Digital Realty Trust Inc (DLR) 2011 Q1 法說會逐字稿

Good afternoon.

My name is Tiffany, and I will be your conference operator today.

At this time I would like to welcome everyone to the Digital Realty Trust first quarter 2011 earnings 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 will now turn the conference over to Pamela Matthews Garibaldi.

Please go ahead.

Thank you.

And good morning and good afternoon to everyone.

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

If you have not you can access 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 would like to remind everyone that the management of Digital Realty Trust may make forward-looking statements on this call that are based on current expectations, forecasts, and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially from expectations.

You can identify forward-looking statements by the use of forward-looking terminology such as believes, expects, 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 leasing trends, lease commencements and terms, construction development and redevelopment plans, supply and demand trends, including the results of our North American Datacenter market survey, capital raising activities, and the Company's future financial and other results, including the Company's 2011 guidance, quarterly run rate FFO, and related assumptions.

For 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 31st, 2010, and subsequent filings with the S.E.C., 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 operation or AFFO; core funds from operation, or CFFO; earnings before interest, taxes, depreciation and amortization or EBITDA; adjusted EBITDA; same-store net operating income, or NOI; 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 package for the first quarter 2011, furnished through the Securities and Exchange Commission, 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 management's remarks we will open the call to your questions.

To manage the call in a timely manner and within the 1-hour time limit we have, questions will be limited to two per caller.

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

If we are unable to get to all of your questions on the call we would be happy to take them off-line.

I will now turn the call over to Mike.

Great.

Thank you, Pamela.

Welcome to the call, everyone.

As reflected in our earnings release today, DLR delivered another quarter of excellent financial and operating results for our shareholders.

Today I will begin my remarks with a discussion of the trends we are seeing in terms of new leasing, renewals, re-leasing and pricing that are driving these good results, followed by an overview of our new investment activity.

Since market conditions haven't changed materially in the 8 weeks since our February call, we plan to provide a mid-year update of selected major markets on our next earnings call.

However I will be sharing results of our annual 2011 North American demand survey of corporate technology professionals.

Following my remarks, I will turn the call over to Bill, who will discuss our recent financial performance, provide a capital markets update, and conclude with a discussion of our 2011 guidance increase.

As provided in our leasing results released earlier this week, we continue to see good demand for both our Turn-Key and Powered Base Building products.

The first followed typical seasonal trends after the usual flurry of year-end activity.

We expect leasing volumes to increase.

In subsequent quarters we appear to be on track to achieve our budget goals for 2011.

Excluding COLA leases, the average lease term for all leases signed in the first quarter was 126 months, or 10.5 years.

For Datacenter space alone the lease term averaged 122 months, or 10.2 years.

The average remaining lease term in the portfolio is 6.9 years.

It is important to remember that first and foremost, as investment managers, our leasing and investment decisions are primarily return driven.

The portfolio now totals over 17 million square feet, including unconsolidated joint ventures, and includes buildings that have been acquired as income-producing investments, as well as facilities that we have developed and leased either as Turn-Key Datacenter or Powered Base Building.

While our results are usually relatively consistent quarter-over-quarter, because of the diversity within our portfolio there are a few interesting transactions that can fall outside the norm and generate very attractive risk-adjusted returns.

Two PBB leases we signed this quarter are excellent examples of the benefits of our investment management approach.

These leases represent very different types of transactions at two different properties.

The first lease, of 152,000 square feet was with an existing customer that has an A credit rating.

It was for Building E, one of two new shell and core buildings we are just completing at our Ashburn campus in northern Virginia.

We began negotiating the terms of the lease with the customer prior to construction, and signed it before the facility was complete, mitigating leasing risk while customizing the base building to the customer's specifications.

As a result, what began as a speculative development project quickly became a build-to-suit PBB transaction for a large, strong credit customer at a very attractive risk adjusted return.

The second PBB transaction was also with an existing customer at one of our Amsterdam buildings, which we acquired in 2006, and was originally constructed in 2001.

While not statistically significant relative to the size of the portfolio, it's an important example of how we seek to continuously improve the returns for each asset in the operating portfolio.

In addition to this customer committing to a new PBB lease for the remaining 30,000 square feet of vacant space at this property, we also restructured and extended the customer's existing 10-year-old lease.

The restructuring consisted of converting the lease from modified gross to triple net, which eliminated our exposure to a EUR10 million to EUR15 million CapEx obligation that was written into the original terms of the lease that we inherited with the purchase.

