Digital Realty Trust Inc (DLR) 2010 Q1 法說會逐字稿

Welcome to the Digital Realty Trust first quarter 2010 earnings conference call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(Operator Instructions) Now I'd like to turn the conference over to Ms.

Pamela Matthews, Director of Investor Relations.

Please go ahead, ma'am.

Thank you and good morning and good afternoon to everyone.

By now you all should all have 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 the 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 can 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 believe, expect, may, well, should, pro forma or similar words and phrases.

You can also identify forward-looking statements by discussions of strategy, plan, intentions, future events or trends or discussions that do not relate solely to historical matters, including such statements that relate to lease commencement, rent increases on lease renewals, construction plans and costs, run rate NOI, expected use of proceeds, and the Company's expected financial results for 2010, including the assumptions related thereto.

For further discussion of the risks and uncertainties related to our business, see the Company's annual report on Form 10K for the year ended December 31, 2009, and subsequent filings with the SEC, including the Company's quarterly reports on Form 10Q.

The Company disclaims any intention or obligation to update or advise any forward-looking statements whether it's new information, future events or otherwise.

Additionally, this call will contain nonGAAP financial information, including funds from operations, or FFO, adjusted funds from operations, or AFFO, earnings before interest and taxes depreciation and amortization, or EBITDA, same-store 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 nonGAAP items and reconciliations to net income are contained in the Company's supplemental operating and financial data for the first quarter of 2010 furnished to the Securities and Exchange Commission and information is available on the Company's website at www.digitalrealtytrust.com.

Now I'd like to introduce Michael Foust, CEO, and Bill Stein, CFO and Chief Investment Officer.

Following management's brief remarks, we will open the call to your questions.

To manage the call in a timely manner, please limit questions to two per caller.

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

I will now turn the call over to Mike.

Great.

Thank you, Pamela.

Welcome to the call, everyone.

I'll be giving you a brief overview of Digital Realty Trust and then I'll review the success of our portfolio operations during the quarter.

Following my remarks, Bill Stein will discuss our financial performance and revise 2010 guidance.

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

Our portfolio currently contains 84 properties and consists of 188 buildings totaling 15 million rental square feet, excluding one property, the Western Building of Seattle, that's held as an investment in an unconsolidated joint venture.

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

The portfolio also includes approximately 1.8 million square feet of space held for redevelopment.

DLR provides a variety of data center facility solutions, including Turn-key Datacenter, Powered Base Building and build-to-suit data centers 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 and data center design and investment.

As most of you know, on January 22, 2010, we acquired a three-property portfolio located in Massachusetts and Connecticut which we'll refer to as the New England portfolio.

The $375 million acquisition totals approximately 550,000 square feet and significantly expands our presence in customer relations in a very important region.

We continue to pursue several attractive acquisition opportunities, including stabilized properties and properties suitable for redevelopment in markets where we are full or close to full and demand is strong.

Also, we are pursuing several build-to-suit opportunities in the US as well as in Europe.

Our innovative data center designs, engineering and strong financial capabilities enable DLR to deliver high-quality and cost-effective enterprise solutions.

As previously announced, far the quarter ended March 31, 2010, leases commenced totaling approximately 116,000 square feet.

This includes approximately 108,000 square feet of Turn-key Datacenter leased at an average angle gap rental rate of $139 per square foot and approximately 7500 square feet of non technical space at an average annual GAAP rental rate of $37 per square foot.

We signed leases during the quarter totaling approximately 241,000 square feet of space.

This includes over 171,000 square feet of Turn-key Datacenter, the best quote on record for Turn-key Datacenter lease signings.

The average annual GAAP rental rate for these leases was $141 per square foot.

We also signed more than 69,000 square feet of non-technical space leased at an average annual GAAP rental rate of $25 per square foot.

Similar to last quarter, lease rental rates for new signings were somewhat lower reflecting the fact that we did not happen to sign any European leases in the quarter and, thus, did not realize the currency translation effect in the is it statistics.

Of the leases signed but not yet commenced as of March 31, we expect approximately 129,000 square feet to commence in the second quarter of 2010, which will contribute incremental revenue in 2010 of approximately $5.8 million.

Approximately 99,000 square feet is expected to commence in the third quarter of 2010, which should contribute incremental revenue in the year of approximately $6 million.

The balance of the backlog of leases signed, approximately 30,000 square feet, is expected to commence in the fourth quarter and contribute incremental revenue of $1 million for the year 2010.

