Digital Realty Trust Inc (DLR) 2009 Q3 法說會逐字稿

I'm afraid we me have had a little technical difficulty and I'm hoping you can hear me now.

Good morning and good afternoon to everyone in any case.

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

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

You can also identify forward-looking statements by discussions of strategy, plans, intentions, future events or trends or discussions that do not relate solely to historical matters, Including such statements that relate to demand, acquisitions, construction activities, cost savings to customers, investment opportunities, future contractual compliance, financing, liquidity, capital expenditures and the Company's expected financial results for 2009.

For a further discussion of the risks and sun turns 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 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 third quarter of 2009, furnished to the Securities and Exchange Commission.

And this information is available on our 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.

(Operator Instructions) I will now turn the call over to Mike.

Great, thank you, Pamela.

Welcome to the call, everyone.

I'll give with a brief overview of Digital Realty Trust.

Then, I'll review the success of our portfolio operations during the quarter.

Following my remarks, Bill Stein will discuss our recent financing accomplishments, our third quarter financial performance and our 2009 revised guidance.

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

Our portfolio currently contains 78 properties now, totaling $13.8 million rentable square feet.

And this excludes one property, the Westin Building in Seattle.

That's held as an investment in an unconsolidated joint venture.

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

The portfolio also includes approximately 1.9 million square feet of space held for redevelopment, which continue to be a very important source of growth for the Company.

DLR provides a variety of datacenter facility solutions, including our Turn-Key Datacenter, our 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 1000 firms.

We are recognized as an industry leader in datacenter design and investment.

Moving on to our operating results for the third quarter.

Portfolio occupancy, excluding space held for redevelopment, increased slightly to 95.2% at quarter end, compared to 94.8% at the end of the second quarter and 95.2% for the same period in 2008.

The increase in occupancy is attributed to leases commencing during the quarter on newly completed datacenter space entering the operating portfolio.

We completed three significant acquisitions during the quarter.

In September, we acquired a controlling joint venture interest in a very well located redevelopment project in suburban Dallas in Richardson, Texas.

Formerly known as Collins Technology Park, the new Digital Realty Datacenter Park Dallas consists of seven very robust buildings, totaling approximately 795,000 square feet of potential park-based building space.

These buildings range in size from 15,000 feet to 250,000 square feet.

The 69-acre property also contains developable land sites for ground-up build-to-suits and our own private utility substation with 40 megawatts of immediate power availability and which is really expandable up to 125 megawatts.

With this high capacity substation in place, we are supplied with power at rates generally 25% below most customers in the Dallas region.

Combined with our industry leading datacenter construction costs, we offer tenants very low cost of occupancy in the Dallas region.

In addition, we acquired 444 Toyama Drive, a highly improved 42,000 square foot, 100% leased datacenter, located in Sunnyvale, California.

We also acquired the remaining non-controlling interest from our partner in 1525 Comstock Street.

This is a fully leased 42,000 square foot property, located in Santa Clara.

The two stabilized investments yield an annual NOI of $5 million and were acquired for a total purchase price of approximately $43.9 million.

The blended cash cap rate is consistent with our 2009 guidance of 10% to 12% given on our last call.

In terms of our leasing activity, for the quarter ended September 30, we commenced leases totaling approximately 101,000 square feet of space.

This includes approximately 90,000 square feet of Turn-Key Datacenter, leased at an average annual GAAP rental rate of $187 per square foot.

And we leased approximately 11,000 square feet of non-technical space, at an average GAAP rental rate of $25 per square foot.

Year-to-date, we commenced over 666,000 square feet of datacenter.

This includes 317,000 square feet of Turn-Key, at an average GAAP rental rate of $178 per square foot.

And includes 174,000 square feet of Powered Base Building, at an average rental race of $62, including conversion for foreign currencies.

In addition, we commenced 176,000 square feet of non-technical space, at an average GAAP rental rate of $16.

Lease commencements, year-to-date, as of September 30, are estimated to contribute approximately $54.2 million of incremental revenue recognized in 2009.

Leases signed year-to-date totaled approximately 278,000 square feet of space.

This includes 216,000 square feet of Turn-Key Datacenter, leased at an average GAAP rental rate of $176.

5,000 square feet of Powered Base Building, leased at an average GAAP rental rate of $32 per square foot.

And approximately 57,000 square feet of non-technical space at an average GAAP rental rate of $20.

We continue to see longer sales cycles for lease approvals and signing, often requiring customer board level approval because of the significant total capital equipment involved in these large IT deployments.

In spite of the longer lead times, we remain on track to meet our 2009 expectations and we see very positive leasing momentum heading into 2010.

