevelopment project located in Piscataway, New Jersey, very near our 3 Corporate Place facility.

This new property is capable of supporting the development of up to 150,000 square feet of improved data center space, bringing new product to a market experiencing strong demand.

We plan to make base building improvements and upgrades to the power with plans for an initial buildout of two Turn-Key Datacenter totaling 20,000 square feet of raised floor.

Overall we are very proud of our success that we achieved in 2007, which is clearly reflected in our strong financial results.

We believe that our expertise and our financial strength will continue to produce superior results in 2008 and we greatly appreciate the efforts of our outstanding team of professionals, as well as the support and comments of our investors and business partners.

As I mentioned earlier in my remarks, in addition to demand, access to capital is the second major concern facing our industry.

I would now like to turn the call over to our CFO, Bill Stein, who will discuss our capital requirements, the success of our capital market activities and our strong fourth quarter and full-year 2007 financial results.

Bill.

Thanks, Mike.

Good morning, everybody.

I would like to begin with a review of our forth quarter and year-end 2007 financial results and will conclude my comments with a discussion of our overall liquidity.

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

EBITDA was $53.9 million in the fourth quarter, up 17.9% from $45.7 million for the fourth quarter of 2006.

For the full year 2007, EBITDA was $221 million, up 36.7% from $161.7 million in 2006.

FFO on a diluted share in unit basis was $0.53 in the fourth quarter of 2007, up 10.4% from $0.48 in the same quarter last year and up 3.9% from $0.51 in the third quarter of 2007.

For the full year FFO was $2.05 per diluted share and unit, up almost 26% from $1.63 in 2006.

Me remind you that our most recent FFO guidance for 2007 was $2.02 to $2.04.

Adjusted funds from operations or AFFO for the fourth quarter of 2007 was $27.1 million or $0.37 per diluted share and unit.

The AFFO payout ratio for the fourth quarter was 83.8%, this compares to a third quarter AFFO of $24.5 million or $0.35 per diluted share and unit.

The AFFO payout ratio for the third quarter was 81.8%.

The increase in the fourth quarter payout ratio reflects the 8.3% increase in the dividend in the fourth quarter and an increase of $1.3 million in capitalized leasing commissions in the quarter due to the increased number of lease signings.

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

Total operating revenues for the fourth quarter were $105.9 million, up 1.1% from $104.8 million in the third quarter of 2007 and up 29.1% from $82 million in the fourth quarter of 2006.

Total operating revenues for the full year 2007 were $395.2 million up 45.2% from $272.1 million in 2006.

This increase -- the increases in rental revenues and tenant reimbursement revenues for the quarter and the full year compared to the same periods in 2006 were primarily due to properties that we acquired during the 12 month period ending December 31, 2007 and overall leasing activity.

Net income for the fourth quarter was $5.6 million up from $5.1 million in the third quarter of 2007 and down $6.4 million for the same period in 2006.

Net income available to common shareholders for the quarter was $254,000 compared to net loss available to common shareholders of $224,000 in the third quarter of 2007 and net income available to common shareholders of $3 million or $0.06 per diluted share for the same period in 2006.

Net income available to common shareholders for the full year was $21.3 million or $0.34 per diluted share compared to $17.6 million in 2006 or $0.47 per diluted share.

Net income in both 2007 and 2006 includes gains on sales of assets.

We do not include gain on sales of assets in our FFO.

Same-store NOI increased 5.4% to $49.4 million in the fourth quarter of 2007 from $46.9 million in the third quarter of 2007 and increased 12.6% from $43.9 million in the fourth quarter of 2006.

Same-store NOI adjusted for straight line and FAS 141 adjustments, which we refer to as same-store cash NOI, increased to $43.4 million in the fourth quarter, up 6.4% from $40.8 million in the third quarter of 2007 and up $13.9% from $38.1 million in the fourth 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 specific guidance included in the statement of operations to provide additional detail on the results for the quarter.

For the fourth quarter tenant reimbursements decreased to $20.6 million from $22.1 million in the third quarter of 2007, due to the year-end true up of common area maintenance and a reduction in property taxes resulting from a favorable tax assessment at our 350 East Cermak property in Chicago.

Total operating expenses for the fourth quarter were $84.9 million up 1.8% from $83.4 million in the third quarter of 2007, due primarily to a recently launched domestic property maintenance program.

