Digital Realty Trust Inc (DLR) 2010 Q4 法說會逐字稿

Good morning.

My name is Chanelle, and I will be your conference Operator today.

At this time I would like to welcome everyone to the Digital Realty Trust fourth 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.

I would now like to turn the call over to today's host, Ms.

Pamela Matthews.

Please go ahead, ma'am.

Thank you.

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 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 the expectations.

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

You can also identify forward-looking statements by discussions of strategy, plans, intentions, future events, or trends, or discussions that do not relate solely to historical matters, including such statements that relate to lease commencements, construction, development, and redevelopment plans; supply and demand fundamentals; our dividend policy and pullback; capital raising activities; and the Company's future financial and other results, including the Company's 2011 guidance, quarterly run rate FFO and same-store NOI growth, and related assumptions.

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; core funds from operations, or CFFO; earnings before interest, taxes, depreciation, and amortization, or EBITDA; adjusted 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 fourth quarter of 2010 furnished to the Securities and Exchange Commission, and this information is available on the Company's website at ww.digitalrealtytrust.com.

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

Following their remarks we will open the call to your questions.

To manage the call within the one hour time frame, questions will be limited to one caller.

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

We would also be happy to take any follow-up questions offline.

I will now turn the call over to Mike.

Great.

Thank you, Pamela.

Welcome to the call, everyone.

2010 represented our sixth year as a public REIT and on many levels was a record year for the Company.

We invested $1.3 billion acquiring 15 properties totaling 2.3 million square feet.

Our lease signings during the year reached 1.2 million square feet, providing for a better than anticipated leasing revenue backlog coming into 2011, of over $27.5 million.

And we increased our quarterly common stock dividend by 28%, a direct result of our ability to consistently grow earnings.

In fact, year after year our business model delivered solid operating results and earnings growth for our shareholders by providing high quality and cost effective data center facilities across multiple markets for our enterprise, telecom networks and co-location managed services customers.

Today I'll begin my remarks with a discussion of our leasing activity in top investment markets including the trends we're seeing in terms of new leasing and renewals, pricing and lease terms, as well as our view of potential new supply.

I'll then provide an overview of our operations, including our same-store results and expectations for 2011, and discuss our acquisitions activities.

Lastly, I'll comment on our development program before turning the call over to Bill.

Bill will then discuss in detail our dividend increase, our recent [good] financial performance and a capital markets update and conclude with a discussion of our revised 2011 guidance.

As evidenced by our leasing results, we continue to see strong demand for both our turnkey and our power based building products.

Overall we had our largest year for new lease signings of 1.2 million square feet and over $110 million of annual GAAP revenue.

Lease rates for new TKD space in 2010 in our top US investment markets, on average, have increased by nearly 6% over 2009.

Demand in our markets is growing as reflected in our customer prospect funnel.

We currently are engaged with potential customers representing over 1.4 million square feet of new requirements, an increase of almost 50% over six months ago.

Tenant prospects come from a variety of verticals such as financial services including internal cloud deployment, energy companies, consumer products, telecom networks, managed services, including cloud service providers, managed hosting, co-location and system integrators.

We had a strong fourth quarter of activity in the New York/New Jersey market both in terms of lease signings and renewals.

We signed a new 73,000 square foot PBB lease in the fourth quarter at our Piscataway campus.

And we renewed two legacy data center leases, one 12 years old and the other 11 years old at our Weehawken property.

Both of these totaled 246,000 square feet.

One lease was for a 7-year extension term and the other lease for a 15-year extension.

No new CapEx was required from DLR.

These renewals demonstrate clearly the long term life of the data center improvements and the ongoing value to the customers operating in these mission critical facilities.

The new cash rental rates for these renewals represent an increase of 21.4% over the expiring rent.

This is typical of our experience this year with PBB renewals.

For the year, rental rates in the New York/New Jersey region for our TKD product averaged $190 per square foot per year on a GAAP basis.

This is up 15% over our average 2009 TKD rates, primarily due to a large lease we signed at our 111 Eighth Avenue property in New York where we have a large leasehold there.

Excluding that lease, rental rates in the New York/New Jersey markets were stable year-over-year.

Our top prospects in this market continue to be the corporate enterprise customer, particularly from financial services sector, as well as co-loan managed service providers that support corporate enterprise customers and deliver cloud services.

As we discussed in our Investor Day in December, we closely track supply in all of our markets, particularly where we are actively developing.

In New Jersey, current supply and demand appear to be in a very healthy balance from the landlord perspective.

We identify approximately 145,000 square feet, equivalent of about 23 megawatts, of available or under construction fully fitted-out data center space.

We're tracking prospective tenants of about 340,000 square feet, or 29 megawatts, seeking space for commencement over the next 12 to 18 months.

