Digital Realty Trust Inc (DLR) 2008 Q1 法說會逐字稿

Good afternoon ladies and gentlemen.

Welcome to the Digital Realty Trust first quarter, 2008, earning conference call.

(OPERATOR INSTRUCTIONS) This conference call is being recorded today, Thursday, May 8, 2008.

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

Please go ahead, ma'am.

Thank you and good morning, good afternoon to everyone.

By now you should all have received a copy of the Digital Realty Trust earning press release.

If not, you can access one in the Investor Relations section of Digital's web site 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 believes, expects, 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 soley to the historical matters including statements related to market trends and conditions, pricing trends, the amount and timing of redevelopment space to be delivered, the timing of lease commencement, the future demands for data center space and the drivers of that demand.

The ability to raise additional debt and equity capital, the company's liquidity including future debt availability and capacity, and the company's future financial results for 2008 including projected FFO per share in unit, the signing and commencement of leases, rental rates, 2008 acquisitions and acquisition cap rates, the acquisition mix between vacant 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 with the United States Securities and Exchange Commission including the company's annual report on Form 10(K) for the year ended December 31, 2007, and subsequent filings with the SEC.

The company disclaims any intension 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 nonGAAP 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 has provided this information as a supplement to information prepared in accordance with generally accepted accounting principles.

Explanations of such nonGAAP item and reconciliations to net income are contained in the company's supplemental operating and financial data for the first quarter of 2008, furnished to the Securities and Exchange Commission, and this information is available on the company's web site at www.digitalrealtytrust.com.

Now I'd like to introduce Michael Faust, 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.

Welcome to the call everyone.

I'll be dealing with a brief overview of Digital Realty Trust, then I'll review our significant first quarter 2008 accomplishments.

Then we;ll conclude with a discussion of new research data about a number of emerging data center trends from a survey we recently commissioned.

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

First a brief introduction.

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

Our portfolio currently contains 71 properties containing 12.7 million rentable square feet excluding one property, the Weston Building in Seattle that is held as an investment in an unconsolidated joint venture.

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

Portfolio now Includes approximately 1.9 million per square feet of space held for re-development, a very important source of growth for the company.

DLR provides a variety of data center facility solutions including turn-key facilities, powered base building and built 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 other Fortune 1000 firms.

Now I will detail highlights from Digital's portfolio operations during the quarter.

Our team turned in another very successful quarter on all fronts, leasing, operations, acquisitions and finance.

Based on that success we are raising earnings guidance for the year as Bill will discuss in detail.

In addition market trends and conditions are very favorable for customer demand and data center supply in our major markets.

Portfolio occupancy, excluding space held for redevelopment, held steady at 94.7% at the end of the first quarter, the same as the previous quarter, and compared to 94.8% for the same period in 2007.

Note that total lease space actually increased in the quarter and newly completed vacant turn-key space were approximately 98,000 feet was added to the portfolio from the redevelopment inventory.

During the quarter leases commenced on approximately 334,800 square feet of space.

This includes 256,200 square feet of turn-key data center space, leased at an annual average GAAP rental rate of $119.25 per square foot.

Also includes 46,300 square feet of powered base building space that was leased at an average annual GAAP rental rate of $52.42 per square foot, and 32,300 square feet of nontechnical space leased at an average annual GAAP rental rate of $19.31 per square foot.

In addition, we signed leases during the quarter totaling 260,200 square feet of space, consisting of 106,400 square feet of turn-key data center space leased at an annual average annual GAAP rental rate of $100.05 per square foot, nearly 120,000 square feet of powered base building space at an average annual GAAP rental rate of $67.60 per square foot, and 33,800 square feet of non-technical space that was leased at an annual-- average annual GAAP rental rate of $25.93 per square foot.

We expect lease rates to fluctuate somewhat quarter by quarter due to varying rates for different products in different markets.

In particular in the first quarter, a unique and highly accretive transaction in already occupied space lured the average lease rate for turn-key space from the previous quarter.

