Digital Realty Trust Inc (DLR) 2009 Q1 法說會逐字稿

Welcome to the Digital Realty Trust first quarter 2009 earnings conference call.

(Operator Instructions).

This conference is being recorded today, Thursday, April 30, 2009.

I will now turn the conference to our host, 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 not, you can access one at the investor relations section of the Digital 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 and 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 and phrases.

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

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, 2008, and subsequent filings with the SEC including the Company's quarterly reports on the 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 first quarter of 2009, furnished to the SEC and this information is available on the Company's website at www.digitalrealtytrust.com.

Now, I would 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 questions and manage the call in a timely manner, please limit your questions to two per caller.

If you have additional questions, 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 then I will review the success of our portfolio operations during the quarter.

Following my remarks, Bill Stein will discuss our capital markets activities and liquidity position and our first quarter financial performance.

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

Our portfolio contains 75 properties totaling 13 million rental square feet, excluding one property, the Westin Building in Seattle that is 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 1.2 million square feet of space held for redevelopment which continues to be a very important source of growth for the company.

DLR provides a variety of Datacenter service solutions, including Turn-Key Datacenter, Powered 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 1,000 firms.

We are recognized as an industry leader in Datacenter design and were recently named one of InfoWorld's Green 15 companies for our work in developing the Breeam standard in Europe.

As a result of this effort, our HSBC Datacenter in suburban London received the distinction of being the first Breeam excellent certified Datacenter in Europe.

The Breeam standard is the European standard lead certification in the US.

Moving to our operating results for the first quarter, the portfolio occupancy excluding space held for redevelopment was 95.1% at the end of the first quarter, a slight increase from 94.9% in year-end 2008, reflecting new-lease commencements.

This compares to occupancy of 94.7% for the same period in 2008.

No new properties were acquired during the first quarter.

In terms of our leasing activity for the quarter ending March 31, 2009, we commenced leases totaling over 450,000 square feet of space.

This includes nearly 134,000 square feet of Turn-Key datacenter space leased an annual GAAP rate at $179 per square foot, includes approximately 173,000 square feet of Powered Base building, including the 113,000 square feet of suburban London build a suit Davis center and the Powered Base building leased at an annual GAAP rate of $62 per square foot.

In addition, we have 143,000 square feet of non-technical space leased on an average GAAP rental rate of $15 per square foot.

In addition, we signed new leases during the quarter totaling 85,000 square feet.

This includes approximately 57,000 square feet of Turn-Key Datacenter leased on an average GAAP rental rate of $172 per square foot and approximately 28,000 square feet of non-technical space leased on an average GAAP rental rate of $19 per square foot.

Among the Turn-Key Datacenter leases signed in the first quarter included new customers Capgemini in Paris, Neuberger Berman in New Jersey as well as existing customers such as Morgan Stanley and Intercontinental Exchange.

The lease signings are typically slow in the first quarter.

We expect to meet our goal of lease commencements totaling 500,000 to 570,000 square feet of Turn-Key and Powered Base building for the year.

The DLR sales team is currently engaged in direction discussions with over 1.3 million gross square feet of new datacenter prospects in eight of our primary markets which is as much demand as we have seen.

In addition, we have identified approximately 3.1 million square feet of potential requirements seeking space in our markets.

The majority of demand we are seeing is for Turn-Key product reflecting customer capital constraints, our cost-effective design and industry-leading position and our quick time to market.

The most active industry categories represented by recent DLR leases are IT service providers, including major network providers such as NTT, Tata Communications and T-Systems, also includes system interrogators such as IBM and Capgemini, financial services which would be represented by Morgan Stanley, JPMorgan and CIGNA Insurance.

We continue to achieve unlevered NOI returns and this would be return on all costs of approximately 13% to 15% for our speculative development and Turn-Key construction.

We have also been actively renewing leases.

During the quarter, we signed approximately 752,000 square feet of lease renewals, including extensions and holdovers as well as early renewals in a couple of cases.