So, we're aware of about 6 megawatts of potential demand in excess of the short-term supply, a healthy market condition from our perspective.

In addition, we're tracking 700,000 feet, or roughly 67 megawatts, of planned potential projects.

These are shelf space, yet to be constructed, so we don't consider this to be competitive product.

We estimate the shelf space would easily require $700 to $1,000 per square foot to fit out, up to $700 million, a challenging amount of capital to raise for a prospective element.

So we see this product coming online, if it does at all, to meet existing demand that's coming on at that time.

So we don't see that as competitive space today.

Moving on to Northern Virginia, during the fourth quarter we signed 153,000 square foot build-to-suit PBB lease with a current DLR customer on a development parcel at Beaumeade Circle that we acquired at the end of 2009 as part of a two-building fully-leased portfolio in Northern Virginia.

For the year, rental rates for our TKD product in Northern Virginia averaged $146 per square foot per year on a GAAP basis, and remains stable over -- in comparison to our 2009 TKD rates.

And our Devin Shaffron campus in Ashburn, the development of building Z and F, which totaled 267,000 square feet, is proceeding as planned with strong interest from both new and existing customers.

The profile of prospects for our data center space in Northern Virginia consists of corporate enterprise customers including financial services firms, internet enterprises, co-location hosting and managed services customers.

Current supply and demand in Northern Virginia appear to be in good balance from our perspective as landlords.

We identify approximately 177,000 square feet, 27.6 megawatts, available or under construction of fully fitted-out data center space.

We are tracking prospective tenants seeking approximately 290,000 square feet, or 38 megawatts, for commencement over the next 12 to 18 months.

So we're aware of about 10.4 megawatts of potential demand in excess of short-term supply, a healthy market condition from our perspective.

In addition, we're tracking 376,000 square feet, 36 megawatts, of potential planned project.

And once again this is shelf space yet to be constructed so we don't consider this to be competitive product at this time.

Heading south to Texas, in the fourth quarter we signed new Turn-Key Datacenter leases for three pods totaling over 56,000 square feet at phased in start dates at our Houston facility with Fibertown, a growing managed services provider focused on the Texas business community.

Houston, along with cities like St.

Louis and suburban Boston, are very good markets for co-loan managed service providers serving regional businesses and our Turn-Key Datacenter space is an attractive solution to support the growth of their companies.

We continue to see good demand at our Data Center Park Dallas campus.

For the year, rental rates in the Dallas market for a TKD product average $131 per square foot on a GAAP basis.

This is up 3% over our average 2009 TKD rates.

Dallas remains a very attractive market for national and multi-national corporate enterprise customers and managed service providers due to its recent power cost, fiber concentration and deep labor pool.

Current supply and demand in Dallas appear to be in very good balance, with a limited amount of built out space.

We identify only 7 megawatts or 88,000 square feet of available wholesale space, under or available or under construction at this time.

We're tracking approximately 550,000 square feet, or 40 megawatts, of prospective tenants seeking space for commencement over the next 12 months or so.

There appears to be about a 33-megawatt of potential demand in excess of short-term supply, a very healthy market condition.

Now that we're tracking 79 megawatts of planned potential projects, shelf space yet to be constructed, that would likely require $1 billion to build out.

50 megawatts of this resides in a former industrial facility east of Dallas that have some competitive challenges, and we don't consider this to be competitive product at this time.

Finally, heading further west to Silicon Valley, we continue to see strong demand for our data center space.

During the fourth quarter at our Santa Clara campus, we delivered 1725 Comstock Street totaling 40,000 square feet which we acquired for complete redevelopment in the second quarter of 2010.

We pre-leased the entire building to a new customer that took two of its three pods starting in December.

Construction of the next phase of our campus consists of four TKD pods at 3105 Alfred Street.

These total nearly 50,000 square feet.

The first two pods have been pre-leased to an existing DLR customer for its operations -- first operations in Silicon Valley and we expect that space to come on line in late March or early April.

In the fourth quarter we signed a lease for a second customer for half a pod, about 6,000 square feet, which is scheduled to commence in the second quarter this year.

For the year, rental rates for our TKD product average $197 per square foot on a GAAP basis.

In 2009, unsure of the direction of the economy, we took a conservative position and did not add new inventory or signed new TKD leases in Silicon Valley.

Going back to 2008 when we had supply to lease in the market, the average annual GAAP rental rate for TKD was up in 2010 compared to 2008.

This is primarily due to our lower construction costs.

We passed part of these savings on to our customer in the form of lower rental rates while still achieving stabilized unlevered returns between 11% and 14% in our Santa Clara projects.

Our prospect funnel in Silicon Valley markets is characterized by growing online gaming and marketing companies as well as hosting, co-location and managed services providers.

Current supply and demand appear to be in good balance in Silicon Valley.

