Digital Realty Trust Inc (DLR) 2008 Q2 法說會逐字稿

Welcome to the Digital Realty Trust second quarter 2008 earnings conference call.

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

Later.

we'll conduct a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, this call is being recorded today, Wednesday, August 6, 2008.

I would like to turn the conference over to Ms.

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 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 415-738-6532 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 rely solely on historical matters including statements relating to pricing and demand, leasing expectations, redevelopment delivery expectations, the company's future liquidity and access to debt and equity capital and the company's expected financial results for 2008 including projected FFO per share in units and assumptions related thereto.

For a discussion of the risks and uncertainties related to our business, see the company's annual report on Form 10-K for the year ended December 31, 2007, quarterly report on Form 10-Q for the quarter ended March 31, 2008, and subsequent filings with the SEC.

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, earning before interest, taxes, depreciation and amortization, or EBITDA, same store net operating income or NOI or same store cash net operating income.

Digital Realty Trust is providing this information as a supplement to information prepared in accordance with generally accepted accounting principles.

Explanations of such non-GAAP items and reconciliations to net income are contained in the company's supplemental operating and financial data for the second quarter of 2008, furnished to the Securities and Exchange Commission and this information is available on the company's website at www.digitaltealtytrust.com.

Now I'd like to introduce Michael Foust, CEO and Bill Stein, CFO and Chief Investment Officer.

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

To manage the call in a timely manner, questions will be limited to two per caller.

If you have additional questions, please feel free to return to the queue.

I will now turn the call over to Mike.

Great.

Thank you, Pamela.

Welcome to the call everyone.

I'll begin with a brief overview of Digital Realty Trust, then I'll review the success of our portfolio of operations during the quarter and conclude with a discussion of market trends and supply and demand conditions.

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

First, a brief introduction.

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

Our portfolio currently contains 74 properties containing 12.9 million rentable square feet of property, excluding one property, the Westin building in Seattle, that's held as an investment in an unconsolidated joint venture.

Our properties are located in 27 metro areas across North America and Europe.

The portfolio now includes approximately 1.9 million square feet of space held for redevelopment, very important source of growth for the company.

DLR provides a variety of data center facility solutions including Turn-Key Datacenter, Power Based Building and Build to Suit Data Center 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.

Turning now to our portfolio of operations, our team turned in another very successful quarter on all fronts, leasing, operations, acquisitions and finance.

Portfolio occupancy, excluding space held for redevelopment, increased to 95.2% at the end of the second quarter compared to 94.7% for the previous quarter and 94.6% for the same period in 2007.

Our leasing program continues to capture demand for new facilities by corporate enterprise customers and by IT service providers.

During the quarter, leases commenced on approximately 138,500 rentable square feet of space.

This includes 86,200 square feet of Turn-Key Datacenter space, leased at an average annual GAAP rental rate of $185 per square foot and also includes 52,000 square feet of non-technical space leased at an average annual GAAP rental rate of $26 per square foot.

In addition, we signed leases during the quarter totaling 121,800 square feet of space consisting of 106,700 square feet of Turn-Key Datacenter leased at an average GAAP rental rate of $173 per square foot, we leased 600 square feet of Powered Base Building at an average annual GAAP rental rate of $67 per square foot and 14,500 square feet of non-technical space at an average annual GAAP rental rate of $25 per square foot.

Tenants include major financial institutions, a large international telecom network provider and a major tech component manufacturer.

After June 30, we signed additional leases totaling 60,000 square feet of Turn-Key Datacenter at an average annual GAAP rental rate of $150 per square foot.

New tenants include a major financial services company and a large system integrator.

Overall, we continue to see very attractive pricing and strong demand throughout our top markets, particularly for our Turn-Key Datacenter products.

The sales team currently is engaged with well over 4 million square feet of new customer prospects, representing over 420 megawatts of data center demand.

We continue to see a significant lack of supply necessary to meet this demand and feel ours is one of the few data center providers actively building speculative turn key space across our major markets.

The depth and experience of our technical team makes DLR preferred infrastructure solution provider for many large corporations and system integrators.

Turning to our redevelopment program, we currently are underway on construction projects in high demand markets in the US and Europe.

These projects will add approximately 510,000 gross rentable square feet of additional Turn-Key Datacenter to our operating portfolio in the second half of 2007 -- I'm sorry, second half of 2008, including 124,500 square feet for AIRCOM in Dublin.

Approximately 428,000 rentable square feet of turn key space was delivered in the first two quarters of 2008.

