Digital Realty Trust Inc (DLR) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Digital Realty Trust fourth quarter and year-end 2008 earnings conference call.

(Operator Instructions).

This conference call is being recorded today, Thursday, February 26th of 2009.

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

Thank you, and good morning -- good 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's website at www.digitalrealtytrust.com, or you may call 415-738-6500 to request a copy.

Before we begin, I would like to remind everyone that the management of Digital Realty Trust may make forward-looking statements on this call that are based on current expectations, forecasts, and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially from expectations.

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

You can also identify forward-looking statements by discussions of future events or trends or discussions that do not relate solely to historical matters, including statements related to future demand, financing opportunities, financial ratios, liquidity, capital expenditures, property results, dividend policy, and the Company's expected financial results for 2009.

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

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 fourth quarter of 2008 furnished to the SEC, and this information is available on the Company's website at www.digitalrealtytrust.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 will begin with a brief overview of Digital Realty Trust, and then I'll review the success of our portfolio operations during the quarter and the year and conclude with an overview of our annual US data center market demand survey that was completed last week.

Following my remarks, Bill Stein will discuss in detail our liquidity position and our fourth quarter and full-year 2008 financial performance.

DLR is the leading owner and manager of technology real estate.

Our portfolio currently contains 75 properties totaling 13 million rentable square feet, 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 includes approximately 1.6 million square feet of space held for redevelopment which continues to be an important source of growth for the Company.

DLR provides a variety of data center facility solutions including Turn-Key Datacenter, Power Base Building, and Build-To-Suit Datacenters 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.

In the face of unprecedented economic and market challenges, we are especially proud of the Company's performance in 2008.

Our team finished the year by turning another very successful quarter, especially with respect to leasing, operations, and finance.

Demand has remained high for our data center products, and we continue to closely manage our balance sheet to maintain comfortable levels of liquidity.

We are confident that we will continue to achieve good earnings growth in 2009.

Portfolio occupancy, excluding space health redevelopment, was 94.9% at year-end, a slight decline from 95.2% at the end of the third quarter.

This is primarily due to timing of lease commencements, including the previously planned termination of a portion of the quest lease of 350 East Cermack, the conversion of redevelopment space to operating portfolios at our Paris property, and the acquisition of a vacant building for a leading internet enterprise company with lease commencement after the quarter-end in January 2009.

Occupied square footage actually increased in the fourth quarter by 108,000 square feet to 10.81 million square feet.

Turning now to our acquisition leasing accomplishments, on December 10, 2008 we acquired the remaining 50% interest in a joint venture that owns 1500 Space Park Drive and 1201 Comstock Street in Santa Clara, California for approximately $20.6 million.

The portfolio -- the properties are 100% leased respectively to a major Internet enterprise and to a global computing technology company.

On November 20, 2008 we acquired a 110,000 square foot facility located in Manassas, Virginia for approximately $10.6 million.

Upon completion of the acquisition, we signed a long-term lease with a leading Internet enterprise company which commenced in January, 2009.

This brings our total acquisitions for the year to approximately $101.2 million.

As previously announced for the year ended December 31, 2008, we commenced leases totaling approximately 1.1 million square feet which represents a 50% increase over leases commenced for the year ended December 31, 2007.

This includes first, nearly 696,000 square feet of Turn-Key Datacenter space, leased at an average annual GAAP rental rate of $142 per square foot.

Second, over 269,000 square feet of Power Base Building space leased at an average GAAP run rate of $42 per square foot.

And third, approximately 180,000 square feet of non-technical space leased at an average annual GAAP run rate of $22 per square foot.

For the quarter ended December 31, 2008, we commenced leases totaling approximately 320,000 square feet of space.

This includes nearly 164,000 square feet of Turn-Key Datacenter leased at an average annual GAAP rental rate of $154 per square foot.

Approximately 119,000 square feet of Power Base Building at an average annual rental rate of $49 per square foot.

And approximately 38,000 square feet of non-technical space leased at an average annual GAAP rental rate of $15 per square foot.

For the year ended December 31, 2008, we signed leases representing over $1 billion in contract value, a 50% increase over the total contract value of leases we signed in 2008.

Leases signed in 2008 totaled over 1.1 million square feet.

This includes approximately 594,000 square feet of Turn-Key Datacenter space leased at an average annual GAAP rental rate of $153 per square foot.

Over 299,000 square feet of Power Base Building leased at an average annual rental rate of $56 per square foot, and approximately 242,000 square feet of non-technical space leased at an average annual GAAP rental rate of $18 per square foot.

Now for the quarter ended December 31, '08, we signed leases totaling approximately 276,000 square feet.

This includes signed leases of 120,000 square feet of Turn-Key Datacenter space and an average GAAP rental rate of $180 per square foot, approximately 8,000 square feet of Power Base Building on an average rental rate of $54 per square foot, and approximately 149,000 square feet of non-technical space at $17 per square foot.

Leases were signed in the fourth quarter with customers that include IBM, Cisco, Cigna Insurance, Facebook, and NTT America.

Despite the challenging market conditions, we continue to see attractive pricing and strong demand throughout our top markets, particularly for our Turn-Key Datacenter product.

This level of demand is consistent with the results of the US data center market demand survey that was completed for us last week, as well as the results of the European survey that we released last week.

The surveys are conducted for us by Campos Research and Analysis.

The US survey was conducted during January and February of '09 and consisted of 300 senior level executives of firms with greater than $1 billion of annual revenues and-or more than 5,000 employees.

The highlights of the results are as follows.