These leases consist of approximately 14,000 square feet of Turn-Key and an average annual GAAP rental rate of $148 a foot, an increase in GAAP rate of approximately 6% also includes over 474,000 square feet much of it fully fitted out at the datacenter by the tenants and prices Powered Base building.

An average GAAP rental rate of $30 per square foot, reflecting a 37% increase in GAAP rent.

In approximately 264,000 feet of non-technical space or non-datacenter space and an average annual GAAP rental rate of $22 per square foot, a 14% increase in GAAP rent.

Turning to our redevelopment program, we currently are under way on construction projects in high-demand markets in the US and Europe on approximately 196,000 square feet of Turn-Key Datacenter space.

We delivered 176,000 square feet of Turn-Key Datacenter and 220,000 square feet of power based building which includes our suburban London facility, and we delivered those in the first quarter.

Overall, our leasing and product delivery programs are on track for the year.

We have been very successful this year raising capital to further improve our liquidity position and provide additional capital for the growth of our business.

With the benefit of a strong balance sheet, our strategy remains one of selectively investing capital in both our redevelopment program as well as new income-producing acquisitions that will generate appropriate risks adjusted returns for our shareholders.

I would like to turn the call over to our CFO, Bill Stein.

Thank you, Mike.

Good morning and good afternoon, everybody.

I will begin with a discussion of our liquidity position and then review our first quarter 2009 financial results.

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

Since our last call, we have taken a number of additional steps that have added to our liquidity position and provided us with greater financial flexibility to continue to grow our business.

These efforts are consistent with our strategy of accessing pockets of liquidity when market conditions and pricing are favorable.

Year-to-date, we have sourced nearly $432 million of additional capital, which includes over $300 million since our last call.

On April 28, a member of our bank group increased its commitment in our revolving credit facility to $70 million from its previously existing $25 million which upsized our credit facility to $720 million from $675 million.

On April 20, as many of you know, we completed an exchangeable senior debentures offering with a 5.5% coupon and a 20% conversion premium which generated net proceeds of approximately $248.6 million.

The proceeds were utilized to repay borrowings on our revolving credit facility, to fund development and redevelopment activities, and for other general corporate purposes.

On February 13, we completed an underwritten common stock offering of 2-1/2 million shares at a closing stock price of $35.39 per share resulting in approximately $83.5 million in net proceeds.

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

Also on January 6, prior to completion of construction was achieved on a datacenter facility located on London's perimeter.

During the quarter, we drew down an additional 13.7 million pounds or approximately $20 million put and put in place an interest rate swap.

The permanent 42.8 million pound loan is five-year interest only financing with an all-end swap fixed rate of 4.18% and no amortization.

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

In addition, on March 9 we repaid the $96.3 million mortgage with a swapped all-in rate of 5.37% on the 350 [Surmac] building in Chicago with proceeds from our revolving credit facility.

The addition of this property to the unincumbered asset pool will enable us to maintain access to full availability on the revolving credit facility, including the addition of the exchangeable senior debentures to total unsecured indebtedness.

We recently received credit committee approval and are in the documentation phase for secured debt financing on a domestic property that will generate approximately $18 million in proceeds.

The loan has a three-year maturity with the a one-year extension currently at a swapped in all-in rate of between 5.25% to 5.30% with principle amortization on a 15-year schedule.

Our total debt at quarter end was $1.4 billion and our ratio of total debt to market capitalization was 29.7% based on the March 31 stock price of $33.18.

Based on yesterday's closing stock price of $37.41, our ratio of debt still to market cap would be 27.7%.

Our adjusted EBITDA to cash fixed charge coverage ratio was 2-1/2 times and our adjusted EBITDA to cash debt service coverage was 4.1 times for the first quarter.

As of March 31, our weighed average cost of debt, including interest rate swaps, was 5.55% and our weighed average maturity is 5.1 years, including debt extension options.

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

Turning now to our revolving credit facility.

We currently have approximately $96 million drawn on a credit facility and $159 million in short-term investments.

We have approximately $770 million of immediate liquidity through short-term investments and additional funds that can be drawn on our revolving credit facility.

