Digital Realty Trust Inc (DLR) 2010 Q2 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Digital Realty Trust second quarter 2010 investor conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

Ms Pamela Matthews, Director of Investor Relations, you may begin your conference.

Thank you and good morning and good afternoon to everyone.

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

If you have not, you can access one in the Investor Relations section of Digital's website at www.digitalrealtytrust.com, or you may call 415-738-6500 to request a copy.

Before we begin, I'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, expect, will, may, 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 lease commencements, rent increases on lease renewals, construction plans and costs, development of additional Datacenter space, expected use of proceeds, the Company's dividend policy and 2010 annual dividend, the Company's expected financial results for 2010 including the Company's 2010 guidance and assumptions related thereto.

For a further discussion of the risks and uncertainties related to our business, see the Company's annual report on Form 10-K for the year ended December 31, 2009, 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 second quarter of 2010, furnished to the SEC and this information is available on the Company's website at www.digitalrealtytrust.com.

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

Following managements brief remarks, we will hold the call open to your questions.

To manage the call in timely manner, questions will be limited to two per caller.

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

I will now turn the call over to Mike.

Thank you, Pamela.

Welcome to the call everyone.

I'll begin with 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 updated 2010 guidance assumptions.

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

Our portfolio currently contains 92 properties, and consists of 129 buildings, totaling 16.1 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.

Portfolio currently includes approximately 1.9 million square feet of space held for redevelopment.

DLR provides a variety of Datacenter facility solutions including Turn-Key Datacenter, Powered Base Building and build-to-suit datacenters for domestic and International corporate customers.

Our properties serve a wide range of industry vertical markets including information technology, Internet and 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.

Our team is very active on the investment, leasing and financing fronts.

As most of you know on June 2, 2010, we announced the acquisition of the Rockwood Capital/365 Main five property portfolio which closed on July 13.

Two of the properties are located in the San Francisco Bay area, one in Los Angeles, one in the Phoenix market and one in Northern Virginia.

The $725 million acquisition totals approximately 919,000 square feet, is 94% occupied, and significantly expands our presence and customer relationships in these important markets.

Major new customers include financial services firms such as Charles Schwab and Union Bank, Internet enterprises including salesforce.com, C-net, expedia.com and HP Snap Fish and IT service providers such as Internap.

In addition to the operating datacenter facilities, the new Arizona property has approvals for up to 250,000 gross square feet of new datacenter development.

We are already in discussions with customers interested in expanding in that market and plan to begin construction on the site before the end of this year.

We're also in discussion with customers interested in the vacant 40,000 square foot shell building at the Chantilly, Virginia site.

Integration of the portfolio is going extremely well, bringing on board many talented new team members and best practices.

Also in June we announced a new 15 year lease agreement with an affiliate of Terremark Worldwide Inc for a new build to suit facility in Amsterdam.

At the same time we acquired the 56,000 square foot shell building, that's subject to a long-term ground lease, that will house the new datacenter.

We continue to pursue other build to suit opportunities with new and existing customers and believe this has a potential to become an important growing part of our business model.

In May 2010 we added new inventory in Santa Clara with the acquisition of two redevelopment properties located adjacent to our existing campus.

The first property, 1725 Comstock Street, is a 40,000 square foot shell building that we promptly preleased 100% to a new Internet enterprise customer.

The second property consists of two shell buildings totaling approximately 82,000 square feet located 3105, and 3115 Alfred Street.

Approximately 25,000 square feet are preleased to an IT services provider who is an existing customer in other markets.

Our leasing program is showing good activity.

For the quarter ended June 30, we commenced leases totaling approximately 164,000 square feet.

This includes approximately 66,000 square feet of Turn-Key Datacenter, leased at an average annual GAAP rental rate of $139 per square foot.

Approximately 25,000 square feet of Powered Base Building, leased at an average annual GAAP rental rate of $34 per square foot.

And approximately 74,000 of non-technical space leased at an average GAAP rental rate of $24 per square foot.

New lease signings are far in excess of commencements and our backlog is healthy for the second half of 2010 and for 2011.

In fact, our lease signings for the first six months of this year will yield approximately $55 million of annual GAAP revenues, and represent a small increase over the entire year of 2009.

For the quarter ended June 30, 2010, we signed leases totaling approximately 295,000 square feet of space.

This includes 121,000 square feet of Turn-Key Data Center, leased at an average annual GAAP rental rate of $175 per square foot.

Also represents over 145,000 square feet of Powered Base Buildings leased at an average annual rental rate of $54 per square foot, and approximately 29,000 square feet of non-technical space leased at an average GAAP rate of $23 per square foot.

Unlike the previous two quarters, these signings include leases for 94,000 feet in Europe.

This includes 6,600 square feet of Turn-Key and 86,700 feet of PVB and reflect a modest effect for currency translations.

We are seeing particularly active demand for colocation, hosting and managed service companies, system integrators and financial services customers.

It's important to note that the good backlog of leases signed, but not yet commenced as of June 30, totals 361,000 square feet and represents $42 million of additional annual GAAP revenue --that's additional annual GAAP revenue.

And also represents an estimated $31 million of incremental additional revenue that will be realized in 2011.

In 2010, we expect approximately 200,000 square feet of these already signed leases to commence in the third quarter, which will contribute incremental revenue in 2010 of approximately $9.3 million.