These increases were partially offset by the favorable tax assessment at our 350 East Cermak property in Chicago.

Total operating expenses were up $23.8 million in the fourth quarter or 39% versus the fourth quarter of 2006, due to new properties acquired during the year, the domestic property maintenance program and increasing utility expenses.

Utility expenses increased because of rate increases and higher utilization by our tenants at several properties.

G&A, which is a component of total operating expenses, was $8.2 million in the fourth quarter of 2000 up from $7.8 million in the previous quarter.

The increase was primarily due to higher consulting and legal expenses.

G&A increased $1.7 million in the fourth quarter of 2007 from $6.5 million in the fourth quarter of 2006, primarily due to higher marketing expenses, travel expenses resulting from our expansion in Europe, and the increase in the number of our employees.

At year-end we had 153 employees compared to 109 at year-end 2006.

Turning now to our balance sheet, during the fourth quarter we capitalized $4.2 million of interest relating to construction projects, excluding our share of a consolidated joint venture, which compares to $3.1 million in the third quarter.

In addition, we capitalized approximately $1.9 million in compensation expenses compared to approximately $1.2 million in the third quarter 2007.

In this year's 10-K we are including a disclosure of construction work in progress.

As of December 31, 2007 we had $289 million of construction work in progress.

As Mike mentioned in his comments, the available of capital is a significant concern for real estate companies as access to capital has become constrained over the past year.

Digital Realty Trust is in a capital intensive business and capital is essential to our ability to continue to acquire and redevelop properties.

Over the course of 2007, and through early 2008, we were not only able to maintain our capital base and financial flexibility but enhance it.

As I mentioned on previous calls, in April 2007 we raised $169.1 million of net proceeds from a convertible preferred stock offering.

In August of 2007, in anticipation of liquidity challenge that were then affecting the capital markets that became much more severe later in the year, we increased the size of our credit facility to $650 million, obtained more favorable covenants, lower pricing and a longer maturity.

On October 22nd, the Company completed a follow on public offering of a little over 4 million primary shares of common stock generating net proceeds of approximately $150 million.

And subsequent to year-end, we just completed an underwritten public offering of 13.8 million shares of series D cumulative preferred stock which generated approximately $333.6 million of net proceeds.

We also utilized net proceeds from both of these offerings to temporarily repay borrowings under our revolving credit facility to fund acquisitions, development and redevelopment activities and for general and corporate purposes.

As of Tuesday, yesterday, we had $44.7 million outstanding on our credit facility, including outstanding letters of credit.

Based on the covenants in our credit facility, we have a total borrowing capacity of over $780 million, consisting of $605 million of immediate liquidity under the credit facility and assuming we first borrow this entire amount, additional secured debt capacity of approximately $175 million.

If this capacity were fully utilized, our pro forma debt to total enterprise value would be approximately 36.5%.

Our total debt at year-end was $1.4 billion and our ratio of debt to total enterprise value was 30.6%.

Our fixed charge coverage ratio was 2.4 times and our debt service coverage was 3.4 times.

Pro forma for the convertible preferred offering, our leverage ratio would be 23.1% and debt service would be 4.1 times.

As of December 31 our weighted average cost of debt was 5.8% and the weighted average maturity was 5.8 years, including debt the extension options.

A description of how we calculate these ratios can be found in our supplemental operating and financial data furnished to the SEC and available on our website.

During 2008, we have three scheduled mortgage maturities, the 350 East Cermak mortgage had a balance of $97.9 million at December 31.

The initial maturity of this mortgage is June 9 and there are two one year extensions available.

Currently we are exploring refinancing options, which include both secured and unsecured debt.

The 375 Riverside mortgage had a balance of $8.6 million at December 31 and matures on December 1, 2008.

We are currently planning to repay this mortgage and add this property to the borrowing base as part of the revolving credit facility.

Finally the 1500 Space Park Drive mortgage had a balance of $5.5 million at December 31 and matures on April 15th.

We are currently planning to repay this mortgage with funds from the revolving credit facility.

We believe that our track record of accessing well priced debt and equity capital from several different sources, particularly in difficult markets, is a powerful competitive advantage.

We also believe that we have sufficient equity capital to fund our currently planned acquisition and redevelopment program for the year, when combined with our planned activities in the debt markets.

