Digital Realty Trust Inc (DLR) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Digital Realty Trust third quarter 2008 results conference call.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today, Wednesday, November 5,2008.

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 and afternoon to everyone.

By now you should have all 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 Realty Trust'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 sole to the historical matters including statements related to future demand, leasing, Capex, liquidity and the company's expected financial results for 2008 and 2009 including projected FFO per share and units and assumptions related thereto.

For further 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, and subsequent filings with the SEC including the company's quarterly reports on Form 10(Q).

The company disclaims any intention or obligation up to date 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, FFO, adjusted funds from operations, AFFO, earnings before interest, taxes, depreciation or amortization, or EBITDA, same store net operating income, NOI, and same store cash net operating income.

Digital Realty Trust is providing this information as a supplement to information compared prepared in accordance with GAAP.

Explanations of such nonGAAP items and reconciliations to net income are contained in the company's supplemental operating and financial data for the third 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 Foust, Chief Executive Officer, and Bill Stein, Chief Financial Officer and Chief Investment Officer.

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

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

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

I will now turn the call over to Mike.

Thank you Pamela , Welcome to the call everyone.

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

Following my remarks, Bill Stein will discuss in detail liquidity, dividend increase, third quarter financial performance and our outlook for the balance of 2008 and 2009.

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 and this excludes 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 metro North America and Europe.

The portfolio includes 1.6 million square feet of space held for redevelopment, a very important source of growth for the company.

Provides a variety of data center facility solutions including turnkey data center, powered base 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 especially with respect to leasing, operations and finance.

Demands is high for our data center products and we are closely managing our BS to maintain comfortable levels of liquidity.

Portfolio occupancy excluding space held for redevelopment held steady at 95.2% at the end of the third quarter compared to 95.1% for the same period in 2007.

The record volume of leases signed during the quarter is a result of our successful leasing program which continues to capture demands for new facilities by corporate enterprise customers and enterprise IT service providers.

As previously announced leases commenced during the quarter on approximately 351,000 square feet of space.

This includes 190,000 square feet of turnkey data center, leased on an average annual gap rent rate of $142 per square foot, it includes 104,000 square feet of powered base building leased at an average annual GAAP rental rate of $30 per square foot, and 58,000 square feet of nontechnical space leased at an average annual rental rate of $23 per square foot.

YTD as of 09/30/08 we commenced 682,000 square feet of data center at an average GAAP rental rate 116 per square foot and 142,000 square feet of nontechnical space at an average annual rental rate of $23 per square foot which are all in line with our previously revised 2008 expectations.

Reflecting the demand we continue to see in our top markets we signed a record amount of leases during the quarter totaling 478,000 square feet of space signed consisting of 262,000 square feet of turnkey data center leased at an average annual rental GAAP rate of $155 per square foot, 171,000 square feet of powered base building at an average rental rate of $47 per square foot, and 45,000 square feet of nontechnical space leased at an average annual GAAP rental rate of $13 per square foot.

These tenants represent a wide variety of industries, including major financial firms such as JPMorgan Chase, Morgan Stanley, TD Ameritrade and Goldman Sachs, large telecom and IT service providers including BT America, T.

Systems and Equinex, a large healthcare provider in Dallas, and finally leading international system integrators such as IBM.

YTD as of nine, 30, '08 we signed leases for 766,000 square feet of data center at an average annual GAAP rental rate of $112 per square foot, and 94,000 square feet of nontechnical space at an average rental rate of $19 per square foot.

Despite the challenging market conditions overall we continue to see very attractive pricing and strong demands throughout our top markets particularly for our turnkey data center product.

Demands for data center space continues to be very healthy in our primary markets.

The deal our team currently is in engaged in direct discussions with over 1.9 million square feet of new data center prospects.

In addition, we have identified over 5 million square feet of active requirements seeking space in these markets.

We continue to see significant lack of supply necessary to meet this demand.

And DLR remains one of the few data center providers with the financial capacity and expertise to proactively build turnkey facilities.

A significant factor for our success is the depth and experience of our technical sounds, design and construction and operations teams who make D.

LR preferred infrastructure solution provider for many large corporations and system integrators.

Turning to our redevelopment program, we currently are underway on construction projects and high demands markets in the U.

S.

and Europe that will add approximately 294,000 gross rental square feet of digital data center space to our operating portfolio including the H.

S.

B.

C.

to suit in suburban London.

Approximately 531,000 of rentable square feet of redevelopment plus 26,000 of rentable square feet that previously was not classified as redev space were delivered as turnkey space in the first three quarters of the year.

Overall we plan to deliver approximately 50 megawatts of IT load in 2008.

In addition we were able to capture previously unutilized space of 120,000 square feet from [Quest] and our 350 [[Sur Mack]] facility in Chicago in exchange for a substantial payment to DLR.

We are redeploying this space as turnkey data center to meet the demands from our tenants including securities and commodity trading customers at the property.

No other space is available at the building.

We expect to achieve significant added value at this flag ship facility in about a is likely our highest demand market.

Overall our leasing and product delivery programs remain on track to deliver strong results in 2008 and into 2009.

We are carefully monitoring both the demand for data center space as well as capital availability in the credit markets as we continue to meet our customers requirements for mission critical IT infrastructure.