As reflected in our year-to-date results, the great majority of demand is for the Turn-Key product, reflecting customer capital constraints, also reflecting our extremely cost effective design and the very quick time to market delivered by DLR.

Currently, our sales team is engaged in direct discussions with over 1 million gross square feet of new datacenter prospects, in nine of our primary markets.

And this is consistent with the level of demand we were tracking over a year ago.

Overall, we have identified approximately 4 million square feet of potential requirements requiring new datacenter space in our markets.

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

Consistent with our last reporting period, the most active industry categories are IT service providers, represented by Equinix, Telex and major network providers.

System integrators such as IBM.

And financial services firms such as [Namora.] Our lease renewal program is performing quite well, with lease rents increasing on average.

And we continue to see a number of existing tenants choosing to renew their leases early.

During the quarter, we signed 418,000 square feet of renewals.

Bringing the year-to-date total, after adjusting for short-term extensions, to approximately 1 million square feet.

Overall, we've renewed approximately 86% of eligible square footage, 111% cash rent, and 112% of GAAP, rent for those renewals.

This includes approximately 27,000 square feet of Turn-Key space at an average GAAP rental rate of $146, reflecting 8% increase on a GAAP basis and 4% increase on a cash basis over the previous rates.

These statistics also include 751,000 square feet of Powered Base Building datacenter space, at an average GAAP rental rate of $32 per square foot.

This reflects a 30% increase on a GAAP basis and a 17% increase on a cash basis over the previous rates.

Turning to our redevelopment program.

We are currently underway in construction projects in high demand markets in the US and Europe on approximately 143,000 square feet of Turn-Key Datacenter space in several locations.

47% of that amount is leased.

And we're underway on 135,000 square feet of new Powered Base Building at our Ashburn, Virginia campus.

During the quarter, we delivered 59,000 square feet of Turn-Key space and 8,000 square feet of Powered Base Building, all of which is 100% leased.

We currently have approximately 66,600 square feet of Turn-Key space that has been completed and is available for lease.

As a result of our strong balance sheet, operating platform and technical expertise, we continue to see attractive investment opportunities that have the potential to contribute to our earnings and the growth of our Company.

As discussed in our last call, we expect income producing acquisitions to take a larger role in our investment strategy, complementing our internal growth through leasing and the development program.

In addition, we have signed our first POD Architecture services design and project management contract with an existing customer to develop its new corporate-owned facility.

As a Turn-Key customer already, this major financial services firm has already experienced the benefits of our cost effective POD design and our operational capabilities.

They will recognize additional savings of tens of millions of dollars in both construction and ongoing operating costs for this new project.

We believe this is a powerful value proposition that, when combined with leased space and DLR-owned buildings, will further deepen our relationships with the enterprise customers.

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

Bill?

Thank you, Mike.

Good morning and good afternoon, everybody.

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

And finally, discuss our revised 2009 FFO guidance.

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

In addition to the new $30 million commitment under our revolving credit facility that we discussed on our last call, we closed two important secured mortgage financings for properties in our European portfolio.

In mid-October, we closed a five-year, GBP23.8 million loan secured by two properties located in the United Kingdom, Cressex 1 in suburban London and Manchester Technopark in Manchester.

The interest rate is 5.68%.

The second is a five-year EUR30 million interest-only secured mortgage financing for Clonshaugh Industrial Estate 2, located in Dublin, Ireland.

This loan is scheduled to fund in early December.

Based on the current swap rate, the all-in interest rate is approximately 7.37%.

Year-to-date, we have sourced $562 million of additional capital and are continuing our efforts to identify and selectively access capital when capital market conditions and pricing are favorable.

Related to these efforts, this morning, Moody's issued a press release announcing that it has rated DLR a Baa2 credit.

We are currently awaiting ratings from the other agencies and plan to utilize our ratings to access the unsecured corporate bond market at the appropriate time.

Access to the investment grade unsecured debt market will be an important component of our future funding strategy and will further differentiate us from our competitors.

Our total debt at quarter end was $1.6 billion.

And our ratio of debt to total market capitalization was 26.5%, based on the September 30 stock price of $45.71.

Based on yesterday's closing stock price of $44.57, our ratio of debt to total market value capitalization would be 26.9%.

Our adjusted EBITDA to cash fixed charge coverage ratio was 2.9 times.

And our adjusted EBITDA to cash debt service coverage was 4.9 times for the quarter.

Net debt to adjusted EBITDA multiple was 4 times for the quarter.

As of September 30, our weighted average cost of debt included interest rate swaps of 5.5%.

And the weighted average maturities were 4.6 years, including debt extension options.