Overall, we plan to deliver a total of 57 megawatts of new turn key space in 2008.

Our leasing and product delivery programs are on track to contribute strong results this year and into 2009.

Turning now to our acquisition program.

In June, we acquired 650 Randolph Road in Franklin Township, New Jersey.

The recently completed purpose filled data center shell totals 128 7,800 square feet and is capable of supporting approximately 70,000 square feet of raised floor.

We contributed the property to our development inventory and are making additional improvements in the building to meet our power based building specifications.

We are marketing the facility to financial services companies, system integrators and other Fortune 1000 companies looking for large blocks of high quality space in the very active metro New York, New Jersey market.

Also in June, we acquired Reynolds House Data Center located in Manchester, England.

The 38,000 square foot income producing facility was purpose built as a data center in 2001 and contains nearly 23,000 square feet of raised floor with the potential for additional 7,000 square feet of raised floor.

The facility is fully leased to three tenants on a long-term basis.

On June 30, we acquired a 50% interest in 1201 Comstock Street, a site in Santa Clara, California contiguous to 1100 Space Park and next to the 1500 Space Park Drive joint venture property.

We immediately began construction on a 24,000 square foot data center which will contain approximately 14,000 square feet of raised floor.

Concurrent with the acquisition, we signed a lease with a leading technology company for the entire building.

The tenant is scheduled to take occupancy in January 2009 upon completion of the facility.

On last quarter's call, I discussed results of the study we commissioned that focused on the current drivers of demand for data centers in the US including immediate and longer term growth prospects.

Consistent with these results, and despite the challenging economic environment, Fortune 1000 companies, internet enterprises and system integrators continue to make significant investments in IT infrastructure, and this reflects the critical nature of these assets to today's corporations.

Our teams are experiencing strong demand in major markets in the US and Europe, especially for our turn key products.

Our ability to deliver this highly improved product quickly and consistently continues to drive our performance and will be an important source of growth for DLR over the coming years.

We believe that these important trends, combined with our business model, strong balance sheet and proven ability to access capital from multiple sources will drive strong long-term FFO growth for DLR.

I now would like to turn the call over to our CFO, Bill Stein, who will discuss our second quarter financial results, the success of our capital program and our revised 2008 FFO guidance.

Bill?

Thanks, Mike.

Good morning and good afternoon, everybody.

I would like to begin with a review of our second quarter 2008 financial results and then discuss our liquidity position and finally, conclude with our revised guidance for 2008.

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

FFO on a diluted share and unit basis was $0.59 in the second quarter of 2008, up 15.7% from $0.51 in the same quarter last year and up 1.7% from $0.58 in the first quarter of this year.

As I discussed on the last call, in the first quarter of 2008, non-recurring items accounted for approximately $0.02 per diluted share in unit of additional FFO.

When adjusting for these items, the quarter-over-quarter increase was 5.4%.

Adjusted FFO or AFFO for the second quarter of 2008 was $30.4 million or $0.41 per diluted share and unit.

This compares to a first quarter AFFO of $27.5 million or $0.37 per diluted share and unit.

The AFFO payout ratio for the second quarter was 75.6%, down from the first quarter AFFO payout ratio of 83.8%.

EBITDA, adjusted for preferred dividend and minority interest, was $68.1 million in the second quarter, up 4.4% from $65.2 million in the first quarter and up 23.8% from $55 million in the second quarter of 2007.

Net income for the quarter was $13.8 million, up 24.3% from $11.1 million in the first quarter of 2008 and up 76.9% from $7.8 million in the same period in 2007.

Net income available to common shareholders in the second quarter was $3.7 million or $0.05 per diluted share, up $2.9 million or $0.04 per diluted share in the previous quarter.

Net income available to common shareholders in the same period in 2007 was $2.6 million or $0.04 per diluted share.

Same store NOI was $69.1 million in the second quarter of 2008, up 0.6% from 68.7 in the first quarter of 2008 and up 16.3% from $59.4 million in the second quarter of 2007.

Same store NOI adjusted for straight line and FAS 141 which referred to as same store cash NOI, was $61 million in the second quarter, up 1% from $60.4 million in the first quarter of 2008 and up 17.1% from $52.1 million in the second quarter of 2007.

These increases were primarily the result of new leasing in our properties commencing during the 12 month period ended June 30, 2008.

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

For the second quarter, rental revenues increased $98 million, up 5.7% from $92.7 million in the previous quarter.

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

Tenant reimbursements increased 17.9% to $25.7 million from $21.8 million in the first quarter of 2008.