After adjusting for the elimination of the CapEx requirement in the original lease on a like-for-like basis, the renewal rate represented over a 50% increase over the previous term.

However, we have not included this particular transaction in our renewal statistics because we believe it inappropriately distorts the results.

In terms of leasing backlog for the year, expected TKD lease commencements are as follows.

Approximately 53,000 square feet are expected to commence in the second quarter; 65,000 square feet in the third quarter; and 23,000 square feet in the fourth quarter of 2011.

That's TKD lease commencements.

PBB leases totalling 152,000 feet are expected to commence in the second quarter; 110,000 feet in the third quarter; and 153,000 feet in the fourth quarter of 2011.

In other activities during the quarter, we renewed and released approximately 75,000 square feet of TKD space; and increased rates per square foot by 4% on a cash basis, and 8% on a GAAP basis, representing 101.5% of the expiring rents.

We also renewed a nominal amount of PBB space, only about 1700 square feet, and this increased rates per square foot by 2% on a cash basis and 22% on a GAAP basis.

We have a very small amount of PBB up for renewal this quarter.

Lastly, we renewed and released 183,000 square feet of nontechnical space.

The majority of this represents office space we renewed with Converse, or released to its former subtenants in our Quannapowitt Parkway property in suburban Boston.

As a reminder, we are in the process of converting the balance of the building to Datacenter space.

Customer demand overall remains strong, and we currently are engaged with potential customers representing over 2 million square feet of new requirement.

And this compares to 1.4 million square feet of new requirements at year end 2010.

So a very positive uplift in market activity we're seeing.

Reflecting the diversity of our Datacenter solutions, customer prospects continue to come from a variety of industry verticals such as financial services, including internal private cloud deployments; energy; consumer products; telecom networks; specially managed services, including cloud services, managed hosting, colo, and system integrators.

Occupancy at the end of a quarter was 93.5%, down slightly from the previous quarter of 94.6%.

The decrease was primarily due to the expiration and vacating of 81,700 square feet in Wakefield at that Quannapowitt Parkway.

That's 81,700 square feet out of the 387,000 square feet of office space that's leased by Converse overall.

As previously mentioned, much of the space was renewed with Converse and other office tenants, and the balance of 115,000 square feet was contributed to the redevelopment portfolio and is being converted to Datacenter space.

Same-store occupancy was also impacted by the expiration of the Converse lease, and decreased to 93.8% from 94.9% at year end.

During the first quarter, same-store NOI was down less than 1% from the fourth quarter.

This is primarily due to year-end real estate tax reconciliations in the fourth quarter of 2010 that were reflected as a decrease in property taxes in that particular quarter.

First quarter 2011 NOI reflects a normalized level for property taxes.

Moving on to our development program, during the first quarter of 2011, we completed and delivered nearly 155,000 square feet of TKD space that was 56% leased, and nearly 10,000 square feet of Power Based Building that was 83% leased.

We were under construction on nearly 289,000 square feet of Turn-Key space that was 36% preleased; 56,000 square feet of build-to-suit that was 100% preleased to Terremark in Amsterdam; and over 690,000 square feet of Powered Base Building space that was 57% preleased.

Including preconstruction work and common building improvements, in total, construction work in progress at the end of the quarter was $166 million.

The estimated cost to complete the ongoing March 31, 2011, work in progress is $364 million.

In terms of our acquisition activity, on April 15, we acquired a 39-acre site that is contiguous to our Ashburn, Virginia, campus, for a purchase price of $17.3 million.

Acquiring this site will provide future inventory for our campus to meet the ongoing demand for both new and existing customers.

Development plans for the first phase on the new site include construction of approximately 300,000 square feet of Datacenter space in gross.

The timing commitment of construction, however, will be subject to a number of factors, including the timing and leasing of the balance of the current campus, with approximately 110,000 square feet remaining in the existing building F that we recently completed.

You know, clearly the demand for Datacenter space in Northern Virginia and for this campus in particular remains very strong.

As I previously mentioned, we are currently completing Buildings E and F on the existing campus, and have leased Building E of 152,000 feet to a single tenant.

Building F, of 113,000 feet, have leases signed for 4200 square feet of Turn-Key space.

Based on current discussions, we expect as much as half of Building F to be leased by mid-year.

Turning now to our annual study of the North American Datacenter market.

This study, as in previous years, was conducted by the research firm of Campos Research and Analysis, and is based on detailed surveys of senior decision-makers at large corporations in North America who were responsible for shaping their Company's Datacenter strategies.