Finally, as noted in our earnings release, we are not changing guidance at this time.

This concludes our formal remarks.

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

(OPERATOR INSTRUCTIONS) Our first question comes from Jordan Sadler with KeyBanc Capital Markets.

Please go ahead.

Good morning.

First question is regarding leasing activity.

I know you did a good job disclosing it before this release and you have got a little bit more color around the edges this time around.

I am curious to know what the total leased but not yet commenced space was at January 1, 2008?

Is that the 403,000?

Or might there have been something else that was leased and not commenced from a prior order?

Let's see.

The, I believe the 403,000 is just leases from actually the fourth quarter.

And I think our actual backlog is something more around 435,000, I'm sorry, 530,000 square feet of total backlog.

So I believe the 403,000 square feet of backlog were just leases signed in the fourth quarter but there are some other leases from the third quarter that will be commencing in '08.

Okay.

And then on top of that, there was some additional leases signed year-to-date, I could presume?

Yes, there's -- and we will have more activity as we go through the rest of the quarter as well, obviously.

I understand but the 530 just to be clear does not include anything that was done since January 1, '08.

That's correct.

Yes.

Just signings in '07.

That have not yet, had not yet commenced.

The average rate and expected timing of those commencements?

Bill, you have that?

Sure.

Well, roughly we are expecting about 80% of that will commence in the first quarter at an average rate of, average GAAP rate of around $95.

Another 6% in the second quarter at an average cap rate of $85.

And then the balance in the third quarter at an average cap rate around $70.

Okay.

Around 70.

And just to stay with this for a second, the timing is mid-quarter convention safe and then the margin?

Mid-quarter convention is fine I suppose for your forecast if that's -- .

Yes.

Is that what you guys are, I mean is that kind of pretty safe number, I mean, for the first quarter, 80% of it is in the first quarter?

Let's see.

That's safe.

That's safe.

Then just the margin on the -- and maybe you could break it out.

If you want to break it out, if it is easier just to say margin on the turn-key space because I know there's -- the other stuff is triple that.

Yes, power base is triple that.

We'd have to go back and look at that and maybe include that in supplemental because every, every site is different.

I don't think we have aggregated them together to look at the margin on an aggregate basis.

Primarily what we are looking -- besides looking at our operating margin and operating cost, we are looking at return on investment and of invested capital and primarily we are looking at on average mid-teen returns on invested capital these projects.

Okay.

That 530, does that include HSBC?

No.

It does not?

Okay.

Last question is just on the, in your commentary, Mike, you mentioned that sometimes you move some of the redevelopment space, I guess, on the books and the timing is different it comes on the books in anticipation of lease commencement.

Was there anything special about this quarter in terms of the amount that was moved on the books that was vacant space?

And meaning was it more sizable than what you would traditionally move on?

It is probably been a little more approaching -- it was around 95,000 square feet or so that moved into the operating portfolio from the re-dev inventory.

So about 53,000, actually it's about 93,000 square feet moved into the portfolio.

And since the end of the year, about 53,000 of that has been have leases commenced on it.

So our convention is when we complete a turn-key space, we move it into the operating portfolio regardless of whether it is leased or not.

And so, as you can tell, that backlog if you will gets or that new operating portfolio space gets leased up quickly.

Okay.

I will jump back in the queue.

Our next question comes from Ian Weissman of Merrill Lynch.

Yes, good afternoon.

A quick question, you talk a lot about the demand in the marketplace, you are seeing a pretty broad level of demand across a number of industries.

Can you just talk a little bit about the trends in market rents you have seen over the last year or so and are you getting any push back whatsoever on rents in this environment today from tenants?

Sure.

We are seeing, I would say, 2006 to 2007 through the end of 2007 we have probably seen rents increase by about 20% on average.

And that would be both Powered Base Building as well for turn-key space.

I don't know if I would necessarily continue to expect 20% growth in 2008, but I could see rates being pretty steady at this current level.

Maybe going up 5% to 10%.

With that said, the biggest push back for us is kind of the tradeoff where customers may look to build their own space rather than outsource a facility if rates get too high.

But with that said, there's a lot of benefit for expediency in having the space available as well.

So we are not seeing push back and in some markets, like Chicago especially, London, New York metro area, we are seeing a lot of strength in lease rates.

So where would that put your mark-to-market today?