The increase in tenant reimbursements was partially offset by property operating and maintenance expenses which was $36.4 million in the second quarter of 2008, up 15.2% from $31.6 million in the previous quarter due to new lease commencements.

Approximately 75% of the increase in reimbursements and property operating and maintenance expenses were related to utility costs at the properties.

G&A increased during the quarter to $9.8 million, up from $8.8 million in the previous quarter, due in part to local business taxes, occupancy expenses related to our new London office, IT professional fees and a full quarter of amortization expense related to our long-term incentive compensation plans.

Turning now to our balance sheet, during the second quarter, we capitalized 24% or $4.5 million of interest related to construction projects which compares to 23% or $4.4 million in the first quarter of 2008.

The increase was due to additional construction expenditures during the quarter.

In addition, we capitalized approximately 27% to $2.9 million in compensation expenses compared to approximately 29% or $2.6 million in the first quarter of 2008.

Liquidity continues to be a significant concern for real estate companies and maintaining a strong balance sheet with financial flexibility to continue to fund our construction activities is a priority for us.

Accessing capital for multiple sources even more critical in times such as we are experiencing today.

We recently completed the following transactions.

On July 17, we closed an $80 million secured financing on our 3 Corporate Place facility located in Piscataway, New Jersey.

The loan is a three year maturity with two one year extensions at an interest only rate of 6.72%.

On July 21, we completed a common stock offering of 5.75 million shares which generated $211.6 million in net proceeds which were utilized to temporarily repay borrowings under our revolving credit facility, to fund acquisitions, development and redevelopment activities and for general corporate purposes.

On July 24, we successfully closed on a $200 million uncommitted, unsecured Prudential Shelf Facility.

The three year, multi-currency facility provides for draws from time to time as approved by Prudential with an average life and final maturity up to seven and ten years, respectively.

Concurrently with the close of the facility, we made an initial draw $25 million at an interest only rate of 7% with three year maturity.

The Prudential Shelf Facility are subject to covenants that are substantially similar to the covenants contained in our revolving credit facility.

When we executed the Prudential Shelf Facility, an amendment to our revolving credit facility permitting the execution of the Prudential Shelf Facility became effective.

Finally on July 25, we increased the commitments under our revolving credit facility to an aggregate commitment of $675 million by adding a new $25 million commitment by Deutsche Bank through the accordion feature of the revolver.

In Europe, we are currently negotiating and documenting a secured construction permanent debt financing for a data center facility located on London's perimeter.

Estimated proceeds are up to 53.9 million pounds with a five year term, no amortization and a swapped interest rate on the permanent debt currently in the range of 6.5% to 6.75%.

The loan is subject to completion of documentation, various closing conditions and is expected to close within the next two weeks.

We are also negotiating and documenting another secured financing of a domestic property held by a joint venture.

This financing will generate total proceeds to the joint venture of approximately $44 million, with a five year term subject to 15 year amortization and an interest rate currently ranging from 6.25% to 6.5%.

Currently, we have $67.8 million outstanding on our revolving credit facility, including letters of credit.

Based on the covenants in our credit facility and the new shelf facility, we have total borrowing capacity of over $957 million consisting of $607 million of immediate liquidity under the credit facility without any future additions to the borrowing base and additional secured debt capacity of approximately $350 million.

If this capacity were fully utilized, our pro forma debt to market value would be approximately 45%.

Our total debt at quarter end was $1.4 billion, and our ratio of debt to total market value was 27.2%.

Our non-GAAP fixed charge coverage ratio was 2.5 times and our non-GAAP debt service coverage was 4.6 times.

As of June 30, our weighted average cost of debt was 5.3% and the weighted average maturity was 5.3 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 website.

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

With better visibility towards our full year 2008 results, we are raising FFO guidance by $0.05 to a range of $2.40 to $2.50 per diluted share and unit.

The new guidance reflects a shift on our leasing mix towards our Turn-Key Datacenter solution and is based on the following assumptions.

Total acquisitions for the full year in the range of $115 million to $200 million, consisting of $65 million to $100 million of vacant properties for our redevelopment program and $50 to $100 million of income reducing properties with an average cash cap rate of 8%.

I'd like to note that these represent a slight change from the assumptions that were in the earnings release.

The commencement of leases for approximately 840,000 square feet to 950,000 square feet of Turn-Key Datacenter and Powered Base building space at an average annualized gross rent of $115 per square foot.