Turning to our lease renewal activity, during the first quarter we signed renewals totaling approximately 183,000 square feet reflecting 91% of the expiring and early renewed square footage.

Two small Turn-Key leases totaling approximately 13,500 square feet did not renew.

We immediately expanded an existing 89,000 square foot tenant into one of those spaces, and we are currently in discussion with potential new tenants for the other suite.

Including early renewals and extensions, 100% of our power base building net rentable square feet was signed at 122% of the previous GAAP rental rates.

This high retention rate for Powered Base Building extension and renewals where the tenants originally built out the data center improvements illustrates the overall stickiness of our tenant base.

In terms of our development program, at quarter end we were underway on a number of construction projects in high-demand markets in the US and Europe that will add over 185,000 rentable square feet of Turn-Key space to our operating portfolio in 2010 and we have signed leases for approximately 58% of the space.

During the quarter we completed the construction on -- of the new 132,000 square foot facility in northern Virginia, which is now fully leased, well ahead of budget.

The deal our sales team is currently engaged in discussions with over one million growth square feet of new data center prospects and as seen in our Q1 signings demand for our turn key product is strong.

Earlier this month we announced our plans to build the next phase of Turn-key Datacenter in our top markets, including 53,000 feet of Turn-Key space in northern New Jersey, approximately 34,000 square feet of Turn-Key in the London Metro area, 29,600 square feet in northern Virginia, over 22,000 square feet of Turn-Key in San Francisco and approximately 33,000 square feet of Turn-Key in the Dallas metro.

We also adding new data space at 600 Federal Street in downtown Chicago, 210 North Tucker in St.

Louis, 113 North Myers in Charlotte, 2323 Brian Street in downtown Dallas, and the Corner Powered Parkway property in Boston, Massachusetts.

These properties meet local demand for highly improved data center space and allows us to maximize returns to our shareholders.

Lastly, we continue our efforts to drive down construction costs generally achieving a 15% to 20% reduction over the past 18 months.

Our development scale and global purchasing agreement allows us to maintain attractive leasing returns and deliver pricing flexibility.

In addition, our portfolio management team is utilizing our operating scale and our global purchasing to lower operating costs and improve margins on our existing portfolio as well as on space we add through acquisitions and development activity.

We believe that our financial strength, operating scale and disciplined approach to managing our business give us a distinct advantage in the marketplace and will continue to enhance shareholder value.

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

Thanks, Mike.

Good morning and good afternoon, everyone.

I will begin with the discussion of first quarter financial performance and conclude with our revised 2010 guidance.

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

Year to date we've sourced approximately $672 million of capital.

Those activities include our inaugural unsecured bond offering which closed on January 28.

We issued $500 million of 10-year notes with the interest rate of 5.875% yielding 6.105%.

Our after-market equity program which generated net proceeds totaling $55 million for the issuance ever approximately 1.1 million shares at an average price of $50.56 as of April 28 and two $50 million draws on January 20 and the third $17 million draw on February 3 on our Prudential shelf facility.

The draw is totaling $117 million, have a weighted average interest rate of 5.06% per year and a weighted average maturity of 5.9 years.

The proceeds from these transactions have been and will be utilized to temporarily repaid borrowings under our credit facility, fund acquisitions, and our development and redevelopment program, and for other general corporate purposes.

As a result, we now have approximately $784 million of liquidity consisting of $57 million in short-term investments and funds that can be drawn on our current -- on our revolving credit facility.

If this capacity were fully utilized, our pro forma ratio of total debt to total market cap would be approximately 34% based on yesterday's closing price of $58.27.

Our pro forma net debt to adjusted EBITDA multiple would be 6.3 times.

Our targeted net debt to adjusted EBITDA multiple is 5.5 times or lower, although this ratio might go higher temporarily in the event of a large acquisition.

If we were to utilize the pool's $784 million of liquidity, we would remain in compliance with the covenants contained in our revolving credit facility, Prudential shelf facility, and outstanding secured and unsecured debt.

As we continue to fund our growth through the investment grade bond market and other sources, we remain committed to maintaining conservative investment grade capital structure.

Beginning this quarter we have included a new debt analysis and covenant compliance schedule and our supplemental operating of financial package on page 17.

This schedule summarizes the major covenant metrics for our unsecured notes due 2020 and our revolving credit facility.

We hope you will find this additional information helpful and we would welcome your comments.