I would say, and this is a real guesstimate, probably around 25% uplift.

And second question, obviously you talk about the difficult financing environment and we have seen a dearth or lack thereof of trades in the marketplace.

How is -- can you maybe just talk to us about your underwriting process today and what your return expectations are today on an unlevered basis.

Sure.

New acquisitions.

Sure and we are being really targeted, looking at opportunities where there might be an attractive return on a stabilized asset as well as looking to fill in our inventory of redevelopment space as we lease up in the high demand markets.

This year our guidance is around 8% on a cash cap rate.

I could see maybe that going up somewhat.

We have got a combination of -- those property type become more accepted in the marketplace.

So, we have seen some stabilized assets trade, even the second half of the year, at 6.5 to 7 caps.

So, I don't see stabilized assets jumping up to 9 cap areas in many cases.

But I could see some creep up 8.25% to 8.5%.

That's on an unlevered basis.

Correct.

Okay.

Thank you.

Our next question comes from Michael Bilerman with Citi.

Please go ahead.

Hi, guys, Irwin Guzman is on the phone with me as well.

I wanted to go over the capital issue and you talked a little bit about how precious capital is for you and done a good job at sort of getting the balance sheet and getting the capital on the books to be able to go out and fund acquisitions and redevelopment and new development.

Obviously a piece of your, big part of your business is funding tenants and tenants being able to use your balance sheet and use your capital as you build out their space.

So, the question that I have is, has there been a change in the tenants' desire for you to be funding more of the improvements?

And how are you in sort of this difficult financing environment looking at the rate at which you are charging for tenants being able to leverage your balance sheet?

We have seen the mix kind of move more toward a 50/50 breakdown between the Powered Base Building, which is the more highly improved shell versus the full turn-key.

Whereas in the first half of the year, especially skewed by the SAVVIS leases, it was much more to a Powered Base Building.

So we are seeing a trend, at least in the short-term where tenants are looking for more turn-key space where it is about equal to the amount of Powered Base Building.

I think that trend is going to continue into the first half of 2008 based on our pipeline.

In terms of of amortization and how our pricing overall, it varies by projects, varies by tenant credit if we are doing a build to suit.

Bill, you might want to address that a little more detail.

Well, it certainly has made -- led to some interesting discussions with build to suit tenants because as our -- as cost of funding goes up, we obviously go back to them and say well guess what, we are going to have to bump this a little bit.

So and it is still a function, as you might imagine, of the credit quality of the perspective tenant.

Right.

So how much have you -- we have seen a complete widening out of spreads, probably 200 to 300 basis points at least.

Is that what you are sort of going back to these tenants and have deals fallen through because you are charging excess rates or their happy to pay whatever it is.

We haven't seen any deals fall through.

And we have been, at least in our internal imputed amortization rates, we have definitely increased them between 100 and 200 basis points depending on the circumstance.

Right.

Just clarity on this 530,000 square feet, how much of that is coming out of the 1.7 million redevelopment space, how much of it is vacant sort of normal just out of the core portfolio and then how much may be new development and does any of it relate to future roll that's occurring in '08?

None of it is related to future roll.

So is all incremental new.

Okay.

A lot of redevelopment.

Yes, it is all.

So the 530 is out of that 1.7 million square feet of redevelopment space that you show?

Right, which has now grown to 2 million feet with a couple of the recent acquisitions.

Keep in mind that redevelopment space goes up and down based on new properties acquired and completions.

Right, but I am just trying to isolate this 530 that you have already leased.

It came out of redevelopment.

It came out -- and have you spent the capital to build out that space already or the capital still needs to be spent.

In some cases the capital needs to be spent but in large part it has been -- I don't think we have much left to complete for that tranche of leasing.

But this is pretty significant in terms of annualized rental income.

It would just be helpful to sort of get a picture of whether the capital has been spent or not.

For the 80% that is commencing in the first quarter, logically most of that would be spent.

Right.

The balance we are finishing up projects for these guys before the leases are commenced.

Okay.

And then Irwin just had one question.

Yes, I was wondering the 300,000 squire feet, you previously mentioned that you were expecting to deliver 300,000 square feet of redevelopment space between the first and second quarter.

And 92,000 square feet that came in implies that there's a little over 200,000 that would be starting in this first quarter.

Is that still on pace?