You will note that there's a slight increase here in the assumed rent per square foot from $90 to $115 per square foot.

The commencement of leases for 100,000 square foot to 125,000 square feet of basic commercial space at an average annualized gross rent of $23 per square foot, this is an increase from $19 per square foot and total CapEx for our redevelopment program of $600 million of which $237 million was spent as of second quarter end.

Finally, G&A will remain, we believe, at $41 million.

This concludes our formal remarks.

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

Thank you.

Ladies and gentlemen, at this time we will conduct a question-and-answer session.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Michael Bilerman from CitiGroup, please go ahead.

Good afternoon, it's Irwin Gutzman here with Michael.

Mike, you talked about, I believe, 500,000 square feet of turn key space delivering in the second half.

Can you talk about how much of that is leased and what the timing of commencement is between the third and the fourth quarter?

It's coming online fairly well distributed.

I would say more slanted toward the fourth quarter and about 124,500 square feet of that, which would represent the AIRCOM building in Dublin, that is fully let and I don't have a break -- I would say probably about a third of that space overall is leased, maybe 40%, and the rest is --

That's including AIRCOM or excluding it?

That's would probably be excluding AIRCOM

Irwin, in terms of our signed but not commenced, the backlog, we've got 215,000 square feet that will commence in the third quarter.

30,000 in the fourth quarter and 132,000 in the first quarter of 2009.

And are you, in the redevelopment pipeline in general, are you seeing more of a shift toward turn key space as opposed to Power Based buildings, in terms of demand?

You previously talked about a 50/50 spread, is that moving more towards turn key?

Yes, the last quarter in particular, it was almost 100% turn key space in terms of leases that we signed.

And now, that trend will balance a little bit but we're seeing for the year it should be significant majority of turn key space.

Can you talk a little bit about cloud computing?

A lot of sort of telecom and internet enterprise companies are out there offering cloud computing to reduce sort of data center storage demand.

When you think about the 420-megawatts demand that you said you're tracking, how much of that do you think could be served by this type of product?

Well, cloud computing means kind of -- it's applied to different types of applications.

So you have cloud computing or utility computing within a company, and that's what we're seeing.

A lot of the demand, especially from the financial services industry, where they're ratcheting up and down computing power for different applications, especially highly computational type applications and risk management and derivatives pricing and such.

You also have cloud competing referred to where you have online applications where instead of running your Microsoft applications on your PCs, they'll be run out of a data center that Microsoft would host.

That's another type.

Sometimes people call the software as a service.

It's very hard for me to break out what amount of our sales force funnel right now is cloud computing, per se.

But we are seeing a lot of the demand driven from the financial services industry for these internal grid computing cloud type computing applications.

You don't see that being a negative to the business?

Oh, no, it's driving demand.

Just the opposite, Michael.

It's going to drive more demand into your assets?

We think so, yes.

Well, we're seeing it.

Okay.

Great.

Thank you.

Thank you.

Thank you.

Our next question comes from the line of Will Marks from JMP Securities.

Please go ahead.

Thanks, hello, Bill, hello, Mike.

Couple questions.

One on -- I may have missed this, but on your guidance, if you compare it to after the first quarter on the commencement of leases, you took the square footage down, but the rate is up substantially and does that have to do with you leased more space in the second quarter than you would have thought, and is the rate up because of the difference between turn key and power based?

It's a shift towards more turn key, Will.

Okay.

There's more turn key in the blend rather than power base, Bill.

Great.

Okay.

And then general thoughts while we're on the rate side of things, are rates continuing to go up for data center space in general?

And along the same lines, I've heard that in Silicon Valley there's basically -- or San Francisco south, there's very little, if any data center space available.

Can you comment on that?

Sure.

We're seeing really solid pricing in almost all of our markets today.

It varies.

Our rates that we're quoting on a per square foot basis vary by quarter by quarter, especially for the turn key, because of different utilizations and the way the spaces are laid out.

On a kilowatt -- per kilowatt basis, rates have gone up for us over the last four quarters on a cumulative basis about 30%.

Now, we don't see that trend continuing at quite that same pace, but we're seeing good trending and pricing on a kilowatt basis and we think we'll continue to see good returns.

In Silicon Valley, going to your question there, right now there's not much space at all available and we're actually working on a couple of buildings on our Space Park Drive site that will be coming online here in the next nine months, six to nine months or so, and -- so we're hoping to get ahead of the market there for that.

There are some large projects that are on the planning side that will be coming online the second half of '09 and 2010, but right now, there's definitely a lack of supply.