Excluding this transaction the average turn key rate would be about $114 per square foot.

Overall we continue to see very attractive pricing throughout our top markets driven by the strong demand for our new turn-key and powered base building products.

Turning to our development and redevelopment programs, we currently are underway on construction projects in High demand markets in the U.S.

and Europe that will add approximately 547,000 rentable square feet of additional data center to our operating portfolio.

We expect this space to come on line through the first quarter of 2009.

Of this space, approximately 330,000 is turn-key data center and 217,000 square feet are build-to-suit data center facilities.

Overall we are pleased that our leasing and product delivery programs are on track to contribute toward improved 2008 results as reflected in our increased guidance.

Turning now to our acquisitions program, in February we acquired 365 Randolphville Road, a 265,000 square foot redevelopment project located in Piscataway, New Jersey, next to 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 upgrade to the power capacity with plans for initial build out of two turn-key pods totaling about 20,000 square feet of raised floor in the building.

In addition this week we are scheduled to close on 650 Randolph Road in Franklin Township, New Jersey.

The purpose built 128,000 square foot data center shell was recently completed for DLR and is capable of supporting about 70,000 square feet of raised floor.

We plan to contribute the property to our redevelopment inventory and to make additional improvements to the building to meet our power based building specifications.

As we complete the additional improvements we will market the facility to financial services companies, system integrators and other Fortune 1000 companies looking for large blocks of high quality data center space in the metro New York/New Jersey market , a market where supply is extremely limited.

A key initiative for Digital Realty Trust has been to gather research and analyze market trends for data center demands in areas that continue to be significantly under served by independent research.

In response again this year we commissioned our own research study that focused on the current drivers demand for data centers in the U.S.

including immediate and longer term growth prospects.

Consistent with last year's study the survey was conducted in March, 2008, by Campos Research and Analysis, and, examined critical issues such as power and cooling, space requirements and the drivers of new facility expansion.

The metrics report in the results are dry from web-based surveys of over 150 IT decision makers in a wide range of large corporations in North America with revenues of at least $1 billion or at least 5,000 employees.

All survey participants are involved in the process of managing corporate data centers, implementing new facilities or expanding existing data centers and our senior level executives including sea level management and MIF and finance..

The results have not only confirm our understanding of today's market trends but more importantly provide specific data from users on the underlying demands characteristics for data center space.

While we plan to release the results of the study in greater detail in the press release later today, I want to discuss a few key findings now with you this morning.

First, 86% of respondents in the 2008 study noted that they will definitely/probably expand their number of data centers in the next 12 months.

This indications an active phase of data center expansions during the second half of 2008 and first half of 2009.

Second, 45% of respondents plan to expand in three or more locations.

This is an increase of nearly 20% over the 2007 results.

Indicating that the scope of data center projects have increased along with the number of projects.

Third, the planned square footage requirement for an average expansion site went up 50% from 10,000 square feet in 2007, to 15,000 square foot in 2008; another indication that the scope of data center projects have increased significantly in the past year.

The result of this study confirms what our teams are already experiencing in the market, that demand for data center space is increasing and being driven by the growing IT infrastructure needs of companies across industry sectors.

Despite the challenging economic environment, companies are making significant investments in IT infrastructure reflecting the critical nature of these assets for today's corporations.

We believe that these important trends, coupled with our proven business model and flexible capital structure, will continue to drive strong long-term FFO growth for DLR.

Now I'd like to turn the call over to our CFO, Bill Stein, who will discuss our very positive first quarter 2008 financial results and our revised 2008 FFO guidance.

Turn it over to

Thank you, Mike.

Good morning and good afternoon everybody.

I'd like to begin with a review of our first quarter 2008 financial results and our revised guidance for 2008.

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

FFO on a diluted share unit basis was $0.58 in the first quarter of 2008, up 16% from $0.50 in the same quarter last year and up 9.4% from $0.53 in the fourth quarter of 2007.