The deal our team will continue to manage liquidity closely will maintain prudent levels of cash.

We believe that our business model, unmatched organizational depth and breath, strong BS, and proven ability to access capital will continue to drive above market long-term FFO growth for D.

LR.

I would now like to turn the call over to our CFO, Bill Stein who will discuss our third quarter 2008 results, capital program, our increased 2008 FFO guidance and new guidance for 2009.

Thanks, Mike.

Good morning and good afternoon everybody.

I will begin with a discussion of our liquidity position and our dividend announcement and then review our third quarter 2008 financial results, our revised guidance for 2008 and our outlook for 2009.

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

Liquidity has become a critical concern for all businesses including REITS.

And maintaining a strong BS with the financial flexibility to continue to fund our acquisition, redevelopment and development activities is a priority for us.

Our ability to access capital for multiple sources is a critical component of our success.

In anticipation what have has developed into a significant economic downturn and global liquidity crisis since the ends of the second quarter of 2008, we have sourced and closed over $492 million of debt and equity capital, plus 142 million remaining on an uncommitted, unsecured private shelf facility with Prudential.

As a result, we have sufficient liquidity solely through borrowings on our revolving credit facility to meet all of our planned CapEx and maturities through 2009 and most of our debt maturities in 2010.

Our third quarter financing included a common stock offering in July which generated 211.6 million in net proceeds, the addition of a new $25 million commitment from Deutsche Bank increasing aggregate commitments under the revolving credit facility to $675 million, the initial draw of $25 million from the Prudential facility at an interest rate of 7% with a three-year maturity, a second draw of $33 million which will fund today at an interest rate of 9.32% with a five-year maturity.

We also completed the following secured debt financing on three properties generating proceeds of almost $198 million.

We reported on our last call we closed an $80 million secured financing in July on our three corporate place facility located in Piscataway, New Jersey.

This loan has a three-year maturity with two one year extensions at interest rate of 6.72%.

On September 11, 2008, we closed a $44 million secured financing for the joint venture at 1500 Space Park in Santa Clara, California.

Our prorat share of the total proceeds was $22 million.

The loan has a five-year maturity at an interest rate of 6.15%, with principal amortization on a 15-year schedule.

On September 2, 2008, we executed documents for a secured construction and permanent debt financing for a Davis center facility located in north of London in Wellon Garden City.

Practical completion of the project is expected later this month and estimated proceeds on the permanent loan will be up to 53.7 million pounds limited by a 75% loan to value ratio.

The permanent loan will have a five-year term, no amortization, and an all in swapped interest rate currently in the range of 5.5% to 5.75%.

approximately 28.7 million pounds has been funded to do date on the construction loan.

The proceeds from these transaction was utilized for paid borrowings under our revolving credit facility and other general corporate purposes.

Our total debt at quarter ends was $1.3 billion, and our ratio of debt to total market cap was 22.6% based on the September 30 stock price of $47.25.

Based on yesterday's closing stock price of $34.05, our ratio of debt to total market value of capitalization would be 27.7%.

Our cash, fixed charge coverage ratio was 2.5 times and our cash debt service coverage was four times.

As of September 30, our weighted-average cost of debt including interest rate swaps was 5.76%, and the weighted-average maturity was 5.2 years including debt extension options.

A description 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.

For additional information on our revolving credit facility we have now added a new schedule to the third quarter supplemental package entitled revolving credit facility commitments which lists the 17 participating banks and their corresponding commitments.

Turning now to our revolver, we currently have approximately 106 million outstanding on the credit facility.

We are holding 60 million of that in short term investments which represents our estimate of funding requirements over the next 30 days.

Including the $33 million Pru facility that will fund today we will have 662 million of immediate liquidity through short term investments and funds that can be drawn on a revolving credit facility.

If this capacity were fully utilized our pro forma debt to total market cap would be approximately 36.7% based on yesterday's closing stock price of $34.05.

Looking ahead, based on our current plans, we expect our capital requirements for the balance of 2008 and 2009 to total between 500 and 550 million including 425 to 475 million of CapEx, and 79 million of ongoing principal amortization and debt maturities in 2009.

This assumes that we exercise the one year extension option on 350 East [[Sur Mack]] in June 2009.

If we fund all cash needs through the ends of 2009 entirely on our revolver we would have approximately $70 to $90 million of liquidity at the end of 2009.

By the end of 2008 we expect to have sufficient eligible assets in our borrowing base to be able to fully utilize the revolver and the remainder of the Pru Shelf Facility.

In 2010 including the $95 million loan at 350 [[Sur Mack]] we will have a total of $108.7 million of debt and principal amortization.

The [Sur Mack] property is expected to have approximately a $40 million of NOI in 2009.

Based on this level of NOI, sometime over the next 18 months, we expect to be able to refinance this loan with a new mortgage of [Sur Mack].

We could also issue notes through the uncommitted Prudential Shelf Facility or rate secured debt at one of our other unencumbered assets.

Moving now to our dividend, yesterday we announced an increase of 6.5%, or 2 cents to 33 cents per quarter for our common stock dividend.