In 2010 we have $11 million of principal amortization remaining in the second quarter through the fourth quarter, and assuming that loan extension options are exercise no debt maturing.

In 2011 we have approximately $232 million of ongoing principal amortization and debt maturities, including $172.5 million for the 4.125% exchangeable senior debentures which could be put to the company at 100% principal amount in 2011.

Based on the current conversion rate, the strike price at $31.84 per share, these debentures are trading at approximately 184% of principal amount.

Our total debt at quarter end was $2.2 billion and our ratio of debt to market cap was 29.3% based on the March 31, 2010, stock price of $54.20.

Based on yesterday's closing price of $58.27, our ratio of debt to total market cap would be 28.1%.

Our adjusted EBITDA to cash fixed charge coverage ratio was 3.2 times and our adjusted EBITDA to cash debt service coverage was 5.2 times for the quarter.

Net debt to adjusted EBITDA multiple was 4.6 times for the quarter.

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

As of March 31 our weighted average cost of debt, including interest rate swaps was 5.91%, and the weighted average maturity was 5.6 years, including debt extension options.

Now I'd like to discuss briefly our first quarter financial results.

The first quarter 2010 FFO per diluted share in unit of $0.81 per share includes $0.016 of additional FFO from certain items that do not represent core revenue streams.

After adjusting for these items, FFO was $0.79 per diluted share in unit.

The fourth quarter 2009 FFO of $0.79 per share included approximately $0.01 of additional FFO for certain items that do not represent core revenue streams.

After adjusting for these items, fourth quarter FFO was $0.78 a share.

There were no material nonrecurring items impacting FFO or net income in the first quarter of 2009.

After adjusting for these items in all quarters, first quarter FFO per diluted share in unit increased 1.3% over the fourth quarter of 2009, and 12.9% over the first quarter of 2009.

Adjusted funds from operation or AFFO for the first quarter of 2010 was $59.2 million.

This compares to a fourth quarter 2009 AFFO of $53.1 million.

The diluted AFFO payout ratio for the first quarter of 2010 was 71.4% compared to the fourth quarter 2009 AFFO payout ratio of 72.2%.

EBITDA adjusted for preferred dividends and noncontrolling interest was $114.7 million in the first quarter of 2010, up 13% from $101.5 million in the fourth quarter of 2009 and up 32% from $86.9 million for the first quarter of 2009.

Turning briefly to the income statement, property taxes were higher in the first quarter 2010 over the previous quarter.

This was due to a $2.9 million one-time property tax refund recorded in the fourth quarter of 2009, and the property tax accrual of approximately $1.3 million in the first quarter related to the Sentinel acquisition.

Run rate NOI was $126.3 million for the quarter ended March 31, 2010.

Annualized first quarter run rate NOI is $505 million, almost 21% higher than 2009 NOI of $417 million.

Same store NOI was $111.3 million in the first quarter of 2010 up 1% from $110.1 million in the fourth quarter of 2009 and up 16% from $95.9 million in the first quarter of 2009.

Note that the same-store pool was adjusted in the first quarter to include properties that were acquired on or before December 31, 2008.

Same-store NOI adjusted for straight line rents and purchase accounting adjustments, which we refer to as same-store cash NOI, was $100.4 million in the first quarter of 2010, up 3.2% from $97.3 million in the fourth quarter of 2009, and up 21.8% from $82.4 million in the first quarter of 2009.

Total development construction work in progress at quarter ended March 31, 2010 was $150 million of which $91 million is construction costs and $59 million is allocated to acquisition costs.

This compares to fourth quarter 2009 construction work in progress of $185 million.

The estimated hard cost to complete the ongoing March 31, 2010, work in progress is $228 million.

As a result of our strong first quarter results, we are raising our annual guidance of FFO per diluted share in unit by $0.08 to $3.26 to $3.28 -- I'm sorry, from a range of $3.26 to $3.38.

This revised guidance represents rejected FFO growth of 11.3% to 15.4% over FFO per diluted share unit of $2.93 for the year ended December 31, 2009.

This concludes our formal remarks.

We are now happy to take your question .

Thank

Thank you, sir.

Ladies and gentlemen, we will now begin the question-and-and session.

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

Please go ahead.

Thanks.

Just to clarify, Bill, the increase in the guidance is primarily a function of -- what are the drivers behind the increase specifically?