A description of how we calculate these ratios and the other non-GAAP financial measures I discussed today can be found in our supplemental operating and financial data report furnished to the SEC and available on our Website.

Turning now to our liquidity.

We have approximately $691 million of liquidity through short-term investments, funds that can be drawn on our revolving credit facility and pro forma for the Clonshaugh loan funding in early December.

If this capacity were fully utilized, our pro forma total debt to market capitalization would be approximately 34.5%, based on yesterday's closing stock price.

And pro forma, our net debt to adjusted EBITDA would be 5.8 times.

If we were to utilize the full $691 million, we would remain in compliance with the covenants contained in our revolving credit facility, Prudential shelf facility and outstanding secured debt.

Our remaining expected capital requirements for 2009 are between $210 million and $225 million.

And include $85 million to $95 million of redevelopment CapEx, $25 million of portfolio level CapEx, as well as $100 million to $105 million for new acquisitions, net of debt to be assumed.

We have $3.2 million of ongoing principal amortization and no debt maturities for the remainder of 2009.

Assuming that we fund all remaining cash needs through the end of the year on our revolver, we'd have approximately $466 million to $481 million of liquidity without raising any additional capital.

In 2010, we have $15 million of principal amortization and no debt maturing.

In 2011, we have approximately $233 million of ongoing principal amortization and debt maturities, including $172.5 million for the 4 1/8 exchangeable senior debentures, which can be put to the Company by the holders at 100% principal amount in mid-2011.

Based on the conversion rate, the strike price is $32.22 per share.

These debentures are currently trading at approximately 147% of principal amount.

Moving on to our dividend.

Yesterday, we announced an increase of 25% or $0.09 to $0.45 per share per quarter for our common stock.

This increase resulted from growth in taxable income and the need to meet our anticipated 2009 and 2010 REIT distribution requirements.

Currently, we anticipate that a portion of the fourth quarter dividend, payable in January 2010, will be pulled back to satisfy the 2009 distribution requirement.

As we have previously stated, our policy is to distribute at least 100% of our taxable income to minimize the payment of federal income taxes by the REIT.

And we expect that future dividend increases will be based on such policy, subject to our Board of Directors approval.

Now, I will turn to our third quarter 2009 financial results.

The third quarter FFO per diluted share and unit was $0.74, up 4.2% from the second quarter 2009 FFO per share and unit of $0.71.

Year-over-year, third quarter 2009 FFO per share and unit increased 8.8% over third quarter 2008 reported FFO of $0.68 per diluted share and unit.

As we stated in our press release this morning, there were no material nonrecurring items impacting FFO or net income in the quarters ending September 30 and June 30, 2009.

For the quarter ended September 30, 2008, the FFO of $0.68 per diluted share and unit included additional FFO from certain significant items that do not represent ongoing revenue streams, primarily lease termination fees.

Without these nonrecurring items FFO would have been $0.62 per diluted share and unit in the third quarter of 2008.

After adjusting for these items, our results represent an FFO increase of 19.4% over the third quarter of last year.

Adjusted funds from operations, or FFO for the third quarter of 2009, was $49.2 million or $0.59 per diluted share and unit.

This compares to a second quarter 2009 AFFO of $41.8 million or $0.51 per diluted share and unit.

The diluted AFFO payout ratio for the third quarter of 2009 was 61%, down slightly from the second quarter 2009 AFFO payout ratio.

EBITDA, adjusted for preferred dividends and non-controlling interest, was $97.3 million in the third quarter of 2009, up 4.4% from $93.2 million in the second quarter of 2009 and up 20.4% from $80 million in the third quarter of 2008.

Same-store NOI was $105.2 million in the third quarter of 2009, up 5.2% from $100 million in the second quarter of 2009 and up 28.6% from $81.8 million in the third quarter of 2008.

Same-store adjusted for straight line rents and purchase accounting adjustments, which we refer to as same-store cash NOI, was $92.1 million in the third quarter of 2009, up 5.4% from $87.4 million in the second quarter of 2009 and up 28.6% from $71.6 million in the third 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 third quarter, rental revenues increased to $130.9 million, up 4.4% from $125.4 million in the previous quarter.

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

G&A increased slightly during the quarter to $10.7 million, compared to $10 million in the previous quarter.

The increase was primarily due to our acquisition activities, which now have to be expensed.

Consistent with what we have been reporting in our previous calls, our accounts receivable aging and delinquencies remain in line with historic norms and we believe we continue to maintain adequate bad debt reserves.

Turning now to our balance sheet.