We currently estimate that the 2009 pay out will represent approximately 103% of our 2009 taxable income based on the midpoint of our 2009 guidance.

We expect future dividend increases will be based on increases in the company's taxable income and the need to meet our REIT distribution requirements.

Now I'd like to turn to our third quarter results.

The FFO of $0.69 per diluted share and unit includes approximately $0.6 per share of additional FFO from certain significant non-recurring items consisting primarily of $7.9 million, representing a partial termination fee, lease termination fee of $9.4 million from request at our 350 East [Sur Mack] property net of $1.5 million of non-cash expenses.

This was offset by $1.6 million of non-cash expenses recognized related to the acceleration of the 2005 out performance plan, and $576,000 in straight line rent adjustments related to two leases.

After adjusting for non-recurring items FFO would have been $0.63 per diluted share and units for the third quarter of 2008, a 6.8% increase over the second quarter of 2008, and a 23.5% increase over the same period in 2007.

Adjusted Funds from Operations or A.

FFO for the third quarter 2008 was $44 million or 55 cents per diluted share and unit.

This compares to second quarter 2008 A.

FFO of $30.4 million or 41 cents per diluted share and unit.

The A.

FFO pay out ratio for the third quarter of 2008 was 56.4%, down from the second quarter A.

FFO pay out ratio of 75.6%.

EBITDA adjusted for preferred dividends and minority interest was $80.7 million in the third quarter of 2008, up 18.5% from 68.1 million in the second quarter, and up 41.3% from $57.1 million for the third quarter of 2007.

Net income for the third quarter was $18.2 million, up 31.9% from $13.8 million in the second quarter, and up 256.9% from $5.1 million for the same period in 2007.

Net income available to common shareholders in the third quarter was $8.1 million or $0.11 per diluted share, up $3.7 million, or $0.5 per diluted share in the previous quarter, and net loss available to common stockholders of $2 million, or zero diluted share --, $ 0.2 million, excuse me, or zero per diluted share for the same period in 2007.

Same store NOI was $70.2 million in the third quarter of 2008, up 1.5% from $69.1 million in the second quarter of 2008, and up 15.2% from $60.9 million in the third quarter of 2007.

Same store NOI adjusted for straight line rents and FAS 141 adjustments which we refer to as same store cash NOI was 64.9 million in the third quarter, up 6.4%, from 61 million in the second quarter of 2008, and up 24.6% from 52.1 million in the third quarter of 2007.

These increases were primarily the result of new leasing and our properties commencing during the twelve-month period ended September 30, 2008.

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

for the third quarter rent revenues increase to $102.4 million, up 4.5% from $98 million in the previous quarter.

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

G&A increased during the quarter to $11.3 million, up from $9.8 million in the previous quarter, primarily due to the acceleration of the out performance plan.

G&A would have been flat quarter over quarter if we had not accelerated the out performance plan.

Turning now to our BS, during the third quarter we capitalized 22%, or $4.4 million of interest related to construction projects, which compares to 24% or $4.5 million in the second quarter of 2008.

The decrease was due to additional construction projects coming online during the quarter.

In addition excluding the O.

P.

P.

acceleration we capitalized approximately 26% or $2.8 million in the compensation expenses compared to 27% or $2.9 million in the second quarter of 2008.

Capitalized.

I would now like to discuss a our revised guidance for 2008.

With better visibility towards our full year 2008 results we are raising FFO guidance to a range of $2.58 to $2.60 per diluted share and unit.

This increase is due to stronger than expected leasing results for the second half of the year as well as the significant non-recurring items previously discussed.

Adjusting for the non-recurring items mentioned that impacted Q3, plus an additional $4 million from the Quest lease termination fee net of non-cash expenses that will be recognized in Q4, or $0.5 per diluted share on unit, FFO for the full year 2008 would be in the range -- $2.47 to $2.49.

This represents projected FFO growth of 20.5% to 21.5% over full year 2000 FFO of $2.05 per diluted share and unit.

Moving on to our initial 2009 guidance.

FFO per diluted share and unit for the year ending December 31, 2009, is projected to be between $2.75 and $2.90 this guidance represents projected FFO growth of 5.8% to 12.4% over the 2008 revised FFO range of $2.58 to $2.60 per diluted share and unit.

Excluding the implementation of APB 14-1 which increases our GAAP interest expense by $4 million, FFO per diluted share and units and net income per share for 2009 would both be higher by approximately $0.4 per share.

Adjusting for both the non-recurring items positively impacting 2008 results and the adoption of the new rules negatively impacting 2009 projections FFO growth from 2008 to 2009 would be between 12 to 19%.

For the balance of 2008 and 2009, all CapEx are assumed to be funded through the company's revolving credit facility.

As of today the balance of the revolving credit facility is $106 million the company has $93 million in cash and short term investments.

In 2009 guidance is based on the following additional assumptions.

Commencement of leases for approximately 500,000 square feet to 570,000 square feet of turnkey data center nd power based building space at average annualized gross rents of $125 per square foot.

The commencement of leases for 150,000 square feet to 165,000 square feet of basic commercial space at an average annualized gross rents of $21 per square foot, total CapEx in 2009 of $275 to $325 million, total G&A of $47 million which includes $500,000 of acquisition related cost previously capitalized which now must be expensed under new accounting rules commencing January 1, 2009, and an additional non-cash interest expense of approximately $4 million due to the adoption of S.