At this capacity, we're fully utilized.

Our pro forma total debt-to-market cap would be approximately 35% based on yesterday's closing stock price of $37.41.

If we were to utilize the full $770 million, we would remain in compliance with the covenants contained in our revolving credit facility, Prudential Shelf Facilities, as well as our outstanding secured debt.

Our remaining expected cap requirements for 2009 are between $298 million and $348 million include $195 million to $245 million of redevelopment CapEx plus portfolio CapEx of $40 million and $63 million of ongoing principle amortization and debt maturities.

Assuming that we fund all remaining cash needs through the end of 2009 on our revolver and do not access any additional secured indebtedness, we would have approximately $420 million to $470 million of liquidity at the end of 2009 without raising capital.

In 2010, we have $13 million of principle amortization and no debt maturing.

As a result, we now have sufficient capital to fund our currently budgeted development program for 2009 and all of our debt maturities for the next three years.

Now I would like to turn to our first quarter 2009 results.

On January 9, 2009, the Company adopted FASB position number APB 14-1 accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement which was required to be applied retrospectively.

Accordingly, net income for all historical periods since the issuance of the 4-1/8 senior exchangeable debentures in August 2006 have been retrospectively adjusted.

For example, the quarters ended March 31, 2008, and December 31, 2008, have been adjusted to include $500,000 and $600,000 of additional interest expense net of capitalized interest and allocation to non-controlling interest respectively.

These adjustments result in a decrease in FFO and a diluted share on unit basis by a penny for the quarters ending March 31 and December 31, 2008.

The first quarter FFO per diluted share in unit was $0.70.

This compares to adjusted fourth quarter 2008 FFO per diluted share in unit of $0.75.

As stated on our last call, fourth quarter FFO also included approximately $0.07 of additional FFO from certain significant items that do not represent ongoing revenue streams.

After adjusting for these items and including the effect of SSP 14-1, first quarter FFO per diluted share in unit increased 2.9% from fourth quarter FFO of $0.68 per diluted share in unit.

Year-over-year, first quarter 2009 FFO per share -- per diluted share in unit increased 22.8% over first quarter 2008 reported FFO of $0.57 per diluted share in unit.

After adjusting for $0.02 per share of additional non-recurring FFO discussed on our first quarter 2008 call and including the effect of SSP 14-1, first quarter 2009 FFO per share and unit increased 27.3% over the same period last year.

Adjusted funds from operations, or AFFO, for the first quarter of 2009 were $42.7 million or $0.53 per diluted share in unit.

This compares to fourth quarter 2008 AFFO of $44.6 million or $0.56 per diluted share in unit.

The diluted AFFO payout ratio for the first quarter of 2009 was 62.3%, up from the fourth quarter of 2008 diluted AFFO payout ratio of 58.9%.

EBITDA adjusted for preferred dividends and non-controlling interest was $86.9 million in the first quarter of 2009, down 3.6% from $90.1 million in the fourth quarter of 2008, and up 33.1% from $65.3 million in the first quarter of 2008.

As previously mentioned, the fourth quarter 2009 financial results included approximately $6.4 million of items that positively affected fourth quarter EBITDA that did not represent on going revenue streams.

Same-store NOI was $94.3 million in the first quarter of 2009, up 4.3% from $90.4 million in the fourth quarter of 2008 and up 28.1% from $73.6 million the first quarter of 2008.

Same-store NOI adjusted for straightline rents and FAS 41 adjustments which we refer to as same-store cash NOI was $81.1 million in the first quarter of 2009, up 5.6% from $76.8 million in the fourth quarter of 2008 and up 28.5% from the $63 million in the first quarter of 2008.

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

For the first quarter, rental revenues increased to $118.1 million, up 6% from $111.4 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 $10.1 million from $8.7 million in the previous quarter primarily due to reversal of professional fee accrual adjustment recorded in the fourth quarter of 2008, higher acquisition expenses, compensation related burden related to FICA and 401(k) as withholding is reset at the beginning of each year and the amortization of the new equity award granted in March 2009.