About 45,000 square feet is expected to commence in the fourth quarter, which will contribute incremental revenue in 2010 of approximately $1.3 million.

Approximately 93,000 square feet is expected to commence in the first quarter of 2011, which will contribute incremental revenue of approximately $10.9 million in that year.

The balance of the backlog of signed leases, approximately 23,000 square feet, is expected to commence in the second quarter of 2011 and contribute incremental revenue in that year of about $2 million.

Turning to our overall lease renewal activity, during the second quarter we signed renewals totaling approximately 193,000 square feet, reflecting approximately 55% of expiring and early renewal square feet and 66% of GAAP rents.

This is lower than average renewal rate, was primarily due to the expiration of one of the 125,000 square foot Siemens office lease in one of our Dallas properties and two smaller leases in Boston and Chicago.

However, we fully mitigated this lower renewal rate by immediately replacing the expiring tenants with new or expanding customers.

For example, last quarter we announced that we signed leases with SoftLayer for that entire Dallas property to houses its corporate headquarters and datacenter operations with DLR approving a portion of the space at Turn-Key Datacenter.

This is a good example of our ability to add value to our existing portfolio through our data center program.

Including the replacement expanding new leases, the renewal statistics would reflect 95% of expiring square footage and 131% of GAAP rent.

If we focus on the PBB, the Powered Base Building renewals alone, 100% of the Powered Base Building net rentable square footage was signed at over 142% of GAAP rental rates.

This high retention rate for the Powered Base Building extensions and renewals where the tenants originally built out the datacenter improvements, continues to demonstrate the overall stickiness of our tenant base.

Our development program is quite active and at quarter end we were under way on construction projects in eight high demand markets in the US and Europe that will add approximately 128,000 rentable square feet of Turn-Key space to our operating portfolio in 2010.

We already have signed leases for approximately 63% of this space.

During the quarter, we delivered approximately 92,000 square feet of Turn-Key Datacenter to our operating portfolio with leases commencing on nearly 30% of the space.

We also delivered over 27,000 square feet of Powered Base Building during the quarter, which was 100% leased.

The DLR sales team currently is engaged in direct discussions with prospective customers of over 1 million gross square feet of new datacenter space.

As reflected in our Q2 signings, we continue to see strong demand for both Turn-Key and Powered Base Building products.

Our pot architecture services program is progressing well.

We recently signed a new customer, are in active discussions with several good prospects.

However, the sales cycle has been longer than we anticipated.

As a result, we have narrowed and slightly lowered our revenue expectations for 2010 between $5 million and $6 million.

2010 overall continues to be a very good year for Digital Realty Trust.

We successfully completed a number of complex transactions that significantly increased our market share, and expand our customer base through both our acquisitions and our leasing activities.

At the same time, Bill Stein and his finance team have done a superb job funding our growth while managing our cost of capital and improving the strength of our balance sheet.

We believe the results of these efforts further improve our competitive advantage as the market leader in the industry with the experience, expertise and capital to take advantage of a broad range of investment opportunities.

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

Thank you, Mike.

Good morning and good afternoon everyone.

I will begin with a discussion of our recent dividend increase, then review our capital markets activities and second quarter financial performance, and finally conclude with our revised 2010 guidance.

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

Earlier this week we increased our quarterly dividend by 10.4% due to the significant growth in taxable income from our recent acquisitions in leasing activities in order to meet our anticipated 2010 REIT distribution requirements.

With this increase, the annual dividend payment for 2010 equates to $2.02 per share, up 37% from the 2009 annual dividend.

Our policy is to distribute 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 upon such a policy, subject to our Board of Directors' approval.

Since the beginning of 2010, we have been very active in the capital markets.

These activities have been focused on two primary objectives.

One, funding our acquisitions in development programs to support the growth of the Company.

And two, minimizing our cost of capital, enhancing financial flexibility and improving our overall credit metrics.

Year-to-date, we have sourced approximately $1.5 billion of capital, including $761.4 million since our last call.

These activities consisted of a follow-on common stock offering of 6.9 million shares in June at a price of $57 per share for net proceeds of approximately $377.1 million.

The offering included 900,000 shares issued upon exercise of the underwriter's over allotment option which was exercised in full.

A private placement of $375 million aggregate principal amount of 4.5% notes due 2015, yielding 4.568% a year.

The transaction closed on July 8, 2010, and generated net proceeds of $371.6 million.

Finally, our after market equity distribution program, which generated net proceeds during the second quarter of approximately $12.7 million from the issuance of approximately 221,000 shares at an average price of $58.38.

The proceeds from these capital markets activities have been used to fund a portion of the Rockwood Capital/365 Main Portfolio acquisition, and we intend to use the remaining proceeds to acquire additional properties to fund development and redevelopment opportunities and for general corporate purposes including the repurchase, redemption or retirement of outstanding debt or preferred securities.

Efforts to minimize our cost of capital, enhance our financial flexibility and improve our credit metrics include, one, amending our revolving credit facility and unsecured notes facility to include eligible unencumbered International assets in the borrowing base in support of our outstanding debt.

This amendment gives us greater flexibility to use unsecured non-US dollar denominated debt to fund future European and Asia-Pac initiatives and further diversifies our debt financing sources while match funding in local currencies without having to rely on secured debt in those markets.