During the third quarter, we capitalized 8% or $2 million of interest relating to construction projects, which compares to 9% or $2.1 million in the second quarter of 2009.

We capitalized approximately 26% or $3.3 million in compensation expenses in the third quarter, compared to 27% or $3.5 million in the second quarter of 2009.

Total construction work-in-progress in the third quarter was $210 million, of which, $159 million is construction costs and $51 million is allocated to acquisition costs.

This compares to second quarter construction work-in-progress of $219 million.

As noted in our press release, we are raising the lower end of our annual guidance range of FFO per diluted share and units to $2.88.

This revised guidance represents projected FFO growth of 11.2% to 12% over FFO per diluted share and unit of $2.59 for the year-ended December 31, 2008.

As discussed in our fourth quarter 2008 call, FFO per diluted share and unit for the full year 2008 included additional FFO from certain significant items that do not represent ongoing revenue streams.

After adjusting for those items, our revised 2009 guidance represents projected FFO growth of 17.1% to 17.9%.

Lastly, we plan to provide 2010 guidance in November.

This concludes our formal remarks.

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

Operator?

(Operator Instructions) And our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Please go ahead.

Thanks and good morning.

Congratulations on the credit rating this morning.

I just wanted to follow-up on that and inquire what do you think the leverage capacity or debt capacity is in terms of sort of an unsecured bond slug in your cap structure would be, given sort of that rating?

I think the initial bond issuance would be about $250 million, Jordan.

Moody's has said that, in terms of their general sort of Baa2 ratings, anything under 6 times debt to EBITDA is a BAA2 rating.

So, I think that we can accommodate $250 million quite easily and still have full use of the credit facility.

We wouldn't take the credit facility up to the max, just because that would not be prudent, but I think we could comfortably do, I'd say, easily 50% of the capacity, maybe a little more, plus the $250 million.

Based on that, you probably have about $800 million of capacity if you were to keep it under 6 times but you'd do less than that?

Well, yes, if we keep it under 6 times, that's right.

And the indentured covenants might trip before that because indentured covenants tend to be book-based, rather than EBITDA based.

And our EBITDA relative to book value is quite robust, as you know.

Sure.

So given the new found capacity and it seems like you're maintaining the 2009 guidance, which included a slug of acquisitions you had plugged in there and some that you announced this quarter.

Can you maybe give us an update on acquisitions, prospective, what you're seeing in the market?

Well, we are seeing a handful of opportunities, as we had discussed earlier.

Some one-off opportunities from funds where maybe these assets are outliers and they're looking to sell income producing properties to redeploy capital elsewhere or redeploy back to investors.

So, we have a couple more investments -- actually, three more that we expect to close by the end of the year.

And we're looking at other opportunities, as well, for 2010.

So, there will be definitely more deployment of capital on an ongoing basis to the income producing acquisitions to complement our leasing and development program.

And the 10% to 12% cap rate is still doable?

On average, yes.

Okay.

And then, lastly, just on the leasing side, the signed leases, as opposed to the commenced leases.

Signed leases, year-to-date, seem like they're down on a dollar volume basis, as opposed to space, about 55% or so.

And signed leases seem to be a better indicator of sort of the outlook, if you will, or at least something of a leading indicator.

Should we expect a seasonal uptick in the fourth quarter or are things just slowing down somewhat?

Well, we're seeing more interest and more real opportunities, more real requirements in the market, so that's definitely ticking up.

The approval time frames are longer than they used to be.

We're looking nine to 12 months now even in some cases.

And so I think we'll start to see an uptick in the fourth quarter and a little bit higher velocity in 2010 in terms of volumes overall.

Higher volumes than 2009?

Potentially, in terms of signings, yes.

Okay.

Thank you.

Our next question comes from the line of Jamie Feldman from Bank of America - Merrill Lynch.

Please go ahead.

Thank you.

One quick accounting question, we noticed on the balance sheet that the deferred rent component is up.

Can you just talk about what's in there?

It's just new leasing with straight line rent.

Is there more free rent component to leases now than there has been in the past?

Not necessarily free rent.

It's just that when you have -- if you do a 10 year lease with 3% bumps, you're going to have a straight line rent that's booked at the beginning of the lease that will burn off over the course of the lease term.

Okay, all right, so nothing abnormal.

And then, in terms of the fee business, can you talk a little bit about how you're pricing it?

And then, it seems like you've had some successes but maybe the expectations for growth?

Sure, yes, the pricing is going to vary somewhat based on the nature of the assignment.

In some cases, we're talking to folks in terms of a percentage of savings, in terms of development costs over and above certain expectations or certain budgeted amounts, to give us a bit of an incentive.

