Digital Realty Trust Inc (DLR) 2009 Q2 法說會逐字稿

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

(Operator Instructions).

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

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

Please go ahead, ma'am.

Thank you, and good morning, and afternoon, to everyone.

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

If you have not, you can access in the investor relations section at 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 based on current expectations and assumptions that involve risks and uncertainties that could cause actual outcomes and results that differ materially from expectations.

You can identify forward-looking statements by the use of forward-looking terminology such as believes, will, may, expects, 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 such statements that relate to demand, acquisition, construction activity, financing, liquidity, capital expenditures 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, 2008, 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, 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 second quarter of 2009 furnished to the Securities and Exchange Commission 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'll open the call to your questions.

To 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 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 I review the success of our portfolio operations during the quarter and discuss how we're managing our business and take advantage of opportunities as market conditions continue to evolve.

Following my remarks, Bill Stein will discuss our recent financial accomplishments and our second quarter financial performance.

Digital Realty Trust is a leading owner and manager of technology real estates focused on Datacenters.

Our portfolio currently contains 75 properties totaling 13 million rentable square feet excluding one property, the (inaudible) 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 1.1 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 facility solutions including Turn-Key Datacenter, Powered Base Building and Build to Suite 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 we were recently awarded what we believe to be the first lead platinum certification for a Datacenter in the US for a recently competed 15, 25 Comstock facility in Santa Clara, California.

Moving on to our operating results for the second quarter.

Portfolio occupancy, excluding space held for redevelopment, remained high at 94.8% for quarter end compared to 95.1% at the end of the first quarter and 95.2% for the same period in 2008.

Much of the small decline in occupancy is attributed to newly completed Datacenter space entering the operating portfolio from the redevelopment inventory, most of which is leased commencing the third quarter.

The portfolio actually has more space under lease than ever before with an increase of 31,000 square feet over the first quarter.

During the quarter, we completed one acquisition in Ashburn, Virginia, consisting of four contiguous land parcels, one of which includes an important utility substation.

These total 34.2 acres located adjacent to our existing Datacenter facilities in Ashburn.

The new parcels increase the potential capacity of the campus by more than 400,000 square feet.

Expanding at this site will allow us to achieve significant operating economies of scale and provide sufficient new inventory to meet the ongoing demand for our Turn-Key and Powered Base Building products in this top market.

In June we broke ground on the first phase of construction, a 135,000 square foot facility, and we are on track to complete the base construction in the fourth quarter of 2009.

The new Datacenter facility is being constructed to our design specifications and will ultimately support four 2250 KW Turn-Key Datacenter pods totaling 68,000 square feet of raised floor and approximately 7500 square feet of ancillary office.

The first pod should should come online in early 2010.

In terms of our leasing activity, for the quarter ending June 30 we commence leases totaling approximately 115,000 square feet.

This includes approximately 93,000 square feet of Turn-Key Datacenter, leasing an average annual GAAP rental rate of $166 per square foot and approximately 22,000 square feet of non-technical space and an average annual GAAP rate of $24 per square foot.

In addition, approximately $627,000 of incremental annualized GAAP rental commenced during the quarter for rooftop infrastructure associated with existing Powered Base Building leases.

Year-to-date, we commenced over 400,000 square feet of datacenter including 227,000 square feet of Turn-Key and an average rental rate of $174 per square foot and 174,000 square feet of Powered Base Building and an average GAAP rate of $62 including conversion for foreign currencies.

As stated in our previous press release, lease commencements year-to-date as of June 30 are estimated to contribute approximately $46.8 million of incremental revenue recognized in 2009.

The leases signed year-to-date totaled approximately 185,000 square feet.

This includes approximately 149,000 square feet of Turn-Key Datacenter leased at an average annual GAAP rate of $169 per square foot and also includes approximately three 5,000 square feet of non-technical space leased at an average GAAP rental rate of $20 per square foot.

Since the broad economic downturn began last fall, lease approvals and signings are taking longer, often requiring customer Board-level approval because of the significant total capital commitment involved in these large IT deployments.

In spite of the longer timeframes, we are continuing to see good leasing velocity.

The majority of demand is for the Turn-Key product reflecting capital constraints, our cost-effective design and the quick time to market delivered by DLR.

Currently our sales team is engaged in direct discussions with about 1.2 million gross square feet of new Datacenter prospects in the primary markets, consistent with the level of demand we were tracking a year ago.

Overall, we have identified approximately 4.5 million square feet of potential requirements considering the Datacenters in the next 12 to 24 months.