Firstly, 84% of the respondents said that they will definitely or probably expand data center space in the next twelve to twenty four months.

Also, the average IT budget is estimated to increase 6% in 2009, with data centers representing about 35% of the overall budget.

Average data center spending is expected to increase by 6.6% over 2008.

64% of respondents plan to expand in two or more locations.

In addition, the average requirement for new data center space is 21,000 square feet, up 17% from 2008.

And lastly, the average projected kW per rack is up to 7.8 kW, up 8% from 2008.

Overall, the results of the survey indicate that at this time, the current economic environment does not appear to be materially impacting demand.

A more detailed overview of the survey results is scheduled to be released in an upcoming press release.

Consistent with the results of the survey, the DLR sales team currently is engaged in direct discussions with over 77 megaWatts of new data center prospects.

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

Turning to our redevelopment program, we currently are underway in construction projects in high demand markets in the US and Europe that will add approximately 409,000 gross rentable square feet of additional data center space to our operating portfolio in 2009, including the HSBC Build-To-Suit in suburban London.

In addition, we have construction under way in London, Paris, northern New Jersey, northern Virginia, Chicago, Dallas, and Silicon Valley.

In 2008, we delivered approximately 605,000 rentable square feet of Turn-Key space and over 50 megaWatts of IT load.

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

We are mindful that many economic forecasts that predict slow or negative growth in 2009, and the global credit crisis shows few signs of abating in the near future.

And, we understand how these macroeconomic trends might affect our business, and that's why we have structured our business model with the operating flexibility to adapt to business cycles and with the financial flexibility to adapt to changes in credit and equity markets.

Our confidence in our financial strength and operating platform is due to the talented, dedicated people on our team who have consistently kept Digital Realty out in front.

We thank all of them for a job well done, and we look forward to reporting on our progress in the year ahead.

Now I'd like to turn the call over to our CFO, Bill Stein.

Bill?

Thanks, Mike.

Good morning and good afternoon, everyone.

I will begin with a discussion of our liquidity position, and then review our fourth quarter and full-year 2008 financial results.

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

Liquidity remains a critical concern for all businesses, including REITs, and maintaining a strong balance sheet with financial flexibility is a top priority for us.

Since our last call, we have sourced approximately $141 million of additional capital that added to our liquidity position, further buttressing our balance sheet while providing potential growth capital for later this year or next year.

On February 13th, we completed an under written common stock offering of 2.5 million shares, resulting in approximately $83.3 million in net proceeds.

On November 5, 2008, we funded a second draw from the Prudential Shelf facility of $33 million at an interest rate of 9.32% with a five year maturity.

On January 6th, we closed a third draw from the Pru facility for $25 million at an interest rate of 9.68% with a seven year maturity.

The proceeds from these transactions were used to repay borrowings under our revolving credit facility and for other general corporate purposes.

On January 6, 2009, practical completion of construction was achieved on a data center facility located on London's perimeter.

After drawing down GBP 9.2 million today, and putting in place an interest rate swap, there is a GBP 42.8 million outstanding on this loan.

The loan is a five year, interest-only financing with an all-in swap fixed rate of 4.18% and no amortization.

As a footnote, clearly, this is a loan from a different era.

The total outstanding loan represents a 75% loan-to-value ratio based on an updated valuation prepared for the bank.

In addition, we are in the documentation stage for secured debt financing on a domestic property that would generate approximately $18 million in proceeds.

The loan has a three year maturity with a one year extension at an interest-only rate of LIBOR plus 3.5% with principal amortization on a fifteen year schedule.

Our total debt at quarter-end was $1.4 billion, and our ratio of debt to total market cap was 29.8% based on the December 31, '08 stock price of $32.85.

Based on yesterday's closing stock price of $28.93, our ratio of debt to total market value capitalization would be 31.9%.

Our adjusted EBITDA to cash, fixed charge coverage ratio was three times and our adjusted EBITDA to cash debt service coverage was 5.2 times for the quarter.

As of December 31, our weighted average cost of debt including interest rate swaps was 5.36%, and the weighted average maturity was 4.9 years including debt extension options.

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

Turning now to our revolving credit facility, we currently have approximately $100 million outstanding on the credit facility.

We are holding $60 million of that in short-term investments, which represents our estimate of funding requirements for the next thirty day period.

We have $623 million of immediate liquidity through short-term investments and funds that can be drawn on our revolving credit facility.

If this capacity were fully utilized our pro forma debt to total market cap would be approximately 39.7% based on yesterday's closing stock price.

We remain comfortably in compliance with the covenants contained in our revolving credit facility, the Prudential shelf facility, as well as our outstanding secured debt.

Looking ahead, based on our current plans, we expect our capital requirements for 2009 to total between $383 million and $433 million, which includes $275 million to $325 million of redevelopment CapEx plus portfolio level CapEx of $40 million and $68 million of ongoing principal amortization and debt maturities.

This assumes that we exercise the one year extension option on 350 East Cermack loan in June of 2009.

If we fund all of our cash needs through the end of 2009 entirely on our revolver, we would have approximately $190 to $240 million of liquidity at the end of 2009.

In 2010, including the $95 million loan at 350 East Cermack, we have a total of $109 million of debt maturing and principal amortization.

The Cermack property is expected to generate approximately $40 million of NOI in 2009.

Before moving on to our fourth quarter and full-year financial results, I would like to briefly address our current dividend policy.

As a reminder, last quarter we increased our common stock dividend by 6.5% or $.02 per share to $.33 per quarter, one of the few REITs to do so.