And in some cases, it's more on a fixed fee for design work and then, the project management components -- or the technical operations components, I should say, if we're managing, would be based on more of a profit margin over costs.

And then in terms of growth prospects, what kinds of successes you're having?

Yes, I think this is an initiative that could lead to maybe about $10 million to bottom line next year, maybe more.

And as importantly, probably more importantly, it's helping develop deeper relationships for broader bases of the business.

Especially, on the build-to-suit opportunities where we might do build-to-suit and actually own the buildings.

So, it ties in very nicely with a lot of our other niches, both leasing Turn-Key space, as well as some of the build-to-suit opportunities that we're seeing.

Okay, thank you.

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

Please go ahead.

Hi, its Mark [Montane] in here with Michael.

Just wanted to, first, get your perspective of how you see the acquisition of Switch and Data by Equinix effecting your future business, in particular?

And also, the overall datacenter landscape?

Sure.

I don't think it has much of a direct impact.

Equinix is our third largest customer and it further solidifies their position as kind of the preeminent interconnect and and peering group out there.

Switch and Data is a good customer of ours in several sites and I think it further enhances kind of our overall relationship with the combined entity.

So, it seems to be a very positive event for them.

And I think it just shows a lot of the strength in the datacenter business and the kind of growth that folks are seeing overall.

Okay, great.

And then, a couple questions regarding your recent acquisitions of 444 Toyama and 1525 Comstock.

I was wondering if they go into [yields.] I know you'd previously guided sort of the 10% to 12% range as a goal.

Wondering if that's sort of commensurate with what actually occurred?

Yes, so if you look together, the Toyama Drive property is a standalone datacenter facility, fully leased.

Comstock is also fully leased to two tenants.

Comstock has been a joint venture with the [Pelio Group] here and in the Comstock, we acquired their minority interest in the property.

And if you look at the yields that we were talking about earlier, the two properties together yielded about an NOI of about $5 million.

And we acquired them for kind of total purchase price together of $43.9 million.

So, over 11% cash NOI yield on those together.

Great and then you also at the same time that you gave the 10% to 12% guidance, you mentioned that some of the potential deals you were looking at had shorter lease terms.

And I was wondering if you could discuss what the lease roll looks like, particularly, on a Toyama?

And some of the dynamics that are occurring in your potential acquisition targets for potential lease roll up when those eventual lease maturities do occur?

Sure.

The Toyama Drive is actually a long term lease.

I believe that it's about 2022, I think, is the lease expiration on that.

And it has annual uplifts.

So, it's a very nice cash flow stream on that asset.

And other properties we're looking at that we do have under contract, we have shorter.

Shorter, being around five to 5.5 years, in a couple of cases.

But with very mission-critical facilities that very confident will renewed, it's a little too early to say what the uplift might be over and above current but I think, at least, there will be some uplift.

Okay, great.

Mike, it's Michael Bilerman.

I just had a quick question.

Not to give him any credit at all, but Jim Cramer comes out and says the death of the datacenter following this Equinix deal last week.

And I think there was a lot of inaccuracies in that reporting.

But I just wanted to give you sort of an opportunity just to talk about why that's not the case.

Obviously, you're bullish in the datacenter business or you wouldn't be in it.

But just can you talk a little bit about the dynamics that you see relative and I'm sure you've seen it or gotten a transcript of it, what they were advocating?

Yes, he was really way, way off the mark and kind of shows a lack of understanding of what's driving the growth of datacenter applications and the deployment.

Whenever you increase computing power dramatically in the hardware, that computing power gets taken advantage of, if you will, and gets absorbed into the applications.

And that computing power is utilized because, as we've seen over the last 50 years, there is always more uses for computing power for the various applications, whether it's trading or database search, derivative pricing, what have you, risk management computational platforms.

The whole world can always use more computing power.

So, the demand is going to outstrip the availability of computing power, if you will.

And on the other side, on a fiscal side, these types of multi-processor chips and boards use a lot more power.

So in our business, it's all about leasing access to power.

The square footage is almost secondary in some cases.

So, your power requirements are going to be staying pretty steady and continue to go up.

And so, I think Cramer kind of just missed the whole dynamic of the industry and the IT world on his comments.

And was there any sense of -- one of the other things that he talked about was corporates now almost bringing datacenters back in-house, rather than the whole outsourcing model that they've been following in the last few years.

Have you seen any trend whatsoever on that?

No, that's pretty much the opposite of what folks in the IT services outsourcing.

If you talk to an EDS or IBM or Cap Gemini or an Equinix or a Savvis, all their businesses are increasing very well.

And this last question from us, just you've made some growth areas in terms of the services side.