We continue to achieve unlevered NOI returns on all costs of 12% to 15% for our new speculative developments and Turn-Key construction.

The most active industry categories are IT service providers including companies like Equinix, [Carpathy] and Telex, major network providers such as NTT, BT, and AT&T, system integrators like IBM and Cap Gemini and major financial services firms such as Morgan Stanley, JPMorgan and Signa.

Our lease renewal program is performing quite well and we have seen a number of existing tenants choosing to renew their leases early.

Adjusting for short-term extensions, year to date as of June 30 we signed 471,000 square feet of renewals.

Overall, we renewed 77% of the eligible square footage, 90% of the cash rent and 105% of the GAAP rent.

This includes a small amount of Turn-Key, approximately 21,000 square feet, and an average GAAP rental rate of $163 per foot reflecting an 11% increase on a GAAP basis and a 4% increase on a first-year cash basis over the previous rate.

In addition, we renewed 356,000 square feet of Powered Base Building space and an average GAAP rental rate of $38 per square foot that tends to be a triple net rate reflecting a 29% increase on a GAAP basis and a 14% increase on a cash basis over the previous rate.

Turning to our redevelopment program.

Currently we are under way in construction projects in high-demand projects in Europe over 165,000 square feet of Turn-Key Datacenter and 105,000 square feet of building at our Ashburn campus.

Also during the second quarter we delivered 81,000 square feet of Turn-Key Datacenter of which 75% was leased and 12,000 square feet of Powered Base Building of which 97% was leased.

Please note that we added these leasing statistics to the redevelopment activity table on page 27 of the supplemental report.

Overall, our product delivery is on track for the year.

At DLR, we view ourselves as investment managers with proven acquisition, leasing, development, portfolio management and financing capabilities.

When combined with our expertise in the Datacenter industry, we believe our team possess a unique skill set to enables DLR to grow even in today's challenged economic conditions.

In addition to delivering internal growth via new product leasing through our development and redevelopment program, we should have a potential to increase external growth by a select number of opportunities to acquire income-producing properties, similar to the types of acquisitions we made as we expanded our portfolio in the years immediately following our IPO.

In addition, we have maintained a disciplined conservative approach to manage our balance sheet such that we are well-positioned to take advantage of new opportunities to invest in the growth of our business at attractive risk adjust returns.

We are on track to meet our 2009 guidance expectations and as market presents us opportunities, we will continue to draw upon our investment strengths to generate appropriate risk adjusted returns for our shareholders.

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

Bill.

Thanks, Mike.

Good morning, and good afternoon, everybody.

I will begin with a discussion of our liquidity position, review our second quarter 2009 financial results and then discuss our revised 2009 FFO guidance.

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

We have continued to improve our liquidity by selectively accessing capital when market conditions and pricing are favorable.

Year-to-date, we have sourced almost $480 million of additional capital including the following $48 million since our last call.

A preliminary $30 million commitment from a new lender, which will bring the total commitments under our revolving credit facility to $750 million, the maximum available under the credit facility.

We expect to have that transaction close in August, and the financing of 1201 Comstock in Santa Clara, California, on June 24.

This new $18.1 million loan represents a 60% loan devalue has a three-year maturity with a one-year extension and a variable rate of LIBOR plus 3.5% which is subject to a 4% LIBOR interest rate cap.

Currently, the all end variable interest rate is 3.785%.

Our total debt at quarter end was $1.5 billion and our ratio of debt-to-total capital marketization was 29.5% based on the June 30, 2009, stock price of $35.85.

Based on yesterday's closing price of $39.11, our ratio of debt to total market value capitalization would be 28.1%.

Our adjusted EBITDA to cash fixed charge coverage ratio was 3.1 times and our adjusted EBITDA to cash debt service coverage was 5.6 times for the quarter.

In addition, we provided the net debt to adjusted EBITDA multiple on page 10 as a supplemental under financial ratios which, is 3.9 times for the quarter.

As of June 30, our weighed average cost of debt including interest rate swaps was 5.89% and the weighed average maturity was 4.8 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 on our website.

Turning now to our revolving credit facility.

We currently have approximately $23 million drawn on the credit facility and $44 million in short-term investments.

Pro forma for the preliminary commitment increased to $750 million and our planned early repayment of the 2323 Bryant Street mortgage in early August with proceeds with borrowings under our credit facility, we expect to have approximately $703 million of the immediate liquidity through short-term investments and funds that can be drawn on the credit facility.

If this capacity were fully utilized, our pro forma total debt to total market cap would be approximately 36-1/2% based on yesterday's closing stock price of $39.11.