We identify approximately 241,600 square feet, 35.8 megawatts, of available or under construction fully fitted-out data center space.

We're tracking about 220,000 feet, 38.4 megawatts, of prospective tenants, seeing commencement over the next 12 to 14 months.

So we're aware of about 2.6 megawatts of potential demand in excess of the short-term supply, a good balance.

In addition, we're tracking 575,000 feet, or 50 megawatts, of planned potential projects.

Once again, this is shelf space yet to be constructed, so we don't consider this to be competitive product until it's actually built out as data center space.

DLR's exposure is well managed in the Silicon Valley with only 33,000 feet of TKD space available and 150,000 feet of PBB space.

In suburban London, we're seeing a rebound in leasing activity.

We signed Turn-Key Datacenter leases totaling nearly 21,000 feet in the fourth quarter to customers, one a very large international financial Services company and the other a large international investment firm.

In addition, we signed a power based building lease for approximately 6,700 square feet with one of the customers for future expansion at our Red Hill project.

For the year, rental rates in the London market for our TKD product averaged 167 pounds sterling per square foot on a GAAP basis.

This is up nearly 11% over our 2009 TKD rates.

Our investment returns for new leasing exceeded expectations in 2010.

For the year, we achieved projected 12% to 14% not cash -- 12% to 14% cash returns, not GAAP, on invested capital for new TKD projects, and a projected 10% to 12% cash return on invested capital for PBB leases signed, including build-to-suits.

Lease terms remain consistent with past years.

Average new lease term for new leases signed was 90 months or 7.5 years in the fourth quarter, and was 91 months, 7.6 years for the full year of 2010.

Excluding non-technical space, the average lease terms were much higher, averaging a healthy 96 months or eight years in 2010, up from the 93 months in 2009.

And this compares to the average remaining lease term of our portfolio of 6.9 years, so we are seeing -- continuing to see good, healthy relatively longer term leases.

For the leases that we renewed during the year, TKD rates were up 6% on a cash basis and 8.9% on a GAAP basis.

PBB rates were up 20% on a cash basis and 26% on a GAAP basis.

So good healthy progress on leasing and lease rates overall.

Our acquisitions team is evaluating a number of investment opportunities, both income producing and for new development.

Currently our pipeline of possible income investments is approximately $600 million of properties in the US and in Europe.

We generally target a going in cap rate range of 8.5% to 9.5% for income properties.

And our guidance for 2011 assumes a range of income investments of $200 million to $450 million.

We expect to continue to play the role of the consolidator in the data center market.

The pipeline for potential development opportunities is approximately $150 million, including properties in the US, Europe, and in Sydney, Australia.

In addition, we're pursuing several potential build-to-suit opportunities with major corporate enterprises.

Portfolio occupancy at the end of the quarter was 94.6%, down slightly from the previous quarter of 95%.

This is primarily due to the addition of nearly 62,000 feet of finished space at our new Singapore asset.

The balance of the Singapore asset was added to our redevelopment portfolio as we continue to build it out.

Overall in the fourth quarter the amount of lease space in the portfolio actually increased by a little over 58,000 feet, reflecting additional leasing and additional space coming into the portfolio.

Same-store occupancy remains stable from the previous quarter at 94.7%.

During the fourth quarter, same-store NOI was up 5.6% from the third quarter.

Year-over-year, same-store NOI increased 7.8% overall in 2010.

In 2011 we expect our annual same-store NOI growth based on the new same-store pool to be approximately 8%.

This growth is primarily due to redevelopment leasing and is included in our 2011 guidance.

Same-store NOI margins improved, calculated excluding utility reimbursements from operating revenue because of the disproportion amount of utility costs compared to other REITS.

And this improvement reflected in 77% NOI margins in the fourth quarter, and this was an improvement from 72% in the third quarter of 2010.

In an effort to provide a greater level of reporting detail for our operating portfolio and development program, we've added new information to two schedules in our quarterly supplemental package.

First we revised the lease expiration schedule on pages 25 and 26 to reflect expirations by product type such as TKD, PBB, and non-tech.

We also added new tables and a page of our construction activity disclosure on pages 30 and 31.

We hope that you find these enhancements helpful and we very much welcome your feedback.

Moving on to our development program.

During the fourth quarter 2010, we completed and delivered 78,000 feet of TKD space that was 30% pre-leased.

We were under construction on over 326,000 square feet of TKD which was 35% pre-leased.

We are under construction on 56,000 feet of build-to-suit space that was 100% pre-leased.

This is in Amsterdam.

And over 614,000 square feet of power based building that was 40% pre-leased.

Including pre-construction work and common building improvements, the construction work in progress at year-end 2010 was $157 million.

The estimated cost to complete the ongoing December 31 work in progress is $388 million.

Our construction progress in Singapore remains on track and we expect the building to be ready for initial occupancy in mid 2011.