Two, the exchange of a portion of our 2026 debentures which reduced our debt by approximately $37.2 million with a combination of cash and shares of our common stock and eliminated shorter tenure debt that carried a GAAP interest cost of 6.75% per APB14-1.

And three, the redemption of our 8.5% Series A cumulative redeemable preferred stock on August 24, 2010 that we announced Thursday.

If we were to issue preferreds today we estimate they would price in the mid to high 7% range.

While the exchange of the 2026 debentures and the redemption of the Series A preferred stock will result in non-cash charges, the result of these efforts will further reduce our cost of capital, and maintain our commitment to a conservative investment grade capital structure.

Our total debt at quarter end was $2.1 billion, and our ratio of debt to total enterprise value was 26.1%, based on the June 30, 2010 stock price of $57.68.

Based on yesterday's closing stock price of $62.57, our ratio of debt to total market value capitalization would be 24.7%.

Our adjusted EBITDA to cash fixed charge coverage ratio is 2.8 times, and our adjusted EBITDA to cash debt service coverage was 4.2 times for the quarter.

Net debt to adjusted EBITDA multiple was 3.9 times for the quarter, which includes the cash raised from the June equity offering for the Rockwood Capital/365 Main portfolio acquisition that closed in July.

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

We currently have approximately $761.2 million of liquidity, consisting of $70 million in short-term investments, plus funds that can be drawn on our revolving credit facility.

If we were to utilize this full amount 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.

In 2010, we had $7.9 million of principal amortization remaining in third quarter and fourth quarter, and assuming extension options are exercised, no debt maturing.

In 2010, we have approximately $194.5 million of ongoing -- I'm sorry 2011, we have approximately $194.5 million of ongoing principal amortization and debt maturities, including the remaining $135.3 million of the 2026 debentures.

As of June 30, 2010, our weighted average cost of debt including interest rate swaps was 5.88%, and the weighted average maturity was 5.4 years, including debt extension options.

Now, I would like to turn to our second quarter financial results.

First, I would like to point out that after adjusting for non-core items in the first and second quarters of 2010, FFO per diluted share and unit from ongoing operations will be flat quarter-over-quarter.

FFO of $0.76 per diluted share in units for the second quarter was negatively impacted by non-core charges consisting of $0.02 per share of charges related to the exchange of the 2026 debentures and transaction expenses related to our acquisition activities, and by $0.01 per share from the issuance of 6.9 million shares of common equity in June in advance of closing the Rockwood Capital/365 Main Portfolio acquisition in July.

This compares to FFO of $0.81 per diluted share and unit for the first quarter of 2010, which was positively impacted by additional FFO of $0.02 per share related to non-core revenue streams.

Excluding the negative and positive impact from these items in both quarters, adjusted FFO generated from ongoing operations would have been $0.79 per diluted share and unit in both the first and second quarters.

Adjusted funds from operations, or AFFO, for the second quarter of 2010 was $58.9 million.

This compares to a first quarter 2010 AFFO of $59.2 million.

The diluted AFFO payout ratio for the second quarter was 73.3%, compared to the first quarter AFFO payout ratio of 71.4%.

EBITDA, adjusted for preferred dividends and noncontrolling interest, was $115 million in the second quarter of 2010, compared to $114.7 million in the first quarter of 2010, and up 23.4% from $93.2 million for the second quarter of 2009.

Turning briefly to the income statement, G&A was higher in the second quarter over the first quarter, primarily due to the growth of the Company which has resulted in additional employees, higher travel expenses, and professional fees.

In response to the accounting rule change effective 2009, and increase in our acquisition activity this year, this quarter we added transactions as a new line item on the income statement which consists of acquisition related expenses.

Transaction expenses were higher in the second quarter 2010 over the previous quarter due to the New England and Rockwood Capital portfolio acquisitions.

Same store NOI was $112.4 million in the second quarter of 2010, up 1% from $111.3 million in the first quarter of 2010, and up 10.2% from $102 million in the second quarter of 2009.

Same store NOI adjusted for straight line rents and purchase accounting adjustments, which we refer to as same store cash NOI, was $102.6 million in the second quarter of 2010, up 2% from $100.4 million in the first quarter of 2010, and up 15.5% from the $88.8 million in the second quarter of 2009.

Total development construction work in progress at the quarter ended June 30, 2010 was $214 million, of which $105 million is construction cost and $109 million is allocated acquisition costs.

This compares to first quarter 2010 construction work in progress of $150 million.

The estimated hard cost to complete the ongoing June 30, 2010 work in progress is $256 million.

I would now like to discuss our revised 2010 FFO guidance.

As I stated at the beginning of my remarks, our capital markets activities are focused on two primary objectives.

One, funding our acquisitions and development programs to support the growth of the Company, and two, minimizing our cost of capital and improving our overall credit metrics.

As a result, we expect to incur additional acquisition related expenses and financing charges during the second half of 2010, including charges related to the redemption of our Series A preferred stock and potential future exchanges of our 2026 debentures.

Revised FFO per diluted share and unit for the year ending December 31, 2010 is projected to be between $3.24 and $3.32.

After adjusting for certain items that do not represent core revenue and expense streams, FFO per diluted share and unit for the December 31, 2010 is projected to be between $3.35 and $3.40, which represents expected FFO growth of 14.3% to 16% over 2009 FFO of $2.93 per diluted share and unit.