Where do you stand today in terms of generating potential income off of those initiatives, as you think about where you are this year and heading into 2010.

Yes, on the powered architecture services, I think we'll see, conservatively, about another $10 million to bottom line earnings, next year, from that.

It could be more.

And as I mentioned before, the fact that the synergy of driving more business with our Turn-Key leasing, in addition to the POD Architecture services, as well as build-to-suits, I think it will drive a lot of associated income as well.

Great.

Thank you.

Our next question comes from the line of George Auerbach from ISI Group.

Please go ahead.

Great.

Thank you.

Just to go back to Jordan's question.

Bill, where do you think you could price debt in the unsecured market today?

Well, it depends on the tenure and it depends on where S&P comes out and Fitch.

But assuming we're a flat BBB with all of the agencies, a five-year would be in the low 6's, we think.

Today, seven would probably be around 7%.

And 10-year would probably be in the mid 7's.

And how does that compare to the rate on secured debt?

And also, if you could just comment on the availability of secured debt for datacenters in the US and Europe?

It's still challenging to obtain secured debt for datacenters, both in the US and Europe.

We were fortunate that we have closed these mortgages over in Europe.

As I said, the UK deal is priced in the mid to high 5's and the Irish deal is in the low 7's.

We haven't looked at doing a large mortgage for a little while because we've been in the middle of this rating agency process.

And clearly if we are successful in this regard, as it appears we will be, that eliminates the need to rely on secured mortgage debt.

But we were in the market, I'd say, six months ago and looking to do a sizeable deal, which I would say between $100 million to $250 million, there's a limited number of providers.

They want to deal with the top tier sponsors.

And the rates at that time were 8% or higher, I'd estimate.

But I can't comment on whether those rates have come in.

The leverage would be about 50%.

Okay.

And finally, yesterday, on their conference call, Boston Properties mentioned some pretty aggressive pricing in the convertible debt market.

Is that an area that you are looking at or if you were to do unsecured, you'd do just sort of plain vanilla unsecured debt at this point?

I didn't hear the Boston Properties call but I would agree that the convertible market looks very attractive right now.

Okay, thank you.

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

Please go ahead.

Good afternoon.

Hi Mike, hi Bill.

A couple of questions.

Mike, I think you mentioned, in response to an earlier question, that the pace of new lease signings should pick up as you go into the end of the year and 2010.

Is that based on the sales pipeline that you're currently seeing?

And in the past, you used to give a number, the total amount of square foot that you folks are currently tracking.

If you could update that number, that would be helpful.

Yes, sure.

It is based on companies coming back into the market for requirements.

Especially now, after Labor Day, we're seeing a good pick up in inquiries and searches in the marketplace.

Right now, we are tracking or in discussions, in various level of discussions, with requirements totaling about 1 million square feet.

And we're tracking potential requirements, folks that are in very early stages or corporates that we know have their own requirements and that's about 4 million.

But 1 million square feet that we're engaged on in nine or 10 markets.

Got it.

Mike, second question.

I know you talked about, going forward, acquisitions would be a higher portion of your growth.

I just want to make sure that you're in no way implying that the internal growth rate of the Company is slowing down here.

And hence, you have to look at external acquisitions to keep the growth rate going forward.

No, really it's as we've always done, our strategy as an investor, is to look at where are the opportunities to achieve attractive risk adjusted returns.

And to the extent we can deploy capital in income producing properties and avoid the development and leasing risk, that's something that's always been attractive to us and we've really built our organization on.

So, it's more to augment and kind of diversify our deployment of capital where we see good opportunities.

Just one last question.

Sorry, Pamela, I have a third question, too.

Bill or Mike, there's been a lot of talk about cloud computing and what it means for datacenter demand going forward.

In your conversations, whether it's with large technology companies or the large ID companies, to what extent are you seeing demand that's being driven because of these new cloud offerings that these companies are potentially going to launch a year from now or two years from now?

Thank you.

It's difficult to quantify but our experience has been that a number of the new space requirements that we've been satisfying for customers have been cloud or grid computing type requirements, whether it's directly with corporate enterprises, such as financial services or with our customers like Savvis, who are providing grid computing/cloud computing applications.

So, we're seeing it as another growth driver for our business and our customers' business.

Thanks, Mike.

Our next question comes from the line of Michael Knott.

Please go ahead.

Hi guys.

I think you had about 67,000 square feet or so of Turn-Key signings in the third quarter.

That was down a lot from 2Q and similar to 1Q.

Can you just speak to why those have been down so much, especially compared to last year?