The first quarter of 2008, one-time items accounted for approximately $0.0 2 per diluted share and unit of additional FFO.

These items include additional capitalized interest related to a prior period.

Fee income from development services and energy incentive payment from an electric utility and a reversal of previously recognized bad debt expense.

Adjusted FFO for the first quarter of 2008 was $27.5 million or $0.37 cents per diluted share and unit.

This compares to a fourth quarter 2007 AFFO.

of $27.1 million or $0.37 per diluted share and unit.

The AFFO pay out ratio for the first quarter of 2008 was 83.8%, which was the same as that of the previous quarter.

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 web site.

EBITDA was $56.6 million in the first quarter of 2008 compared to $65.7 million for the first quarter of 2007; which included an $18 million gain on the sale of two properties.

Excluding the gain on sale EBITDA for the first quarter of 2007 would have been a $50.7 million reflecting an increase in 2008 of 11.6%.

Net income for the first quarter was $11.1 million, up from $5.6 million in the fourth quarter of 2007, and down from $22.1 million for the same period in 2007, which includes the $18 million gain on the sale of two assets.

Net income available to common shareholders in the first quarter was $2.9 million, or $0.04 per share up from $254,000 or zero per diluted share in the previous quarter.

Net income available to common shareholders in the same period in 2007 was $18.6 million, or $0.32 per diluted share, reflecting the non-recurring gain on the sale of two properties.

Excluding the gain net income available to common shareholders would have been approximately $3.6 million or $0.06 per diluted share, gains on asset sales are not included in our FFO.

Same store NOI increased 10.8% to $68.7 million in the first quarter of 2008, from $62 million in the fourth quarter of 2007.

And increased 17% from $58.7 million in the first quarter of 2007.

Same store NOI adjusted for straight line and FAS 141 adjustments which we refer to as same store cash NOI increased to $60.4 million in the first quarter, up 13.5% from $53.2 million in the fourth quarter of 2007.

And up 17.3% from $51.5 million in the first quarter of 2007.

These increases were primarily the result of new leasing in our properties commencing during the twelve-month period ended March 31, 2008.

I will now review specific items in the statement of operations to provide additional detail on the results for the quarter.

For the first quarter rental revenues increased to $92.7 million, up 8.9% from $85.1 million in the previous quarter.

The increase was primarily due to the commencement of leases signed in 2007.

Likewise tenant reimbursements increased 5.8% to $21.8 million from $20.6 million in the fourth quarter of 2007 due to the new lease commencement.

Total operating expenses for the first quarter were $89.3 million, up 5.2% from $84.9 million in the fourth quarter of 2007, primarily due to a one time property tax credit of $3.1 million that we received in the fourth quarter and in part to the new lease commencements.

Turning now our balance sheet.

During the first quarter we capitalized 23%, or $4.4 million of interest related to construction projects, which compares to 21% or $4.2 million in the fourth quarter of 2007.

In addition we capitalized approximately 29% or $2.6 million in compensation expenses compared to approximately 25% or $1.9 million in the fourth quarter of 2007.

Liquidity continues to be a significant concern for real estate companies as access to capital has become increasingly constrained over the past year.

As I've said in previous calls, 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 capital to fund our currently planned acquisition and degree of development program for the year when combined with our planned activities in the debt markets.

In February, 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 utilized the net proceeds to temporarily repay borrowings under our revolving credit facility to fund acquisitions, development and re-development activities, and for general corporate purposes.

Currently we have $175.2 million outstanding on our credit facility; including letters of credit.

Based on the covenants in our credit facility we have a total borrowing capacity of over $724.8 million consisting of $474.8 million of immediate liquidity under the credit facility and additional secured debt capacity of approximately $250 million.

This capacity were fully utilized our pro forma total debt to total market value would be approximately 36.6%.

Our total debt at quarter end was $1.2 billion and our ratio of debt to total market value was 26.8%.