Supporting that, Will, we had a large project that is leased to a major internet provider that leased before it finished -- well I guess it's finished now.

And then we leased a prompt simultaneously with a close down there, a redevelopment property to a tenant and we mentioned that, I believe, in our earnings release.

Right.

Okay, a other things.

On page 11 of your supplemental, the run rate NOI, is that straight lined, the rental revenues?

Yes.

Okay.

It is.

Okay.

And then on -- in terms of your comment, Mike, about rates being up 30% or so in the last year, I guess we should -- you have about 10% of your portfolio turning '08, '09 I think and I guess we can read into that that would be -- those leases have considerable upside in market rates, even above probably the straight line amount.

Yes, we should see some good uplifts in those rates and we've seen that with some of the renewals we've done where rates are going up 20%, 30%, and it varies.

Some of the space is turn key.

That's up for renewal.

A lot of it is more priced at a power based building level, because there's spaces where the tenants have put the improvements in themselves, but regardless, in the right buildings, our rates are uplifts of 20% to 30% I think they're going to be typical.

And Will, the straight line -- since the straight line is the midpoint, it's typically lower than the end of term rent, so it's actually -- the increase is substantially higher when you're comparing straight line versus cash.

Got it.

Makes sense.

Okay.

Thanks, guys.

Thank you.

Our next question comes from the line of Craig Mailman from Keybanc Capital Markets .

Please go

Good morning, all.

It's Jordan Sadler here with Craig.

Going back to the backlog, Bill, you ran through that real quick.

It was 215 square feet in 3Q, 30,000 in 4Q and 132?

In 1Q?

1Q, correct.

Okay.

Do you have the -- sorry.

I'm sorry, 132.

Okay.

Do you have the rents on those commencements?

Yes.

We'll give you revenues.

Okay.

Roughly 8.7 Q3, 1, 2, Q4, and about 12.5, Q1.

And those are the annualized numbers, right?

Well no, those are the revenues that I expect -- the first two I gave you are the revenues expected in 2008, the last is expected in 2009.

The contribution for 2008, got it.

Versus the contribution for 2009.

Got it.

Correct.

And then the leases -- well, the leases that were commenced during the second quarter, the 86,000 square feet at 185, what was the timing of that?

Oh, let me see.

I don't think I have that.

Was it -- was there one sizable lease in there?

Hold on.

I have a very small point on the spreadsheet here.

This may take a little while, given my eyes.

You could come back to me on it, if you'd like.

I could ask another one.

Yes, no, it's here.

It's -- it looks like it's spread more or less into the quarter.

Trying to find the commencement date in the column.

So mid-quarter would be a --

Mid-quarter is fine.

Okay.

And then, what is the planned use of proceeds for the equity offering that you guys completed in July?

Is it just to kind of continue to build out the redevelopment pipeline, or is there anything more imminent?

The immediate use of proceeds was to pay down the revolving credit facility.

Sure.

And I think we had -- we have some of our borrowings in pounds and sterling, so we actually have something of a cash position too, because we're waiting for the UK construction loan to fund, to match fund the paydown there.

An then other than that, right now it's to continue to fund our CapEx, although, as you might imagine, from time to time we see some interesting opportunities on the acquisition side.

There's nothing teed up above and beyond your guidance at this point is kind of what you're saying?

Nothing that we would deem probable.

Okay.

And then I think in the third quarter, your option on Kelex comes due, or potentially expires, and I'm just curious what your plans are.

Yes, we're looking at that.

We haven't made a determination yet, whether we're going to exercise that or not.

They're doing quite well as a company.

It represents more of a private equity type investment in the company, so we just have to determine if we want to move ahead with that option, but we haven't made a determination yet.

And how does sort of their leases in your meet me room sort of play into your decision, meaning wanting some participation in the upside there?

The leases, really -- I guess I personally view it as kind of a separate topic, because I think we really have to look at the investment in terms of -- we'd be making kind of a strategic private equity investment in a company that we think is strong and has really good business plan.

But it really doesn't affect the income coming from those leases at all, so it's more kind of a separate capital allocation analysis for us.

Okay.

That makes sense.

Last question, just coming back to the 4.2 million square feet of prospects you identified on the demand front.

Yes.

What is your typical -- and it wasn't clear if that's what you're tracking or how much you're entertaining and bidding on or what, but maybe you could clarify that and then maybe talk about the potential capture rate.

Sure.

So those are prospects, potential customers at various levels of interest and discussion that our team is tracking and talking to.