We are currently paying approximately $26.7 million in dividends and distributions per quarter.

We have done extensive internal analysis of the various dividend options other REITs have employed to preserve capital and-or improve liquidity, including the stock cash dividend split.

After our review we have determined to maintain our current quarterly cash dividend distribution but will continue to monitor this as the year progresses and market conditions evolve.

Now, I'd like to turn our fourth quarter and full-year 2008 results.

The fourth quarter FFO per diluted share in unit of $0.76 per share includes approximately $.07 of additional FFO from certain significant items that do not represent ongoing revenue streams.

These items consist primarily of the remaining $4 million from the net termination fee of $11.9 million from Qwest at our 350 East Cermack property and property tax adjustments for two properties totaling $3.1 million.

This was offset by $700,000 in straight line rent expense related to facility leases.

After adjusting for these items, FFO was $0.69 per diluted share in unit.

As I discussed on our last call, third quarter FFO of $0.69 per diluted share in unit included approximately $0.06 per share of additional FFO from certain significant items that do not represent ongoing revenue streams.

After adjusting for such items, third quarter FFO was $0.63 per diluted share in unit.

After adjusting for one-time items in all quarters, fourth quarter FFO per diluted share in unit increased 9.5% over the third quarter and 30.2% over the fourth quarter of 2007.

For the full-year 2008, FFO per diluted share in unit was $2.62 per share.

When adjusting for one-time items plus $0.02 per share of additional non-recurring FFO discussed on our first quarter 2008 call, 2008 FFO per diluted share in unit was $2.48.

This represents a 21% increase over reported 2007 FFO per diluted share end unit of $2.05.

After adjusting for approximately 2.5 million or $0.03 per diluted share in unit of additional FFO from items that did not represent ongoing revenue streams in 2007, 2008 FFO per diluted share in unit increased 22.8% over 2007.

Adjusted funds from operations or AFFO for the fourth quarter of 2008 were $44.3 million or $0.56 per diluted share in unit.

This compares to a third quarter 2008 AFFO of $44 million or $0.55 per diluted share in unit.

The AFFO payout ratio for the fourth quarter of 2008 was 58.9%, up from third quarter AFFO payout ratio of 56.4%.

EBITDA adjusted for preferred dividends and minority interest was $90 million in the fourth quarter of 2008, up 11.5% from $80.7 million in the third quarter, and up 51.8% from the $59.3 million for the fourth quarter of 2007.

For the full year, EBITDA adjusted for preferred dividends and minority interest was $303.9 million in 2008, up 34.2% year-over-year from $226.4 million, excluding the $18 million gain on the sale of assets in 2007.

We are paying considerable attention to the impact of the challenging economy on our tenants and business.

At this time, our accounts receivable aging and delinquencies remain consistent with historical norms, and we believe we maintain adequate bad debt reserves.

One of our tenants filed for bankruptcy during the fourth quarter.

That tenant lease is approximately 12,000 square feet of Turn-Key Datacenter space as its primary data center for US operations and 3,000 square feet of office space.

This tenant is current on its rent, and we believe that this tenant will firm its lease in bankruptcy.

The tenant's current monthly tax rent is approximately $94,000.

Same store NOI was $76.7 million in the fourth quarter of 2008, up 9.3% from $70.2 million in the third quarter of 2008, and up 23.7% from $62 million in the fourth 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 $67 million in the fourth quarter, up 3.9% from $64.5 million in the third quarter of 2008, and up 25.9% from $53.2 million in the fourth quarter of 2007.

These increases were primarily the result of new leasing commencing in our properties during the twelve month period ended 12-31-08.

I will now briefly review specific items in the Statement of Operations to provide additional detail on the results for the quarter.

For the fourth quarter, rental revenues increased to $111.4 million, up 8.8% from $102.4 million in the previous quarter.

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

Rental revenues for the full-year 2008 were $404.6 million, up 26.6% from $319.6 million in 2007, reflecting the commencement of leases signed during the year for Turn-Key and Power Base Building space.

G & A decreased during the quarter to $8.6 million, down from $11.3 million in the previous quarter, primarily due to the acceleration of the outperformance plan in the third quarter and lower audit and tax related fees and a state tax refund in the fourth quarter.

G & A expense in future periods may be higher as a result of audit and tax-related fees, compensation expense, marketing spending, and other items.

G & A was $38.6 million in 2008, up from $31.6 million in 2007.

The increase was due primarily to the growth of headcount from 153 employees at the end of 2007 to 210 employees at the end of 2008.

In addition, occupancy expense increased approximately $850,000 in 2008, relating to our San Francisco, Boston, and London office rents.

Turning now to our balance sheet.

During the fourth quarter, we capitalized 19% or $4.1 million of interest related to construction projects, which compares to 22% or $4.4 million in the third quarter of 2008.

We capitalized approximately 25%, or $2.4 million in compensation expense compared to approximately 26% or $2.8 million in the third quarter of 2008.

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

This concludes our formal remarks.

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

Operator?

Thank you, sir.

(Operator Instructions).

Our first question comes from the line of Michael Bilerman with Citi.

Please go ahead.

Good morning, it's Irwin Gusman here with Michael.

Mike, there was some news over the last couple of weeks about new data center technology being marketed by Dell that effectively allows data centers to run at higher temperatures.

The purpose of which is to reduce obsolescence and legacy data centers.

Can you explain that technology a little bit, and how you see it affecting demand for your products?

Yes, it's not new technology at all.

It's marketing -- trying to sell more Dell servers, which is good.