Following revised 2010 FFO guidance assumption represents our current view towards our full year results and includes estimated total transaction expenses and financing charges.

Acquisitions of additional income producing properties, totaling $50 million, at an average cap rate of 9%.

Commencement of leases which will contribute $75 million to $85 million of GAAP rental revenue on an annualized basis.

Odd architectural services revenue recognized between $5 million to $6 million.

Development and redevelopment capital expenditures of $440 million to $475 million.

Portfolio level capital expenditures of $50 million.

Total G&A of $48 million.

Total transaction expenses of $8 million to $9 million.

And financing charges of $6.5 million to $8 million, related to the exchange of the 2026 debentures into cash or common stock and the redemption of preferred stock.

We expect the impact on 2010 reported FFO per diluted share and unit from the remaining non-core charges to be between $0.08 and $0.11, consisting of acquisition related expenses between $0.04 to $0.05 per share and financing charges between $0.04 and $0.06 per share.

While these charges have a negative impact on reported FFO in the short term, we expect to realize the benefits of our investment and financing activities by the fourth quarter of 2010 and the full year 2011.

This concludes our formal remarks.

We are now happy to take your questions.

Operator, are there questions?

(Operator Instructions) We will first the line of Vincent Chao.

Good morning, everyone.

Just had a question on just a GAAP rental revenue, $75 million to $85 million.

I think that was $80 million to $90 million before.

Just trying to understand why that would have gone down since lease signings seem like they're accelerating year on year, I'm sorry, quarter on quarter.

Some of the lease signings, Vincent, have slid to 2011.

So it's not included in our 2010 annualized.

Okay.

So previously things that were expected to commence are pushed out a little bit?

Correct.

Okay.

Okay.

And then just another question on the mix between the power based billing this quarter was higher than it's been in some time.

How should we be thinking about that mix going forward?

Is there an increased interest in Powered Base versus Turn-Key from your customers?

I would say it's more just timing.

These transactions in the first quarter we didn't have any Powered Base Building, second quarter we had a considerable amount, about 145,000 feet of signings and it just varies.

I'd say we're probably looking at in terms of revenues that the Turn-Key will still be the great majority of revenues coming from the Turn-Key and probably -- I'm guesstimating, probably about two-thirds of the square footage.

Okay.

Thank you.

We will now open the line of Jordan Sadler.

Hi.

Just wanted to go, dig into the backlog a little bit.

It seems for 2011 versus 2010 there's a -- I think I caught this right, $31 million of pickup, but actually it wasn't clear.

I think you said $31 million of pickup will be realized in 2011, then you said some of it won't commence until -- some of it will have a contribution beginning in 1Q, 2011, of $11 million, then another piece of $2 million.

But is the aggregate year on year pickup between 2011 and 2010 that $31 million, based on the current backlog?

Is that what you were trying to say?

Right.

That's right.

That's right.

That backlog will contribute about $31 million estimated of revenue in 2011 over and above 2010.

What is the less to spend amount in order to generate that incremental revenue as it relates to ongoing development, redevelopment?

That's the $256 million that I mentioned in my remarks, Jordan.

Is it -- is that the total number?

What's that?

That's the cost of--.

That's the total?

That's the cost to complete our current construction work in progress.

That's the cost to complete it.

And $105 million had already been spent to date, as of the date?

Yes, that's right.

Okay.

And then maybe could you just discuss the acquisition opportunities as you see them right now?

I know you're down to $50 million as sort of a place holder there, but obviously you guys have far exceeded original expectations and so I'm just curious how the environment's shaping up.

Sure.

We're seeing -- the $50 million represents a couple of properties that we have high visibility on, in terms of potentially closing on those.

But we're also looking at several opportunities, both income producing assets as well as interesting development opportunities or additional development opportunities in new markets, and especially some of the International markets that we're exploring in Asia Pac and Europe that it's very binary, whether or not those deals happen down the road, but our acquisition folks are very busy and our corporate development folks are very busy on those potential opportunities.

And we have some additional income producing opportunities that are suspect at this point in the States, as well as looking at some development sites.

So we can continue to bring on product in some of our more active markets.

So all in all, it's looking -- there's good activity.

So Jordan, just picking up on that, these incremental acquisitions are not reflected in our guidance assumptions, as you can see.

But we have some expectation as to capital that would be put out in order to purchase these properties.

Most of which are not income producing and so there's some additional equity in the second half of the year, which we didn't lay out in the guidance assumptions.

But there's just been some confusion about our guidance and how it matches up to the Street consensus and part of that is due to additional equity being issued in the second half of the year to fund these.

Basically a capital place holder in there.

Correct.

That may be dragging a little bit.

Correct.

Okay.

Thank you.

Your next question comes from Srinivas Anantha.

Yes, good afternoon.

Thank you.

Mike, in your prepared remarks you mentioned about a little bit of elongating sales cycles.

Maybe if you could just compare and contrast what kind of sales cycle length are you seeing and how do you compare that to either prior period or the year-ago period?

I'd say the sales cycle is similar to 2009, and where it's nine months, even a year from start to completion, especially working with some of the larger corporates.