So, kind of represents kind of the demand that we're seeing that we're touching today in our various major markets in the US and in Europe as well.

I think we've been tracking between 25% and 30% or so over time, maybe slightly higher, because some of these end up being -- companies end up doing their own construction on a number of these.

That's a guesstimate on my part.

I'd have to go back and do more analysis on that.

Maybe it would be more useful -- do you know what that prospect pipeline looked like three months ago, on the last call?

Actually, probably the three months, probably similar size, probably similar size.

Great.

Thank you.

Thank you.

Our next question comes from the line of from [Siri Anumpa] from Oppenheimer and Company.

Please go ahead.

Good afternoon, thank you.

Try to limit to two questions, anyway.

On demand front, I know Michael, you talked about pretty healthy demand, but there still seems to be a healthy bit of skepticism.

If you could give us -- talk about what kind of a sales cycle are you guys seeing and how has that changed, let's say maybe three months ago or six months ago and also on the competitive front, are you guys seeing any new players out there or any new builds?

Obviously, there's talk about, hey, the credit markets are definitely not helping, any kind of speculative supply to come on line.

And also, do you see any incentives where enterprises are taking some of the outsourced data centers in house just because of the macro concerns.

Thank you.

Sure.

Really not seeing a trend on going in-house.

If anything, we're seeing much more of a trend of outsourcing, either outsourcing on wholesale basis like we provide, or outsourcing to system integrators who are customers of ours or other IT service providers like the Equinex and Savvises.

We're seeing, I guess I would say definitely seeing more outsourcing than in sourcing.

Also, you asked about kind of the sales cycle.

We're working with many larger corporate enterprises and large international companies and the sales cycle for anything with those types of companies could be anywhere six to 12 months, to complete a lease transaction and that's fairly -- that's pretty much the same what we've been seeing for the last nine months or so.

So I don't think that trend has really changed.

I'm sorry, I think you had another question about demand.

Yes, on the demand, maybe if you can just give us a little more color, are there any product verticals that you guys are seeing increased demand, or has that pretty much remained the same during the past six months?

It's been pretty much the same and with a large emphasis on the financial services and system integrators.

I'd say -- I think I mentioned this before, probably, that our current revenues are about 12% financial services and financial services probably represent about a third of our current prospects.

So a lot of demand from the major international services, Wall Street trading platforms, we're seeing a lot of demand there and the system integrators and broadly Fortune 1000.

And just one follow-up question.

On the lease expirations, I know you guys have reasonably good size of space that's expiring over the next two years.

Could you guys give us a mix of how much of it is turn key and how much of it is power based?

I don't have that at my fingertips.

I think probably -- this year, '08 and '09 is a very small number.

It's a larger number, I think around 14% or so of square footage in 2010.

But I think most of it, even though it's built out, a lot of it, it would be priced as power based building because the tenants put the investment in themselves.

And so if they want to renew -- now ironically, kind of the big upside in some of these spaces is if the tenants move out and we can release it as turn key space so we can take advantage of the improvements that tenants have put in.

But that's typically not the case.

The tenants usually, when they have built out space that they've invested in, they usually they like to stick around.

Fantastic.

Thanks a lot, guys.

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from the line of Tayo Okusanya.

Please go ahead.

Yes, good afternoon.

Congratulations on another great quarter.

Quick question, in regards to -- could you talk a little bit about the shift in mix between the power based versus the turn key, what's driving client demand towards more of the turn key solution right now?

And if that -- if you expect that favoring of that particular product to continue over the next few quarters.

I think, Tayo, I think we will see it continue with the emphasis on the turn key space.

I think customers like the idea of being able to utilize our capital to fit out and I think as importantly, are recognizing the quality of our development engineering schemes and our ability to deliver the space.

To besides being a good financial solution, I think operationally and engineering-wise, we're a very good solution for these large corporates.

So I think we continue to develop that level of security and reliability with the customer.

Our turn key space is a very good solution and are also willing to customize spaces for customers too that might have some more specialized applications, so I think that plays into it as well.

Tayo, the nice thing about the turn key space is from our standpoint, there are significant barriers to entry, and the most significant barrier to entry is capital.

So for a private developer, they simply -- unless they have a lot of access to equity, they really can't provide this product.

And because where we are, we do have a financial wherewithal and engineering capability to build the space and to do some speculative space, speed the market is very important.

We can provide that speed to market to get the customers up and running in a much shorter time frame than virtually anyone else out there, and that's a really good competitive advantage for us, because the tenants, as I mentioned, recognize that engineering expertise and our operational capabilities of running the property's cost effectively.