We already run our data centers at temperatures well into the 70 degree Fahrenheit, up to the mid-70's, depending on the circumstances.

So, this isn't really anything new.

And in fact, in that particular article, the ASHRAE and standards they were talking about being set were standards that our engineers participated on the standard setting committee.

So, it's no new news.

But, just good operating practices though, that they are pointing out that you can run these facilities much higher -- at a higher temperature.

So, you can lower your cooling costs and run your data center more efficiently.

Fair enough, and some of your publicly traded peers have talked about slower rates of bookings among enterprise tenants.

Can you talk about what you are seeing and layer that into the analysis that you did that was just published a week ago?

Sure.

We're seeing our velocity of signings and levels of demand staying pretty steady from what we've seen in the previous quarters.

We haven't seen any material change at all to our experience with our prospective customers.

So, it's moving along at relatively the same pace.

Would you say that financial services is still, I think you mentioned 30%to 40% of external demand or the demand that you're tracking for your development pipeline?

Probably, around 25% or so roughly.

Thank you.

Thank you.

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

Please go ahead.

Hi, guys.

Just coming back to the construction -- what's under construction at year-end, I think you mentioned in your comments it's in the supplemental of about 408,000 square feet.

I have two questions about it.

One, it doesn't look like the Manassas property is included in there.

And, just if you could confirm that?

And then second, could you characterize how leased this portion of the pipeline is -- or how leased that portion of the pipeline is?

Sure, yes.

You're right.

The Manassas property is not included in there, and that property was acquired and leased to the tenant.

And, the tenant is using their capital build out the space.

So, we identified the site, have the power and fiber, and the tenant wanted to use their capital to build it out.

So, you're right.

It's not included in that amount, and so -- I'm sorry, the other part of your question?

How leased is the 409,000?

Oh -- I'd say it's probably more than 50%, probably two thirds or so is signed leases on it.

And, we've got tenants under negotiation for virtually all of the space.

Jordan, for example, included in that number would have been the HSBC facility in [Wellon], as well as the Crescent facility both of which commenced in January.

Okay.

And so if you, that's a good segueway into the question I have for you, Bill, which is what's the backlog look like?

The signings that haven't commenced?

Yes, sir.

Okay, looking into the first quarter, there's about 85% of what we have signed will commence.

And then the second quarter about 10% and 5% in the third quarter.

What's the amount in terms of revenue?

Revenue, call it roughly $30 million in the first quarter of annualized GAAP rent.

And $5 million in the second and $5 million in the third.

And that's the -- those numbers are the contribution to 2009 numbers?

No.

Those are annualized.

If you want the contribution in '09, call it like $28 million plus in the first quarter, $3 million plus in the second quarter, and between $1 million and $2 in the third.

Okay, and then lastly, on Manassas, I'm curious what shell rents look like these days?

Jordan, before we go on though, all of those revenues are stated in dollars and some of the leases that commenced, like the HSBC and [Wellon] lease in particular, and there's some leases also in Paris that have some currency risk associated with them.

Okay, makes sense.

And so just lastly, in Manassas, I'm curious what shell rents look like these days?

Yes, that one, because we didn't make any additional Power Base Building improvements, we really turned around and leased that more on a -- high end industrial rent so the returns are good but the rents don't reflect a true Power Base Building.

Okay.

Low $20s?

Actually, lower than that.

Just because it's more of a industrial building rent, but the returns are very good for us.

The returns are very good for an industrial building.

Because we were able to buy it right.

Okay, I'll hop back in the queue.

Thanks, guys.

Thanks.

Thank you.

Our next question comes from the line of Michael Bowen with Piper Jaffray.

Okay, thank you.

Nice quarter.

I had a couple questions.

First of all, I guess, first question for Bill.

Bill, how do you think about going forward here when you make your decisions about doing either equity or debt offerings?

Obviously, I know debt is expensive here, but one can make the argument that the equity is not necessarily cheap either.

I just want to understand your methodology with regard to that.

Second question -- you had already pre-announced it.

I believe your number of square footage for signed leases in the fourth quarter was I think 276,000.

And, one thing that struck me was that that was down sequentially and down year-over-year.

So, I wanted to get a feel for, if you could now that we're two months, almost two months into first quarter -- how signed leases are progressing in the first quarter whether you're seeing a pick-up there.

And, I guess that really dovetails off the other question with regard to some of your other non-REIT peers in the space are experiencing slowness in bookings.

So, I want to get an idea on how things are tracking.

Thanks.

Okay, I'll address the balance sheet, Michael can address the second question.

So, we have plenty of capacity on our revolver as I indicated, but our objective is to maintain as much liquidity on that facility as we can.

We also have plenty of capacity within our financial covenants to add more debt.

So, I think given the choice today, we would look to add debt rather than equity.

The market is being a little stingy in terms of allowing companies access to debt, as you probably know.

But, we are in the market as I said, we're documenting one small mortgage, the $18 million deal.

And then, we're going to market with another package or two in the US, and we're looking at another secured financing in Europe as well.

So, our bias at this point would be to achieve mortgage debt if we could get it at reasonable rates.

Fortunately, we have plenty of room on the credit facility.

And so, we're not in any dire need to go back to the market in either case.

I think in terms of whether or not we go back to the equities -- we saw the last raise as -- basically an opportunistic small raise.

We were concerned that in terms of timing -- we were concerned that the announcements coming out of the administration might not be well received.

And, that that might put a little downward pressure on the market.

So, we thought it would be an appropriate time to take a little equity.