So I think that's really a fact of life working with large corporates and actually it's probably not too different, looking at other types of real estate decisions independent of data center, looking at office space and these planning cycles can be quite long.

Where we are seeing folks being more agile are with the managed services, colocation, hosting segment of our customer base who are -- who have a clear -- a more clear view of their requirements at times and can move more quickly and so I think that those -- that industry segment will continue to help mitigate some of the longer time frames with some of these large corporate requirements.

Got it.

Just to follow up on an earlier question about this mix shifting between power and Turn-Key, the reason you're seeing more power is it because of more demand from managed hosting and also because of the improving economy, where now customers are feeling better so they can put up their own capital rather than shifting that capital to you guys, and, hence, more Power Based demand?

I think it's more the former, where there were some of the IT services, managed services companies want to use their own capital and so we happen to have a couple of those opportunities lately that we signed up this quarter.

And that will vary.

Some of those folks also like the Turn-Key product as well because it's expedient for them.

So it's just kind of -- is a very kind of lumpy trend.

Got it.

Bill, just a clarification.

Are you saying that your guidance assumes that there's going to be additional equity raised in the second half of the year and that's why the disparity between your FFO guidance versus the Street?

That accounts for part of it, yes.

Okay.

Thanks so much.

Your next question comes from the line of Mitch Germain.

Good afternoon, guys.

Mike, any hesitation on your part to invest in Europe today, possibly waiting until conditions improve a bit?

Well, that's a good question.

That's something we're looking at very closely in terms of the overall economic climate.

I will say that where we are focused and active in Paris, Amsterdam, London, are markets with a high demand and so we're seeing good activity from customers and I think leasing that we've done with Terremark and Equinix and some of the folks like IBM as well and some of the large prospects we have in London kind of reflect that amount of corporate -- good corporate activity and IT services system integrator activity.

We're not looking to go far afield in other markets.

If we make investments in a new market, it would be very large, very substantial economic situation.

Okay.

Thanks, guys.

Europe is going to be much smaller investment opportunity for us relative to the US, much smaller.

Thank you.

Your next question comes from the line of [Suzanne Kim].

Hi.

I'm just calling to see how much accretion came exactly from the 365 Main acquisition.

It's kind of hard to tell with guidance.

Well, yes, it's -- net of everything on a partial year basis, roughly a dime, $0.10 to $0.11.

Okay.

Great.

And then does your guidance right now assume that the preferreds will be replaced with another preferred?

I'm sorry?

Your guidance, the guidance, that range that you provided, does that assume that the preferred will be replaced with another preferred?

No, it does not.

It doesn't/ Okay.

And then last question.

Regarding the 142% increase in your GAAP rent growth on page 26 of your supplementals, can you kind of impact that for me?

Kind of a massive spread.

That's based on the -- I think that's--?

The new rents over the expiring rent was about 142% increase.

$71, $0.50 over $29.50.

I think part of it, you're looking at a subset of leases that expired and actually were renewed.

It's different product sets too.

You're looking at -- because some of the expiring space was Turn-Key and some was Powered Base Building, with pretty widely divergent rates associated with them.

So it's not very sustainable, you don't think, this kind of a spread?

Yes, we're typically seeing our uplift on new leasing on a GAAP basis probably about 20%, 20% to 25% on a GAAP basis.

Okay.

Your next question comes from the line of Vincent Chao.

Hi, just a follow-up question on the acquisition commentary you made earlier about looking at some deals that could be considered binary which is sort of the terminology you used before the 365 Main.

Is that kind of order of magnitude we're talking about in terms of the additional deals you're looking at in Europe and Asia?

Not that size, no.

The Rockwood portfolio was pretty large, over $700 million.

Right.

We are looking at some relatively large opportunities, but not of that size.

Okay.

And I guess just relative to sort of the capital or the external growth that you posted this year with the $1.1 billion of acquisitions and some developments, how should we be thinking about that going forward?

I know you're not ready to give 2011 guidance, but in terms of the development opportunities, how much can you realistically do in developments if the acquisitions are maybe not there in the same size?

Yes, it's so hard to predict on the income properties and just a lot depends on different owners' investment strategies going forward and when people are looking to monetize investments.

So it's very hard to predict at this stage.

I guess in terms of the development opportunity set, is that looking better in terms of demand, or your willingness to do more spec development if the acquisitions are out there?

Has the environment improved?

We'll definitely continue our program like we have been in both spec development and pursuing build-to-suits and I think you'll see us at least maintain kind of this same pace of investment in new construction over the next couple years.

If you look at the back half of this year versus the first half, the first half of the year the CapEx year-to-date is about $140 million, and we're projecting $430 million to $465 million I think for the full year.

So that basically implies, call it roughly $300 million for the back half of the year.

Okay.

We can do $45 million to $50 million a month.

That's per month.

Okay.

Sort of an ongoing sort of pace longer term?

Yes.

If you look at sort of a couple years ago, we were running at that.

Okay.

All right.

Thanks.

Your next question comes from the line of Srinivas Anantha.

Yes, hi, thank you.

Mike, with respect to 365 Main acquisition, I know one of the big portfolios was more like a retail property as opposed to a wholesale property.

Could you tell us what your strategy is going to be with that particular property going forward?

Are you going to convert some of those customers to more of wholesale as those leases come up for renewal.