Sounds great.

Thank you.

Thank you.

Our next question is a follow-up from Craig Mailman from Keybanc Capital Markets .

Please go

Hi, guys, it's Jordan.

Just talking about the turn key leasing, what is sort of the range of size of space that you're leasing in terms of raised floor square footage and sort of, where's the sweet spot for you guys right now?

We're ranging typically from 5,000 feet to 40, 50,000 feet, and I think that sweet spot -- we're seeing good demand, we can really track is in that 20,000-foot range.

Okay.

And separately -- and the sales cycles on those and the larger transactions are in that six to 12 month range that you quoted earlier?

Yes.

Okay.

Yes.

It's the larger corporates who are taking that space?

Exactly.

Okay.

And then, could you talk about markets and where you're seeing sort of the most significant dislocations in terms of demand outweighing supply, just give maybe -- give your rank currently.

Yes, I mean, this isn't exactly an exact rank order, but we're seeing Silicon Valley -- and these are all kind of favorable from our perspective in terms of high demand and lack of supply right now.

Chicago certainly, we're seeing it in -- well, even more in Dallas now, starting to turn.

But even more so northern Virginia, very strong market for us, New Jersey and northern New Jersey, and then Paris and London.

So those markets are probably the ones that have kind of the strongest supply demand imbalance in our favor.

And Jordan, when we say Chicago, we're talking about downtown Chicago, not the suburbs.

Yes, specifically for our 350 Surmac building.

Do you guys have anything in the suburbs.

No.

Well you wouldn't have any demand in the suburbs then.

That's right.

No.

But, you know, we are just addressing downtown demand.

Right.

And have there been any transactions within the investment market, have you seen anything to point to?

Have there been more or less transactions or properties for sale?

It's been pretty quiet.

The large Rockwood Capital 355 Main portfolio has not traded at this point.

And really --

is that going to trade?

I couldn't speculate.

I know they're still working on a deal.

Jordan, just access to debt in significant quantity is a challenge for any asset class, so -- and I think that's what's involved in any large portfolio deal.

You basically have to --

(inaudible)

Pardon me?

I was saying that's not forcing anybody to bring portfolios to market, though, for sale?

Well, would only force it if you had a debt maturity.

And you're not seeing much of that?

No, not at this point.

When these assets are stabilized, they usually flow very strong cash flow.

We have seen folks, individual development opportunities where folks are buying sites or buying shell buildings that they're trying to market as data centers, but we've -- I can't think over the last quarter of any stabilized data center assets that have traded.

That's helpful.

Thank you.

Thank you.

Our next question comes from the line of Michael Bilerman from CitiGroup.

Please go ahead.

Want to come back to some of your comments about capital and turn key space.

You keep on talking about how you're well-positioned because you have access to capital relative to others or private developers that can't do it.

Have you shifted from your own, given how precious your capital is, not knowing if the debt markets or the equity markets are always going to be open for you, are you pricing your capital differently today than you were three months ago or even six or 12 months ago for these build-outs?

Well we certainly -- we are pricing it differently on the acquisition front for sure.

We've established much higher thresholds there.

And on the development front, I think our returns are going up too, as rents go up.

So the answer is yes to -- in both product sets.

Give me a sense, I mean, is it up 100 basis points?

200 basis points?

On the development front, I think it's a couple hundred.

You think your returns that you're getting are north of 15% at this point on redevelopment?

Typically.

Okay.

And then looking --

I would say averaging in mid-teens, on average.

And then, on the stabilized, I think we -- to do a stabilized, we would probably prefer to be mid-nine-ish.

Okay, and the 415,000 square feet of leases that are signed but not yet commenced that are going to roll in 3Q, 4Q and 1Q, how much of that is coming -- is that all out of the redevelopment out of the 1.9 million of the square feet?

Yes.

And has all the capital been spent on that space yet?

No.

So can you just break out how much -- what's the total capital spend to build out that space and how much has been spent to date as of June 30?

I can give you the June 30 construction work in progress, which for redevelopment, is $364 million.

That will show up in our 10-Q.

We've got another $11 million of construction work in progress that's unrelated to redev.

Then we have -- then the best I can do is give you the -- you know what we've spent to date and what our revised CapEx program is for the year, which is roughly 600.

How much of that relates to this 400 -- I mean, you've already delivered some space and you're working on space that's going to deliver in 2009 and 2010.