If we were to utilize the full $703 million, we would remain in compliance with the covenants contained in our revolving credit facility, credential shelf facility and outstanding secured debt.

Our remaining expected capital requirements for 2009 are between $300 million and $390 million and include $150 million to $160 million of redevelopment CapEx, $30 million of portfolio level CapEx as well as $120 million to $200 million for new acquisitions.

We have $61 million of ongoing principle and debt maturities, including the $55 million mortgage at 2323 Bryant Street that matures in November and has an interest rate of 6.04%.

Assuming that we fund all remaining cash needs through the end of 2009 on our revolver, we would have approximately $307 million to $397 million of liquidity without raising additional capital.

In 2010, we have $14 million of principle amortization and no debt maturing.

In 2011, we have approximately $232 million of ongoing principle and debt maturities which includes $172.5 million for the 4.125% Exchangeable Senior Debentures which have a par put in 2011.

Based on the conversion rate for that issuance, the strike price is $32.22.

These debentures are currently trading at 128% of par.

Moving on to our dividend.

Yesterday we announced an increase of 9.1% or $0.03 to $0.36 per quarter for our common stock dividend.

This increase was approved by our Board of Directors a quarter earlier than previous years based on anticipated increases in the Company's taxable income as well as the result of our strong financial performance and the need to meet our 2009 redistribution requirement.

Our policy is to distribute at least 100% of our taxable income to avoid paying federal income tax and we expect the future dividend increases will be based on such policy subject to our Board of Directors approval.

Now, I will turn to the second quarter 2009 results.

The second quarter FFO per diluted share and unit was $0.71, up 1.4% from the first quarter 2009 FFO diluted share and unit of $0.70.

Year-over-year second quarter 2009 FFO per diluted share and unit increased 22.4% over second quarter 2008 reported FFO of $0.58 per diluted share and unit.

As we discussed on our last call, on January 1, 2009, the company adopted FASB Staff position APB 14-1 which was required to be applied retrospectively.

Accordingly, the quarter ended June 30, 2008, has been adjusted to include $0.6 million of additional interest expense related to our 4.12.5% Senior Exchangeable Debentures net of capitalized interest and allocation to non-controlling interest.

This adjustment resulted in a decrease in FFO on a diluted and unit share basis by $0.01 for the quarter ended June 30, 2008.

As we stated in our press release this morning, there are no material non-recurring items impacting FFO in the quarters ending June 30 and March 31, 2009, and June 30, 2008.

Our strong financial performance is the result of operations.

Adjusted funds from operation our AFFO for the second quarter of 2009 was $41.9 million or $0.51 per diluted share and unit.

This compares to a first quarter 2009 AFFO of $42.7 million or $0.53 per diluted share and unit.

The decrease was due to higher recurring CapEx and tenant improvements in the second quarter.

The diluted AFFO payout ratio for the second quarter of 2009 was 64.7% up from the first quarter 2009 diluted AFFO pay out ratio of 62.3%.

EBITDA adjusted for preferred dividends and non-controlling interest was $93.2 million in the second quarter of 2009 up 7.2% from $86.9 million in the first quarter of 2009 and up 35.5% from $68.8 million in the second quarter of 2008.

Same-store NOI was $100 million in the second quarter 2009, up 6% from $94.3 million in the first quarter of 2009 and up 28.4% from $77.9 million in the second quarter of 2008.

Same-store NOI adjusted for straight-line rents and FAS 141, which referred to as same-store cash NOI, was $87.4 million in the second quarter of 2009, up 7.8% from $81.1 in the first quarter of 2009 and up 31.4% from the $66.5 million in the second quarter of 2008.

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

For the second quarter rental revenues increased to $125.4 million, up 6.2% from $118.1 million in the previous quarter.

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

G&A remained flat during the quarter at $10 million compared to $10.1 million in the previous quarter.

Consistent with what we reported on our last call, our accounts receivable aging and delinquencies remain in line with historic norms and we believe continue to maintain adequate bad debt reserves.

Turning now to our balance sheet.

During the second quarter we capitalized 9% or $2.1 million of interest related to construction projects which compares to 14% or $3.1 million in the first quarter of 2009.

We capitalized approximately 27% or $3.5 million in compensation expenses in the second quarter compared to 29% or $3.2 million in the first quarter of 2009.

Total construction work in progress in the second quarter was $219 million which compares to first quarter construction work in progress of $268 million.