Our plan remains to invest at least an additional $35 million in 2011 to complete spec TKD as we build out on a floor by floor basis.

Customer interest is high as we're currently tracking between 20 to 20 megawatts of immediate demand represented by approximately 30 active prospects at various stages of inquiry.

We are conducting between 4 to 6 customer tours a week whose requirements generally range between 500 KW to 4.5 megawatts of capacity each.

So a fairly wide range of requirements.

The pipeline consists of international financial institutions as well as some managed service providers and government organizations.

Turning to our business development in Asia-Pac, while we regret seeing Chris Crosby leave DLR, we have a solid team in place to maintain that momentum he's created in the Asia-Pac region, where he's focused the majority of efforts heading up our business Development.

Kris Kumar has been with DLR as our head of Asia-Pac business development for over a year and is taking the lead driving new opportunities.

Kris Kumar has a wealth of experience developing and operating data centers for over 20 years in the region and is instrumental to our penetration into the Singapore market, as well as driving new development opportunities and potential investments in Hong Kong.

We appreciate all the great work Chris Crosby has accomplished at DLR and we wish him all the best on his new opportunities.

As I stated in my opening remarks, our investment and development business models consistently delivered solid operating results and earnings growth, often in the midst of challenging business conditions.

These consistent results are based on the dedication of our talented team of technical and real estate professionals whose combined efforts are the foundation of our performance.

If you look at our technical platform alone, this consists of 182 team members, and these folks have enabled us to obtain an operating scale far beyond that of our competitors, delivering significant value to our customers in terms of cost effective and highly reliable and secure facilities in multiple markets.

We now have a design and project delivery team totaling 32 professionals, our sales and sales engineering team totals 38 professionals, and our technical operations team is composed of 112 professionals.

These dedicated team members, who really come from the technical data center side of our business, are focused on delivering solutions to the corporate enterprise IT departments, as well as companies serving the enterprise customers such as co-location and managed services providers.

Our team delivers flexible, reliable cost effective data center facilities for our customers critical business applications across multiple markets here, Europe and now in Asia-Pac.

I'm very proud of their contribution to our customers and to our shareholders.

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

Thanks, Mike.

Good morning and good afternoon, everyone.

My remarks today will include comments about our recent dividend increase, additional color on our fourth quarter FFO, an update on our 2011 financing plan and a brief discussion of our increased guidance for 2011.

As Mike said, 2010 was an exceptional year for us in terms of operating performance and earnings growth.

For those of you who are newer to Digital, like all REITs, the Company is subject to a distribution requirement of at least 90% of taxable income to maintain REIT status.

Subject to Board approval, our dividend policy is to distribute 100% of taxable income each year which is based on our estimated growth and cash flow so as to eliminate corporate level federal income tax.

To the extent that a REIT distributes less than 100% of its taxable income in a calendar year, the IRS allows REITs to, in effect, borrow some of the dividend declared in the fourth quarter but paid in the following January to satisfy the payout threshold.

This is commonly referred to as a pullback.

In 2009 and 2010, we pulled back 39% and 42%, respectively, of the January dividend in order to meet our goal of distributing 100% of taxable income.

I have heard some concerns from analysts, and indirectly from investors, that our recent dividend increase was too large and that it perhaps signals a lack of investment opportunities.

Let me be very clear.

We raised our dividend 28% because we seek to maintain our practice of distributing 100% of our taxable income, eliminating corporate level federal income taxes while retaining as much cash flow as possible to reinvest in our business.

At our increased FFO guidance levels, we estimate a pullback of next January's dividend of more than 30% at the high end of guidance.

In other words, we could have increased our dividend even more than we did and still be consistent with our dividend policy.

Let me now turn to the year's financial results.

As stated in our press release, after adjusting for items that do not represent ongoing expenses or revenue streams in each year, 2010 FFO was $3.49 per diluted share in unit, up 19.5% from 2009 FFO of $2.92 per diluted share in unit.

A reconciliation of reported FFO to core FFO is provided as an attachment in today's earnings release.

$3.2 million or $0.03 per share of our fourth quarter non-core property tax related adjustments are excluded from our full year 2010 core FFO.

While the property tax related adjustments are applicable to the quarter in which they were recorded, they have no effect on an annual basis, as these adjustments represent a true-up of an annual accrual.

This increase in FFO represents our fifth straight year of annual FFO growth in excess of 17% thanks to the collaborative efforts of our unmatched team of technology, real estate, and finance professionals.

To underscore what Mike said in his remarks, these people are the foundation of our unique business model that has consistently delivered solid operating results and earnings growth.

After adjusting for items that do not represent ongoing expenses or revenue streams in each quarter, fourth quarter 2000 (Sic-See Press Release) FFO was $0.96 per diluted share in unit, up 23.1% from fourth quarter 2009 FFO of $0.78 per diluted share in unit.