In terms of the impact that the economy is having on our tenants and our business, our accounts receivable aging and delinquencies remain consistent with historic norms and we believe that we continue to maintain adequate bad debt reserves.

Turning to our balance sheet.

During the first quarter we capitalized 14% or $3.1 million of interest related to construction projects which compares to 19% or $4.3 million in the fourth quarter of 2008.

We capitalized approximately 29% or $3.2 million in compensation expense in the first quarter compared to approximately 25% or $2.4 million in the fourth quarter of 2008.

Total construction work in progress in the first quarter was $268 million, which compares to fourth quarter construction work in progress of $415 million.

As noted in our press release, we are not changing our 2009 guidance at this time.

However, we are increasing our range of redevelopment capital expenditures by $50 million to $325 million to $375 million, which will support our growth in 2010.

Finally, I would like to highlight for you the accounting treatment of the recently-issued exchangeable debentures.

Unlike our previously issued exchangeable senior debentures due 2026, the newly issued debentures do not contain a net share settlement feature and are, therefore, not subject to APB 14-1.

Instead, the newly issued debentures are exchangeable at any time by the holders solely for shares of Digital Realty Trust Common.

Accordingly, we expect that the newly issued debentures will be accounted for using the if converted method to calculate both earnings per share and FFO per share.

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 is from Jordan Sadler with KeyBanc.

Please go ahead.

Good morning, guys.

I wanted to get a little bit of a better handle on the leasing.

Clearly, it slowed somewhat significantly in the first quarter, I think you mentioned that could be seasonal.

Last time we saw a number like that was the second quarter of 2007, I think that low.

Maybe you can give a little color on the backlog and what leasing looks like in the second quarter.

Yes, sure.

If you -- really, it's pretty consistent with other first quarters.

It was higher last year first quarter of 2008, primarily kind of reflecting the lease signing of one particular larger lease, but if you look at what we're projecting for the entire year, we're very confident of making those numbers, that $570,000 at least of Davis Center leases.

We expect to pick up in the second and third quarters to be on line.

Including our current backlog of leases signed, we're actually probably around 75% to 80% of our goal for the year in terms of revenue, new revenues to be achieved.

So, we're seeing very comfortable that between the what has already commenced and what is signed in the backlog we are right on track.

So can you give us just the detail on the backlog in terms of revenues to come on line, commence?

Sure.

Looking at the backlog, there is about 65%, 66% of it will come online in the second quarter, period ending June 30.

About 20% comes on line in the third quarter and then there is a 12% piece that will come on line the first quarter of next year.

What is the number?

Is there 65%, 20%, 12% of -- ?

About 20 million.

Of 20 million is gross.

And that is an annualized number?

Annualized.

Okay.

And then could you guys --

Jordan, slicing another way, if you're looking at revenue that we expect in 2009 --

Yes.

-- from this backlog, 85% of it comes on in the second quarter and 15% in the third.

Okay.

That is just 2009 recognition.

Okay.

And that is not $20 million.

That is probably like $16 million or something like that.

Yes, that is about 10.7.

Right.

10.7?

Yes.

That is what I'm looking at.

That is the full-year contribution?

10.8, that is the 2009 contribution.

Got it.

Then the use of proceeds, it sounds like you have upped the CapEx guidance a little bit which might be back end weighed now, I assume, given the change in the leasing guidance.

Other potential usages of proceeds, you can make talk about the acquisition environment?

We're starting to see income-producing opportunities.

Not many interesting to us because we like to see a little more upside typically, but there are a couple of potential deals out there that we're looking very hard at.

So you will probably see us doing a couple of income-producing acquisitions this year.

That is clearly not in the guidance for capital.

Right.

I don't know.

Did you give Cap acquisition guidance for this year?

You didn't anticipate any in your guidance.

No.

No.

Okay.

And then lastly -- well, are they portfolios or one-off type transactions?

What are you seeing out there?

One-off deals.

And the nature of the seller, their sellers?

Usually investment funds.

Okay.