As noted in our press release, we are narrowing the annual guidance range of FFO per diluted share and unit to $2.80 to $2.90.

This revision is based on our existing assumptions and an additional assumption that we will close acquisitions of income-reducing properties in the range of $120 million to $200 million at average cap rates between 10% and 12%.

This revised guidance represents projected FFO growth of 7.7% to 11-1/2% over FFO per diluted share and unit of $2.60 for the year ended December 31, 2008, adjusted to give retrospective effects of FASB Staff position APB 14-1 as described earlier.

As discussed on our fourth quarter 2008 call, FFO per diluted share unit will include an additional FFO from certain significant items that don't represent ongoing revenue streams.

After adjusting for these items, our revised 2009 guidance represents projected FFO growth of 13.8% to 17.9%.

This concludes our formal remarks.

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

Operator.

Thank you, sir.

(Operator Instructions).

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

Please go ahead.

Good morning.

I wanted to just touch on leasing velocity having listened to some of your piers, tenants' conference calls so far this earnings season.

Sounds like they were seeing an acceleration of demand of business into the second half with increased capital spend estimates and so forth.

I'm just wondering if that is parallel in your universe?

Yes, Jordan, I think we're seeing definitely significant uptick in the second quarter over the first quarter and I think that general pace will continue through the rest of the year that we're experiencing in the second quarter and into the third and fourth.

Meaning the pickup or the pace in the second quarter will stay flat?

The pace in the second quarter will remain fairly flat.

Okay.

Which is a significant uptick from the first quarter.

Okay.

And that -- so is that the -- would you say you're seeing the same acceleration in demand incrementally beyond what you saw in the second quarter or early in the second quarter or not so much?

Certainly we're seeing where demand increased significantly from the fourth quarter and first quarter.

So we're back to, we're tracking about 1.2 million square feet of current requirements that we're bidding on that are in either LOI or proposal stage and that is similar to where we were a year ago before the major economic slowdown.

As far as we can tell, we kind of recovered to a pretty robust prospect funnel and we're starting to see more new prospects every day, so, we're tracking well over 4 million square feet of potential rain storms that are out there for probably the next 12 to 24 months in that kind of timeframe.

It's pretty healthy.

Okay.

And then on acquisition, you can maybe give us a sense of time something types of sellers?

Is it Turn-Key versus shell?

What have you?

Sure.

We really, on the income-producing properties, those tend to be properties that are investor-owned, often times part of a portfolio and might be an outlier in terms of the type of product relative to other properties in the portfolio.

Off the ones we're looking at now are generally single-tenant buildings.

In some cases there are somewhat shorter term leases remaining that we're very comfortable underwriting and thus being able to achieve somewhat higher cap rates than you would normally see, and also looking at per square foot numbers that while we view as far below replacement costs, might be challenging for your typical suburban office investor to underwrite.

I think those combination of things give us a very good opportunity to acquire some of the buildings, keeping in mind it's a rifle shot.

There are a handful of opportunities out there.

We think there will be a charger number as we go through the rest of the year and in 2010.

So, it's encouraging we see our opportunities for external growth kicking in.

Jordan, I wouldn't characterize the properties as distressed.

I would characterize some cases as the seller's circumstances as being potentially distressed in other parts of their portfolio and so these assets are among the more liquid assets in some cases.

There is some lease roll exposure perhaps?

Yes, in certain instances, that is true.

And (inaudible) the Turn-Key or shell mix?

These, the income-producing properties are all built out Datacenters so they would be larger Turn-Key.

Now, the rent often times reflect the fact that the tenant put the improvements in.

Right.

Not the investor.

The tenant-owned improvement.

A shell acquisition for you guys.

Yes, but the important thing is not shell.

Those are fully-operating datacenters that infrastructure that we consider important to us, the power, cooling, UPS systems, those are integral to the building and pertinent to the building.

We feel we have an opportunity to acquire very good operating assets at 60%, 50% of replacement costs.

Okay, but just to be clear, you probably would be buying, in terms of versus the improvement, you would be buying shell and getting 10% to 12% improvement on shell in terms of your outlay.

Right.

We would -- but the feel, the building effectively owns that infrastructure.

If you had a lease term, the improvements revert to the owner.

Okay.

I got it.

Thank you.

Thank you, the next question question comes from the line of Michael Bilerman with Citigroup.

Please go ahead.

Hi, this is Mark [Montana] on behalf of Michael.

I have a quick question with regards to the hiring of Michael Manos back in April.

When that was announced, you mentioned he would be spearheading the launch of the new professional services offering that you were planning to unveil it shortly.