EP, APB 14-one.

In conclusion with modest financing between now and the ends of 2010, we have sufficient liquidity without issuing new equity to meet our current growth expectations.

This concludes our formal remarks.

We would now been happy to take any questions that you might

Thank you, sir.

(OPERATOR INSTRUCTIONS) First question comes from the line of Michael Billerman with Citigroup Inc.

(inaudible) Guzman, Michael is here as well, Mike, I have a question on the guidance for 2009 with regards to leases commencing.

Based on sort of the volume of demands that you mentioned you were tracking in your prepared remarks and the shear volume of leasing that you've done over the last several months, I'm wondering why the amount commencing next year assuming a lot of the leasing that you are doing now won't commence until then, I'm wondering why that number wouldn't be bigger considering you've commenced probably about 40% more this year than what you're project to go start next year?

It's really our amount of leasing activity and commencement is driven largely by capital availability.

And our desire to maintain sufficient capital liquidity cushion.

So where we are taking a conservative view, if the capital markets loosen up a little bit next year as we are hopeful they will, then we will be able to beat those numbers.

So it's really not a reflection of demand, it's a reflection of capital available that we are seeing today in the marketplace.

So are you holding back on pursuing some of this new demand because of capital constraints?

Yes, yes, I mean there is business that undoubtably we would like to do but we won't be able to address in terms of capital available.

And one other question on the lease termination fees, can you provide a little more background on the tenants, the reason for terminating, and what the sort of run rate adjustment would be to your third quarter NOI if we were to back out the income that won't be coming in any more.

This was related to Quest as I mentioned in my remarks at 350 [Sur Mack] in Chicago it's maybe our most highest demand building, highest demand market, and we are out of space there.

So we have the opportunity to have Quest pay us a significant fee to give back space to us that they were not utilized.

And so we can take that square footage and turnaround and build out turnkey data center space to satisfy the demand we have in the building.

So it's a great value-added opportunity to us that will substantially increase NOI coming from that floor.

And will provide a lot of value-added.

Essentially the payment overrides consistent of approximately two years of gross rent giving us a real good cushion in terms of releasing capability time frames.

I don't have the numbers at my fingertips in terms what if the run rate is without that space.

I will say we are planning on definitely replacing that and more in terms of new rents that are being captured in 2009.

The average annual rent on the space that was given up was a little over $5 million.

Thank you.

5.3.

Thank you, sir.

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

Please go ahead.

Thanks, guys, good morning.

Just coming back to your comment, Mike, on the space you're tracking, you broke it up a little bit differently this quarter than the last couple of quarters.

And I think this time you said that you are in discussions for 1.9 million square feet of new prospects with over 5 billion square feet that you are tracking in the markets and I think last quarter you talked about 4 million square feet that you were engaging.

And I'm trying to bridge the two comments.

Is the 5 million then an analogous to the 4 million you were tracking and the 1.9 is the more serious stuff or what?

Exactly.

So the 5 million relates to that 4 million plus.

And the 1.9 is more serious L.

O.

I.s beyond just, hey, we know you have space, why don't you talk to us.

So more serious, more serious discussions than the 1.9.

So what are you doing to your return requirements given sort of the capital constraints on new deals?

How have you ratcheted them up?

We've definitely been nudging up those unlevered returns we are looking at.

So I would say today on projects where we are building my turnkey space, we are definitely targeting solidly in mid teen on are unlevered returns for new projects whereas previously we might have been more, a little more broader ranged dipping down to the 12% range, 12 to 15.

And now deals we are working on kind of range anywhere from 14 to 16, 17.

And sometimes somewhat more.

This is on spec projects that we are building and leasing on a spec basis.

That makes sense.

Hey, Bill, just curious if you could give us the backlog in terms of space that's tead up but not yet commenced?

Sure.

So on the signed but not commenced, there is about 6.4 million of revenue that should come in in the fourth quarter.

And another 18.2 that will come in in the first quarter.

And then a little over 700,000 in the third quarter of 2009.

For that, that's for the year 2009.

Right.

Third quarter $2,000.09.

Each one of those reflects the contribution to that respective year, right?

So 6.4 million in 4Q is the additional revenue we'll see.

Additional revenue to be recognized in 2008.

Right.

Thank you.

Thank you, sir, our next question comes from the line of George R.

with Merrill Lynch.

Good morning and good afternoon.

Following up on Jordans question, it sounds like the demands to market has actually increased over the last three months.

Wondering if the demand growth is real net demands growth or does it now include tenants who had planned to build out their own space but now can no longer fund this on their own balance sheets?

I think it's a little of both.

We are seeing many more applications now across the board, across all the industry verticals that we address.

We are seeing more outsourcing and that's driving business from the system integrators and the IT service providers who are tenants of ours.

And there are several larger companies who have previously been looking at do it yourself projects.

These tends to be the larger scale longer time frame planning projects who are now engaging with us on potentially building out projects for them.

And that's been actually typical kind of throughout our experience the last several years as previously there really weren't many viable alternatives to building it yourself.