So I'm just trying to get a perspective of the bottom line impact of this 415,000 square feet of space coming online.

When you say bottom line impact, you mean the --

The FFO, right.

You talked about revenues.

What I would like to get to is an NOI less interest as that starts to flow back onto the income statement.

Yes, I think that, as Mike said, if you do a mid-teen unlevered return on the capital invested -- granted, it's trending more towards turn key so the dollars per square foot on average are going to be higher.

In terms of the blend, I think you'd have to work with a range there.

And the 364 in CIP, that's on the whole $1.9 million -- 1.9 million square foot pipeline; right?

Correct.

And does that include land basis?

Yes.

But not all of that is currently sort of under construction.

You may have it in the redevelopment pool, but it may not be an active.

Right.

Because there's a portion of that redevelopment -- I think it's about 35%, 40%, that are in the income producing buildings, so it's space that was shown when we bought the buildings and we may not be currently building.

What's the volume of redevelopment space that you -- that is delivered but not yet rent paying?

Very little.

Yes.

Very little.

I don't have a number at my fingertips, but it's going to be a very small number.

Is that included in your run rate NOI?

In other words, does that adjust for a couple thousand square feet that you might have that you delivered over the last couple of weeks that might not be paying rent yet?

I don't think that would be in the run rate NOI, because I think that's as of June 30.

Yes, June 30 is the cutoff.

But shouldn't you have on this 415,000 square feet of space that's near term deliveries, some of that has to be fully built out, waiting -- I mean, where if you spent the capital, but you haven't -- the rents haven't commenced.

Right?

So there is that upside.

That's the backlog, but at -- I mean, the backlog is basically a situation where leases commence as soon as -- for the most part, as soon as the product is finalized and commissioned.

You're not sitting on any vacant fully built out turn key space as of June 30 where you are -- where you sort of have rolled the interest expense from that capital spend onto the balance sheet?

Very little.

It might be well under 100,000, might be 50,000 feet.

I mean --

I'm speculating.

I think there's a -- we have some that was vacant at June 30 where we've -- we either signed a lease yesterday or expected to sign this week, later in the week, and that will basically take up all of it.

Okay.

And none of the vacancy that's in the core portfolio has been leased, pending lease commenced for the 500 basis points of vacancy you have in the core.

I'm not aware of anything there that's out for lease.

What's out for lease is really redevelopment.

Okay.

Thank you.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Craig Mailman from Keybanc Capital Markets .

Please go

Last one, sorry.

The mix on the commencements is -- used to be, I think 50/50, and with this update is now closer to turn key versus shell.

Right, so the commencements in the second quarter of data center space all but 300 feet were --

I just mean the guidance of 900,000 for the full year.

Oh, on the -- kind of the blend?

Yes, yes, I mean you've got 900,000 square feet of commencing, I guess I could back into how much are in the different buckets year-to-date, but -- and then you guys could give me the amount of the stuff that's commencing in the back half.

But maybe it would just be easier to back of the envelope, what do you think the mix is?

Turn key versus shell for the full year?

Eyeballing it on a square footage basis, it's a little more than 50/50.

Basically --

60/40?

Yes, 60/40.

But we drive so much more revenue through the turn key product, that from a revenue standpoint, it's much higher.

That makes sense.

It just gives me a better idea of what you're spending CapEx per foot.

Right.

Thank you.

Thank you.

Our next question comes from the line of Philip Gutfleish from Elm Ridge Capital Management of please go ahead.

Yes, just a quick question.

If I look at the supplement, it looks like you have a contract with a lease with JP Morgan that expires in three months, and in the last one, it was about 100 some odd months and I'm wondering is there a typo in this supplement or has there -- has something changed, also because if I do it on a per square foot basis, it's about $250 per square foot on that contract.

What page are you?

20.

Gentlemen, I'm showing we have no further questions at this time.

Please continue with any closing remarks that you might have.

We still need to answer the gentlemen's question.

I'm notice sure what was in the last supplement.

But this would be space most likely at 111 Eighth in New York and it's a short-term lease that is at a high rent per square foot and will likely renew.

It's turn key space, it's data center, operating data center space.

Hello?

It seems that Philip's line has disconnected.

Okay.

Gentlemen, I'm showing that we have no further questions in the queue.

Please continue.

Okay.

Well, we appreciate everyone's time and focus on DLR and look forward to following up with everyone as we go through time here and appreciate taking the time to join us today.

Thank you very much.

Ladies and gentlemen, that does conclude our conference for today, thank you for your participation.

You may now disconnect.