Our nonGAAP fixed charge coverage ratio was 2.1 times and our nonGAAP debt service coverage was 3.2 times.

You should think of those items as more of a cash coverage test.

As of March 31, our weighted-average cost of debt was 5.5%.

And it's weighted-average maturity was 5.7 years including debt extension options.

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

We've exercised the first of our two options to extend the maturity on the 350 East [Sermac] mortgage.

The maturity date on the mortgage subject to completion of legal documentation is now June 9, 2009.

The current amount outstanding on the mortgage is $97.5 million the interest rate as of March 7, 2008, assuming the extension were effective, would be 4.82%, a 141 basis point reduction from the current swap rate.

We continue to work on a number of financing options in support of our growth and development.

In the U.S.

we are exploring the opportunity to access the unsecured private placement debt market.

This potential financing vehicle would supplement our capital structure with medium to long-term unsecured debt while providing further diversification of our capital sources.

In addition, we are in various stages of due diligence and documentation on two stand-alone secured financings of domestic properties that would generate total proceeds of over $120 million with terms ranging from three to five years, and interest rates ranging from 6 to 6.5%.

In Europe we are also in various stages of due diligence and documentation on two stand alone secured financings.

The first transaction is for a data center facility located on London's perimeter.

Estimated proceeds range from GBP50 to GBP55 million with a five-year term and an interest rate in the range of 6.5% to 6.75%.

The second transaction involves two data centers located in Dublin.

Estimated proceeds range from EUR50 to EUR55 million with a five-year term and an interest rate in the range of 6 to 6.25% All these loans are subject to the approval of the respective bank's credit committees and other conditions.

I would now like to turn to our revised guidance for 2008.

We are increasing FFO guidance by $0.05 on each end to a range of 235 to 245 per diluted share in unit because of the results of our leasing activity and a reduction in expected G&A expenses.

The new guidance is based on the following assumptions.

Total acquisitions for the full year in the range of 125 million to $185 million consisting of 65 million to $75 million of vacant properties for redevelopment and 60 to $110 million of income producing properties at an average cap rate of 8%.

The commencement of leases for approximately 890,000 square feet to 990,000 square feet of turn-key data center and power based building space at an average annualized gross rents of $90 per square foot.

Commencement of leases for 100,000 square feet to 125,000 square feet of basic commercial space at an average annualized gross rents of $19 per square foot, total CapEx for our redevelopment program up $550 million and total G&A up $41 million.

These new assumptions reflect a shift in the mix of investment capital, increasing CapEx for our redevelopment program and reducing capital allocation for acquisitions as well as a $3 million reduction in G&A due to the elimination of third party acquisition and disposition related professional fees from FAS 141 RG&A line items which will not become effective until next year.

We established 235 per diluted share in unit as a low end of our 2008 FFO guidance primarily due to our exposure to foreign currency translation loss.

As of May 8, 2008, $81.4 million outstanding under our revolving credit facility is denominated in foreign currencies.

Were we to repay these borrowings today, depreciation in the U.S.

dollar since we borrowed these funds would cause us to recognize a charge to earnings in FFO using yesterday's exchange rate of approximately $5 million in foreign currency translation losses.

We expect to repay some if not all of these borrowings over the next several months with proceeds from the new secured loans that I mentioned earlier.

This concludes our formal remarks.

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

Thank you.

Thank you, sir.

(OPERATOR INSTRUCTIONS) Our first question come from the line of Jordan Sadler with KeyBanc Capital Markets.

Please go ahead.

Thank you and good morning out there.

First question is for Mike regarding I guess the results of the survey and just your thoughts in general regarding data center demand from what you're seeing.

Just maybe you could characterize it in terms of innings, what innings of the ball game do you think we are in here today?

Well, that's a good question.

Certainly demand continues to be strong and by all indications the data center facilities for many corporation really are not discretionary.