And still giving the operational flexibility and control that the deal our model provides.

So it's kind of a trends that we've seen all that will we are seeing continuing.

All along.

What percentage of the 5 million square feet of demands that you mentioned is new net demand to those markets as opposed to tenants relocating from older facilities or consolidating their operations?

You know, that is hard to say.

I would, I think that the net new is probably very high percentage of that.

Keeping in mind that we are seeing -- we are seeing a lot of consolidation.

We have been over the last three years.

financial services, energy company's, larger Fortune 1000s and so this is a new trend where they need new data center facilities to accommodate the new applications especially the new server based applications that are, and trading applications that are more energy demanding.

So that's a trends that's, that we continue to see and definitely works in our favor because people need more new facilities.

Right.

And finally, Bill, what was the construction and progress balance at the end of three Q.?

Okay.

Let me give it to you a couple of different ways.

First when you look at the turnkey product, that we had 293,757 square feet of turnkey product under construction at the end of the third quarter.

The work in progress total relating to that was $135 million.

And that's broken up $72 million for the actual construction work in progress and $63 million that's allocable to acquisition costs.

So land and building.

And then we have another 451,000, 452,000 square feet of power based building, with there's $146 million of work in progress allocable to that.

$109 million of that is actually the acquisition cost, plant and building, and $36, $37 million of that is the construction part of it, construction work in progress.

Is that clear enough for you?

There's a fair bit of data there but we'll have better, that will be laid out in the Q.

as well which is going to be filed on Thursday.

Okay.

That's helpful.

Thank you.

Thank you sir, our next question comes from the line of Sri Nagarajan with Oppenheimer Company Inc.

Mike, I know you talked about this quest, the existing revenue run rate is around $5.3 million that's coming.

At what price do you expect to replace that and what do you think the annual rent rate for that is going to be once its fully leased out?

We typically don't give out specific rental rates at particular, at specific buildings.

But I can tell you that Chicago is our highest priced market in terms of the rates that we are able to achieve there, typically because the connectivity in the building, the power and kind of the universe of trading platforms in that market.

So we see oftentimes 20 or 30% higher rates than we achieve in our other markets.

It's odd other thing as I mentioned in my remarks, our budgets assume approximately 40 million of NOI in 2009 at [inaudible] property which is higher than the NOI today.

Got it.

Okay.

And, Mike, do you have any other instances of similar customers who have taken space in some of your key markets but not utilizing fully where you can take it back especially with some of the leases still coming due later this year and next year?

You know, we don't have very much rollover in the portfolio in terms of leases maturing this year and next year.

There are a couple of instances in our Internet Gateway buildings where we are talking to customers who might want to give back space that frankly like in the Quest position, they never really utilized the space.

But the power is available and that's obviously very valuable when it's in one of our buildings with a lot of power availability and with the data center infrastructure already in place.

So I think we are going to have some value-added opportunities like that, maybe not on the same scale as the Quest space.

We have not factored those into our 2009 projections.

But our folks will be pretty aggressive to be able to take advantage of those opportunities when we can redeploy space.

There's a couple of instances I think on smaller spaces we will be able to do in 2009 that we have not factored those into the guidance.

Got it.

And one last question, I know [inaudible] Mike or Bill, I know you guys haven't said anything about your prior guidance of commencement of leases from 2008.

I'm assuming there's no change to it.

But your commercial space is already well ahead what have you have guided to.

So anything that we should keep note of for 4Q '08?

I think we are going to come in overall with, easily within that range that Bill had mentioned for our FFO guidance.

Right now we are just, we are focusing the analyst community on the FFO per share numbers since there's so little time left in the quarter.

Thanks, Bill.

Thank you, sir, our next question comes from the line of David Rogers with RBC Capital Markets.

Hi, guys.

I was wondering on your comments regarding your own capital availability and how that may be limiting 2009 faster expansion.

Could you prioritize as you sit here today between existing developments or existing redevelopment, new redevelopment and acquisitions, kind of what your preference is or what you are seeing in the market relative to each of those opportunities today?

Sure.

I mean, our focus going forward right now is on deploying our existing portfolio of redevelopment inventory, that 1.6 million feed that is in the portfolio today.

And so we will be opportunistic in terms of new acquisitions.

But where where we are definitely prioritizing looking very closely at return on investment, return on cost in order to prioritize building out our current inventory redevelopment space versus new acquisitions versus new developments.

So we really are not looking at any new out of the ground developments at this point for 2009 and really focusing capital on the current redevelopment inventory that we own.

Given that final comment, do you anticipate slowing down any existing redevelopments due to the same capital issues or are the existing redevelopments still on track and how much space during 2009 will become available?

Will it be the entire amount?

Nothing not the entire $1.6 million.

I believe now well In our guidance we are talking in the range of 500 to 570,000 feet of data center space coming online so that will reflect very closely, that is what we will be, project to go bring online in 2009.

Is that fairly ratably throughout the year, do you think?

Probably more heavily weighted in the first half of the year.

Probably 60 to 75% in the first half of the year.

Okay and then final question, Bill, you drew down on the Prudential facility you said or I guess you will today.

The cost on that obviously higher than your remaining sources of debt.