These non-core expense and revenue items in the fourth quarter of 2010 primarily consisted of $5 million in property tax accrual adjustments that were partially offset by $3.7 million of expenses related to the redemption of our Series B preferred stock, in exchange of $21.3 million of 4-1/8 exchangeable debentures.

The tax adjustments generally resulted from accruing property taxes during the first 3 quarters at what were considered prudent levels in light of potential reassessments.

Net of new leasing and fees related to our POD architectural services business, we estimate our 2011 quarterly run rate FFO to be about $0.92 per diluted share in unit.

The run rate is $0.04 less than FFO excluding non-core items because the fourth quarter 2010 includes a higher level of percentage rents than will be recognized in the first quarter of 2011.

And fees related to our PAS business, the recognition of which tends to be lumpy over the course of a year.

The tax adjustments are reflected as a decrease in property taxes during the fourth quarter on the income statement, a portion of which is passed on to certain customers.

Property, operating and maintenance expenses also decreased quarter-over-quarter due to lower utility costs.

As a result of these items, tenant reimbursements were also lower in the fourth quarter.

The other revenue line item consisted of a nominal termination fee.

Before moving on to our revised guidance, I'd first like to provide you with an update on our financing activities.

We issued $62.8 million of common stock through our At The Market equity program, all of which occurred before the last earnings call.

Our earnings growth has improved our debt to adjusted EBITDA ratio to 4.6 times from 5 times.

Adjusted EBITDA grew by $19.4 million or 14.7% quarter-over-quarter.

Our fixed charge coverage ratio was 3.9 times at year-end 2010, up from 2.7 times in the previous quarter.

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

This leads to our funding requirements for 2011.

First and foremost, the timing of our capital raising activities is a function of our investment activities and market conditions.

We expect to raise additional capital for growth through a combination of common equity, preferred stock and unsecured debt.

It is also possible that we may sell certain non-core assets to raise capital.

However we have not included any potential asset sales in our 2011 guidance.

As of the end of the day yesterday, the balance on our $750 million revolving credit facility, net of cash at year-end, was $423 million.

Finally, moving on to our revised 2011 FFO guidance.

Because we are entering the year with a leasing backlog equal to approximately $27.5 million, which is quite a bit larger than we anticipated last quarter, and because we've changed some of our assumptions regarding the timing of capital markets activities, we are raising our FFO guidance for the year ending December 31, 2011 at the midpoint by $0.075 per share to between $3.80 and $3.95 per diluted share in unit.

This guidance represents expected FFO growth of 12.1% to 16.5% over reported 2010 FFO of $3.39 per diluted share in unit.

Before opening up for questions I would like to summarize my comments and make one final point.

One, our recent 28% increase in dividend was due to our expectations for growing cash flow and is consistent with our existing policy to target a 100% distribution of taxable income.

At a $57.50 share price, the current dividend generates a yield of 4.73% versus 3.4% for the RMZ.

Our 2010 FFO per share exceeded consensus by $0.10 for reported results and $0.20 on a core basis.

Our fourth quarter results also exceeded consensus reported FFO by $0.08 and core by $0.06.

There have been some comments from analysts about the quality of the bead because of the reversal of the Real Estate tax accrual in the fourth quarter.

While the fourth quarter results were positively affected by the reduced real estate taxes in the quarter, it is important to understand that the real estate taxes accrued in the previous quarters were too high and that the full year accrual is correct.

Therefore the 2010 FFO represents a clean bead of consensus.

Obviously we feel very good about this outcome.

Despite modest stock sales during the fourth quarter, our key credit metrics improved quarter-over-quarter due to our significant growth in EBITDA and the redemption of higher cost preferred stock.

And finally, four, although we are only 6 weeks into the new year, we feel sufficiently confident about our 2011 prospects to raise guidance at the midpoint by $0.075.

Before I close I would like to try to focus on a bigger item.

Based on our midpoint guidance and yesterday's closing share price, Digital is trading at a forward multiple of less than 14.4 times.

The RMS is trading at about 17.3 times.

Our projected growth and FFO per share at midpoint is 14.4%.

Our PEG ratio, FFO multiple divided by FFO growth rate, is basically 1 times.

The PEG ratio for the RMZ is about 2.4 times which would imply a growth rate for the basket of stocks in the RMZ of 7.2%.

Therefore, based on our calculation, the RMZ is trading at a 20% multiple premium to Digital with half of the projected growth.

We believe this offers a compelling combination of growth and value to investors.

Now, Mike and I would be happy to take your questions.

We have a question from [Chris Cotton] from Morgan Stanley.

Good morning.

I wanted to dig in on the redevelopment pipeline that expanded in the quarter.