I think maybe I'm -- I think maybe those numbers might be off a little bit that you just mentioned.

Well, maybe another way of asking is the 600,000 square feet plus that you have under active redevelopment right now, is that sort of apples to apples with the 530,000 square feet of leasing that has yet to commence?

No.

Is that out of that 600,000.

No, that's additional.

That's additional product that we will be bringing online in the first three quarter of the year.

Okay.

That's right now unleased, right.

Correct.

And I am just wondering, as the amount of construction, as the amount of redevelopment activity you have has grown, has your sort of attitude on preleasing changed a little bit?

How much are you comfortable building out on spec at one time.

In a typical asset we will build one or two pods, which is roughly 10,000 square feet of raised floor space, roughly 18,000 to 20,000 feet of rentable square feet.

That has been, that's served us pretty well.

It validates the building and it provides quick time to market for the corporate users who invariably needed the space yesterday and it is pretty powerful in the marketplace to be able to move people in expediently.

Okay.

So since that 530,000 is in addition to the 600,000 that you are currently building.

Is it safe to assume that that's pure occupancy growth from here forward, those leases that will be commencing.

Yes.

Okay.

Thank you.

That's it.

Yep.

Let me add a little bit to that, to that question or to the answer.

The downturn or potential downturn in the economy we have found so far has led to increased interest in our product.

When you think about the financial institutions as a (inaudible), clearly they have lost a lot of capital in the last couple of quarters.

They still have needs.

They still have IT application needs that need to be housed somewhere but they now really don't have as much capital as they once had for capital investment, so they're far more interested in an operating lease solution which we can provide.

And our next question comes from Omotayo Okusanya with UBS.

Please go ahead.

Ian has actually asked my questions already, so thank you so much.

(OPERATOR INSTRUCTIONS) Our next question is a follow up from Jordan Sadler.

Please go ahead.

Thanks.

Bill, just another way of sort of slicing the capital question, I think the guidance this year was for $700 million of capital spending and I think that was roughly split almost evenly between acquisitions and other capital spending on redevelopment and I guess recurring CapEx.

How much of the $350 odd million for capital spending outside of acquisitions has been spent?

Well not much given where we are in the year.

And let's maybe in the context of your $44 million outstanding on your line of credit.

Not very much at all.

But I do think, I mean -- maybe where you are going is at this point we are anticipating a shift in the mix.

So there will be more of our investment capital directed to redevelopment, we think, than acquisitions.

Now if we see cap rates suddenly back up, we may change that again, but right now I think that there could be more than, there's likely would be more than 340 headed toward re-dev, but we would just back off the acquisition budget.

We still plan to stay within the 700 at this point unless there's a significantly very attractive opportunities out there.

Yes, that's a good point.

I mean we are -- our leasing pipeline continues to expand and we are seeing a lot of good opportunities at very attractive returns to continue to build the organic leasing out of the redevelopment inventory.

So, as -- and we are keeping a very close eye on that and I think we are being very prudent how we are allocating capital to the best returns.

And as long as that demand profile continues to remain strong, we have no reason that it won't be, we will allocate more capital to the higher returning activities.

That does affect the timing of revenues since you have to build generally before you can recognize.

But if you noticed, a lot of the signed leases that from last year are commencing the first quarter.

We think they balance each other out, which is why we are not changing guidance.

You think the capital goes out the door pretty evenly though.

It will be front end loaded, I think we've got about 60% in the first half on CapEx.

Yep.

And then just coming back to the 530,000 feet.

Mike, you said that's basically going to be an occupancy gain rather than out of the redevelopment inventory.

Does that mean that the expense load is already being reflected in the 4Q numbers and so there will be no incremental expenses?

No, I think the way to look at it, the great majority of that space is coming out of the redevelopment inventory.

So you will have an uptick in occupancy but remember your denominator is going to get bigger now, because it is space coming out of the re-dev inventory into the operating portfolio.

Also, the expenses on all of that right now is being capitalized, something picked up in the, in the -- .

But and I think further is that a lot of this, great majority of this is Turn-Key Datacenter space, which are gross leases plus electric.

So, our operating, as those come online, our operating expenses will go up, but revenues will go up significantly to much, much obviously more than cover that and because returns are quite attractive on these.

So the -- keeping in mind the turn-key space carries with it operating expenses net of electric and utilities that will add to operating expenses but will be obviously way more than covered by the very attractive rents we are getting.