Lastly, you hired Microsoft's data center guru, Mike Manos, this quarter and you mentioned there might be something to be announced on some expanded services offering or professional services offering and I was curious if you could (inaudible) on that?

Well, it's -- we're looking at working with a couple of different clients right now where we're providing in addition to our own facilities also providing conjunction, consulting and development project management.

And you will see us doing more of that in the future and once Mike is on board, we will have a more formal announcement of our program as we continue to roll that out.

Will this be a fee offering or just going to be beefing up your personnel?

It's a fee offering similar to what we're already doing for a couple of customers and we're providing design and construction management services for them.

Okay.

Thank you.

Thank you, our next question comes from Will Marks with JMP Securities.

Please go ahead.

Thank you.

Hi, Mike, hi, Bill.

Sorry if I'm on a cell phone.

I hope this is clear.

My question and, Mike, I missed the early part of your comments or maybe you said it and then I'll call you back if you discussed, but can you mention a few of your markets, particularly Silicon Valley, maybe Dallas, Virginia, and talk about supply and occupancies in those markets?

In general, we're seeing a pretty limited supply and I think that fits for virtually all of our markets.

Now you will see flyers and announcements of building reported to be functioning datacenters but often times are shell buildings that are waiting for tenants and developers looking to try to match new financial commitments with new tenants and they're not really functioning data centers and so we tracked those kinds of -- that kind of product in addition to the fitted out properties that are actually functioning and as datacenters.

So we're seeing a pretty strong imbalance in our favor in terms of healthy demand and limited supply.

Okay.

Is there -- I mean can you quote a market occupancy rate in the bay area?

We keep that information to ourselves, but I can say that it's -- for functioning datacenter space it's well into the 90s in term of occupancy, as far as we can tell.

And are you seeing any pressure at all on rates for technical space?

Not really.

I mean rates very market-to-market but for our Turn-Key product with the fully dedicated power and cooling infrastructure, you know, rates are holding up quite well.

And any kind of shift to shorter term, demand for tenants of shorter-term leases?

No, no.

No, we're not seeing that.

The lease is still typically in the seven to ten-year range.

Great, thanks, Mike.

That's all for me.

Sure, thanks.

(Operator Instructions).

Our next question from Michael Knott with Green Street Advisors.

Please go ahead.

Hi, guys, a question on long-term capital structure technology.

What do you feel is the right ratio between common equity and preferred equity and debt in your capital structure.

You have obviously done a pretty good job of being conservative thus far in your public life.

What do you think about that?

Mike, we manage our debt based on fixed charge rather than leverage ratios.

Fixed charge covered ratios because the denominator, if you do it on the basis of enterprise value, that changes day-to-day, as you know, and if do you it on the basis of gross book in our case, we feel it doesn't give us credit for these very substantial unleveraged yields we get on development projects of 13% to 15% to 16%, maybe as up as 20%.

So, we focus on fixed charge coverage.

What we said, first of all, the constraint within our revolver is 1.4 times for fixed charge coverage.

What we said is we don't want to see that go below 2 and it's been trending pretty consistently around 2-1/2.

That is taking into account the preferred stock dividends as well as the interest and the amortization when we talk about fixed charge.

Okay.

If you did 500,000 to 575,000 square feet of lease signings this year for Turn-Key and Powered Base, that would be fairly close to 2008, right?

So that is question one and question two would be where would that space come from just to help us understand where that would come from.

You delivered quite a bit of space this quarter, you have 200,000 feet currently under redevelopment.

Can you help us understand where that would come from.

Would some of it comes from the current portfolio?

Sure, that space is all owned space today that is largely -- about half of it has already been delivered or built.

So it's in London, Virginia, New Jersey, Chicago, Dallas, Silicon Valley.

Those are the primary markets.

And you feel pretty confident you can rebound the rest of the year in terms of going from what was it, 60,000 feet or so of turn-key space this quarter?

Oh, yes.

In terms of our leases signed and our backlog, we are probably between 75% and 80% of our goal for the year so in terms of revenues that we expect to recognize.

So, we're right on track.