Can you just explain why you elect to do pull down on that?

I'm sure there's a reason but I'm just curious as to the rationale for that.

Probably a liquidity issue.

The Prudential facility, I want to emphasize for everyone on the call, is an uncommitted facility, and we basically want to do test the facility in a small amount to make sure that it was available as we entered into our planning process for 2009.

And we were gratified that it was available.

While looking back historically the 9.3% coupon is certainly higher than if we had issued maybe even six months ago, in today's environment it's actually not that bad at all.

At the time that we issued or the time that we priced it it was October 22, even though we are drawing it down today we priced it October 22.

This spread over the five-year treasury was 674 basis points and, of course, we don't carry it at that a debt rating and just to give you some indicative spreads on that same day for debt of comparable maturities where Nato had a piece of debt maturing at 2,011 trading at 725 basis points over, Simon was at 675 over and Kempco company was at 725 over, Boston properties was at 675 over.

So basically the spread was at least as good if not better than obviously companies that are bigger, Ben around longer and have debt ratings and as a new issue this actually should have traded at a higher spread in any event.

Thank you.

Thank you, sir, next question comes from the line of Tayo Akusana with UBS.

Just to go back to the Pru uneconomicked facilities if you uncommitted facilities if you need to do drawdown on it going forward each time you draw it's considered a new issue and you immediate to come up with new pricing on that particular drawdown, is that the way the facility works?

Absolutely, it's market based pricing at the time.

Okay.

That's helpful.

And then how do I go about thinking of your taxable earnings versus FFO in '09?

Is there away you can give us a sense of what the two, what the big differences are between the two numbers at least from that ends we have a better sense of how to model dividends?

That would be very difficult.

There are just one or two line items that would be helpful if [inaudible]

It's basically depreciation .

It's a very complex model, I can tell you

I'm sure it is.

Last question, going back to the Quest lease termination, net/net how much space are they giving up between this quarter and next quarter?

So it's about 120,000 gross square feet.

Essentially what we find as our [inaudible] it's about 1.8 megawatts of IT load that will redeploy as turnkey.

I'm sorry 8.1 megawatts of IT loads that will be able to redeploy as turnkey data center space.

And just to be clear, that's not all of Quest space in the building.

They still have a very substantial space in that building.

It was just excess space that they frankly over the years never utilized.

And so now that we are full we can take advantage of that.

And they were paying the $5.3 million on that 120,000 gross square feet?

Correct.

Okay.

Great.

Thank you.

Great quarter.

Thank you.

Thank you.

Thank you sir, our next question comes from the line of Will Marks with JMP Securities.

Hello, Bill, hello, Mike of the just a quick question, you answered a lot of what I was going to ask but on sectors of the economy, are there any areas where you are seeing a real slow down in demand?

Not really.

You know, I mean it's interesting, Financial Services continues to be a strong demands area.

And that's very broadly, everything from commodities, security trading platforms and to major Wall Street firms.

We are seeing continued demands from the Internet sector.

Companies that are operating, the company's like the Yahoo!

s and Amazons and Facebooks of the world still need more space.

And the system integrators and IT outsourcing companies are seeing a lot of demand.

And I think if you look at a lot of the analysis that's coming out of kind of the collocation hosting, managed services sectors who are a lot of our customers, their businesses are doing quite well and they continue to see expansion for 2009.

Okay.

That's all for me.

Thanks.

Thank you, sir.

Our next question comes from the line of [Dave A] with Robert W.

Baird.

How much redevelopment opportunities do you specifically see that is left at the [Sur Mack] property past the Quest space?

We are pretty much full at that point.

When you think about that asset, no redevelopment opportunity relative to your capital financing plans going forward.

Obviously mortgages due in 2010.

Can you just provide your thoughts about where you may see financing at that asset over the next two years?

II will let Bill chime in as well.

The mortgage is quite small relative to the size of the building and the size of the income.

So in truth we could refinance today that amount if we wanted to.

It's just such a low loan to value that we would rather hold off.

We were in the market this year looking for $200 million of debt against the asset and because of the nature of the market you can't get a bank to under right that, you are basically forced to do [inaudible] deals, you have to bring in several banks in the $40 to $50 million size.

And frankly it's a little bit like hearing cats and everybody has their hot points.

Everybody has $150 million that we could have done but we just felt that the land, that the building would be grossly under levered at that point and we clearly have room.

We have almost two years to wait for this market to open up.

I mean if you were to cap $40 million actually the NOI would probably be higher than that in 2010.

But if you cap it $40 million at 8.5 you are at $470 million of asset value.

And your current target on the Quest redevelopment base to have that space stabilized would be 2010?

Probably, yes, first quarter 2010.

Yes.

Okay.

And then just one last question relative to earlier question about just demand and whether or not it's falling off, are you seeing anything differentiating the international side of your business right now?

Not, no, I'd say no.

now with that said we've been very focused on London, Paris, Amsterdam.

And we are seeing good demand in all those markets.

I would say in London there was probably a little bit of a slow down in interest from Financial Services but growing interest from kind of corporate, major corporate and system integrators, easily taking the place and now we have Financial Services coming back and showing interest again.