Are your commencements going to be higher of the $80 million to $90 million range you had given or is it just the timing of the acquisitions that were already complete?

What specifically sort of the driver?

The leasing volume in the first quarter was higher than we expected.

As we indicated, the Virginia building leased up much faster than we thought.

It's full now.

And it reflects our acquisitions as well.

So the commencement volume of $80 million to $90 million for the full year, fair to say that you'll be above the high end of that range?

I wouldn't necessarily say that.

I think it's really more timing.

Okay.

Okay.

And then, lastly, just on acquisitions maybe you could flush out, Mike, you talked a little bit about -- you said you're looking at portfolios.

Can you maybe just give us a sense of location, types of sellers and what pricing is looking like?

Well, we're looking at a portfolio -- a domestic portfolio and there is a few individual or two building small portfolio opportunities that are off market right now that we're looking at on the one or two on the stabilized asset side, and then we're looking at opportunities, especially in Silicon Valley and Paris and some other locations to acquire our redevelopment sites to continue delivering product to those markets.

So it's kind of a broad range.

We're also pursuing a few build-to-suit opportunities and we think those will be kind of attractive drivers for growth going into 2011 and 2012.

A couple of those are competitive situations, so we're hopeful, but we're competing with other developers, a couple of projects in the US, a couple of projects in Europe right now.

Is it fair to say that cap rates could come in a little bit as a function of your sort of cost of financing coming down or do we expect the returns just to get better?

Yes, well, it kind of remains to be seen.

I think in a lot of asset classes cap rates are tightening.

Because of the challenge to finance these assets that have Turn-Key buildout, I think cap rates are going to remain high because of the -- higher, I should say, than some of the other asset classes.

We might see a little bit of tightening, but it kind of remains to be seen where the next round of deals go.

Thank you.

Thank you.

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

Please go ahead.

Hi, this is Mark Montana here is Michael and (inaudible).

I guess speaking to built to suits, just wondering what the potential size is that you're pursuing, also, timing-wise I know you just mentioned 2011, 2012.

Is that when you're expecting to complete these projects or when you're expecting to secure the negotiations?

Those would be -- 2011 and 2012 would become targeted completion dates if we are selected.

And the projects range probably from around $50 million to $200 million.

And are we talking three projects or three build-to-suits or ten?

Right now we're pursuing actively five that are in front of us right now.

Okay.

And in discussions with early, early stages on others in addition.

But-- and these are competitive situations, so, you know, we'll see how it all turns out.

But our solutions are pretty strong and pretty cost effective for the customers.

And then going on -- digging a little deeper on returns as well, your announcement in mid April to develop the new Turn-Key facilities, what are your returns like there versus what you're seeing on the stabilized income acquisition side?

Well, on our development projects on the speculative project, I mean, we're targeting on average 12% to 14% unlevered NOI returns and at stabilization.

Now, you might see some a little below that range, occasionally a pod or two might be a little bit above that range, but I think on average for our speculative development, that's where it will be.

On build-to-suit opportunities it could be a fairly wide range depending on customer credit, how much is highly customized, where it's located.

That can drive a much wider range.

But, once again, I think kind of roughly 9.5 and a half to 11 range would be typical.

Okay.

With construction costs coming down 15% to 20%, would it be fair to assume I guess the rents are coming down a similar amount on your projects there or is it just something else that's keeping the returns constant?

Operator, are you there?

Yes, ma'am.

Are there more questions?

Yes.

Mr.

Bilerman was still speaking.

Okay.

Sorry.

Yes.

Just wondering on the return side with the 12% to 14% with construction costs coming down, is there something else keeping yields in that range or is it, is price coming down as well?

I'm sorry, could you repeat the question?

On your ground of developments or speculative developments, you talked about 12% to 14% returns, but at the same time construction costs are coming down.

So I'm just wondering on the pricing side are you pricing to a specific margin you're trying to achieve or are rents, it would imply that rents are coming down if you're going to have lower cost but similar yields.

It depends on the market.

We're really pricing to market and that range is pretty wide, 12% to 14% with some a little below, some could be a little above.

But our development costs coming down as well as our operating -- ongoing operating costs coming down allow us to be very flexible in pricing.

Okay.

And you'll see -- you may see some markets, like northern Virginia, you know, where rates have softened due to competition, but we can derive -- we'll always have a premium over other competitors in the market in terms of pricing but we can provide a lot more flexibility and still obtain the returns that we like to see.