And does the increased allocation or CapEx budget for redevelopments reflect your perception of greater opportunities or just more comfort with actually allocating additional capital?

I guess you could say they're tied together.

We're deploying more capital to meet demand in markets like Virginia, like Dallas and continue with our project -- two projects in New Jersey that we're leasing.

So it's kind of in response to continued demand for our product.

Okay, thanks.

Thank you, our next question is a followup question from Jordan Sadler with KeyBanc.

Please go ahead.

Hi, I was curious to maybe you see if you guys can characterize the demand in the market today, if it's changed at all, who were the -- where is the bigger demand coming from?

You said it's predominantly Turn-Key users, I think, but what is changing, evolving?

Well, I think we're seeing kind of consistent like we have seen the last couple of quarters where we're seeing a lot of demand from IT service providers and system interrogators who are providing outsourcing services to large corporations and those would be folks characterized by your Capgeminies and IBM's and, Equinix's and Savises, folks like that.

Their businesses are doing quite well in expanding and then in financial services both from banks, fund managers, insurance companies and trading, especially commodity trading and derivatives trading platforms in Chicago and New York, so we're seeing significant amount of demand from those folks as well and then generally large corporates who are, in a lot of cases, consolidating disparate departmental data centers into much more efficient regionalized corporate data centers for their new use.

Is the mix changing at all?

Is the first group becoming a bigger piece of the pie at this point?

Continuing to be.

Right now it's pretty consistent with our historic allocations so, for example, our IT services customers, I believe, are about 30% or 32% of our revenues and they probably are a little bit higher percentage of our backlog or of our funnel, prospect funnel.

Probably financial services has grown.

Financial services is about 10% of our revenues and I would say they're probably about 25% to 30% of our prospect funnel today.

Okay.

And just in the context of the mix shifting more toward Turn-Key, what is your thinking on pricing of Turn-Key specifically as it relates to the useful life of the improvements these days?

Sure, well we view the improvements being the HVAC systems and the primary power and UPS backup power systems as being long-lived investments, 20-, 25-year-type investments in the properties.

If you look in terms of an amortization of that, we're really amortizing effectively within the lease terms in most cases which leads, from our perspective, a very healthy residual value for those improvements and at the end of the lease term where we either renew at what we expect to be continuing growing rates or re-release to new tenants at healthy market rates at the time.

Even with the long-term leases in place, we think the residual value is relatively high for those improvements.

Okay and then just the redevelopment pipeline looks like it's dwindled down a little bit as you have leased up and have not back filled recently in terms of new supply.

Thoughts on that pipeline and prospects to backfill it or if it's no longer attractive?

We do have over a million feet.

We still have 1.2 million feet.

That is a good couple of years of a product that we can bring to the market.

So we'll add incrementally in markets where we need, where we see demand and need more product.

Virginia is a good example where we will likely be adding new product since we're fully leased in that region and looking at other opportunities in some of the other major markets.

It will be incremental.

We don't feel like we need to carry a couple million square feet unless it came with an income-producing project so we'll be very comfortable even having less than a million square feet of redevelopment space because we can add incrementally.

And, lastly, where is the best place to invest your money these days?

The marginal capital, externally.

Is it with marketwise, I'm thinking?

By geographic market?

Yes, yes.

Our 350 Surmac Building in Chicago is very attractive returns, it's a very special building there.

We like -- most of our marks are pretty similar, New Jersey, Dallas, Silicon Valley, Paris in particular are stronger-term markets for us.

Sounds like London fell off the list.

London's good but London is, I would say it's right in there kind of that 13%, 14% but we're probably not seeing some of the pops that we get in some of these other markets that sometimes pop up to the high teens.

Okay.

Thank you.

Great, thanks.

Thank you, our next question is from Srinivas Anantha with Oppenheimer.

Please go ahead.

Hey, Bill, hey, Mike.

Mike, I know in the past you have talked about sale cycles in general have lengthened and you're requiring high layer of approval.

Has that changed or is it still the same today?

No, I think it's pretty similar.