Consistent with our experience, one finding is how the industry is moving away from the do-it-yourself approach, and moving toward a model that relies on the expertise and resources of Datacenter specialists such as DLR.

This trend is in contrast to many of the large internet enterprise companies, such as Google, Microsoft and now Facebook, who prefer to build their own facilities, often in more remote locations with inexpensive power.

Many of the companies that participated in the survey are choosing the lower costs and minimized development risks by working with the Datacenter specialists.

We believe that we will continue to see an increase in the number of companies partnering with Datacenter specialists, as more enterprises seek to reduce the risk, exposure and significant capital outlays for these very capital-intensive projects.

For example, some data points from the survey -- only 51% of respondents who plan to expand their Datacenters in 2011 reported considering the do-it-yourself approach, a decline of 6% from last year's result.

In addition, 60% of respondents pursuing Datacenter expansion 2011, plan to lease Datacenter space from a wholesale provider, rather than build their own facilities.

This is an increase of 7% over last year, which follows this upward trend over the past few years of outsourcing.

Another clear finding in this year's study relates the overall strength of the Datacenter market.

More than 80% of companies that participate in the study are planning Datacenter projects in the immediate future.

This is in addition to the 65% of respondents who say they have built or acquired a new Datacenter in the past 24 months.

In addition, the leading geographic locations cited by respondents for these Datacenter projects in the US, are New York-New Jersey Metro, L.A., Chicago, San Francisco Bay Area, and Dallas.

And internationally, a lot of focus is on London, Mumbai, Paris, Singapore, Tokyo, and Hong Kong.

Furthermore, based on data from respondents who plan to expand their Datacenters in 2011, the average expansion represents a maximum IT load of 2.8 megawatts of electrical power; average size of a little over 18,000 square feet.

Finally, two data points in this year's study also reinforce insights we have developed from our work with customers.

First, Datacenter projects have become very high-profile decisions involving the highest level of companies' management teams.

And, secondly, no surprise, energy efficiency and lower energy costs are extremely important to our customer base.

We've also completed a similar survey of the European market.

The full findings of each survey will be distributed in separate press released.

You can also find a detailed presentation of the US reports by our Chief Technical Officer, Jim Smith, along with Rachel Dines of Forrester Research, in the Knowledge Library section of our website.

Turning briefly to our Asia PAC investment activities, construction and marketing in our Singapore facility remain on track.

We expect to deliver the first turn-key PODs in July and expect to report lease signings by year end, which would be ahead of our internal underwriting.

We also expect to announce the acquisition of our first development project in Sydney, Australia, in the coming few months, which will bring our global footprint to 29 markets.

I'd like to conclude my remarks with a few comments on yesterday's announcement by Savvis that it's being acquired by CenturyLink, both of whom are important customers of DLR.

This merger significantly increases CTL's position, the higher growth and higher margin managed hosting cloud computing sector, and broadens the service offerings for CTL's large base of installed enterprise customers.

We view this merger very positively, as it represents an upgrade in credit quality of our largest tenant, and likely will drive additional growth for the Savvis management services program.

CTL announced that the Savvis' management team, with whom we have a very good relationship, will continue to run the business unit.

Century Link recently completed its merger with Qwest, and is a large customer in several DLR internet gateway buildings for their internet and telecom network facilities, in additional to Enterprise computing Datacenters.

Combined, CTL and Savvis represent approximately 10.7% of DLR annualized rent.

We believe that the managed services business of Savvis will be a very good complement to CTL, and we look forward to working with their team on future initiatives.

This concludes my prepared remarks.

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

Thanks, Mike.

Good morning, and good afternoon, everyone.

My remarks today will include an update on our capital markets activities, comments about our first quarter 2011 financial results, and a discussion of our increased guidance for the year.

Year-to-date we have sourced approximately $438.6 million of new capital from the following sources -- the $400 million unsecured 10-year notes offering with an interest rate of 5.25% a year, yielding 5.279; and the issuance of 674,000 shares under the Company's at-the-market or ATM equity distribution program, for net proceeds totalling $38.6 million at an average price of $58.13.

We currently have approximately $140 million of availability remaining on the ATM.

We remain focused on maintaining a strong balance sheet while reducing our cost of capital.

Adding to what we disclosed in today's press release, year-to-date we've exchanged $36.1 million principal amount of the 4.125 exchangeable senior debentures due 2026, for $47.8 million in cash; and 306,000 shares of common at the request of holders pursuant to the terms of the debentures.