Not a lot of equity because frankly we didn't need it, and we didn't know.

I mean the stock price could go higher.

So, in a sense, we were dollar averaging in.

Okay.

And then, regarding your question on signed leases, a couple of things I'd say.

Leases, in our world, tend to be very chunky.

They are sizeable square footages, sizeable dollar amounts, and we had an extremely high quarter in the third quarter.

Actually, the highest quarter we ever had.

So, I think some of those deals that may have been fourth quarter deals percolated into the third quarter.

And, if you look overall for the year it's quite good.

Also, in November-December, I think almost all businesses really pulled back the reins and took stock of kind of where their situations were going to be going forward.

And, there's definitely a slowdown in those two months.

And then, we've seen mid-January, companies seem to have their budgets in place and seem to have their strategic and tactical plans in place.

So, we're seeing our leasing activity at a very good pace right now.

So, there's a bit of a lull there that at the end of the year, last two months of the year that now has -- activity has picked up again.

Okay, thank you.

Thank you.

Our next question comes from the line of Sri Anantha with Oppenheimer.

Please go ahead.

Yes, good afternoon, thank you.

Mike, I think in your prepared remarks you talked about this potentially $5 million of opportunity in the marketplace.

Could you just maybe give us some color on that?

How much of that demand do you think is coming from your existing tenants as opposed to new tenants?

And second question for Bill.

Bill, I know you guys have maintained the guidance.

Is it possible to give some kind of a break down?

I know previously you talked about Turn-Key and Power Base lease commencements of 500,000 to 570,000.

And just based on your recent trends, it looks like more of it is coming from Turn-Key as opposed to Power Base.

Should we expect that to continue in 2009.

Thanks.

So, in regards to kind of that universe of prospects we see out there, we probably somewhere around 25% to 30% or so would be from existing customers and the rest from other prospective customers out there or people we are aware of.

Some of that might also be folks that are considering doing it themselves and building and owning their own datacenters which we see a lot of, and then that's been the typical program in the past.

And, what we've also seen though is a number of these companies are looking at doing it themselves are now looking at DLR as a great opportunity to be able to spread their requirements out over several years and be able to utilize our Turn-Key solution for their facilities.

So, it's a pretty broad range of prospective customers, but we're pleased to see that that kind of activity is out there in the market.

Relative to guidance, as I said, we're not making any changes there at this time, either to the output nor the assumptions.

But having said that, there is, I think, going to be more leasing out of the Turn-Key space than Power Base during the year.

I think that's a fair assumption, Sri.

Thanks guys.

Good quarter.

Thank you.

Our next question comes from the line of George Auerbach with Banc of America.

Hi, good afternoon.

Mike, you mentioned that demand in your markets was flattish quarter-over-quarter at around five million square feet, but have you begun to see tenants push back on rents just given the macro weakness and uncertainty.

And which markets and industries seem most affected?

Well, we haven't seen push back on rents thus far.

So, we're being conservative, and we're not projecting significant increases in rents.

I mean, rents are typically at -- providing good returns currently.

In terms of what verticals might be slowing down, gosh, the ones that are primary vertical markets with some of the Internet enterprises and Financial Services and some of the broader corporate Fortune 1000s, I couldn't say that we're seeing a particular slowdown in any of them.

Okay.

Bill, what was your construction-in-progress figure that you were capitalizing at year-end?

At year-end, it's a little over $400 million, $403.8 million to be precise.

But as I said, quite a bit of that includes [Wellon] -- includes [Wellon] and Cressex which are coming out in January.

But the numbers will be in the Q, which will be filed, I think, on Friday.

Okay, and finally have you seen construction costs on the redevelopment pipeline abate over the last twelve months, just given the pullback in some commodity markets and a general slackening in demand?

Really, no.

Now, our team -- with that said, our team has done a great job of standardizing and industrializing, if you will, our engineering design and construction and equipment purchasing.

But, we really haven't -- I can't say that there has been any kind of significant decrease overall in cost.

And, I think what you see is for a lot of this electrical equipment and generators and what not, the equipment is built to order, not to inventory.

So, as demand slackens, manufacturers are also reducing their manufacturing capacity at the same time.

So their holding on unit costs, but the good news for us is because we have our global purchasing programs in place, it gives us a lot of flexibility for equipment both here and in Europe.

So, we can continue to enjoy a pretty significant cost advantage over other folks building these facilities.

Okay that's helpful.

Thank you.

Thank you.

Our next question comes from the line of Michael Knott with Green Street Advisors.

Please go ahead.

Hi, guys.

Can you give us a little color on how you thought about deploying capital this quarter for the acquisitions you did?

Obviously, the one you talked about sounded opportunistic.

What about the joint venture?

How did you think about preserving capital versus going ahead to do that deal?

It was a very attractive yield, Michael, on acquiring the acquisition or the JV equity from our partner.

And from an administrative standpoint, it was good to take full ownership of the asset.

These assets, once they are fully owned go into our revolver borrowing base.

And in the case of these two, at least the one had debt on it and the second we are negotiating to put debt on it.

But, it's still easier to put the debt on if it's solely owned by Digital.

The bottom line, it was an extremely attractive return.

Was it on par with development?

Or was it -- ?

I'd say so.

I mean, let me go this way.

A smidge under, but without any of the risks.

I mean, it's already leased.

Right.

Can you just help us understand your thoughts on sort of the overall health of your tenant base in this downturn compared to what we may have seen had you been as big as you are today in the last downturn?