I think positive is that these facilities are very strategic to the users and, thus, this, the buying decision has been pushed up in addition to the dollar amount of investment that tenants are putting into the space themselves.

Even in the case of Turn-Key space, the tenants are putting in tens of millions of dollars in computer equipment and network equipment so think the combination of the high capital investment and the strategic nature of the facilities are driving approvals and visibility at the highest levels of the company.

So it takes longer but at the same time we're able to demonstrate at the highest level of these companies the value proposition of working with DLR both from a initial build cost as well as ongoing technical operations our facilities are cost-effective to operate so it's a little longer progress program but it pays off in terms of commitment and stickiness of the tenant.

And, Mike, when you talk about demand coming from these commodity exchanges or the financial exchanges in general, when you look at even the datacenter guys, neutral datacenter guys like in Equinix or even Savis, they talk about demand, too.

Are you talking about indirectly demand coming to you guys or some of these financial companies coming directly to you guys and looking for space?

No, it's usually on a direct basis.

Often times people who are already customers in our building as well as folks who understand our ability to deliver space in a very timely matter and usually the very large companies that are trading and the exchanges themselves.

Got it.

And, Bill, just one clarification on signed leases versus commenced leases.

Assuming there is a three-month lag between signed leases and commenced leases, and if I'm looking at your signed leases in 2008, just the Turn-Key and Powered Base, you guys, I think, roughly signed 900,000.

If I'm looking in a trailing 12-month basis, it's already much higher than that.

Is there something within your portfolio that gets added in the commenced leases that's not part of the signed leases here?

Some of the signed leases commence at the same time that they sign so that, I am not sure that you can assume necessarily a three-month lag.

For example, shell leases frequently commence when they sign or are very close to that day.

Within the same quarter you will have a commencement and a signing.

Got it.

May be I will up with you offline on this.

Thank you so much, guys.

Thank you.

Thank you, the next question is from [Justin Palamwit] with Robert W.

Baird.

Please go ahead.

Hey, guys, a quick question.

Savis earlier this week was talking about demand and how it sort of picked up near the end of the quarter after being slow at the beginning and they talked about adjusting time purchasing and I was wondering if you had thoughts on that.

If that lowers your visibility going forward, if you see that at all or if maybe that helps you guys given your quick turnaround on a lot of this space?

Yes.

Actually we have been through our kind of industrialization standardization efforts.

We're really working to bring down our delivery times for the Turn-Key product, so this actually -- customers needing space in a short timeframe actually plays very well in our strategy and how we're looking to deliver space and the fact that we also do some space on a speculative basis on a Turn-Key, so we can always have inventory available.

So, and we're working very closely with customers to be able to shorten those timeframes pretty considerably.

I guess otherwise, I mean you're not getting any questions on rent relief from tenants or anything like that?

It's pretty stable?

Yes, yes.

We're not really looking at those types of situations.

I didn't think so.

That is it.

Thanks a lot.

Thank you.

Thanks.

(Operator Instructions).

Our next question is a followup from Michael Knott with Green Street Advisors.

Please go ahead.

Mike, did I mis-hear you in your prepared remarks when you talked about renewed leases being 750,000?

What was the number there?

We had come early -- we had a couple of early renewals of leases that actually expire in 2010.

So, the total number of renewals was 752,000 square feet and that includes extensions, holdovers and a couple of larger early renewals as well.

Okay, may be I'll follow up with you guys offline to try to understand how that foots the page 25.

You said the GAAP increase in the renewals for Powered Base was, I think, 36%?

What was the comparable cash number?

I would have to look that up, but it's fairly close actually in terms of the percentage uplift.

And had that -- if you signed those leases maybe six months ago before Lehman Brothers and changes in the economy, do you think that number would have been much higher or do you feel like that stayed pretty stable even given what the economy's gone through?

No.

I think it's pretty stable.

Okay, do you feel that that is a good representation if someone looks at your lease expiration schedule the next two or three years, do you feel like that is what one should expect, something in that range?

Are those pieces similarly under market?