$52.7 million of the 4.125 debentures are now outstanding.

Holders of these debentures have the right to acquire to repurchase all or a portion of their debentures in cash, for a price of 100% of the principal amount, plus accrued and unpaid interest, on August 15, 2011.

We have the right to redeem all or a portion of the outstanding debentures in cash, for a price of 100% of the principal amount, plus accrued and unpaid interest, commencing on August 18, 2011.

We have also converted, through today, approximately 1,718,000 shares of the Series D convertible preferred stock, with a liquidation preference value of $42.9 million, (Inaudible) 918,000 newly issued common shares, at the request of holders pursuant to the terms of the Series D convertible preferred stock.

This comprised approximately 25% of the Series D preferred stock that was outstanding at December 31, 2010.

In addition, we have converted, through today, a little over 3 million shares of the Series D convertible preferred stock, with a liquidation preference value of about $75 million, into 1,838,000 newly issued common shares, at the request of holders pursuant to the terms of the Series D convertible preferred stock.

This comprised approximately 22% of the Series D preferred stock that was outstanding at December 31, 2010.

Adjusted EBITDA of $150.1 million in the first quarter was relatively unchanged from the previous quarter.

Fourth quarter 2010 EBITDA reflected approximately $5 million of reduced property taxes, while first quarter of 2011 reflects a normalized level of property taxes.

Thus, additional NOI from new leasing in the quarter was largely offset by the reduced property taxes in the prior quarter.

Our net debt to adjusted EBITDA ratio was 5 times at quarter end, up from 4.6 in the fourth quarter.

Our GAAP fixed charge ratio was 3.2 times at the end of the quarter, up slightly from 3.1 times in the prior 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.

Any future capital market activities during 2011 will be subject to our investment activities and market conditions, and will consist of debt and equity including common and possibly preferred stock.

As of the end of the day yesterday, the balance on our $750 million credit facility, net of unrestricted cash, was $160 million.

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

As stated in today's earnings release, first quarter 2011 FFO per diluted share and unit was $1.02 per diluted share and unit, up 4.1% from fourth quarter 2010 FFO of $0.98 per diluted share and unit.

And up almost 26% from the first quarter 2010 FFO of $0.81 per diluted share and unit.

I would like to point out that tenant reimbursements for this quarter included $1.3 million related to expenses that were incurred in 2010 for common area maintenance, or CAM, expenses.

We've also included as separate line items this quarter revenues and expenses associated with our POD architectural services business.

After adjusting for items that do not represent ongoing expenses or revenue streams in each quarter, first quarter 2011 core FFO was $1.03 per diluted share and unit, up 7.3% from fourth quarter 2010 core FFO of $0.96 per diluted share and unit.

The non-core expense and revenue items in the first quarter of 2011 consisted of non-cash expenses related to the exchange of $35.9 million of our 4.125 exchangeable debentures, and transaction expenses incurred in connection with potential acquisitions.

These expenses were partially offset by a nominal lease termination fee in the amount of $295,000, shown in the other revenue line item.

To assist our investors in the analyst community in developing estimates for the next several quarters, we would like to guide you to a run rate FFO at quarter end of approximately $0.99 per diluted share and unit, which is $0.04 less than core first quarter of $1.03.

The run rate adjustment consists of the following items.

Approximately $0.03, or $2.9 million of additional interest expense, to reflect the full quarter impact from the issuance of our $400 million notes which closed on March 8th; and $0.01, or a $1.3 million reduction due to the reimbursement revenues recognized in the first quarter of 2011 that relate to 2010 CAM reconciliations.

This run rate FFO does not include transaction expenses to be incurred in connection with acquisitions over the remainder of the year, and incremental operating expenses including personnel-related costs, which we expect to be incurred to operate and maintain our growing portfolio, and which we expect will be reflected in our results over the next three quarters.

In certain instances, new revenues will lag behind these incremental expenses.

As noted in our earnings release today, we are raising our FFO guidance for the year ending December 31, 2011, at the midpoint, by $0.125 cents per share, to between $3.95 and $4.05 per diluted share and unit.

This guidance represents expected FFO growth of 16.5% to 19.5% over reported 2010 FFO of $3.39 per diluted share and unit.

We are not changing our guidance assumptions at this time.

Our lower operating and interest expenses in the first quarter, coupled with lower financing costs than initially projected for the balance of the year, are the principal drivers behind this increase in guidance.