Can you tell us what that will look like through the year in the context of the guidance that you gave?

Sure.

We'll be delivering product to satisfy the demand and our leasing projections.

So today, we have under construction a little over 380,000 square feet of TKD and build-to-suit space.

And in addition to that we have available already built-out space of about 167,000 square feet.

So all in all, we have plenty of product to satisfy our leasing.

And plus, in addition to that TKD under construction, we're leasing PBB space, so we're well set to meet all of our goals.

And just a follow-up, in the context of the supply and demand dynamic you described, are you changing at all your pre-leasing requirements as you look to further build out redevelopment space?

Not really.

We're continuing on the program that that has been typical for DLR in that we build out on a pod by pod basis.

So our spaces are fully contained, typically around 1100-kilowatt, 1400-kilowatt incremental phases.

So we'll continue to do that on a pod by pod basis, so we always have product available but we don't over commit in any one market.

And this way allows us to have product in 10 different markets at one time to satisfy -- a lot of our customers want multiple market deals.

In fact, I think a little over 60% of our leasing is done with repeat customers in multiple markets.

Thank you.

Your next question is from Jordan Sadler with KeyBanc Capital Markets.

Thanks and good morning out there.

Bill, could you just reconcile some of the assumptions underlying the updated guidance for us?

I heard the backlog of $27.5 million.

But maybe you could just give us a sense -- well, number one, is that the contribution of commencements to 2011?

And second, are you still expecting to commence $90 million to $100 million of GAAP rental revenue on an annualized basis in 2011?

The answer to both questions is yes.

So we haven't changed our guidance for annualized run rate for commenced leases, and the backlog affects positively what we think the recognition will be on the year.

In addition, we pushed back some of our capital markets activity.

So for example, we did have some assumed equity issuances through our ATM, even in the balance of the fourth quarter post earnings call in this quarter, and we didn't have any of those equity issuances.

Clearly, because of where the stock price was.

So all of that has had an effect on price on the guidance, as well.

And as a follow-up, how are you thinking about capital going forward for 2011?

You mentioned an outstanding balance on the line today net of debt -- excuse me, of cash of $400-plus million.

What looks like the most attractive venue?

Yes, debt -- I'm inclined to actually come with a bond issuance first, Jordan.

I'm concerned that long term rates, 10 year rates, are going to be [easing] up over the course of the year so I'd like to pull the trigger on that first.

I'll hop back in the queue, thank you.

Your next question is from Michael Bowen with Guggenheim.

Thank you very much.

I wanted to make sure I understood, Bill, just very quickly on the taxes, with regard to what happened there with your accruals being higher in the prior quarters, and then obviously we caught that up in the fourth quarter.

And then, just in general, if you could talk a little bit more about the demand environment with regard to Singapore that would be very helpful.

Thank you.

Sure.

I'll cover the first question and then Mike can take over with the second question.

I think the best way to look at this is to look at page 13 of the Supp, and you'll see the change in property taxes quarter-over-quarter for both same-store and for new properties.

And you'll see that the property taxes for same-store were 4.5 in the fourth quarter and 10.9 in the third quarter.

Likewise for new 4.25 in the fourth quarter and 3.1 in the third quarter.

And one thing that I should mention, too, is that reimbursements were reduced by the savings in property taxes, if you will, by a little less than $3 million, so that the net effect is not the $9 million that you're seeing there.

The net is closer to $5 million.

And then turning to Singapore, we've been focused on that market for several years, looking for the appropriate entry point.

And our data center in Jurong, in the Business Park there is a great facility because it meets the demands for the international companies that do so much business in Singapore.

As I mentioned in my remarks, we're tracking up to 25 megawatts of immediate demand, folks to whom we put proposals out currently.

And there's very little wholesale space in that market.

So for large corporate enterprises, especially international financial firms that are operating in Singapore, that are operating in Hong Kong, and because of the very good fiber service between Singapore and Hong Kong, Singapore is a very attractive spot for additional and back up facilities.

There's also a lot of managed services companies looking to do business with regional Singapore, Malaysian companies, as well.

So overall, we see this as one of the strongest markets in our portfolio, and we have very high expectations on the success of this asset.

Thank you, guys.

Your next question comes from Rob Stevenson with Macquarie.

Good afternoon, guys.

Mike, can you talk a little bit about what you're seeing in terms of acquisition opportunities both in Europe and in Asia, and whether or not you think that going forward you're going to have to develop the vast majority of product that you add in those markets?

We are seeing income producing opportunities in Europe, and we'll continue to do a combination of new development and for internal growth and external growth with income producing acquisitions, as well, I suspect.

Similar to as we've been doing all along.

Our guidance is between $200 million and $450 million of new income producing assets in 2011, and I think we'll be able to achieve toward the upper end of that range.