And secondarily, what kind of an EBITDA contribution comes from that as a percentage of the overall EBITDA contribution of 365 Main?

We'll continue to operate the colocation business there at the 365 Main building.

We think it's a really great business.

It holds a dominant position in the San Francisco market and that property, along with our 200 Paul Avenue property and the Oakland property, I think we can really be the dominant colocation provider in the city of San Francisco and immediately adjacent.

So we'll continue to run it with the current team and the current sales team and hopefully continue to grow that business.

Got it.

Okay.

If you -- would you consider expanding that strategy to other cities?

Only if we have situations where we're acquiring a building that -- where we have a legacy operation in there, but I don't see that.

We have some co-lo, a little bit in Chicago, we have a little bit in Phoenix, a couple other locations in Virginia and New York.

But I don't see that as -- it's going to be more as a matter of if we're acquiring an asset with a legacy operation rather than pursuing that as a strategy in other markets.

We're going to probably stick to San Francisco with it.

Got it.

And if I'm looking at your Turn-Key rental rates today, I think you started this product maybe in 2005, correct me if I'm wrong there, 2005 or 2006.

What kind of an uplift in rental rates or lease rates are you seeing on Turn-Key properties today, compared to like three or four years ago?

You mean in terms of the kind of annualized uplifts in the lease terms?

Yes.

Typically 3% is still pretty typical.

That's the annual one.

But if I were to compare the lease rates two years ago to the lease rates today, what is the difference?

How much higher are today's lease rates compared to three years ago on Turn-Key properties?

It varies so much market to market, but I would -- once again, this is a guess, about 20%.

Okay.

I would assume that most of your Turn-Key properties in large cities as opposed to the smaller cities.

That we're building, yes, in the major markets, absolutely.

Got it.

Okay.

Thank you.

And your next question comes from the line of [Chris Katen].

Good morning.

Picking back up on acquisitions, I noticed the guidance cap rate and guidance was, I think, a 9, down from past guidance which was 10 or even higher.

Does that reflect a mix shift in terms of going to some lower cap rate markets or are you seeing cap rates going down in your core markets?

I think it's really a function of the particular opportunity that's being pro forma'd in the guidance.

We're looking at an opportunity with long-term, high credit tenants in very strong markets, kind of where that 9 cap is a very reasonable cap rate for that product and credit risk.

This is one specific deal that's really under negotiation, so--.

Got it.

Got it.

And then we were talking about build-to-suit.

Can you comment on some of the major users recently, just in the space, choosing to own rather than lease their facilities?

I guess I would say how do you expect this owner user dynamic to unfold going forward?

And then as you make in-roads in build-to-suit activities, some of these owned facilities are in kind of non-core server markets.

What's your comfort level following tenants into those markets?

Well, I think what we're seeing is what we've seen over the last number of years, where especially with the Internet based companies, folks like Microsoft and Google and eBay, it's been very typical for them to build and own their own facilities.

So it's not a new trend.

Where I think we can make and we have the biggest impact are with corporate users and some of the system integrators and IT services companies, where they've got better use of capital, higher return investment capital in their operations and I think it's that kind of cost of capital and capital return analysis that companies do and I think which leads to working with us, especially because we have such a lower development cost than is typical.

So that's pretty attractive.

Folks looking at their overall cost of occupancy, working with DLR can be a good solution.

Thanks.

Your next question comes from the line of [Suri Najajong].

Yes.

Thanks.

This is [Reed Nagarol] in FBR Capital Markets.

Good afternoon.

Thanks for taking the question.

First off, will you be filing a separate 8-K for the 365 Main portfolio and in connection with that, with the earlier question, what percentage of the $725 million is really insignificant, I would imagine, of your colocation services of 365 Main itself?

Let's see, in terms of -- we're not breaking out the revenue or EBITDA from the different buildings.

We want to keep that competitively to ourselves, that particular bit of data of detail, I would say.

We've already filed an 8-K that contains the pro formas on the 365.

In terms of the transaction expenses for 3Q, 4Q, on the $0.04 to $0.05 details, is that related to the 365 Main acquisitions or is it related to future acquisitions?

365 closed in July, so there's certainly some third quarter expenses associated with 365, then there's some new initiatives specifically in new markets that are picked up in that guidance assumption as well.

Okay.

Again, a follow-up on the earlier question.

You've got Facebook announcing its own Oregon datacenter and Twitter saying they don't want to outsource from NTT.

What if any impact would that have on your current and future prospects?

Really none that I can anticipate at this point.

As I mentioned, the Internet based enterprises have a pretty long history of owning -- developing and owning their own facilities.

So that really hasn't been a target segment for us on the build-to-suit or on the overall leasing side for new.

We've done a lot with Facebook and they're doing -- they've historically done a combination of leasing, as well as building their own.

Okay.

Fair enough.

I think related to an earlier question, just to phrase an earlier question, what would the cash rents on leases -- I think you disclosed a GAAP rent on leases signed.

What would the cash rent growth on leases signed be let's say over the past four quarters on let's say Turn-Key space alone?

You've covered $175 as GAAP, what would that be on a cash basis from a growth perspective.

You don't have to disclose the actual cash numbers.

Over the last four quarters, I'd say on average probably rates have been fairly flat.

It varies widely once again by market.

Absolutely.