Before concluding my remarks, I would like to direct your attention to the new and enhanced schedules we have included in this quarter's supplemental package.

The first change is to the occupancy analysis schedule beginning on page 20.

We've reorganized the table to present the properties by market, reflecting our geographic concentrations.

Another change is to the summary of leasing activity schedules on pages 26 and 27.

Here we are now reporting renewal activity and new leasing activity by space type, in terms of both signings and commencements.

In addition we have included expiring GAAP rents, new GAAP rents, and the rental rate percentage changes.

We've also eliminated the run rate NOI scheduled this quarter, since there were no new income-producing acquisitions during the quarter.

This schedule will be provided during quarters when we have such activity.

Finally, we've added an inventory report to page 29, which provides a detailed analysis of our construction work in progress by market.

These new schedules are in response to certain investors' requests for a higher level of detail for our operations.

As always, we appreciate your constructive suggestions regarding our disclosures, and hope that you will find this additional information helpful.

Please feel free to call us with any questions or comments.

This concludes my prepared remarks.

Mike and I would be happy to take your questions.

Thank you.

(Operator Instructions) Your first question comes from Michael Bilerman.

Hi, it's Mark [Montanin] here with Michael and Quinten.

Had a question on the dynamic going on between the turnkey and Powered Base Building.

I know that a couple quarters ago you guys had mentioned how the turnkey space you were seeing particularly strong strength from.

It seems, based on recent leasing and what you expect to deliver as the year progresses, that that might trend -- might be reverting somewhat.

Just wanted to get your sense of what was taking place.

I think we'll continue to see a trend of strong demand for the turnkey.

The leases are pretty lumpy so he we'll see a pickup in the amount of turnkey leases that are executed over the next three-quarters.

The Power Base Building leases tend to be especially lumpy and larger such as the 150,000-foot transaction we mentioned on the call.

So it's -- I think it's more just kind of variability based on the sample size we're looking at.

But turnkey, both our standard product as well as customized solutions is still popular, and economically, we're indifferent, because we are return driven.

Either way, the returns are very attractive for the Company.

Okay.

And then in Australia and Singapore -- I guess maybe start with Singapore, wondering how tenant activity is going there?

And then in Australia, I was hoping to get a better sense of the potential size of this acquisition and development and timing and maybe a little bit on the economics.

Sure.

In Singapore we have a lot of activity from international firms, financial services, very strong vertical in that market, as well as IT service providers and network providers as well.

So we have a very good funnel of prospects for that building and we're very -- we're really optimistic about the lease-up and how that's going.

We'll be commissioning the first phase of the first PODs in that building this summer, probably in July, and then I think we'll really start to see lease signings accelerate.

But the funnel of prospects is very strong for that building.

In reflecting the good commercial activity in the Singapore market broadly.

In Australia, in Sydney, we are under contract on a development site and we're finalizing the entitlements of permitting and power allocations before we close.

But it's in a very good master planned business park.

We can build two buildings on two separate parcels that we're acquiring.

Each one around 110,000 feet, eight megawatts of IT load.

And we'll build those buildings sequentially and build out on a POD basis for the corporate customers we're looking for.

And we're also one of the finalists for a potential government requirement in that market that we're pursuing.

So regardless of whether or not we're fortunate enough to -- when the government mandate, we think Sydney is a very good market for Sydney-based companies and their business activity is really attractive, and we project returns similar to our other markets on spec builds, kind of in that 11%, 12%, 13% range.

Okay, great, thank you very much.

Your next question is from Jamie Feldman.

Thank you.

Mike, I was hoping you could talk more about the Savvis acquisition.

Just kind of -- I guess, did you see it coming?

And given that Savvis will have a bigger balance sheet to work with, do you think it changes their strategy?

And does it change any competitive position with them, and maybe how they'll focus on Datacenters?

Yes, from everything I understand from reading the press and going to the websites of the respective companies, CenturyLink is really looking to expand into higher margin business, higher growth business beyond their IP and telecom business.

So, you know, the Savvis acquisition is strategic for them to drive that because of Savvis' strong platform in managed services, cloud compute, and take it to the next level with their enterprise customers that both Savvis and CTL have.

I don't see this as Savvis going into the real-estate business.

It would be a real departure from that strategy to invest in growing a managed services business.

So we anticipate that our good relationship will continue and we'll continue to help them grow that program.

But we -- I don't expect to see, you know, a significant change in strategy from Savvis on this.