And in Asia-Pac, I think what we'll be developing, because to a certain extent, because there really isn't a lot of wholesale product.

We're seeing a lack of product to meet demand in Singapore.

We see Sydney, Australia as a very attractive market for new development.

And you'll likely see us announcing something there over the next several weeks.

And we are looking at opportunities potentially in Hong Kong where we might be able to acquire existing operating assets but that's earlier days in the Hong Kong operation.

And then one for Bill.

In terms of the new lease commencements in 2011, is there any lumpiness to the quarter where we should be thinking about a big commencement in the second quarter versus third?

Or should it be relatively smooth throughout the year in terms of when they're going to come on?

It tends to be back end loaded, back half loaded.

Okay, and then so from a quarterly standpoint that would indicate lower earnings in the first half of the year and higher in the back half, all else being equal?

That's right.

There's a pretty steep slope between second and third quarter.

Okay.

Thanks, guys.

Your next question is from Michael Bilerman with Citi.

Hi, it's Mark Montagna in here with Quentin Villeley and Michael.

Had a question on the container market.

A recent press release had i/o Data Centers and their factory stating they can basically pump out about 18 megawatts of modular product in a month.

Wondering how you see this market progressing and whether you see it as a threat to your core business?

No, we don't see it as a threat at all.

The container market tends to be for pretty specialized applications.

So while there's a market for it, it's definitely much more limited, in our opinion.

And looking at a lot of research at IDC and other of the technology research companies, the demand for modular space freestanding is really fairly limited.

And from what we're seeing today, with our corporate enterprise customers, they are looking for cost effective solutions with our pod architecture, as well as utilizing a lot of our, what you might call, modular approaches for us.

We have pre-fabrication techniques that we're implementing currently that's driving down a lot of our costs.

So we actually pre-fabricate our electrical rooms and our pump rooms in the shop and ship them to the different sites.

And this gives us a tremendous amount of flexibility for much faster delivery of space, as well as lower costs and higher quality because we can build these components in the shop.

But your enterprise user and your IT services users want to be in a hard wall building where containers can be implemented.

So there's no reason why, with our electrical and pump room set ups, why you can't -- one could not put a containerized set of servers in one of our PBB spaces.

But the standalone container is useful for a much more limited set of applications.

Okay.

And then on the financing front, I know that potential build out in a lot of your key markets is pretty significant relative to near term potential supply that's under construction.

Wondering if some of these private guys or PE funds come in with either the access to capital opens up or if these private equity funds are more willing to invest in the space as they see the spread to cost so attractive.

What is the threat there?

What's the barrier to banks and lending institutions not lending to these guys?

We are in the market constantly looking for secured and unsecured debt.

And we have one joint venture, in particular, where we're in the market.

And I think it's fair to say that the secured debt market for data centers is slim to none.

We had one deal fall out with a bank.

We'll be going back soon.

But it's very very tight.

And I'm not aware of any financial institutions at this point that are doing non-recourse mortgage loans on stabilized data centers, let alone spec development construction loans.

So the private equity firms would, one, have to fund everything up-front with equity.

And, two, their refinancing or take out is, at this point, not clear.

So for a private equity firm that's looking for a high teens return for limited partners, they have to assume, I think, to be prudent, that their unlevered return is their levered return for the foreseeable future.

Fair enough, thank you.

And I don't see unlevered returns in the high teens.

Right.

Thank you very much.

Your next question is from Sloan Bohlen with Goldman Sachs.

Hi, good morning.

Just a question on leasing.

There's been the thought out there from those that believe there's more supply in the market that concessions or higher tenant improvements would have to come in.

And in this quarter it seemed like yours were a lot lower.

Could you maybe mention what the trend is and why the differential quarter to quarter?

Yes, I think part of the explanation is with our PBB renewals, oftentimes these are legacy spaces that were built out originally by the tenants, or have been in place, and they don't require much in the way of improvement.

They are already good operating facilities which demonstrates the long life of these assets.

And for our turnkey product, they're ready to go.

So the construction costs that are in there in our base building, if you will, for the TKD, allows the customer to come in ready to go.

So we don't see additional concessions in terms of TI very much over and above what we've already put into the property.

Okay.

But with regard to, say, some of the markets where there's maybe more supply coming on, are we seeing any concessions being offered to tenants to lease up space?

Not really.

Not really.

In many cases where customers are taking multiple pods, we'll provide on a 10-year lease maybe a 12-month ramp up period where they get the full stabilized rent after 12 months.

But really, we're not seeing any special concessions beyond that.

Okay.

And then maybe just a question about demand in some of the southern markets where maybe power is a little bit cheaper.

For that demand, is that all locally based or are you seeing any migration out of, say, Silicon Valley and New Jersey into those markets?

No.

What we're seeing, North Carolina has been successful in capturing build-to-suit projects.