So that gives us a lot of flexibility.

We can compete hard against anybody in the marketplace because of our scale.

Okay.

Great.

Thank you.

Thank you.

And our next question comes from the line of Jamie Feldman with Banc of America Merrill Lynch.

Please go ahead.

Thank you.

I was hoping you could give a little bit more color, more general color, on just what's happening in the sector in terms of -- I mean, here we are at kind of the beginning of the recovery and what are tenants thinking, what kind of demand do you see?

Are we kind of at the early stages of a pickup demand or late stages as people haven't been spending the last couple of years?

Just kind of more color.

Sure.

I this I we've definitely seen a little bit of the pent-up effect where companies have been more comfortable making decisions or kind of being forced to go ahead with projects because they have internal demand that's been pent up.

At the same time, we are seeing a lot of expansion of applications that are IT services customers are taking advantage of and folks like Equinox, [Savis], Terremark, and Telex are doing quite well and are seeing their businesses expanding pretty rapidly.

We're taking advantage of that as they continue to expand in our buildings as well.

So a lot of the things you're hearing about, especially with utility computing, cloud computing, both for the IT services providers as well as the corporate enterprises themselves, that's one aspect that's driving additional demand in addition to online retailing, social networking, content distribution, trading and settlement in the financial services industry as well as cloud computer, computing and financial services are all driving pretty good sustained demand.

Okay.

And then on the competitive side, I mean, in terms of new entrants coming into the market, what's kind of the latest on that?

Well, we continue to see individual developments in most of the markets that are original developers funded with private equity capital often times high net worth individuals, groups of individuals and some of the more institutional developers as we've seen pretty much all along.

Typically, their strategies are to build a shell building and then hope to sign a lease from which they can obtain additional financing, so that they have -- our competitors often times is in a bit of a chicken and egg issue, because we find that the customers by and large want to see the Turn-Key space underway because they usually need to have the certainty of timing and that there is the financing in place for their landlord.

Ourselves and Dupont Fabrose are two of the few folks who actually do build ahead of demand, and I think that serves as well.

But we are seeing interest from private equity funds that are looking at opportunities in our space on a one-off basis.

Thank you.

And our next question comes from the line of [Chris Katen] with Morgan Stanley.

Please go ahead.

Hi.

Good morning.

First question on just the lease expirations in the top 20 it looks like of your tenants, it looks like you only have one kind of expiring in the very near term Converse.

What are you seeing there?

Are you beginning to talk to them about what they -- their space needs might be as this lease expires?

Yes.

As we do with all of our customers and we've been engaged with them and talk to them about what their facility needs are and potential to bring other operations into that site.

We're also looking at and we're actively -- we have a little bit of vacancy in that building already and we're going ahead and redevelopment as datacenter space for the Boston market.

So we've got a couple of different plans depending on how much space Converse would want to retain as we go ahead.

So we are working with them, and we've got a couple of different plans for how we might position that building, depending on how much space we have available.

Are they fully utilizing the power and the space now or are they half?

No, not at all.

We have a lot more power.

That building is really not a Datacenter building.

It is regional headquarters and electronics assembly.

So they have the OEM Turn-Key messaging system for the wireless, and really focused mostly on international wireless networks.

So they do their assembly and R &D in corporate functions out of that building.

Got it.

Yes.

We have a lot of power capacity to build out data center space in that, in that particular building.

And then there's actually two buildings on the site.

The other billing is pretty much highly utilized office building with subtenants in there.

In that building though those tenants would likely stay in it at their current market rents.

Understood.

Yes.

Second, just a followup question on acquisition, I see you have some redevelopment space you can utilize as the market grows here, but a lot of it's concentrated in Dallas.

I'm wondering do you feel you have enough space to capture growth as it occurs in your markets or are you short of redevelopment space or land or what have you in certain markets that are really expanding?

We're in pretty good shape.

However, we need to always be looking, looking to the Horizon to make sure that we have space available.

So right now we're really focused on Silicon Valley.

We've seen a bit of an uptick of demand there.

We're building our next phase at the Ashburn campus, and we've got opportunities now in the Boston market with the New England portfolio we can add on to the buildings.

We're looking at Paris right now because we're almost full in our large Paris facility for new product there, and, also, you know, looking ahead in the London market for new products.

So I think by and large we're in good shape to meet our growth opportunities now, but we always need to be thinking out to 2012 to make sure that we're -- we've got sufficient amounts.