And then, is it possibly a reflection that you can get 11% type yields on buying now, as opposed to only a little bit higher on building?

Well, I think the level of signings is reflective of the fact that we did have such a slowdown in inquiries and companies having the inclination to pull the trigger on new facilities at the end of last year and beginning of this year.

So, I think it's just kind of a general slowdown and the longer time frames for the approvals.

And I think it will start catching up now as we go into the next six months and new requirements come on the table.

And some of the requirements that we start working on earlier in the year will come to fruition and come to approval.

So, I think it's more kind of the cycle catching up with itself over the next six months.

And in terms of the kind of our spy versus investment in income producing versus leasing, as I mentioned, it's purely on a; Where can we get the most attractive risk adjusted returns?

And looking that way.

But I don't think that's a -- I don't think it reflects on tenant demand for datacenter space.

Because we're looking as an investor, as opposed to a customer whose looking for deployment of applications, if I understand your question.

Okay.

And then just a follow-up to that.

What do you feel like the right spread is between buying, income producing and building Turn-Key?

It sounds like it's maybe anywhere from 300 to 500 basis points.

Is that about the right spread?

It might be somewhat tighter than that depending on tenant credit and location.

Any comment on the appropriateness of that spread?

It's going to vary quite a bit.

It could be -- like I said, it depends on the credit.

It could be 200 basis points.

But it's just going to vary.

And the size of the space and so on and so fourth.

It's going to be a pretty broad range.

Okay, thanks.

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

Please go ahead.

Hello, Bill.

Hello, Mike.

A couple of questions.

One on that Equinix acquisition.

Would REIT rules have prevented you from making that type of purchase or could you actually consider it?

Well, it's a real different business.

Switch and Data, I believe, leases virtually all of their facilities and they're in 20 some markets.

So, they're not an owner of real estate.

And their business is clearly in the co-location, peering interconnection and they're very strong in those areas.

Which is very different from our more wholesale real estate based business.

So as a customer, obviously, they have been a very good customer.

But I think they're a type of business being in more the co-location and interconnection fee-based businesses is sufficiently different from ours that it wouldn't be an investment for us.

Okay, I figured that.

I just wanted to hear your take.

Second, is I believe yesterday's Wall Street Journal, the Toronto datacenter that sold, did you look at that property?

Is that something that you'd be interested?

Yes, we did look at it back about a year ago and it's a very good facility.

We probably -- at that time, the pricing seemed to be higher than we were willing to pay at the time but it's a good project.

Okay, thank you.

And we have a follow-up question from Jordan Sadler from KeyBanc Capital Markets.

Please go ahead.

Thanks.

Bill, I didn't get the backlog from you.

Could you hook us up?

I thought I put that in the remarks or do you like asking the question?

I like asking the question.

Okay.

Sorry.

There's, obviously, not much of the signings will be recognized in the fourth quarter, just because of where we are in the quarter.

Roughly 75% would be recognized in the first quarter next year and 25% in the second quarter.

What was the dollar volume?

Dollar volume next year for revenue recognition is about 7.5.

So 5.5 in the first quarter and 2 in the second.

And those are the full year contributions?

Yes.

My other question is just on the acquisition front.

There was a portfolio kicking around last year, a West Coast portfolio, that I recall, that I never saw across.

And I was just curious if that's still kicking around and if that would still be of interest to you?

I'm guessing you're referring to the Rockwood Capital, 365 Main portfolio.

That one has three properties in the West Coast and properties on [CNX] in Virginia.

And they're looking at various financing opportunities.

So, they have not traded.

Okay.

But would that be of interest to you, that portfolio, at the right price?

Conceptually, yes.

It does have a very big component of co-location, which is not our core business at all.

Which we could execute and continue to manage as its been managed but very different from the real estate business in their San Francisco facility.

Different valuation metrics.

Okay, that's helpful.

And then, I had a question, just following up on one of your comments on the cycle catching up to itself a little bit.

Are you guys, do you think, a little bit victims of your own success here?

And sort of -- meaning, things are so good and the profits been so good, that capital has become somewhat available to good opportunities, like your sector.

And it seems to me that, despite the environment we're in, there continues to be folks who expand their datacenter business plans.

Is that squeezing out some of the profit a little bit or the opportunity a little bit?

So you mean in terms of companies doing it themselves versus looking for an outsource?

Not as much.

I was thinking of like the telcos actually getting into the business a little bit more.

And maybe -- I know the private guys aren't as well capitalized but there are some that do have a little bit of access.

Well, hopefully, those kinds of demand we can take advantage of.

A good example, both with NTT and ATT, for their enterprise services solutions, we are playing an important role as a landlord of those facilities.