A lot of interest from network providers, content delivery, corporate, system integrators, folks like IBM, we recently did a lease with them in Paris for their corporate customers.

So it seems more broadly based in terms of different industry verticals than maybe it was even a year ago.

Okay.

Thank you.

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

Thanks, guys.

Just the lease termination fees, I just want to clarify, I don't know if I missed this, I think in your release you say there's another 4 million coming in the fourth quarter, is that also from Quest?

Also from Quest.

It's an accounting recognition issue.

It's being recognized over a three months, but the fee has been received, the cash was received last week or the week before.

Okay.

So you've received the total of 14 million or so?

14 was the gross fee.

14 million is the gross.

And it's all related to the same space at [Sur Mack] with Quest?

Right.

Okay.

Now this you would categorize this as an opportunistic lease termination, I would imagine.

Are there prospects for this specific space and how much would you have to spend to bring this space online to relet it?

Yes, we definitely have prospects, Jordan.

There's several folks in the building now that we are talking to who really want to expand and the turnkey product works really well for them here.

And for pretty critical operations.

So we will probably be deploying somewhere around 60 million or so in total to build out the entire space if we build out the entire space as turnkey; probably in that range.

And why is it sort of a 15, eighteen-month lead time on the turnaround?

I mean you guys have built buildings in six to nine months in San Jose, I'm just kind of curious.

It's our usual conservatism.

We are very, very positive about this space.

It's in a great building, best market, high demand.

We are being conservative, and the lease term is effective as of what date, when does it come out?

November 1.

On November 1, okay.

Jordan, you know, we are going to be building out six pods in the building.

And eventually but we are only doing four of the six right now under this capital program.

Okay.

So that's why we speak about full stabilization in 2010, that is assumes that the other two arability.

That makes sense.

Hey, Bill, what did you assume in your guidance on next years lease overall, I think 5.3% of rent is rolling.

What's the bump and or retention factor?

I don't have that in front of me but I think we assumed five.

Flat?

Flat, conservative, flat.

Can you just maybe give us a little bit of color on who is rolling or what type of space is rolling?

It looks like 200, I don't know, 481,000 feet at $40.00 rents.

No, I don't have that.

There's a substantial chunk of that is some office space, I believe office space in Boston and some office space in Philadelphia that's rolling over.

So those rents won't go up much.

And I think we are being conservative in seeing out of the parts that our data center probably going up about 20% and so it kind of all blends out to a fairly -- I think we actually have about 10% roll up in that space is what we are projecting, I believe, in our pro forma.

But a lot of it reflects the fact that considerable portion is nontechnical space.

That's helpful.

So just to follow up, it sounds overall the guidance is, reflects your conservative nature, not to mention the environment and the ability to access capital.

Could we maybe talk a little bit about what you guys are doing on the capital front to try and source new capital today?

I know, I recognize it's very difficult to in terms of big denominations and the long-term debt markets are shot but what are you doing nonetheless.

We are meeting with prospective lenders both in North America and in Europe with the expectation that we will get hopefully some injection of liquidity in the first half of 2009.

We have smaller properties that I think are going to be more easily financed initially than [Sur Mack].

It's the big mortgages are the tough ones to close at this point because of the illiquidity in the system.

But I think there are still some banks in the U.S.

that are open for business that you can get a $35 to $40 million loan and that would be appropriate for some of our buildings, and we have a large unencumbered asset base that would support that.

These are --

I'm sorry?

One off type mortgages you are talking about with these lenders?

Correct.

Correct.

And we continue to have discussions with potential joint venture partners as well.

Obviously that initiative has been affected by the ill liquidity in the markets too.

But we have found some interest there which we are pursuing.

That's helpful.

Thank you.

One other thing just on HSBC, is that starting earlier than you expected?

I think in the release you referenced November and I remember you guys talking about like March of '09 or one Q.

'09, is it starting in November now?

I think we have it in at December 1.

That might be a couple months earlier than we had projected before based on construction completions.

It's going to put you well above the commencement that you, the high-end of the commencement number for 2008 that you were expecting?

900 or whatever that number was?

Yes.

Thank you.

Thank you sir,: Our next question comes from the line of Michael Billerman with Citigroup.

Yes, Bill, I just wanted to come back you said in your opening comments about having sufficient eligible assets in your borrowing base to be able to fully utilize the revolver on the remainder of the Pru facility.

What time period were you referencing in order to do that?

That would be at the end of this year.

And how much more needs to be put in and how do you get there to be able to at that point this facility?

Tap this facility?

It's pretty insignificant.

Basically what we do, our borrowing base consists of two groups of assets, the lease or stabilized assets and buildings that are under construction.

That's only in the U.S.

It's not in Europe.

Only domestic assets are eligible for the borrowing base.

And we've done so much leasing in the last few months that we are basically going to be converting assets that had been in the borrowing base at their cost, the construction cost, and putting them in as leased assets.

And our leased assets, if you think about the math on it, Michael, let's assume that we have a going in yield of, let's make it 16% to make it easy, in our cap rate that we use for calculating the value of the borrowing base is around eight and quarter, we will make it eight just to make the math easy, if you spend $100 million you've signed a lease at 16 percent, it goes in at $200 million rather than 100, so you created value within the borrowing base, and then we have a 70% advance rate against that borrowing base asset.