Well, I think one big difference between your 2000 to 2002 timeframe and today is that so many of these facilities were populated by venture-back dotcom-type tenants, who in many cases were really negative EBITDA start-up type companies.

Whereas today, the tenant base in these facilities, and this holds true for our IT services tenants as well, the [Sabasses] and the [Equinexes].

Their customer base are corporate enterprise now for the most part and large Internet enterprises that have significant revenues, significant EBITDA.

So, it's a real different customer profile.

And, I think it reflects the fact that these types of facilities and the Internet and data processing is really not just focused on Internet per se, but it's utilized by corporations overall.

And, I think we're seeing that both in our direct customers as well as the customers of our system integrator and IT services tenants.

Michael, I would characterize these as essential facilities to higher grade credits than what was taking place in the early 2000 time period.

I think the economy is in worse shape today than it was then, but I think that the usage and the needs are very different.

Okay thanks.

That's helpful.

Thank you.

Our next question comes from the line of Susan Gutierrez with JMP Securities.

Please go ahead.

Hi, thanks.

I was just wondering if you could discuss what you're seeing in the market in terms of cap rates, and what the cap rate looked like on your fourth quarter acquisition?

Cap rates are really hard to peg, and I think similar for our datacenter niche as in other product types just because there's so few transactions occurring right now.

Our investments in the fourth quarter, one was a building we acquired vacant for a customer in Virginia.

And, we were able to lease that at a very attractive return for ourselves, but it was a vacant building when we bought it.

And as Bill was just mentioning, buying the 50% interest in the joint ventures which worked out well.

So, I'd have to say it's really hard to peg cap rates today just because there's so few comps occurring.

Okay, thanks.

Thank you.

Our next question is a follow-up from the line of Jordan Sadler.

Please go ahead.

Could you just clarify on the acquisition of the 1500 Space Park in 1201 Comps, I might have missed this, did the $20 million, I assume that excludes -- that's just the equity?

Well, 1500, you're right.

It's just the equity.

1500 had that in place.

1201 does not.

1201 is where we are working to put debt in place.

So $22 million, roughly half the debt was the JV partners, right?

So, the all-in price was probably more like $42 million?

Is that the right way to look at it?

It would be the right way to look at it.

I don't know if -- that's not the exact number.

Because our investment in our half is less than what we paid our partner for his investment.

If you follow what I'm saying.

No, but I'll follow-up with you later.

And then, you mentioned $623 million of immediate liquidity.

Did that exclude what remains in terms of the committment under the proved facility?

Yes.

And so just remind me, what's left under there?

Is that $125 million, $150 million?

It's about $117 million, I think.

That is an uncommitted facility though.

So, when we look at our liquidity position, we don't include that.

Wait, it's committed, or it's uncommitted?

It's uncommitted.

Oh, I thought -- .

It's always been uncommitted.

I thought it was actually committed, but that you had -- you drawdown on an individual.

I guess I'll follow-up with you on that one as well.

And then, just I guess more big picture, I was curious in terms of your thoughts and expectations as it relates to the stimulus bill and healthcare IT spending.

How Mike, you think that may factor in and if you seen any evidence of what may come of that type of spending?

Yes, it's interesting you bring that up because that's something that we're looking at pretty closely in our sales team, and some of our analysts are looking at closely -- to try to discern where the spending is going to occur.

A lot of it supposedly is targeted for records and access and records with tension and billing and those sorts of things which would play very well into the strategy providing increased data processing capacity and facilities for that.

So, not clear how that's going to play out.

A lot of your large healthcare companies tend to own their facilities because they own large hospitals and clinic buildings.

But, I think we have a very good value proposition for these folks that we can provide some of this increased requirements, and they could put their capital into the directly into the healthcare facility instead of into data centers.

So, that's one, it's not clear how it's going to play out, but it's definitely a vertical that our group is focusing on.

Great, and then just curious about what you're seeing and you may have touched on this a bit, just the mix of the five million square foot pipeline that your guys are tracking, Turn-Key versus shell.

It would probably be the great majority would be Turn-Key.

Also just want to reinforce that that five million feet, that's requirements in the marketplace that we've identified.

So, it's not necessarily folks that we're negotiating with or have proposals out.

We've got proposals -- you're engaged on about 75 megawatts which would translate to roughly 1.5 million, 1.7 million square feet or so on kind of gross runnable basis.

But, what's encouraging is that companies are seeking out data center expansion and new solutions.

So, I think just in terms of kind of gross numbers, it's encouraging.

But, it's certainly -- folks need Turn-Key, built-out space whether they do it themselves or whether they come to DLR.

Okay, and then on that amount you're engaged on, what's the typical or expected closed ratio?

I think, probably around 30% to 40%.

And you said, that's mostly Turn-Key as well?

Yes.

And last question, just is on the roll.

What is the mix of the roll for 2009?

You have 5% of rent rolling roughly.

Yes, I think we've got a pretty large portion is non-technical space, actually.

Wasn't that 2010, the non-technical spaces rolling?

Or is that -- ?

Well, I think actually, in both years.

So, I think about two thirds of it is technical space and about one third is non-technical space.

And of the technical, how would you handicap it?

Turn-key versus shell?

I'll have to take a look at that because a lot of the leases are essentially Power Base Building because the tenant put the improvements in themselves.

Yes, it's mostly shell.

So, it would be more Power Base Building-type rents.

Any thought process, Bill in terms of giving us a little bit more color on the roll schedule given that it's going to be a little bit more meaningful over the next couple years in terms of the exposure?

Well, we could do that, but it's in our guidance.

It's in the bottom line number.