I was wondering if you could provide an update on this if at all possible?

Sure, I can give you a background.

Great.

This is a pod architecture services where continue providing services under a more formalized product offering similar to what we have done in the past for several very large international companies, and that is working with the customer on the Datacenter design, implementation, project management and, in some cases, facility management on an ongoing basis.

We'll be rolling that out in a more formalized manner in the near future and we're completing the documentation of contracts with first, customer under the new formalized program here very shortly.

We think it's a service that actually our customers have come to us and asked us for and, which really prompted us to look at this on a more formalized systematic basis and among Mike Manos' responsibility, he'll be spearheading that and tremendous experience in market-leading position in the Datacenter world and doing a great job of putting that together for us.

Great and then shortly, does that mean next quarter or this quarter and, also, when do you expect revenues to start hitting the financial statement from this?

It will be, we'll be announcing it this quarter.

We should have revenues in the fourth quarter.

Okay, great.

Thank you very much.

Thank you, our next question comes from the line of [George Arbach] from ISI Group.

Please go ahead.

Hi, good morning.

Bill, I was wondering if you could give us some color on the market for secured debt (inaudible) loans.

As the overall markets improve, are you seeing more of an appetite then lenders for your product type and also where are interest rates and loan to value ratios in the secured market today?

We are seeing greater interest on the part of the secured lenders.

I wouldn't say it's overwhelming but we're seeing greater interest.

We are seeing it from different pockets as well.

We are seeing it from certain commercial banks and we're seeing it from some life companies, we're seeing it both in Europe and the US.

The loan devalues in the US, I would say, on the larger deals, so if you're talking $100 million and if you want to get some term, which we'll call it over five years, call it seven to ten, you're in the 45% to 50% loan devalue range.

I think the interest rates are 8% plus or minus but roughly 8%.

In Europe, the terms actually that we're looking, we're looking at a couple of deals in Europe right now where the advanced rates are a little bit better, mid-50s to 60 and one deal is a LIBOR plus 2.4 and the other is LIBOR plus 5, so clearly much higher, so that represents some unusual characteristics of the asset.

And then, of course, we just closed on the Comstock loan which was a LIBOR plus 3-1/2 at 60%.

Again, that was an $18 million deal, less than five years under $25 million, so I think if you're under 25 and you're under five, you're going to get better pricing than if you're probably north of 25, certainly north of 50 and certainly five plus years in term.

Does that answer your question, George?

That is it.

Thanks for the color.

Sure.

Regarding the acquisition language in your guidance, should we expect you'll fund part of the cost with the additional equity or at this point are you comfortable adding more leverage?

Well, we certainly have a liquidity to fund with cash.

That is an advantage we have that we can offer to the seller.

If they don't want our equity, they don't have to take it.

We're flexible.

If we find a seller that wants to diversify its position in a Datacenter world and still wants to participate in the Datacenter industry as a whole by owning our stock, we'll issue units or stock.

And, of course, we can offer the units allowing the seller to defer taxes, which is a nice feature as well.

Right.

Finally, I'm sorry I missed it earlier.

What was the construction in progress figure at the end of the second quarter?

About 185, I think about 189-- 186,000 square feet.

Okay.

That's great.

Thank you very much.

Sure.

Thank you.

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

Please go ahead.

Hi, guys.

Just quick on the acquisitions.

You sound pretty confident you are going to do these.

Should we expect announcements soon or are there more coming behind these also as a separate question?

Probably here announcements, I would say, early fourth quarter.

Maybe sooner, but early fourth quarter.

Okay, is it safe to assume they will be somewhere in the North American markets that you're currently in?

That's correct.

Okay.

And do you feel like these are one-off opportunities from sellers with unique liquidity positions or do you feel like this is just the first wave of opportunities that you will have in the next couple of years?

I think on a rifle-shot basis, which is kind of how we have always acquired the income-producing assets, I think we will see a growing number of opportunities keeping in mind that we're going to stay focused on the Datacenter product and not look to deviate from our expertise.

Also focused on pricing discipline and underwriting.

Okay and then just one more question, if I could.

Sort of tagging on Jordan's question, I think, of demand.

You said you expect the pace to remain flat from 2Q levels.

Look at specific, quantifying your lease signings you announced for Turn-Key space.

The 2Q numbers, obviously, they're above the 1Q number, still below what was signed in 4Q.

I'm curious, do you expect that sort of I think it was 92,000 feet this quarter you that signed.

Do you expect that number to remain flat over the next few quarters?