So.

I'm sorry?

And so how much, I mean what's the, take me from why you're not getting a stay and then what sort of rolls into the fourth quarter to be able to --

I think we may be even [inaudible] today, it's really paperwork so we just need to do the paperwork to submit it to the borrower to convert assets to borrowing base.

But we most certainly have it at the end of the quarter due to the expected leasing this quarter.

And that gives you the up to the full capacity of the both of those lines.

It does.

And we also have to count the convertible debenture against that as well because that's another unsecured issuance.

And just going on to [Sur Mack], what's the NOI today after giving to effect to the Quest going out at $5 million?

I would have to look, I think the run rate NOI without that would probably be in the, I'm guessing 33, 34 million.

But that's not a totally precise number.

And so you think about getting to that 40 million of getting a 10% return on the 60 million?

It will be much higher than that.

I'm just trying to figure out, you throughout a number of a $40 million NOI number.

Yes, that's not a run rate NOI.

That would be the NOI that we would achieve next year.

So it wouldn't reflect the full year of lease up.

So the 40 is not even a stabilized number, the 40 is just an'09 number?

It's an'09 number because we are building out the space in '09 and we will be signing leases in the back half of '09, so, yes, that's right, it's definitely a partial year.

And we also have some leases on the fourth floor that are commencing in the second half of '08 that we don't have the full impact of until next year.

When you were talking about going out and getting that $200 million, that obviously was with the Quest, the previous NOI.

What sort of loan to value was that target, 50%?

It was around 50%, exactly.

So even that wasn't a robust L.

TV compared to what you could have gotten a year ago.

We are really confident, we don't see at minimum refinancing the current loan balance as a particular hurdle for us.

As I mention have had we want to do we could refie that today but it would be such a low loan to value that it doesn't make sense.

We don't see a liquidity issue on that refinancing at all.

Just going back to Jordans question on the expiration, 482,000 expiring, what you list as technology office total is only 670,000 out of your 11.2 million square feet.

So I'm just trying to figure out how much of that 42 is really just technology office space?

In addition to that high percentage given your, you only have 670,000 square feet of it?

We've gone large parts, I believe in Boston we've got a lease maturing there that's probably about 380,000 feet or so.

2010.

2010.

I would need to look at that and look at line item by line item and get back to you.

Since there's 127 leases so I wouldn't think that there would have been that one large lease in there but maybe we can go over it afterwards.

That's looking like co-low space at 127 leases, at least some of it.

I was just trying to understand the lease distribution to make sure we understand what's going on.

That's it for me.

Thank you.

Thank you, sir, once again,(OPERATOR INSTRUCTIONS)Our next question comes from the line of Tom Lamb with [waybosetts] research and management.

Good afternoon, good morning, one moment, please, thank you.

Hello, just a question about the capital structure.

Did I understand you correctly that the new line of credit costs 9.3%?

Well, there's not a new line of credit.

The line of credit was put in place in August of 2007.

I'm sorry, more than a year ago.

And.

That is priced today at LIBOR plus 110.

And that's the term of the line, LIBOR plus 110.

It's grid pricing so as leverage increases the spread increasing but currently it's at LIBOR plus 110.

What I'm trying to understands are opportunities for refinancing assuming that the credit markets come in and improve somewhat both on that line and we have some preferred issues outstanding that are carry pretty high coupon possible can you tell us what the opportunities are to refinance?

We wouldn't, I mean, when we put secure debt on properties, we use the proceeds to pay down the revolver.

That's just how we conduct business here.

Okay.

Revolvers basically are our source of growth capital until the term debt markets reopen as well as the equity markets.

And then at that time you'll replace the revolver, is that what you're saying?

Well, it's a revolving credit facility so you pay it down and you borrow against it.

That's the basic nature of it.

And it's essentially a five-year facility.

So we put it in place in August of 2007, the initial term is three years and then it has two one year extensions.

Okay, thank you very much.

Thank you.

Thank you, our next question is a follow-up question from the line of Jordan Sadler with KeyBanc Capital Markets.

Please go ahead.

Sorry about that.

Did you guys punt on Telex?

Yes.

Okay.

And that was it.

I'll follow up with you guys later on that '09 rollover schedule.

Thanks.

Hold on, and just so people know, they may not realize but we had an open someone to exercise warrants for a small percentage of ownership in Telex which is one of our tenants.

And we declined to go ahead with that.

It just didn't seem like a prudent use of capital at this time in this environment.

And, thank you, sir.

At this time there are no further questions.

I would like to turn it back to management for any closing remarks.

We are very pleased with the progress that our entire team has and accomplishment that our team has made this year and we are very positive going into 2009 and I appreciate everybody's taking the time, it was a long call today and a lot of good questions as well.

So we appreciate everybody's focus on D.

LR.

Thank you, very much.

Thank you.

Thank you, gentlemen.

Ladies and gentlemen, this concludes the Digital Realty Trust third quarter 2008 results conference call.

If would you like to listen to a replace of today's conference please dial (303)590-3000, or 1(800)405-2236, and enter access code 11120276 .

Thank you for your participation.

You may now disconnect.

Have a pleasant