But I think over the last four quarters, they've been flat, but flat at very high returns on -- very healthy returns on investment for us and our returns have been -- continue to be quite strong.

Okay.

Thank you.

Thanks a lot.

Your next question comes from the line of [Quinton Belelli].

Hi.

It's Mark Montana here with Quinton and Michael.

Just starting off with the equity issuance that you have embedded in your guidance, might have missed this, but wondering what the size of that assumption is?

We haven't stated it.

Basically we're committed to maintaining a debt to EBITDA ratio of 5 times and we haven't stated what the acquisition assumption is for the undesignated acquisitions.

You can look at the remaining CapEx of 300 to 335.

We've got the 50 on the deal that is in the guidance and you can probably back into what the equity would be required for just that piece of it and then there's a little bit more.

Okay.

That helps.

And then on acquisitions, wondering about the economics that you're seeing in the Asian and -- Asia Pac markets and European markets relative to domestic yields, going in yields on stabilized properties in the US have been around the 10% level for some time, give or take a little.

Wondering how that compares overseas?

Well, really, I'd say the -- most of what we're looking at Internationally right now has a pretty large development component or redevelopment component associated with it.

So we haven't looked too much.

We've looked at a limited number of income producing assets in those markets, but I think once again depending on the underlying tenant base, we're looking at 9.5 to 10.5 cap in a European market.

I guess maybe a better way to ask that then would be how does the yield on costs compare, if you were to buy a redevelopment property in the US versus Asia Pac or Europe?

Is there some type of premium that you're ascribing or pretty flat?

I think pretty similar to US.

Okay.

In terms of our expected debt development returns.

The difference though is that in some of these markets the cost of funding is lower.

Okay.

And then on the 2011 roll in the corporate data center, notice the rents per square foot are very much below your averages, around $16 a square foot.

I'm wondering if this is due to the very long-term leases expiring, what the plan is there, any additional information would be appreciated.

What are you looking at?

Page 24 of the sup.

It's in the 2011 corporate data center roll, there's 450,000 square feet of space expiring at annualized rents of about $16 per square foot.

Yes.

Relative to the portfolio average of 42.

I think a lot of that space is non-datacenter space.

Well, corporate data center.

I'll have to take a--.

I think that's being skewed by one particular transaction.

Oh, yes.

We have a couple of larger leases that are expiring and the tenant operated the buildings as datacenters.

However, they were originally leased as alternative use, more industrial flex space building.

Yes.

That we acquired with those leases in place and I think that is skewing it quite a bit.

There's one big legacy lease that's in at $5 a foot, roughly.

Are those expected to roll and you're going to put that back into redev or is that something that's going to be renewed at similar rates?

No, the large building that Bill's referring to will go into redev.

Okay.

And actually it will be a good opportunity for us.

It's in a market that right now we're full.

We don't have any product.

So it will be a good value add opportunity for us.

Great.

Thanks very much.

We will now open the line of Michael Bowen with Guggenheim Securities.

Okay.

Thank you.

Good afternoon and good morning.

So I'm trying to look back at -- looked like at your signed leases for the first quarter and the second quarter, both pretty strong, 241,000, and 295,000.

I'm still a little unclear if you could help explain what has been the delay in the commencement of some of these leases?

Because I think if I remember correctly, it normally takes anywhere from maybe three to four months to go from signing to commencement.

This seems a little out of character and I think you mentioned some of the sales cycles have lengthened.

What are you seeing out there and experiencing in the marketplace that is the cause of this right now?

Well, this just happens to be that we've been signing leases on newer properties.

So we've got a couple of good signings in Santa Clara, on properties we just acquired to redevelop.

So the redevelopment process will take us into early 2011.

We have a significant lease with Terremark in Amsterdam, which will be a 2011 as we have to build that building.

So it's just more -- we happened to sign a number of bigger leases in facilities that were in the process of building out.

Another way of saying it is we signed in markets where we were out of finished inventory.

So we have to complete the inventory before we can commence the lease.

Got it.

Okay.

And then you also mentioned that you were seeing some strength from managed hosting.

What are you seeing on the colocation side out there as far as demand for wholesale space, relative to last quarter, relative to year-over-year?

At least from the activity we're seeing with our customers, it seems to be very robust.

Whether co-lo, interconnect and hosting, all of those aspects of the datacenter business seem to be doing quite well and I think a lot of the third party data like people like Tier 1 Research follow the markets are seeing really good growth.

And then I guess just a follow-up real quickly with the first part of the question I had, with regard to some of the areas where you've signed leases where you ran out of space, are there any kind of best practices or lessons learned as far as how you can maybe avoid that in the future or is it really just that lumpy that it just happens when some of these deals come out of the blue or give us some thoughts on that.

Thanks.

Sure.

It's more of very hard to predict, especially sometimes you will have customers pop up in relatively last minute and require space and that could absorb inventory that we have and sometimes it's hard to plan and you don't want to turn someone away obviously.

So it's a good challenge to have and we're still going to be measured on how we bring new product into the market, since so much of it is on a speculative basis.

We'll continue to utilize our pot architecture and add product in a very incremental fashion.

An interesting example is in Northern Virginia, we finished a shell and two pods in January of this year and we ended up signing a lease for the entire building.

We thought it would take us the whole year to lease the building, but we had it leased by mid-March and so we've got two other parcels at that location and now we're building shells on both parcels.