So, I hope over time and we've seen this play out that it will lead toward more demand for our facilities as a landlord and facility provider.

So, more of sort of a base building sort of model?

Well both base building and Turn-Key but we're happy to accommodate either way.

You did say you think Turn-Key is going to be sort of the way of the future near term?

Well, certainly this year, Turn-Key is the great majority.

I think this year it's over 90%, so far, by revenue, of new business.

And do you think that will continue that dynamic?

I think so.

I think it will moderate a little bit, especially with a couple of the projects that we'll be bringing online here in the next year.

But I think it will still be the great majority of new leasing will be the Turn-Key, by revenue.

Okay.

And anything, did I miss anything on the markets, any changes, positives or negatives, favorites?

No, we're seeing our IT service provider customer vertical Savvis, Equinix, Telex, IBM, system integrators, as well included in there, their businesses are going quite well.

And demand from that customer base is very good and we're seeing financial services continue to grow their applications and --.

Geographically that's sort of Silicon Valley, D.C., and New Jersey?

New Jersey, Dallas, Chicago, London, Paris, would be, I think our top activity centers.

Thank you.

Our next question comes from the line of Srinivas Anantha.

Please go ahead.

Mike, on the last call, you mentioned, there should be -- going forward, we should expect some consultancy related revenue because of the hiring of Michael Manos.

Was there any contribution this quarter or is that something we should expect more in 2010?

I don't recall exactly from the quarter but we've had ongoing assignments with a couple of customers that are contributing revenues currently.

I think, in this year, I think it will be $3 million to $4 million of revenue from consulting services, POD Architecture services this year, I believe.

Got it.

And Bill, in the guidance, on the last call you guys gave, from acquisitions, it should be $120 to $100 million.

Looking at your acquisition year-to-date, you guys are still -- the guidance is well about that.

Does that guidance still hold good?

Should we expect more in the lower end or the mid range or the higher end?

What should we think going into 4Q, just with a few months left here?

Well, as I said, it's going to be between $100 million to $105 million, with a few months left and that's net of debt that's going to be assumed on one deal.

Got it.

Okay, thanks.

Cash out the door.

(Operator Instructions) We have a follow-up question from the line of Michael Knott from Green Street Advisors.

Please go ahead.

Hi, guys.

Could you give an estimate of where you think your overall portfolio, mark-to-market, is today in terms of your average in place rent per foot, compared to where that would be at market?

Well, I think that it would be a little more accurate -- I would say on renewals, we'll continue to see an uptick of 10% to 15% on average, I believe.

And I think that's probably not a bad indicator on an average basis.

Okay, that's helpful.

And then Bill, in the condition text of obtaining the rating from Moody's, could you just give us an update of what your target capital structure would be in terms of equity, preferred, unsecured debt, convertible, etc.?

Yes, I think we'll probably keep our debt to EBITDA sort of under 5.5, maybe under 5.

And fixed charge coverage ratio, I would expect to remain pretty much where it is in the mid 2's.

Obviously, it's been a little higher recently.

It could go a little lower.

The perpetual preferred market really isn't open right now.

So, that's not an option.

And convertible preferred is really not open either, except I saw the [Grub] analysis did a small deal the other day but I don't think that that's open meaningfully.

As I said, we'll measure -- we'll target based on fixed charge coverage and debt to EBITDA multiples.

Okay.

But the intent of accessing the unsecured market, at some point, is more broadening your capital sources, not a move towards less conservative financial structure than you've employed as your time as a public Company?

No, in fact the Moody's rating, one of the criteria is that, you'd see this in the Moody's release, is the fact that we have had conservative financial management policies.

So, if we were to lever up, that would not -- that would work against us in terms of ratings.

Right.

And then lastly, just curious how you view your cost of equity here today?

Given that the real estate cap rates for your portfolio seem like they're fairly high.

And then, the public market is appropriately giving you plenty of value for your platform etc.

above and beyond the real estate value.

How do you view your cost of equity today.

Any thought about raising additional equity?

Well, we consistently view our long term cost of equity in the low double digits.

We think that's an appropriate measurement over the long term.

Obviously, if you look at the cost of equity as -- on the basis of FFO yield, either this year or next, it's a lot less than that but that's not how we prefer to look at it.

Okay, thank you.

And Mike Foust, I'm showing there are no further questions at this time.

If you'd like to continue with any further remarks?

Thank you everyone for joining the call.

I appreciate the tracking us.

And I want to thank our management team and our overall operating team here at DLR for another very good quarter.

Much appreciated and thank you very much.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation and for using ACT teleconferencing.

You may now disconnect.