No, I know, but it just makes it easier for us to track and sensitize as we look forward.

To model it or something?

Yes.

That's what we do.

You just won't accept our word for it, will you?

We think an awful lot of you.

No, but I think what we'll be able to do is as we start going through the year -- what we'll be able to give more details and more clarity.

But, I think we'll have a good renewal rate, and in some cases where maybe tenants are not renewing or downsizing a little bit -- we're getting space back that we're redeploying at good rates.

So, it's a bit of a combination there, but -- .

Anybody giving back space?

We're working on one lease right now, one of the larger network providers.

And, we're actually, in San Francisco, and what we're able to do is renegotiate the space on the remainder that they are keeping.

And that's actually go to be somewhat higher total revenues than we're achieving now.

And then, we'll have 40,000 or 50,000 feet that we could then redeploy.

And, it's one of our internet gateway buildings at -- where we expect good rents.

So, getting some of the benefit of accommodating our customer but still maintaining our revenue profile at the same time and with space to grow.

Qwest was a big give-back, too, in the fourth quarter.

There was one in the fourth quarter?

Yes, that's what Qwest was.

The termination -- .

Right, right.

Any prospects on back-filling that space?

Oh, yes.

We've signed one pod customer, and we've got prospects that we're negotiating with for virtually all of the space.

So, leased by year-end safely?

Yes.

Okay.

Signed.

We expect to have signed leases for the floor by the end of the year.

Thank you.

Thank you.

Our next question comes from the line of David Rodgers with RBC Capital Markets.

Please go ahead.

Bill, just wanted to follow-up.

$380 million of $430 million is the number I wrote down for capital deployment.

Was that just for '09, or did that include all of the finishings on the redevelopment and development spending?

And, did it also include acquisitions?

That's '09, that includes redevelopment CapEx.

That includes portfolio CapEx.

That also includes debt maturities and amortization.

That's all capital outflows, not just CapEx for redev.

So, we if just looked at the capital spending for redevelopment, development, TIs, other improvements that are planned from now until completion.

What does that number look like?

I mentioned that.

That was $275 million to $325 million.

Okay, thank you.

With respect to acquisitions -- ?

That's part of our guidance.

Which was consistent with before.

I just wanted to make sure that that was consistent.

Yes.

With respect to the acquisitions or opportunities -- I didn't hear you address this, and if you did, I apologize.

But with respect to distressed opportunities, or similar to the Manassas acquisition, industrial, other types of assets can you just comment broadly on what you're seeing?

We're really not seeing anything distressed, and any assets that even might hint at being distressed are assets that aren't built out.

And there may be some interesting opportunities as we need to fill in in certain markets and bring online some incremental space.

But, by and large, assets that are leased are enjoying good cash flow and typically are underlevered.

And, there's really, you don't see the stress in our sector at this point, but we're keeping our eyes open for opportunistic, or I wouldn't say opportunistic but opportunities shall we say where maybe on a risk-adjusted return, an acquisition might look interesting.

Or, there might be some portfolio situations down the road.

And then, the Manassas building, that was more a buy-to-suit, if you will.

One of our existing customers needed to expand, and so we went out and found a building for them.

And we'll certainly look to do more of that, and I'm thinking that perhaps finally maybe 2009 might be the year where sale lease backs might be attractive to owners.

Especially corporates who would want to do sale lease back on corporate owned facilities.

Though I have been saying that every year for the last five years, but maybe this year will be a year where we may have some opportunities there.

We've also looked at some situations where mortgage debt was presented to us at a discount mortgage debt on data centers but have not been able to come to an agreement on pricing on any of that.

What types of discounts are being offered?

Not big enough for us.

Alright, thanks guys.

Thank you.

Next question comes from the line of Tayo Okusanya of UBS.

Please go ahead.

Hello, yes.

Good afternoon.

I just wanted to push a little bit more on the acquisition environment.

The two acquisitions you did.

One, who was the JV partner on 1500 Space Park again?

And, just based on the pricing you paid, what exactly was the cap rates on those two deals?

Our partner in that market is [Pellio] Associates and a very experienced Santa Clara developer and investor.

And, we're not disclosing the exact economics on that.

Okay.

But, it was consistent with kind of our risk adjusted returns for that kind of a lease facility.

And then the Pru financing, could you just walk us through the basic terms of that again?

Which one?

The one we did in the fourth quarter or the first quarter?

The fourth quarter.

The fourth quarter was $25 million, I'm sorry, that was the fourth quarter.

The fourth quarter was $33 million at 9.32%, that was five years interest-only.

Right.

And the first quarter was a $25 million draw for seven years interest-only at 9.68%.

And you said you still have $117 million of draw you could make against this, but it's an uncommitted facility?

Is that correct?

It's an uncommitted facility, so Pru doesn't have to make any of it available, and the pricing is subject to negotiation every time we draw.

Got it.

Okay, thank you very much.

So far, they've made it available, but I think for the purposes of liquidity planning -- .

You don't include it.

Great.

Thank you.

Thank you.

Next question is a follow-up from the line of Sri Anantha.

Please go ahead.

Mike, I know you've said on your comments that you haven't seen any material slowdown in new leasing signing, actually.

Is it safe to assume that given that you already are through mostly two months in 1Q that the pace of new lease signings in 1Q is at least on par with what you have signed in 4Q?

Probably not signings.

Negotiations are up, but I think a lot of the signings -- majority of signings will happen early in the second quarter.

Got it.

And in the past, you have made comment that Chicago was one of your strongest markets.