Understood.

So it's fair to say that kind of capturing some of the growth in the market over the next 12 to 18 months is not contingent upon consummating any transactions?

Not, not very large ones.

I think we're in fairly good shape.

Great.

Thank you.

Thank you.

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

Please go ahead.

Good afternoon.

Thank you.

Bill, is it possible to quantify the contribution of acquisitions from revenue in NOI perspective in 1Q 2010 and 2010 guidance?

We have -- I'm sorry, your question is how much does the Sentinel acquisition contribute?

That's right.

To --

The revenue.

Yes, I mean, you could probably figure it out just by looking at the sub, because you can see our Q1 NOI, and then you've got the run rate NOI.

It's on page 11.

Got it.

And is there anything else beyond the Sentinel acquisition that we should think about when you're modeling for 2010?

We have acquisitions assumed for third and fourth quarter.

And, Mike, when we're looking at these rental rates both for signed leases, they seem to be flattening out.

Is this purely a function of market or, you know, to your comments that there are certain markets that are certainly becoming a little more competitive from a pricing perspective?

Thank you.

Sure.

Yes.

I mean, we have -- and I think that that's been our view for the past several quarters that, you lease rates have stabilized, flattened out at a good return for us.

And we have seen a couple markets such as northern Virginia where lease rates have softened a bit and we've been able to maintain our turns because of our development and operating scale.

So I think it's fair to say on average we'll probably see -- continue to see rents flat at attractive return levels for us.

Thank you.

Thank you.

And our next question comes from the line of Will Marks with JMT Securities.

Please go ahead.

Thank you.

Hello, Michael and Bill.

I was wondering on just trying to value your 1.8 million square feet of space that you haven't developed, how should we be thinking about that?

I think partially answered this.

How should we be thinking about this in terms of buildout?

Is it over five years?

Do you think you could fill it all today if it were all opened up?

I think we will look at that in very rough terms about a three to four-year potential inventory.

It ebbs and flows because depending on the market we may end up adding more in a particular market and then it gets leased up and we've had that portfolio go down as low as 900,000 - 1 million square feet.

Now it's back up to 800,000 and being whittled down as we continue to bring more space on to the market.

So I think that's probably kind of the rhythm we'll remain in.

Okay.

And currently I think, as you said, we should expect mid teens returns on current developments, right?

Well, we're projecting on average 12% to 14% unlevered NOI returns.

And some are a little lower, some are a little higher on occasion.

Okay.

And I think you addressed some competitive issues.

I'm wondering on the actual development side, and maybe you were referring to that, I was thinking more acquisitions, on the development side who you've seen any competitors?

Well, yes, as we continue to see kind of the same market dynamic that we've seen over the last couple of years where in a lot of markets we'll have kind of private equity back regional developers and they'll redevelop or come out of the ground with kind of an industrial R&D building on a shell basis and market that building as data center and try to capture leases, which is typically a lot harder to do than if you go ahead and inspect the Turn-Key space.

But it's a financing issue for folks because you really need to build these things out of, in our opinion, out of corporate resources, and it's virtually impossible to get a construction loan on a spec basis or even with tenants how to get a construction loan for this kind of product.

So, yes, the competitors we see on the development side usually are one-off projects and looking to lease -- a lease or two in place before they actually build out the Turn-Key space.

In terms of acquisitions of stabilized -- more stabilized assets, there are just not that many opportunities out there, but we are seeing some private equity firms looking at these opportunities.

Okay.

That's perfect.

Thank you.

Thank you.

And our next question comes from the line of [George Araback] with ISI.

Go ahead.

Great.

Thank you.

Mike, you mentioned that your sales team is tracking 1 million square feet of gross demand, which I believe is the same level you're tracking in the third and fourth quarters.

Have you been surprised this figure hasn't increased in 2010?

Part of that is the function of the amount of the size of our team and the amount of business that that we can reasonably address.

I think to get a view as to the overall markets, looking at some of the IT reports in terms of IT demand and demand for co-location managed services, hosting clout services, those kinds of analyses kind of give a broader view of demand, and those are typically pretty good bellwethers for where the market is going overall.

Would you be able to give us, maybe quantify the amount of growth then in the overall market over the last six months?

Hey, George, before we go there, there's a qualitative aspect of this pipeline too, which is with these prospects you do get a sense of greater urgency today than there might have been six months ago.

That's a good point, definitely a good point.