And this -- an acquisition of Savvis has been widely speculated in the market for many months, if not years, really depending on the rebound of their stock price and their continued good growth.

So this is not unexpected by folks in the market, though we had not heard any details at all about a pending transaction until the press releases.

Okay.

And then the findings of your survey are interesting.

Can you talk a little bit more about what your clientele or what the people you surveyed are thinking about as their Datacenter options?

Your commentary that Google and some of the others are looking at these lower energy, lower- cost energy markets to build.

Do you get a -- has that shifted at all within the survey that they're considering that more than they used to, your target clientele?

Well, our clientele are corporate enterprise, not -- we like the Internet companies, and they're about 10% of our revenues, but that's not our target market.

So those folks have been on the Internet companies, have been much more oriented towards do it yourself.

There will always be tangential business there, and we love to get that business.

But the Internet-based businesses like Google and Microsoft are very different from the orientation of the corporate enterprise.

And in large measure, the corporate enterprise tend to have their facilities near their IT operations, near their headquarters or regional operations.

And tend much more to be located in these areas, in these markets of high commercial activity which we've been targeting all along.

So I don't see that as a change.

What we have seen the trending is more of an orientation for the corporate enterprise to be open to outsourcing of Datacenters on various levels, whether it's outsourcing to an IT service provider, who may lease from DLR, or outsourcing to a wholesale provider for the facility such as DLR.

We're seeing -- at least by the survey results, we're definitely seeing a clear trend for companies, corporate IT to be more oriented towards outsourcing.

And corporate IT is the focus of our sales and marketing.

Okay.

Thank you.

Your next question is from Jordan Sadler.

Hi, out there.

I just wanted to expand a little bit upon the trend of telecom companies acquiring cloud and managed hosting companies, including, obviously, CenturyLink for Savvis yesterday.

You don't have a tremendous amount of exposure to the Internet guys, but now pro forma the CenturyLink deal, you have just working off of your top twenty list, 22% plus of rent coming from large telecommunications companies, excluding the Telexes and Equinexes of the world.

I'm just curious about your thoughts on the direction of telecommunications companies and what their ultimate goals are and how you think that will play out over the next three to five years?

Meaning are you concerned that they are going to be investing a significant amount of capital and resources into this business and create increasing pricing pressure and increasing supply, to your product.

Well, if you -- not really.

I mean, I think they're going to drive more demand, because they're driving -- they want to be able to deliver these managed services to their base of enterprise customers.

If you think about a lot of the telecom products have become more commoditized over the years, you have a real decline in wireline services.

That's really the cash cow being milked over the next several number of years, and they're looking for ways that they can drive more managed services.

So companies like CenturyLink and Qwest have been in the managed services business.

Verizon has been in the managed services co- location business, AT&T.

So it's not new, but they want to step that up.

And with these strategic acquisitions, appears to be a good way for them to step up and bring that more high-growth business into their business line.

If you look at typically the telecommunication network providers have been anywhere between 25% and 30% of our revenues pretty much all along over the last three, four years.

So that's always been an important customer base, vertical market for us.

But I don't see on the face of it that it will create oversupply.

I think they'll continue to grow these managed services businesses as they have been, which has been pretty orderly.

If you look at Savvis, Equinex, Telex, which in data was an independent company, increasing square footage as needed for their expanding customer bases, which all of them growing pretty well.

It's more a function of you're expecting them to sort of -- continue to sop up some of the third-party providers and resellers and basically just now be the resellers and partners that you deal with?

Is that fair?

My expectation is that we'll continue to work with the Savvis' and Terremarks and folks like in that their current forms, with their -- as part of a bigger company.

We see the positive is that the bigger companies have broader balance sheets so they can invest in the managed services business, and in these platforms.

Frankly, I would be surprised if they go on a building binge in putting capital into bricks and mortar.

I would not expect that to be a trend.

Separately, acquisitions didn't get a lot of lip service this quarter.

Can you maybe just talk about outside of sort of the Australia investment that may be pending, anything in the stabilized market that you're looking at?

I know last quarter you talked about sort of expecting to be within the range of guidance, and at the high end, so just maybe some color.

Sure.

First quarters are typically slow in deal- making land after fourth quarters.

Our opportunities tend to be more like previous years before 2010, where we're looking at one-off transactions, oftentimes owned by high-net-worth individuals or a building -- an individual building might be part of an institutional portfolio.

So they're more, kind of the one-op transaction opportunities.