Is that still the case today?

At least it does seem to be that a couple of your peers seem to be in Chicago.

They've generally been market being slower than expected in that part of the market.

Yes, there's a real dichotomy between our our building and the central [CVD]-type properties.

Our building, being 350 Cermack, really is the fortress Internet gateway that has a lot of Financial Services, a lot of trading -- commodity trading platforms.

A lot of these applications need very low latency.

Because of the power infrastructure and the network infrastructure in there, it's very attractive for customers.

So, our demand is very strong in that market, and I think it just reflects a suburban market is a different tenant base perhaps.

And, I'm speculating it might be more of a tenant base that tends to do it themselves.

Some of the large insurance companies that already own big corporate campuses.

That's what I'm speculating on my part, but why it might be a little bit significantly slower in the suburbs than at 350 Cermack.

Sri, we're not able to tout or endorse any other third party data source, but Tier One did a report on this within the last month.

I think it was entitled, "The Tale of Two Cities", if I remember it right.

And Bill, on your guidance for 2009, does the lease commencement include any contribution from acquisitions?

And secondly, I know previously you talked about average annualized gross rent of $125 per square foot.

But so far, what have you signed is much higher?

Any reason why that could be lower in 2009?

There's nothing in for acquisitions right now other than the deal that we talked about that we subsequently -- that might even be in the leasing budget rather than the acquisition budget.

We're not changing guidance on rents, Sri, at this time.

I know you don't want to change, but I'm just curious, why it would be only $125 when you're signing at much higher rates today.

It's a blend.

Got it.

Okay.

Thanks.

Your next question is a follow-up from the line of Michael Bilerman.

Please go ahead.

Yes, in the supplemental on Page Nineteen, where you have all of the annualized base rents.

For 1500 Space Park -- that $5.1 million of annualized rents, that's 50% or is that listed at 100%?

What page are you, Michael?

Page Nineteen, whether you list these annualized rents at your share or at joint venture?

I need to find it first.

Should be the whole thing, Michael.

So then, if you take $5.1 million, and you even put a margin on that and you look at the gross value implied by the $20.1 million, you get to a very, very low cap rate.

Since I'm just trying to put the pieces together, there's a $44 million gross mortgage on it, and your $20.1 million would equate to an $85 million valuation for the asset and if it's only $5.1 million of rent that would be a very low cap rate.

Even if it's 50%, can you gross it up, and apply your typical 63% to 64% margin you'd still be in the [sevens].

You're talking two buildings now.

You're talking equity only.

Right, but I'm just trying to figure out which other building got paid for in the $20.2 million?

1201 Comstock.

As part of the valuation for that?

It was a buyout of both properties in the joint venture.

These were the original contribution properties?

No.

No, these were joint venture properties that we developed over the last year.

The 1201, and then there was a lease subsequent signing, I guess, so there was no income?

Correct, yes.

Both of these were billed that we started out as spec builds, and then subsequently both properties were leased and 1201 Comstock was completed.

And then, lease commencement in January.

And so, what was that -- what sort of rental income is coming off 1201?

We haven't provided it.

It will be in the first quarter, but our supplemental is going through December of '08.

Thank you.

Can you give a sense of what the rents were on that square footage, and so there's only 24,000 square feet, so -- ?

Not specifically.

I mean we've got NDAs with the tenants in most of these cases, so we'll be providing that.

I don't think we're prepared to give that right now.

The Wells Fargo loan, Michael, was a very high loan-to-cost loan.

The $44 million?

Yes.

Was there a buy-sell in the joint ventures?

No, not that I recall.

So they approached you, or you approached them?

It was mutual, I'd say.

I mean, this is a private developer.

They seemed to get most of the prices out when you did the re-fi in December.

Yes, we did very well on the re-fi.

And is any -- we're clearly seeing on the retail side, there's a lot of tenants obviously asking for some rent relief.

And, I was curious, just given the high operating cost that the tenants would be paying in a data center.

And, I recognize they are in many cases mission critical, but I've got to assume it's a big piece of the operating budget.

I'm just curious to see how tenants are reacting in this environment.

Well, certainly we're seeing lease rates holding at similar levels that we have experienced over the last couple quarters.

So, we're not seeing a significant reduction at all.

I'm just wondering if tenants -- you're finding a lot in retail, tenants are commenting and asking for reductions on their existing space.

Are you saying that's not occurring with any of your tenants?

That's correct.

Typically not, no.

And Michael, some of what flows through reimbursements here are utility costs, which are significant, and the tenant needs the power to function.

And just going back to the 1201 Comstock building, I don't have the rents at my fingertips here, but you're going to see that they are TurnKey rents that are very consistent with what we've been achieving with lease signings in the previous couple quarters.

Okay, thank you.

And it's a smaller building as well.

Thank you.

(Operator Instructions).

Our next question is a follow-up from the line of Michael Knott.

Please go ahead.

Hi.

Just wanted to ask you about your assessment of the overall mark-to-market in your existing portfolio.

I think you had said previously it was in the 20% to 25% range.

Do you feel like the current environment has lessened that at all?

And if so, by how much?

I don't think so, because at least up to this point, lease rates are consistent with where they've been in the past couple quarters.

So, I don't think that would, on general terms, that would change.

Thank you.

Thank you.

Management, at this time, we'll turn the call back over to you for closing comments.

Great.

Well, I appreciate everybody being on the call and your interest in DLR.

And I want to thank our team members here for a great year in 2008, and we expect to keep the program rolling along at a very good pace, so thanks everyone.

Thank you.

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