They are required for continued productivity and continued expansion of the businesses.

And that seems to cut cross virtually all vertical markets.

I mean, I would think that we are maybe in the, I'm guessing third inning, fourth inning perhaps, kind of in the middle of the game.

I think we are going to continue to see at least in our foreseeable future over the next 24 months, 36 months, I think we are going to continue to see pretty strong demand.

What are you seeing on the supply side?

Supply doesn't seem to be picking up to the extent to meet the forecasted demand that we are seeing.

We are doing some other analysis inhouse on a market by market basis looking at kind of seven or eight top markets and we are seeing a pretty, at least from our own research, we are seeing a pretty significant supply demand shortfall of supply as much as perhaps around 50% less supply than for the demand that we are seeing forecasted over the next 24 months.

But that's kind of our own internal analysis of several of these top markets.

So we are pretty comfortable that it's a pretty favorable environment for us today.

And then the second question is just on the capital side, Bill, you outlined the secured financing in Europe and domestically.

I would suppose those represent the $250 million of secured debt capacity you mentioned in your opening commentary?

That's right.

Okay.

So any other plan --

Jordan, one point, though, for that 55 million pound financing on the facility in London, that's a construction loan so it won't go out all at once, it will go out as the facility is built but for the most part should be funded this year.

And so on the capital side of things, any other plans either through asset sales or joint-- status on joint venture, potential joint venture transactions you could maybe update us on?

Nothing really on asset sales at this point.

We are looking at several joint venture situations, one of which would be for European development and the second would be for stabilized assets in the portfolio.

Domestically?

Domestic, yeah.

Are those '08 events or not necessarily?

Not necessarily.

The development JV might happen this year.

I think the stabilized is going to take a little longer.

And that's -- we are generating build-to-suit as well through our development platform and we would see the stabilized JV as an exit vehicle for build to suits.

Right that's helpful.

Thank you.

Thank you.

Our next question comes from the line of Michael Bilerman with Citi Please go ahead.

Hi, it's [Irwin Gutxman] Michael Bilerman is on the line as well.

My first question is about the assets that you have been-- especially the vacant assets that you've been buying such as the purpose built data center.

I'm wondering who are the sellers of these completely vacant assets and why the previous owner would choose to sell rather than trying to lease the space themselves?

I can give you some incite, Irwin, there too.

The last couple of transactions that-- actually that we mentioned today, the property in Piscataway that's adjacent to our 3 Corporate Place.

That property is a warehouse facility that we will-- that we were, actually we're in the process of creating our powered base building and then one or two turn-key pods in.

So right now the building is a warehouse.

So it's nothing marketed as a data center and engineering work has to be done both on some structural work as well as power and communications fiber being brought into the building.

The second one I mentioned in Franklin Township that we'll be closing on in the next week or so, that building is actually a brand new shell building that's being developed for us by a local developer.

And so that's being built on a shell basis to our specifications on land that the developer owns and then with the closing this week we'll take over and then market that building and potentially do some turn-key pods later this year depending on how the marketing goes on the other property.

And just to clarify, you said that you might set up a development joint venture at some point over the next 18 months?

That's right, with European assets.

And I'm wondering why, what sort of driver is the decision to develop within a joint venture as opposed to developing on balance sheet given sort of the yields that you are getting on that?

It's really a function of balance sheet capacity versus the opportunities that we see out there.

As well as the amount of risk that we think is appropriate to have in development assets within the portfolio at any one time.

And sort of in keeping with that, you mentioned the $800 million of debt capacity that you have to fund developments for this year but at the same time you mentioned the fixed charges sort of trending at around two times.

I'm wondering if you're considering anything to sort of shore up the equity side of the balance sheet to fund developments potentially in '09 to get that fixed charge up.

Well, the interest rates-- when we lease these assets with unlevered returns in the low to mid to high teens even with an interest rate of 6 to 6.5% it's not going to be dilutive to the fix charge coverage ratio cause you are basically at two times.