And we're looking -- we probably have about, oh, I'd say the prospects funnel for acquisitions, income acquisitions, is about a billion dollars of potential acquisitions that we're looking at closely.

And by market, can you just -- or region?

Can you give us that breakdown?

Oh, I'd say it's probably roughly, and this is very roughly, you know, half US, half Europe.

Thank you.

Your next question is from George Auerbach.

Thanks.

Mike, can you touch on the Dallas market?

There were a couple of move-outs during the quarter.

And maybe just talk a bit about demand and pricing.

But also what you think the prospects are for releasing the space that went vacant but also the prospects for developments in that market.

Sure.

Dallas is a good market in that you draw from various regions.

So it's much more of a national market than other locations.

We're working on a number of leases that are under -- that are under negotiation right now.

We did have one move-out at Webb Chapel Road of an airline company that was kind of consolidating.

This was a DR site for them.

So it's -- Webb Chapel is a really good market, submarket for us there.

So I think that space will be really interesting for a number of prospects since it is built out as both Datacenter and disaster recovery, for which Dallas is a good location for that.

So I think I may be slow in -- well, not slow and steady, but I think it will be steady in Dallas for us.

And we'll continue to build out at our Richardson campus at Datacenter park Dallas.

Building out POD by POD, and we have two PODs that we recently completed there that we have available at DPD Dallas that total roughly 30,000 feet or so.

So we've got some good activity on those.

So I think that will be a steady market for us as we continue on, and we're in on a good basis with our partners at Datacenter Park Dallas.

So we have a lot of flexibility to do build-to-suits, as well as POD-by-POD spec builds.

It gives us a lot of flexibility because we have a huge amount of power at that site.

Over 40 megawatts.

It's readily upgradeable to 90 if we need it.

Can you talk about the plans for the non-tech space?

I guess you sort of moved the building in Boston into some redevelopment this quarter.

The rest of the space, does that also have the potential to be Datacenter or is that more of a disposition source going forward?

Well, it's all in one, two building campus there in Wakefield, the Quannapowitt Parkway.

And the building -- one building is a mid-rise office, and then that's really not a Datacenter candidate.

But the larger building, where we are redeveloping and building our first PODs

works really well for Datacenter.

We have the power there to be able to execute.

So we've gotten good traffic when we haven't finished our first POD yet.

So we have 115,000 feet that we've contributed to the redevelopment inventory of shelf space there, and potentially, out of the remaining 89,000 feet of vacancy, potentially we could build out Datacenter because we have higher clear heights than you would normally have in an office.

This was a headquarters building, kind of built in the old days where they build a much more robust base building than you would see in an office building today.

So it could work very well for additional Datacenter as well.

And just finally, on the same point, the other 2.9 million square feet you have in that non-tech portfolio, how much of that 2.9 million square feet do you think could be Datacenter going forward and how much is just generic office?

We're not really looking at those buildings right now.

However, there is a -- there's one -- two building complex in -- adjacent to Silicon Valley in Fremont that has been a fab plant and now is solar manufacturing, solar materials manufacturing, which would be very adaptable to a Datacenter, but we've got a long-term lease on that asset.

Okay, thank you.

There's also a project down in -- outside of Phoenix at BSML which could be converted to Datacenter when that lease is up.

That's a long-term lease as well.

Thank you.

Your next question comes from the line of Jon Stewart.

Thank you.

Mike, I was hoping I could get you to comment on the recent announcement that the government is going to close another 100 Datacenters by the end of the year.

And to what extent any of that may play into the $500 millionish acquisition pipeline you're describing in the US.

You know, we haven't seen those facilities, so it's difficult for me to comment.

My guess is that they're probably embedded in -- that they're not stand-alone facilities, that they're embedded in other office facilities, and -- but until we actually see something from the GSA, it's hard to determine.

My guess is that they're largely embedded in broader operating facilities in different departments, not dissimilar from consolidation we're seeing in office enterprise, where these smaller disparate Datacenters are in really more office R&D type environments.

But I don't really know.

So it will be interesting to see if there's some opportunities to pick up assets that could be repositioned.

In other words, it doesn't sound like there's much, if any, in the current pipeline.

Not of that particular opportunity, no.

Okay.

And I was just wondering if I could get your take on Amazon's recent outage?

And it's probably early to say what long-term impact it may have, but just what you are hearing from customers in terms of that situation.

The press followed that really closely over the past week.

And from all the reports, it's software provisioning challenges that they had, based on the growth of that particular software platform.

So it didn't -- it didn't have anything to do with the physical building systems.