We're being more conservative kind of on a broad bases over the next couple of years and looking in terms of probably cash rents going up on average 15% to 20%.

Okay.

And then, Bill, the real estate taxes look like they were up quite a bit year over year and up a lot sequentially.

Can you just help us understand that?

Sure.

Basically in the fourth quarter, we actually had a refund, if you will, at our Surmac road facility.

The fourth quarter is a little bit distorted.

There was a $3.1 million downward production in the fourth quarter.

I think that is what you're seeing.

Even year over year it looked quite a bit higher as well?

Well, that -- that should be a function of property additions, investment additions.

Okay.

The last question is on cloud computing, it seems like there has been some articles in the media suggesting confusion over the terminology and what it really means.

I was going to see if you guys could give your best definition and also, more importantly, tell everyone what you think it means for the future of Digital.

Well, there is different aspects to cloud computing and you have software of the service and different applications like -- such as your spreadsheet and word processing and scheduling-type applications that companies like Google and Microsoft and Yahoo!

are delivering over the web, over the cloud, if you will, and a lot of those applications are geared toward small, medium enterprises, your SME market.

We're also seeing a lot of our larger corporate customers are effectively setting up what you might call their own clouds and the corporate enterprise of these clouds computing delivering applications via internet via private network is a very cost-effective way for them to deliver applications out to the field out to their different offices and to be able to lower the cost of hardware on the desktop as well.

And so we're seeing a lot of those types of internal applications and those types of internal corporate clouds, private clouds, if you will, being developed within our facilities, as well as some other online applications that folks can tap into via either private network via internet that the companies are running themselves.

That is a pretty substantial growth there.

And you will be seeing our, as Mike Manos comes on board, he will be having a periodic blog that will address a lot of these kind of questions and characterizations of different computing applications and trends that we're seeing.

Mike, as far as the lease renewals, the 750 that Mike spoke of were signings.

What is in the supplemental on page 25 are commencements.

That is why there are different numbers.

Okay.

Thanks.

Thank you, our next question is a followup question from Jordan Sadler.

Please go ahead.

High, guys, I wanted to check my math on this.

You said that you are about 80% of the way there versus the datacenter commencement guidance for this year and so I'm just -- you did 310 of commencements this quarter.

You said you got 57,000 signed during the first quarter.

Assuming that stuff didn't start, that put you up to 360,000 to 370,000.

That would mean at the midpoint, you would have signed another 60,000 or so square feet of Turn-Key datacenter leases so far in the second quarter.

Is that the right way to look at it?

Yes, so actually the number I was referring to was our projected -- our internal projections for revenue recognized within 2009 and the combination between our signed deals and commenced deals and deals that are signed to be commenced in the backlog, actually about 85% or so of our expected revenues are already in the bag, if you will.

Already executed.

So it would be safe to assume that leasing volume in terms of square footage would trend lower because the mix toward Turn-Key data centers is going higher?

Yes.

I think that, I think that clearly is the trend.

So even though we have seasonal -- somewhat seasonal slowdown in 1Q in terms of volume, 85,000 square feet of leasing, it might not be -- that, just the leasing square footage alone might not be the best way to be looking at it.

I think that is right.

You have to look at the combination of what the -- what the revenues being derived on a per square foot bases.

With that said, we'll very likely do the high-end of that 500,000 or 570,000-foot range of datacenter leases, combined Turn-Key and Powered Base building.

Okay.

Thank you.

Going to hit both, Jordan, revenue and square footage.

Thank you, I show no further questions.

I will return it back to Mr.

Foust for any closing remarks.

Yes, we're very pleased to have you on the line and the good questions that in time you're taking to understand DLR and I'm just very pleased with the great work that our team accomplished on financing and leasing operations and we can expect to continue on with the good program here.

So, appreciate all your time today.

Thank you.

Ladies and gentlemen, this concludes the Digital Realty Trust first quarter 2009 earnings conference call.

If you'd like to listen to a replay of today's conference, please dial (303)590-3000 or 1-800-405-2236 with access code 11125411.

ACT would like to thank you for your participation.

You may now disconnect.