Okay.

Thank you.

Thank you.

And our next question comes from the line of Omotayo Okusanya from Jefferies & Company.

Please go ahead.

Good afternoon, everyone.

Bill, Mike, congrats on another great quarter.

Quick question, things have been going very well for the company for the past several quarters.

And I was just wondering in regards to excessive capital acquisition opportunities, opportunities to kind of continue growing, I was wondering at this point in time is there anything on your mind that kind of keeps you up at night and worries you in regards to your ability to continue to sustain this strong growth profile?

I probably, I don't know if stay up at night is right, but we're always focused on I improving our operational management of the buildings and improving our delivery of new construction.

And those are probably areas that concern us but in a healthy way, because in order to continue to grow, we need to continue to expand our capabilities in the asset management and in the development and delivery side, and also continue to improve our design.

And we're putting a lot of resources into our design team and engineering team so we can continue to improve the efficiency of our construction, the operating efficiency of our buildings.

So that's where a loft focus is for us these days.

Got it.

Could you also talk a little bit about opportunities in Europe?

If you're still actively looking at that and where you could potentially -- which European markets you may prefer?

Yes.

We're start to go see things pick up, and we're still focused primarily on Paris, Amsterdam, London, some potential build-to-suit opportunities in Dublin.

We're pretty much full, we are full in the Dublin market.

We're reluctant to do spec building right now in Dublin just because of all of the financial challenges that they have in Ireland right now, but it is still an attractive business location for a lot of international companies.

So we do have a couple of customers who are looking for potential opportunities there.

But for kind of our spec building program and it's really focused on London, Paris and Amsterdam.

Got it.

Then anything in regard to 365 Maine to watch in that portfolio?

Yes, yes, that's -- it's on the market, and we're keeping close to the action there.

So we'll see kind of what transpires.

Great.

Thanks again.

Thank you.

And our next question comes from the line of Jordan Sadler with Keybanc Capital Markets.

Please go ahead.

Hi, Bill.

Just following up on sort of the capital discussion a little bit, you went through sort of the exercise of figuring out or letting us know where you'd stand pro forma to the extent you utilized the capital that's available to you today.

So just playing it out a little bit further, what are sort of your plans from a capital stack perspective from here to the extent that we get six months down the road and you've hit your acquisition expectations and sort of the rest of the capital spending expectations.

I mean, I assume you could continue to use the unsecured market to some extent, but is it equity through the ATM or is there a preferred component?

And sort of what's your current thinking?

Well, the preferred market is becoming more attractive, the perpetual preferred market.

It's still a little wide of where I'd like to issue.

And we have some preferreds clearly that are callable too, at least one callable now and one callable in the middle of the year.

As I said, we're targeting a debt to EBITDA of 5-1/2 or lower in order to remain within rating agency guidelines.

So I think --

Excluding preferreds counting at equity in that calc?

Yes, the preferreds would count as equity.

Preferreds have to fix charge coverage, but they don't go up to EBITDA.

It's just that -- and we'll term out the revolver once we have enough on the revolver to result in a reasonably-sized bond deal.

The unsecured bond market is still attractive and frankly the convertible market looks pretty attractive, too.

But we're right now sitting on the cash that we have plus the revolver.

We're not going to be hitting the capital markets any time soon.

And what's the sort of rationale or thinking on the ATM?

I know you've used it a little bit, but you've got quite a bit left.

We used it really to help on the Sentinel acquisition.

And now the rationale will be to really be opportunistic and, again, to be mindful of where the agencies would like us to run the business from a capital stack standpoint.

Is this another sort of tool in the shed for you guys?

Absolutely.

Okay.

And then the acquisition volume discussion, I think your guidance for the year is now just another $150 million.

Are you based on sort of where we sit today, does that seem like a pretty easy hurdle?

I don't know if it's easy.

These things are binary, so -- and we're going to maintain our discipline around pricing.

And so if we have the opportunity and it makes sense for us it could be more, it could be less, but we think 150 is a reasonable amount, you know, for what we can count on today.

So it's the mean between zero and 300.

Last question.

I might have missed this, but I didn't hear a ton of discussion about markets and what you're seeing or where the demand is coming fro right now, what you envision sort of the rest of the year, in other words, a question about demand picking up.

But who's the driver over the course of the next 12 to 24, including like these built-to-suits and just the organic demand?