The initial pods there won't be ready until early next year.

Okay.

Thank you very much.

It's kind of good news in a way.

It is good news.

We leased way ahead of expectations, but as a result we were out of inventory.

Your next question comes from the line of Jeff Spector with Bank of America-Merrill Lynch.

Good afternoon.

I guess can you discuss a little bit more the reason for reflecting this future raise in today's 2010 guidance?

Why did we put a capital raise in, although not specifically indicating how much?

No, not -- just why not wait until the acquisition occurs and at that point if you raise the equity, you could always lower your guidance then.

Why put it in today?

Well, we need some for the CapEx program for the remainder of the year anyways.

As I said, we've got 300 to 335 basically in the second half CapEx budget, plus 50 that we've indicated for acquisitions.

So that takes you to basically 350 to 400.

We've got another 50 of general portfolio CapEx and some of that's been spent, but some hasn't.

So we just basically need it to keep our ratios in alignment if we're able to spend that much CapEx on the balance of the year.

So that's kind of the wild card.

But it's in the budget and because it's in the budget we feel it is prudent to put the equity in as well.

Some of that does reflect some of these new opportunities out there we're pursuing, where a part of that cost would hit in the second half of the year.

Okay, and the 5 times, that's just -- that's not in your covenant, that's just Company policy?

That's actually -- Moody's has put that in their literature.

Okay.

All right.

Thank you.

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

One follow-up on the build-to-suit opportunities.

What are the return expectations on those deals?

Those are going to vary by location and customer credit and length of lease, but we're definitely looking at between 9.5 to 10.5, typically.

And separately, just clarifying on Santa Clara.

I know this quarter you took down two redevelopment properties and you've done some leasing.

I'm just trying to gauge how much remaining inventory you have that's unleased?

So in other words, I don't remember the exact split, but I think you had three one-megawatt pods you could build at 1725 Comstock and maybe another six at Alfred Street.

How many of those remain?

So the 1725 Comstock is fully leased.

The Alfred Street where we have a potential for six, we have two leased.

Two leased.

And just for fun, what's the expected return on these redevelopments?

I'm not going to give that specific information at this point.

It's consistent with the numbers that we've provided in the past.

Okay.

Mid-teenish.

Well, we've always said we're kind of averaging 12 to 14 unlevered.

Cash.

Cash NOI, upon stabilized.

Okay.

Thank you.

We will now open the line of Rob Salisbury with UBS.

Hi, it's Ross Nussbaum here at UBS with Rob.

Couple questions.

First, can you give us an update on what's going on in Dallas, specifically at the two large 250,000 square foot assets you have there?

Well, let's see.

We have the Datacenter Park Dallas which is in Richardson and that is a a redevelopment campus of about 750,000 feet total in several buildings and so we're building that out incrementally, building by building, and so I think the first building of about, oh, I believe it's about 125,000 square feet.

We're looking to have that fully let very soon, based on the prospects we have and we have some initial tenants in there, a large national financial services firm, a large International consumer products firm, and an International IT services managed services company are our first three tenants in that building.

So it sounds like everything is on track in terms of the timing with respect to--?

Actually we're probably a little ahead of schedule on our original projections.

Okay.

Second question, with respect to the timing of lease commencements, I think one of the things that's probably tripped up analysts here with respect to your quarterly results is it's incredibly difficult to figure out when all the leases you're signing are actually commencing and I know you gave some color earlier in the call, but I'm wondering, could you put into the supplemental going forward a schedule that lays out what the square footage and dollars associated with that are, sort of on a quarterly basis going forward, as to when all these leases are commencing?

Because I think that will probably alleviate some of the issues like we had this quarter, coming in a little shorter numbers.

Something we can look at, I'm not sure if that's something we can do, but we can consider it.

Yes, we need to be careful from a competitive standpoint too.

Yes.

Showing the timing of when leases commence, what's the competitive nature of that?

We can do that.

I don't think we want to put -- we just can't put names on it.

That's fine.

I think what we're all sort of struggling with it was a question earlier as well, you signed a couple hundred thousand feet and we all have to take our best guess as to when that's starting.

My guess is one of the things that happened this quarter is we all guessed wrong and it's probably something you could have helped us with and I don't think would hurt you competitively.

No, that's why Mike laid out how much of the signing is really showing up in 2011, to really help with that.

Thank you.

We will now open the line of Mitch Germain with JMP Securities.

Hi.

Bill, just a quick bookkeeping.

Did you give the CFE number for the quarter ending?

We did.

Hold on.

I'll give it to you again, though.

Thank you very much.

So at the end of the quarter, the construction work in progress was 214, and 105 of that was construction costs and 109 of that was related to acquisition costs.

And I also said that the cost, the hard cost to complete that work is going to be 256.

Okay.

Thank you very much.

It appears there are no further questions at this time.

Management, do you have any closing remarks before we conclude today's call?

No, we appreciate everybody's focus on DLR and participation on the call and I just want to thank everybody on our team here for another great quarter and I think 2010 is going to be an exceptional year for us, in terms of the activities on both the acquisitions and leasing side.

So a job well done by our team.

Thank you very much.

This concludes today's conference call.

Thank you for your participation.

You may now disconnect.

Presenters, please hold for a subconference.