But if 80%, so 400,000 square feet in the first quarter, okay, comes online, leased, should we also expect a like amount of redevelopment space to shift from that redevelopment column over to the net rentable square footage that's in the stabilized column?

Actually, it is 340,000 square feet, so the percentages are by revenue not by square footage.

Okay.

What's the aggregate revenue represented by the 530?

By the 530?

Yes, I mean it will be -- we are projecting it to be on during the year around $38 million of revenue recognized in the year.

From that backlog.

37 to 38.

From the backlog you mentioned.

From the backlog, yes.

So those percentages I gave you reflect the revenue contribution in each quarter.

That's really helpful.

Thank you.

All right.

That's it.

Our next question comes from Frank Greywitt with [Reif].

Please go ahead.

Hi, guys.

Were there any onetime items in the JV line this quarter?

No.

The 289 of construction in progress, does that include land, redevelopment and development to be clear?

Yes.

And then how about some of the buildings that aren't under, that were purchased that aren't currently under development?

Do you throw that in that bucket as well or do those -- are they sitting somewhere else.

Those wouldn't be there.

Okay.

That would be an addition.

Yes.

The -- do you have -- I'm sorry if you said this already, but is there a breakdown between the Powered Base Building and the turn-key for that 530,000 square feet?

There is a break down.

I don't think we have disclosed it.

Do you wish to.

We will think about it.

Not right now anyway.

I will say it is definitely the trend.

If you look at our fourth quarter leasing you will see that trend on leases executed much more toward 50/50 in terms of the data center space between turn-key and power-based buildout.

It is heavily weighted.

I can give you a percentage.

You were nice enough to give the GAAP revenue numbers.

Do you care to provide what the cash number is.

By the way, it is 85% turn-key.

Of that 500,000.

Of the 500,00 Plus.

Okay.

And actually, as far as the expenses go, that's just a normal building expense, right, of roughly $10 per -- $1.00 per square foot number?

For the turn-key?

Yes.

On a per square foot basis, annual.

Yes.

You are talking about?

Well,no, for the turn-key you are going see operating expenses higher.

Now that might be your, the $8 to $10 would be your taxes, insurance cam, your traditional real estate and then if it is turn-key that we are operating for the customer then you are probably going to see probably another $20 to $25 on top of that, per square foot annually to cover managing of the space, the preventive maintenance programs, that sort of thing, staffing.

Now, you are also getting rents that are $150, $180 a foot too for that.

Great.

Thank you very much.

Thanks.

Next question is a follow up from Michael Bilerman.

Please go ahead.

Bill, the $37 million to $38 million, that's an annualized number or that is just for the full year.

That's the expected contribution for '08.

Now, so it is not annualized.

I am going to hedge a little bit on that because these -- that amount is going to be a function of when leases commence and that's a function of when projects are delivered.

Right.

So thinking about this from the other perspective, you walked that through $95 or 80%, $85 for 6% and then the 14% balance at 70.

Say let's say the weighted average is sort of in the mid- 80s gross revenue, is it effectively go down to about a 70% margin to NOI?

Is that a fair sort of number to start running for this 530,000?

You are doing a blend or just on turn-key.

On the blend on the 530,000 space that will contribute $37.5 million of revenues this year, what does that drop down to the NOI line?

Is it fair to assume a 70% NOI margin on that space?

Yes.

It is close enough.

And then from the perspective you talked about a $290 million of capital that has been invested in redevelopment, development and land today.

How much of that $290 million relates to the 530,000 square feet?

By the way, that's at year-end.

Okay.

I think that would be virtually all for the 530 because it is construction work in progress.

So none of that stuff has been delivered.

But don't you have -- but don't you have land and other money that you have spent on development that would be in the 290?

Well, that part is separate.

There may be some -- some of that 290 may be for space that doesn't have signed leases.

But I would say most of it is.

But.

Just given when you look at the --

But you also had -- if you look in your supplemental page 26, the redevelopment space under construction in the quarter, the 637,000 square feet.

I thought in a previous response you said the 530 is not part of that?

So wouldn't that have cost associated with it in the 290 million?

290 million?

The -- well that space under construction in the quarter.

Right.

Which I thought was separate from the 530,000 square feet of leasing -- of leases that are going to commence.