I think in terms of the Turn-Key number that will go up as we go through the next couple of quarters and also keep in mind that the turnkey is the premium rent so the revenues and NOI generated from smaller square footages are disproportionate in comparison to the Powered Base Building product.

Those signings for Turn-Key should increase.

Okay.

Thanks.

I'll get back in the queue.

Thank you, our next question comes from the line of Susan [Guietierez] from JMP Securities, please go ahead.

Thanks, this is Will Marks for Susan.

Hi, Bill and Mike.

I had a question on ROI's on developments.

You're shifting a little bit to acquisitions, I guess, there are good opportunities.

I assume the ROI's on development haven't come off a little bit.

Are there lower labor costs involved?

Higher rents?

Anything that you can help me with there.

I think our returns, our NOI returns are pretty consistent with what we have been seeing over the past year or so.

In terms of construction costs, our engineering schemes and volume procurement is helping to drive down costs and our team is continually working on that, I say we're probably down 10% or so from last year on a year-over-year basis in terms of construction costs and we're working on through our industrialization, standardization of components that go in the Datacenter, we're looking to drive down the costs even more.

Commodity prices for things like copper are all over the place, down and now back up again.

That is a bit of a wild card.

We are mitigating the costs through our volume.

Okay.

Great.

Will, the other part of that is we have seen a lengthening of the sale cycle.

We mentioned that before and we include the additional carrying costs attributable to that longer sales cycle and the denominator.

Okay.

That makes sense.

Okay.

One other question on the (inaudible) construction in progress balance and square footage, do you have that in dollars?

I think we just gave you $219 million.

Okay, sorry I missed it.

Thanks, Bill.

Yes.

Thank you, Mike.

Thank you, our next question comes from the line of Dave Rodgers with RBC Capital Markets.

Please go ahead.

Hi, this is [Mike Caro]l here with Dave.

How do you characterize the risk return tradeoff between your revenue-generating acquisitions and your development activities?

Inherently with an income-producing property you don't have the construction and lease up risk.

With that said, in the markets that we're developing in we're very comfortable on underwriting the risks because have a very good handle on demand.

Before we embark on new development projects, we pay close attention to market demand from customers that we have identified and are talking to as well as the potential competitive set is.

We're fortunate to be in a situation where there is very, very little built out Datacenter supply in the markets.

So, we're a dominant provider of those facilities because we're building out the full Datacenter space and with the more regional developer.

That mitigates the risk as well.

I think the, kind of of on a return basis, our returns for income-producing properties are somewhat less than on the development assets and development assets and that reflects the fact that primarily we don't have the lease up risk.

It would also reflect the fact, David, that we're buying at a discount replacement.

Okay.

Can you quantify how many developments you will start in the back half of the year?

That is -- we have got pretty specific plans, but that is not something we want to single to the market at this point.

Well, I guess I'll ask another way.

What would make you more comfortable to accelerate the development starts?

What in the marketplace would have to have that?

Well, as we continue to see demand, right now we're very active in the markets that we deem to be the high-demand markets and we're active with products in Paris, London, Virginia, northern New Jersey, for the New York metro, Dallas, we're looking at probably commencing another project soon in Silicon Valley as we're 100% leased here in this local market.

So we do have a lot of activity that will be able to drive that internal growth.

Okay.

Thank you.

Thank you.

We have a followup question from the line of Jordan Sadler with KeyBanc Capital Markets.

Please go ahead.

Thanks.

Bill, do you have the backlog signed but not yet commenced?

I do, Jordan.

I had a feeling you might ask that.

Excellent work.

What do you got?

Roughly half of the signed will commence in the third quarter.

And then --

Of the stuff that is signed in the second quarter?

Yes.

Okay.

And then nothing of that is commencing in the fourth quarter.

And then about a quarter in the first quarter of next year and a quarter in the second quarter of next year.

There was nothing from prior quarters though that hadn't started like 1Q or 4Q?

Pardon me?

There was nothing signed in prior quarters, quarters prior to the second -- ?

That is everything, Jordan, actually.

That is everything?

Yes.

What is the total value for contribution of this year?

For contribution this year about 6, a little over 6.

In subsequent periods.

That is the contribution from this year for the stuff that is signed but not commenced?

Right.

Right.

Okay.

Would that include a -- it appeared that [Savis] signed a significant lease in Weehawken they announced the other day.

Would that be in your existing center?

No, that is in a building that is adjacent to our building and previously owned by a large financial institution.

Okay.

They're staying in your building though.

Is there any expiration there?