But having said that, if you look at our needs, we could make it, I suspect, to the first quarter of next year but I think that would be pushing it.

I think that it would be more like that will we would raise equity before the end of the year, this year, unless we do something on the private side, a joint venture.

But we, we are price sensitive basically and so we are in no rush to raise equity.

Fair enough.

Thank you.

Thank you.

Our next question come from the line of Will Marks with JMP Securities, please go ahead.

Hello Mike, hello Bill.

A couple of questions to start with, can you give us a little more detail on how you are able to bring down G&A.

You gave some comments in your prepared remarks.

Sure, Will.

There was a proposed FASB that would have required all real estate companies to expense third party acquisition costs and disposition costs.

So basically any consultants or brokers or anything like that that are involved in the acquisition process that, where those fees have been historically capitalized it was proposed that those would be expensed.

So we put that in our G&A assumptions for this year.

Feeling that that FASB would be effective.

And it's not going to be effective this year.

It's going to be effective next year.

So that's a significant component of the G&A reduction.

And then other pieces of it just relate to continuing to try to manage our business more effectively.

and efficiently.

Great.

Okay.

A couple other things.

One is, I believe when you refer to your survey you said one of the questions related to, I think you said definitely/ probably two-thirds will be extending their data centers.

Did I hear that correctly?

Actually with that, Will, it's 86% of the respondents in the definitely and probably category said they will expand in the next 12 months.

Okay.

So it's a combination of those definitely and probably?

Yeah.

Okay.

Sorry, I was just a little confused by that.

Thank you.

And one other question, I don't think [Savis] .

has been brought up yet.

Can you just give us an update on their business, how it relates to you, if there is potential upside or down

Sure.

Yeah, obviously they are very important customer of ours and we have good incite into their activities in our buildings obviously and they are filling up space with good customers at a pretty good pace.

It's kind of interesting if you look at their filings and conference calls they've had, their data center based business has increased very nicely and very similar to how other companies like maybe like [Equinex] Rack Space and Switch and Data continued to so the data center based business that goes on in our buildings has done well.

I think there has been some drag on growth for them has been on their network side because they have a pretty extensive private network business.

That to a large extent is unrelated to the data center business that goes on in our buildings.

So we are seeing them actually do quite well in the business that operates in our facilities.

Okay.

So in terms of more exposure, is that now completely out of the question or could you possibly lease more space to them?

Boy, there is not anything, any discussions going on now in that way but I could say we'll look at it on a circumstance by circumstance basis depending on the market and who their customer base is.

More importantly, you're not worried about collecting the rent from them at the current time?

Not at all.

If you look at their cash flows and balance sheet, , they are a pretty healthy

Great.

That's all for me.

Thanks.

Our next question comes from the line of [George Ourback] with Merrill Lynch.

Hi, good afternoon, guys.

Regarding the increase in redevelopment CapEx, is this purely an increase in the amount of square footage you plan to develop or are you spending more per foot in the turn-key space?

It's more square footage that we are continue doing build out both on the turn-key as well as in the powered base building but our construction budgets are coming in within our parameters and our guys and gals are getting more cost effective all the time on these construction products.

George, basically reflects that fact that we are somewhat ahead of schedule in our leasing plan so we are pulling forward into 2008 some of 2009s plans.

For the past two quarters your redevelopment schedule has not shown that you had shell product in the construction pipeline.

Are you just seeing less demand for that product side or are you focusing your efforts on the higher yields in the turn-key product?

Well, I mean it really does continue to be both products that we are leasing to customers.

So in the same building, you'll have suites that we are building out as turn-key as well as space that we are leasing in multi-tenants facilities on a powered base building situation.

So it's really both products are being absorbed.

I think we are-- on, leases commenced in the quarter it was much more heavily weighted towards the turn-key facilities and certain until terms of total dollars being expended if it's going to be the dollars expended in cap are going to be much more weighted toward the turn-key just because of the nature of that product.