I just want to make sure that we are -- I don't want to keep on double counting.

I want to make sure that we are parceling it out right and really get a clear picture of what -- .

I think that the 530 is space that is included in the signings on the quarter that will commence in the year.

Right.

But it is all coming out of the redevelopment square footage.

Yes.

This says there are 637,000 square feet under construction in the quarter.

Is the 530 in there or it is not in there.

It is.

You can see it on the page 26.

So this turn-key data, this 533 is what we are talking about now, Turn-Key Datacenter doesn't include any of the build to suit?

Well, there is one -- well, some of that -- so within the -- so within the 637 that's under construction.

Yes.

There's, let's call it 100,000 that doesn't have signed leases, I think would be the best way of looking at it.

And just -- .

Clearly the build to suits are signed, so within the 533 there's 100,000 that's sort of unaccounted for at this point.

And then if you do the math your return if the 209 relates to the 530,000 square feet and you take an $85 revenue number and you put a 70% margin, your return would only be about 11%.

So what am I missing?

How does that not compare to the 15 plus returns that you are talking about?

A couple of those projects are build to suits for Aircom, build to suits for a couple of other smaller places.

The Aircom build to suit we are probably looking more at 10% or 11% on that one for example.

But the build to suit is not in the 530,000 square feet.

I thought the build to suit was -- .

The build to suit is in it.

The Aircom is.

We are saying that all of the signings are in the 637 and clearly when you talk about build to suits at 103 those are all signed leases.

So really we have got 100,000 roughly of -- .

Turn-Key Datacenter space.

Turn-key where we don't have signed leases.

I think that's the best way to think about it.

I think it is like 98,000 feet.

Then if you think about 100 being in sort of the, you said, the 10% range?

The balance of that square footage should give returns, you are saying underwriting close to a 15%.

14, 15, yes.

So there must be some other things in the $290 million that don't relate to the 530 is what it comes down to.

For example I think -- we have got, I think, Welling would be in that number, which doesn't commence until 2009.

Because we have engineering costs, A&E engineering, which are very high, and the land acquisition, which was a pretty substantial number for -- .

That's the HSBC build to

Right.

And then when you were saying you were capitalizing some of the OpEx, you are also capitalizing the interest and so when most of this 530 comes on, bring on the revenues and then start charging you interest on the space on the capital that you spent?

Yes.

And operating expense.

And the operating expenses.

You talked about the Cermak, the property taxes and the benefit that you got.

What -- was there any offset -- how much was that gain and was there any sort of negative offset to that benefit.

In the quarter?

Negative, some of it was passed through.

So I think about two thirds fell to the bottom-line for us.

There was nothing else negative in the quarter that would have taken numbers down?

No.

I mean that took numbers up, actually, because that reduced operating expenses.

So two thirds and it was about $3 million?

Yes.

I mean, I mentioned in my remarks that we, we had an initiative that we started in the year that picked up in the fourth quarter for a new maintenance contract in our Turn-Key Datacenter.

That added some expense to the property expense operating expense line item.

Okay.

Thank you.

Our next question comes from Sri Anantha with Oppenheimer.

Please go ahead.

Good afternoon.

Thanks for taking my question.

A couple of questions.

Guys, could you talk about the demand environment out there?

I know you guys said there's not been a whole lot of impact with respect to on the -- from the macro concerns, but has there been any changes with respect to the verticals that you are seeing in demand during the past six months or during the past one month?

And my second question is about pricing.

I am just trying to understand the difference in pricing that you guys disclose here on a per square foot basis.

If I am seeing the rental rate per square foot for power based or a Turn-Key Datacenter space that have been commenced during the quarter, as opposed to that have been signed during the quarter, it appears that the pricing per square foot for the ones that have been signed is slightly lower than what has been commenced.

Am I reading this correctly or what exactly is the difference there?

Thank you.

Well, I think you are seeing snap shots in time with different product in different markets, so I think it is helpful to look at kind of the trend over the entire year.

And if you look at where we are in leases that were signed in the quarter, that could represent some space that's in markets where we are getting low 30s offset by markets like northern New Jersey where we are in the low 40s.

So it is kind of more of a timing market by market.

But overall, we are seeing that significant uplift where markets where we were maybe in the low to mid-30s today, we were in the high 20s the year before.