No, they're very, very full -- fully occupied and with major customers in our building.

Could you just clarify, did you say that lease renewals this quarter were 471,000 square feet, was that this quarter or year-to-date?

That was year-to-date.

Did -- I think I need to follow up with you offline.

Did you have a different number that you said in the first quarter?

Was it less than that?

Yes, because I -- we're including in the 471,000 square feet of renewals, that is the total for both quarters.

I thought you said 750,000 square feet in the first quarter.

I must have heard that wrong.

I'll follow up with you afterward.

Okay.

Just lastly, on the acquisitions just coming back quickly.

What would be the vintage of these buildings and if you were to inherit the improvements on the upcoming lease role, would there need to be sort of additional improvements to release that space?

No.

It would be very little to none as we underwrite these.

These buildings are contemporary and we have good power densities and UPS systems.

We would be very pleased.

I don't think we'll have a chance to lease to new tenants because I think the tenants that are in there will be there a long time, but we would be in very good position if we had to release them.

Okay, perfect.

Any lease term fees in the number this quarter, Bill?

About $80,000.

Okay.

Thank you.

Thank you, our next question comes from the line of Steve Benyik with Credit Suisse.

Please go ahead.

Hey, guys, just on the total bucket of Turn-Key development space that could be leased up for the balance of the year, I guess when you look at page 27 and you look at 32% lease of that Turn-Key bucket implies you have already signed 59,000 square feet of that and have about 126,000 that can be leased up.

When you add that to what is currently vacant, what is the total bucket of Turn-Key space you guys could be leasing?

I'm sorry, Steve, could you repeat the question?

When you looked on page 27 of your supplemental --

Okay.

-- and you look at the amount of turn-key space under construction.

Right.

About a 32% lease on the 186,000 square feet

Right.

-- implying that you have about 127,000 square feet of space that is currently under construction that is Turn-Key that could potentially be leased up by your end.

Yes, sure.

I was wondering what portion of the currently vacant space in the portfolio, is there a space in addition to that space that could still be leased up in the back half?

I think we have another about 70,000 feet or so of Turn-Key inventory that is not yet leased.

And that would --?

Might be closer to 80,000 feet built and not yet leased.

Those two together you have 200,000 square feet of Turn-Key space that could be leased up.

You're looking probably closer to a number about 100,000 square feet of Turn-Key space that could be leased in the back half, which is similar to what the volume of leasing was in the 2Q.

Is that a fair statement?

Yes, I think at least.

Have a couple hundred thousand feet.

Maybe, Bill.

A couple hundred thousand square feet that you could lease up.

Correct.

And there could be additional Turn-Key space that is not there and probably not going to be done by year-end anyway, correct?

What we have under construction now will be added this year.

Right.

Will be available to lease this year.

Okay, what was the actual CapEx spend in 1Q and 2Q on redevelopment?

Think it was over $200 million.

And then I guess could you comment on the rise in TI 's, LT's for the quarter and whether that is a trend we should expect to continue?

That was related to one deal.

It was an existing tenancy where we provided TI 's to that tenant.

Most of it was, about $6 million, a little over 6, related to one deal and we provided the TI's and are earning a return on the TI's.

That was part of the deal initially.

All right, a final question on the revised guidance change range and what you have announced so far for the year in terms of Turn-Key leasing, it seems like it's pretty front-end loaded just given the 1Q, 2Q that you completed.

Does the revised guidance range take into account the additional income that will be recognized for the -- during the course of the year because of the faster-paced leasing in the first half?

It includes that, it includes our acquisitions that we are projecting to complete before the end of the year which will have contribution this year, albeit small relatively, and the ongoing leasing that we see in our funnel.

And on the G&A front when you look at, I think the guidance you guys originally had given was $47 million, correct me if I'm wrong.

Looks like you're turning far below that year to date.

Is that something we can expect to come in lower?

I think we'll come in lower than that.

You have to see how much lower it will be.

We have some expenditures that are somewhat back end but we're hoping, expecting to be less than the $47 million.

Great.

Thanks.

Whether the savings in the first and second quarter are permanent or whether they're deferrals and we're digging into that right now.

Thanks.

Thank you.

We have a followup question from the line of Michael Knott with Green Street Advisors.

Please go ahead.

On the lengthening of the sales cycle, can you remind us what the time used to be from sort of first discussion with a tenant on a Turn-Key space to lease signing what that sort of used to be and what it is now?

Sure, tended to be roughly four to six months and now we're seeing that six to nine months, pretty typical.