Thank you.

Our next question comes from the line of Tao Okusanya with UBS.

Please go ahead.

Thanks for taking my question.

Great quarter.

Looking at the guidance I just had one question with regards to the cap rate assumption of 8%, it seems a lint high to me, just wonder what you guys are seeing in the acquisition market at this point.

Yeah, right now the projects that we've looked at and that we've been closing on we are in excess of an eight cap.

So we are between 8 and 8.5% on the income producing properties.

So we think eight is, will be pretty consistent for us and maybe a bit conservative.

Interesting.

Okay.

And who would, I mean I thought cap rates on this product were a little bit higher like in the mid sevens.

So I know you guys do a lot of off market transactions.

8.5 cap rate transactions were off market transactions that you continue do find out there?

Yeah, I mean, gosh, virtually everything we are doing has been off market.

And a lot of these properties, they may have an income producing component and a non-income producing component for redevelopment as well.

If you look at-- so not all of the properties-- rarely were we buying any more of our property that's strictly fully leased income producing.

So might represent portions of buildings that we are splitting out.

With that said, we've seen over the past year a number of sales occurring well down into the sevens.

But those just aren't opportunities that are very interesting for us because we get more, better returns obviously out of our development and redevelopment programs.

Got it.

We've been quite selective in the acquisitions area.

So when we look at capital allocation, if we have the opportunity to earn a high teams leverage, mid-teens leverage versus a seven or so in an acquisition, clearly we are going to lien towards the higher yielding opportunity, particularly in a capital constrained environment such as this.

And that's really what we think our investors are looking for us to accomplish.

Great.

Thank you.

Our next question is a follow up from the line of Jordan Sandler with KeyBanc Capital Markets.

Please go ahead.

Thanks, guys.

I just wanted to clarify the mix.

Based on the affirmed leasing guidance, the 890 to the 990 on the data center space, turn-key and shell staying at $90, I assume is the spending rate on those commencement expected to stay the same?

And is the mix expected to stay the same?

So 50/50 turn key, shell?

Yeah, that's what we are continuing to project right now.

Kind of the best of our forecasting.

I think what's happening also is that we are leasing and thus commencements are occurring a little more quickly than we forecasted.

So the same amount, we are forecasting the same amount of square footage so we are a little ahead of schedule.

In terms of booking revenue for the full year?

Exactly.

But you are spending on that same square footage went up, just to go back to an earlier question, and so what's-- but you are saying the costs are actually being contained so it's implicit in that is that you are going to be prefunding as Bill alluded to, next year's commencements?

That's right.

It's a function of this year's leasing activity accelerating?

Right, we basically need to fund inventory this year for next year's growth.

Can you, what is the expected spend on HSBC in that guidance, in the 550?

Well, some of it's already been spent.

But the loan is -- GBP55 million.

What's baked into the 550?

That is attributable to that property.

Probably about, I want to say around GBP55 million, GBP57 million.

So call it GBP110 million roughly.

Okay that that's helpful.

And then there is a larger sized portfolio out there for sale that we've talked about previously.

Any expectations on pricing that you guys might have-- or whether or not you are still looking at it?

It appears that from what we are hearing in the marketplace is that the pricing is getting very aggressive on that portfolio.

Which I think at the end of the day will probably be a very favorable comp for us if it proceeds as we are hearing.

It should be helpful for the NAV focused owners of DLR.

But that means it's going to get very expensive but probably goes away from digital, it's done away from digital.

I would say that's likely.

Okay.

That's helpful.

Lastly, overall expenses sequentially as total real estate operating expenses ex real estate taxes, sequentially they went from $33 million last quarter to $31.5 million this quarter.

What was that decrease attributable to and what's a good run rate?

I think I mentioned on the last call that we had a-- we hired a new contractor to do maintenance across our portfolio.

And there was significant amount of deferred maintenance last quarter and so this year-- this quarter you are seeing I think more of a normalized rate.