So we've seen a number of the internet companies, who traditionally do build their own assets and their own facilities, and that's what they've always done, building facilities like in North Carolina on a build-to-suit for themselves to own.

Okay.

And then maybe just one last bookkeeping question.

We have to move on.

We're trying to limit it to one question.

We'll take your question offline, feel free to give us a call.

Yes, please.

Your next question is from Vincent Chao with Deutsche Bank.

Good morning, everyone.

Just a question about your thoughts on some of the M&A that's going on amongst some of the managed service players out there, and what your thoughts are on the potential impacts for wholesale, or the dynamic between the managed service and wholesalers?

And also if you had got any conversations with Caremark following the Verizon announcement?

We don't think there's going to be a material impact to our relationships with the folks in the managed services world.

We deliver a really cost effective product for them and allows them, serves those companies and co-location companies broadly to utilize our capital and make their investment into their business.

Especially with the managed services companies where they do make a significant investment in their platform for managed hosting, cloud services and so forth.

So we remain a good solution for their continued growth, so we expect that's going to continue.

Okay.

And any comments or discussions with Caremark post the Verizon announcement?

At this point we have conversations with all of our tenants, including Caremark.

Everything is very positive with all of our tenants in the managed services area.

Okay, thank you.

Your next question is from John Stewart with Green Street Advisors.

Bill, just following up on your comments on the availability of debt capital, do you have any insight into the Data Foundry's financing in Austin?

Yes.

That was done out of the private bank at JPMorgan.

And that was done, as we understand it, with full recourse to the individual sponsors.

Interesting.

Do you have any idea about LTV?

I do not.

But basically it was a loan to private bank customers.

Got it.

And just quick clarification, Mike, the lease transactions that you highlighted in Weehawken, was that Powered Base space or was that Turn-Key?

It's built out space.

We consider it Powered Base Building because the rents are structured that way because these are leases from 10 to 12 years ago where the tenants built out the space.

So the pricing is essentially Powered Base Building type pricing.

Okay, thank you.

Your next question is from Bill Crow with Raymond James.

Good morning guys.

Quick question from me.

On the same-store guidance, when you think about the importance of redevelopment and the timing of redevelopment of some of the large ones, including Singapore, how do you see that transitioning from 2011

A lot of the leasing, much of the leasing that we have pro forma and projected for 2011 will be space that is being built out currently that's in our redevelopment pipeline.

I mentioned earlier there's about 382,000 feet under construction, about 167,000 feet that's completed and in the operating portfolio now.

So I think the great majority of that will be transferred from redevelopment and into the operating portfolio as it's completed.

And those are usually either pre-leased or leased very soon after completion.

Okay, thank you.

So I think we have time for one more question.

Yes, sir, the final question is from the line of Suzanne Kim with Credit Suisse.

Hi.

I just want to quickly review your FFO and AFFO guidance assumptions for 2011.

Just want to make sure that I heard correctly.

So, all the FFO guidance assumptions that you spelled out in last quarter apply now.

And then, secondly, under the 2011 FFO, how you're treating Singapore and the capitalized interest on that in your guidance.

And then some of the bigger AFFO line items and how we should look at that for run rate for 2011.

Yes, so there is no change in the assumptions for FFO at this point.

We give the FFO leasing guidance on the basis of annualized rent rather than commenced rents.

And so the major changes I guess, since I think that's what you're asking, would be on timing of commencement and timing of capital markets activity, as I said.

But, specifically, how are you treating capitalized interest on Singapore and how do you see that rolling off throughout the year?

Is there a change in that?

Or not particularly?

We'll be capitalizing interest as we spend -- the capitalized interest will increase as we spend more money on construction on the Singapore project.

It's a function of the construction activity at the project.

So I think we're estimating about $35 million right now in total of construction activity at the project.

So as that ramps up over time, you'll see capitalized interest associated with that, just as you would with any construction project that we have.

Okay.

And then with regards to some of your items like capitalized leasing commissions and your compensation and your straight line rents then, how should we look at that throughout the year?

What's a good run rate for that?

Because you talked about a change in your leasing commencements and how that shifted your FFO guidance.

I'm wondering how that impacts your AFFO.

We don't give AFFO guidance.

We only give FFO guidance.

The leasing commissions are very lumpy, because they are a function of leasing activities.

And we pay leasing commissions both on signing and on commencement.

So you'll find that that's a fairly jagged line item in the AFFO reconciliation.

Straight line rent is -- that's pretty straightforward.

You can see that in our income statement.

Okay, thank you.

I'd like to wrap up now and thank everyone for your time today.

We're very happy to take other questions and comments offline, as a team here and are definitely available for that.

And once again, I want to thank everyone, and thank our team for a great year, and we expect it will be a similarly great year in 2011.

Thanks very much.

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