And then on the leasing percentages on the back, on page 27, the redevelopment activity, thanks for adding that by the way.

Can you just comment on how the 75% leased on the delivered space and the 32% preleasing on the under construction compares to prior periods since we don't have that data before this quarter?

I don't have it.

Just your sense, not necessarily quantified.

It doesn't feel unusual or seems -- it feels pretty consistent.

I agree with that, Michael.

It feels consistent to me also.

Okay, and then the same-store NOI increase of 28%, is there any way to help us think about what that was on the same capital basis if you were to try to strip out the impact of redevelopment or other sort of one-time things?

How that would -- how that number would sort of shake out?

Well, I mean, I can't give you a number.

Obviously, the leases are struck with 3% annual bumps and we have the renewals that Mike talked about.

That would be your same-store component.

Okay.

And on the renewals, can you just give us -- can you remind me, I might have missed it earlier, the mark-to-market on the Powered Base was 14%?

Can you just remind me of those numbers and what the weights were and I think the aggregate number was 471,000 feet?

Yes, and we renewed the Powered Base Building space rate equivalent average $38 on a GAAP basis and that was a 29% increase and then the increase on a cash basis first year of renewal over the previous rate was a little over 14%.

What was that on the Turn-Key again?

On the Turn-Key it was a very small amount of Turn-Key, only 21,000 feet.

The average annual GAAP rental rate $163 a foot and that is 11% increase on a GAAP basis and a 4% increase on the first year cash and those were small dataset, short-term leases primarily that we had built and so represent fairly recent renewals there and in one case kind of a restructuring of a lease to accommodate some more space that a service provider was taking.

You feel like the 14% cash rent roll-up is indicative of sort of your overall portfolio mark-to-market or is it less than --?

No.

I think on an overall basis our estimates are somewhere in the mid to high teens.

My last question, I thought I read something about Equinix building out in Singapore.

Where do you guys stand today on future expansion beyond North America and Europe?

We're looking at opportunities in different markets and in Asia and south Asia and India as well where we can potentially join venture with a regional operator who might be kind of a customer as well as a partner would be ideal and we're exploring those kinds of opportunities but our real focus, we want to focus on those eight or ten markets with capital and resources primarily in US and four or five major European cities.

That's where we think we'll have the biggest opportunities for returns for us.

Thanks.

Thank you.

(Operator Instructions).

We have a question from the line of Srinivas Anantha, please go ahead, with Oppenheimer and Company.

Good afternoon, thank you.

Mike, I know I think in your comments you mentioned about your pipeline of opportunities that you currently either in NOI or some form of discussion.

Maybe if you could give us a breakdown, like what percentage are for Turn-Key as opposed to Powered Base Building.

Thank you.

Sure.

The great majority, I would say probably 75%, 80% is for Turn-Key.

Okay.

And it might even be going higher this quarter.

All right.

And in the past you also used to give us a number where you used to track your opportunities over the longer-term period.

Has that number, in terms of square feet, increased with the recent stabilization that you guys are beginning to see or has it remained relatively constant?

Let's see.

Do you mean kind of what our prospect funnel looks like in terms of volume?

Yes.

Yes.

It's probably back to where it was a year ago after a big slowdown at the end of last year and the beginning of 2009, so I think that current funnel of 1.2 million feet and kind of that further-out prospect group that's looking for sites to satisfy in 12 to 24 months, which we're tracking well over 4 million feet is probably reflective of where we were a year ago and I think, our sense is that those prospects, the numbers are growing.

Got it.

And with respect to pricing, I know you signed Turn-Key space at $167 which is up from year-over-year but it's slightly down from 1Q.

Is this more like one-off deal that happened or do you still think the pricing is relatively stable?

The pricing is definitely stable.

What you see in some of these variations, you have variations between markets, some markets have substantially higher rates than others and also currency fluctuations and whether or not we have sites in different markets.

Okay.

And I guess that's pretty much it.

Great, thanks a lot, guys.

Great.

Thank you.

At this time, I am showing no further questions in my queue.

I would like to turn my call over to Mr.

Foust.

Thank you, everyone, for participating.

A little bit longer call this time but we had a lot of good things to discuss and really appreciate your attention and focus on DLR and I am very pleased on behalf of our team here for the great work that everybody's doing here and in the great continued growth that we have.

Thanks very much.

Ladies and gentlemen, that does conclude the Digital Realty Trust second quarter 2009 earnings conference call.

If you would like to listen to a replay of today's conference, please dial -303-590-3030 or 1-800-406-7325 with the access code of 4096189#.

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