Yeah, there was a ramp up with the portfolio wide contract.

And as well we were able to tighten the specs once we got them up and running, there are some cases where we were able to tighten the scope of the contract and ongoing costs there as well so it turned out to be really cost-effective.

And there's a couple of other broad vendor contracts like that that we've been able to fine tune and reduce ongoing costs.

Were any of those one time items you discussed that were in the numbers in the operating expense line meaning either the energy item or the reversal of bad debt?

No.

No, would you find those in revenue and you would fine it in the capitalization issue would be in the interest expense.

So the reversal of bad debt is in revenue and the energy is both in revenue?

Right.

Okay.

Thank you.

So is the fee.

So is the fee.

Okay.

Thank you.

Thank you.

Ladies and gentlemen, as a reminder, (OPERATOR INSTRUCTIONS) Our next question comes from the line of [Dave Rogers] with RBC Capital Markets.

Please go ahead.

Hey, Bill, a question for you, in relation to the acquisition guidance being lower is that more of acquisition pricing which you mentioned can be aggressive or more a function of capital?

And the seconds part of that is at what point do slower acquisitions begin to potentially slow the funding or the opportunity for the future growth through redevelopment, et cetera?

I think it's a function of relative yield opportunities between the two buckets of capital and we are at the point now where we are commencing leases every quarter so if you were starting a development program afresh, you might have to wait a few quarters before you recognize revenue but we are commencing revenues every quarter so we don't have a-- we are not hurting in that respect in terms of the delays you otherwise might see with a de Novo development project.

And then when you compare what the accretion effect is of an 8% cap investment versus what's called a 15% yielding development project there's clearly no comparison.

I would agree with that.

I think that, hasn't that same dynamic been true, say last quarter, when you gave the guidance originally and is it a function of the leasing demands and the ability to capture that today through the redevelopment faster, is that all?

I think that's right.

And what you are also seeing is kind of the continuous process where we are developing space out of the-- that resides in the redevelopment inventory, developing it, putting it into the operating portfolio and then in selective markets we are refreshing space through acquiring sites and/or existing buildings that we can re-develop like we just discussed about in northern New Jersey.

So we are adding in on an incremental basis to maintain our inventory and those markets where we see a lot of demand.

So it does require us to add so much more square footage as perhaps we've added in past years.

And some of these assets that have yield when we acquire them, they have internal growth opportunities.

Rarely are we buying totally full assets.

We are still taking advantage of a lot of growth out of, for example, 350 Sermac in Chicago or 600 West Seventh in LA which we've held for a few years now.

And continuing to build out and getting good same store growth out of those assets.

I guess a follow up to that which relates to your comments in northern New Jersey.

Give us just a brief thought on the differing strategies between those assets and maybe waiting to go the route of the turn-key space on the asset you are likely to close on here in the next week?

That one we will likely for the time being finalize-- , finish the powered base building improvements in terms of power and fiber that we'll complete at the building and we will hold that for likely larger powered base building or kind of custom build situations for users who maybe want a larger footprint or a stand alone facility.

And we can utilize the Piscataway asset we just bought next to 3 Corporate Place and utilize that as more of a multi-tenant opportunity and we'll build out a couple of turn-key pods in that building in Piscataway and have the inventory in Franklin for individual users perhaps or a couple of larger users.

Okay.

Thank

Thank you.

There are no further questions at this time I will turn the conference back over to Mr.

Faust for concluding comments.

Please go ahead, sir.

Very good.

Well, appreciate everyone's focus and taking the time to come on the call.

And we look forward to following up with you in the future.

Thank you very much.

Thank you.

Ladies and gentlemen, that will conclude today's teleconference.

If would you like to listen to a replay of today's conference please dial into 303-590-3000 or 1-800-405-2236 and enter access code 11111705 followed by the pound sign.

We thank you again for your participation in today's conference and at this time you may disconnect.