Markets like northern New Jersey where we were in the low 40s with our latest deals done, a year ago we were in the low 30s.

So it is kind of more of the mix of the specific spaces that are coming online at any one time.

Got it.

What about on the demand front?

Oh yes, well you know it is really interesting.

We are seeing a lot of demand from a variety of verticals, content distribution, social networking, represented by Face Book and expansions with CBS are quite strong.

The system integrator IT services companies, folk like Computer Sciences and some of the other major companies that we have in our pipeline with whom we are working, the increase SAVVIS portfolio and their absorption, and then interestingly we are seeing a lot more inquiries over the last three or four months from financial services.

And I think that's being driven because a lot of the applications are regulatory requirements.

A lot of companies are still trying to catch up from, believe it of not, Sarbanes Oxley and SEC requirements that were promulgated a couple of years ago.

There's a lot of trading applications that we are seeing both from Wall Street and Chicago-based and London-based financial institutions where securities trading, commodities trading are coming online.

And we are also seeing some great computing applications for Wall Street firms that are looking to expand their risk management computational capability in this environment that is driving need for more space on the data center side.

So we are seeing some other corporates too, where in light of reducing headcount, they are making further investments in their data processing capabilities and increasing productivity in that way.

So, it is interesting to see that there's a lot of ways that companies may actually be saving money through expanding their data centers and through outsourcing to Digital Realty.

Got it.

Just a one other question, could you talk about how many bandwidth providers on an average do you have in some of your Turn-Key Datacenter and how important is that to customers who are signing up with you, apart from power?

So when you look at our internet gateway portfolio, and those are the buildings that are the hub telecommunication network locations for a city, for a region, and they're the large number, the 30, 40 carriers or more in a particular building, such as 350 Cermak.

Another good example would be 2323 Bryan Street in Dallas.

600 West 7th in L.A., 200 Paul Avenue in San Francisco.

I mean those, that high density of carriers creates a very interesting value proposition for customers, both other carriers as well as corporates, trading platforms and the like.

In our standalone corporate data center facilities, typically two to four carriers is sufficient and desirable.

There is redundancy and some pricing power on the part of the customer.

But where you really get these unusual situations, which are the interest gateways, those are very high value added for the customers and for our pricing.

Is that a major driver for customers to come locate in your data centers?

Do they really care about it or no.

They definitely care about it.

We are seeing reflected in premium pricing that we have, especially in places like 350 Cermak and 200 Paul Avenue, even in Dallas, because of being able to access directly without going through third party carriers is pretty attractive and for some of these very low latency applications, such as some of these trading applications, it is very desirable.

Great.

Thanks so much.

Our next question is a follow up from Jordan Sadler.

Please go ahead.

Just one point of clarification again.

Sorry to beat a dead horse here.

On that 530, do you have a capital number that ties back to the 530,000 feet, what the total cost of redevelopment was?

No.

I can't give you that right now.

We do but we don't have it aggregated that way.

Okay.

I assume interest was capitalized on that 530 throughout the full fourth quarter on the cost of it.

There's all -- the full capital that was spent remains in construction work in progress.

Interest was capitalized, yes, to the extent that construction work was done.

You mean some of it could have been -- .

Some of these signings might have occurred later in the quarter and at that point we might have started construction on a project.

So that's why it is hard to say.

At what point do you stop capitalizing on redevelopment space.

At commissioning, basically.

Or (inaudible) occupancy.

So the commissioning of the data center is a fairly elaborate process.

Do you not have the flexibility to kind of hold that over for a little while until -- or is there any wiggle room there or are you kind of as soon as it receives the full CO or commissioning it gets -- comes off the capitalization ticker?

Not really, we don't.

We have taken a conservative approach here on capitalization of interest and operating expenses.

Okay.

Thank you.

This does conclude our question-and-answer session.

I would like to turn the call back over to Michael Foust for concluding remarks.

Great.

Really appreciate everyone's interest and in the good give and take on the call and as always, we are available for follow up and just want to continue to emphasize that we see ourselves in a very strong demand environment for our product and a little bit unusual relative to some other areas of the economy.

But I think our product does create cost savings and efficiency for companies and helping productivity.

Thanks very much everyone.

Ladies and gentlemen, this does conclude the Digital Realty Trust fourth quarter 2007 earnings call.

ACT would like that thank you for your participation.

You may now disconnect.