I think in terms of industry verticals you're seeing the social networking, online kind of delivery of retail services as well as the online delivery of computing services.

So that would include companies like Amazon and with IT services as well as retailing, companies like Savis and Equinox and Telex and Terremark, all of their businesses are doing quite well.

So I think they're driving demand for space.

Financial services vertical is still remains very active as their businesses grow both here and primarily around New Jersey and the London markets.

And then we see kind of broad broad Fortune 1000 demand in places like Dallas and Paris, especially where we get a broad range of corporate IT requirements.

Okay.

Those would be -- the build-to-suits would be I assume the financial services and the Fortune 1000s mostly?

Really, yes, IT services, large international network, telecom let network providers, financial -- some financial services in there as well.

Okay.

Thank you.

Thank you.

And our next question comes from the line of Vincent Chao with Deutsche Bank.

Please go ahead.

Good afternoon, everyone.

Just a quick question on starts in terms of what's baked in to guidance, are there any future starts that are built into that that are not currently in the progress pool?

Yes, no, we're -- probably yes, they're -- that progress pool, there would be additional starts, especially since we're billing on a pod-by-pod basis.

We generally try to keep ahead of demand when we can.

And so likely there will be additional starts of individual pods as we go along through the year over and above what's underway now.

Okay.

Specifically I was referring to I guess there's 155,000 square foot space and 115,000 square foot space that was slated to start construction in the third quarter.

Are those in the pool already?

I imagine those are probably a combination of --

I think that might -- is that northern Virginia?

If it's northern Virginia --

Yes, that's Ashburn.

Yes, that's not in the re-dev space right now.

Okay.

Great.

I'm just wondering if you could broaden the update on sort of the pod services business in relation to your expectation of how that might generate some potential opportunities down the road.

Sure.

It's really been important for us, especially engaging on these potential build-to-suit opportunities that we're working on, and being able to engage on a consulting and design level gives us an opportunity to embed ourselves more deeply with the customers and ties in very well with our ongoing corporate development program, you know, for new markets, new verticals, and new customers.

So kind of working hand in hand.

Chris Crosby is driving that product texture services business.

And it's just a natural extension of our ongoing development program.

And we're able to show a lot of value for the customers in terms of cost to build and cost to operate.

So we think that's going to be a nice adjunct to our business overall.

Yes, I guess I'm just wondering in terms of your expectations for that business, are you on track, ahead of schedule?

How is that?

I think we're right on track.

Okay.

All right.

Thanks.

Thank you.

(Operator Instructions) And our next question comes from the line of Srinivas Anantha with Oppenheimer.

Please go ahead.

Mike, assuming, let's say, if rental rates are beginning to flatten out, is this sort of now becoming an (inaudible) where companies are trying to get as much capacity out there as possible before your competitors come into the marketplace with their original capacity?

It appears it's now becoming more of a volume game?

I don't know if I'd characterize it that way because these are more specialized -- certainly much more specialized assets, especially since customers are looking for Turn-Key solutions more and more often and it's very expensive to build and very challenging to finance.

So I think that kind of keeps a lid on.

It's really not for the opportunistic player, I would think, because, because the costs are so high to build and you're building on specs.

Got it.

Bill, do you have a --

No, I don't think it's -- if your question is is this becoming a commodity business, I would say not.

Got it.

And, Bill, when I'm looking at the lease expirations, especially at the Internet gateways, there's roughly around 5% of annualized rent that's coming due between now and 2011.

From looking at the rental rates, is it safe to assume that you should be able to re-sell that space at current $140 plus for a Turn-Key space?

Yes.

Okay.

Some of those are probably month-to money month rollovers still.

Month-to-month rollovers, okay.

In the past you've also given details on the guidance like what should we expect over G&A for the year and --

It's unchanged.

It's unchanged, so $48 million?

Yes.

Okay.

All right.

Thank you.

Thank you.

And I'm showing no further questions in the queue.

I'll turn the call back to Mr.

Foust for any further comments.

Great.

Thank you, everyone.

Appreciate your time and attention to DLR.

And I want to thank our team here at Digital overall for a great job done and a lot of hard work and focus, and thank you to our shareholders for the acknowledgement.

Appreciate it.

And, ladies and gentlemen, that does conclude the Digital Realty Trust first quarter 2010 earnings conference call.

If you'd like to listen to a replay of today's conference, you may dial 303-590-3030 or toll free at 1-800-406-7325 and enter the access code of 4276649.

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