It was them allocating computing resources and so I don't see it as affecting the Datacenter demand.

I think it's more of a symptom that as these IT systems grow to such scale, there's always going to be glitches in anything that's growing so fast at such a scale.

But I guess, more broadly, do you see this as a sort of a cautionary tale for -- do you think it's going to slow demand for cloud adoption, or do you think it's just a short-term speed bump?

I don't even know if it's a speed bump for Amazon.

My sense is it won't have any effect.

Companies are still going to continue to utilize the most cost-effective services.

Okay, thank you.

Your next question comes from the line of Sloan Bohlen.

Hi, good morning out there.

Just a question for Bill.

In the past you talked about the capital advantage that you guys have and that there isn't really lending for private investors or even mortgage financing for these assets.

Could you give us an update there?

I think that's still the case.

The amount of private debt that's available is extraordinarily limited.

I think on the last call we -- there was a question regarding a deal in Dallas that Chase did, but that was out of their private bank.

And I think with very limited exceptions you won't find a Datacenter, private mortgage Datacenter financing today.

Not without recourse.

Yes, without recourse.

And your perspective view on that?

Does that change going forward, or --

Well, I mean, the CMBS market certainly is opening up for other asset classes.

You would think that at some point they would open up for Datacenters.

But, I mean, as for the rest of the prospective lenders, banks and life companies, even when there was plenty of liquidity, it was challenging to obtain debt financing from those sources for Datacenters.

At least that was our experience.

So I think CMBS is a possibility but we certainly haven't seen it yet.

All right.

And then my second question, Mike, I think someone earlier tried to ask a little bit about this, but just with regard to demand by geography and how much power costs play into that?

In your release you talked about some non-financial or non-tech-type firms, whether it be healthcare or on-line marketing.

Is power cost a pretty big determinant in where those guys are looking for space?

We tend to see for the enterprise customers broadly looking for space in the regions where they're currently operating, their headquarters or major regional operations.

Not exclusively, but the great majority of the time, which is why we see markets like northern New Jersey and London being active markets, even though they're extremely expensive places to do business.

It's just the nature of managing the systems as well as some of the lower latency applications that are especially associated with the financial services world.

Folks tend to gravitate around their existing businesses.

Okay.

Thank you very much.

Your next question is from Vincent Chao.

Hi, good afternoon, everyone.

Just had a couple cleanup questions.

In regards to the pipeline of deals that you're following, the $1 billion of acquisitions, I just wondering how that compares to historically what you've tracked and perhaps what you were tracking at this time last year.

Well, if you look at -- last year was kind of an extraordinary year because there were two very sizable portfolios that had been on and off the market each for three years, and both happened to come to fruition last year.

So while last year was -- there was a much higher number of opportunities in the market for income real estate.

So I'd say this year is kind of more back to the norm where there's some interesting opportunities, but there's not the -- we're not seeing $2 billion of potential deals out there.

It's more like a billion, which is still a lot, and certainly enough opportunities that -- to be interesting on an investment perspective.

Okay.

And historically, what's your hit rate been on sort of the pipeline that you've been following?

I don't have that off the top of my head.

I couldn't tell you with accuracy.

Okay, thanks.

And just one final cleanup question.

In terms of your acquisition guidance for the year, that does include both income producing and non-income, or just income producing?

Income producing, the $200 million to $400 million.

So the Australian deal that you mentioned would not be included in that bucket?

That's correct.

Okay, thanks.

Your next question comes from Rob Stevenson.

Good afternoon, guys.

Just a quick question.

What have you been seeing in terms of price on materials and labor on construction/redevelopment these days?

The trend?

It's been flat, though we expect the materials trend to go up, especially for components, electrical components that have a high copper and lead component.

With our scale and our supply-chain management, we locked in pricing for substantially the rest of this year on a number of things.

In fact, I just bought a bunch of steel yesterday for projects for later this year.

So I think we're going to be in very good shape relative to a lot of folks this year.

And we're working very closely with the equipment suppliers to mitigate that commodity impact as much as we can.

What's the magnitude of the increase that you're seeing in the spot market?

If you didn't control the stuff, is this 5% increase in materials?

10%?

Is it sort of -- how meaningful would it be to the overall construction price?

It's varying really widely and very quickly up and down.

So I'd be reluctant to give you a number today without sitting down with our construction guys and doing a little more up to date to the hour research.

Okay.

Thanks, guys.

Your final question comes from the line of Chris [Cajun].

Just wanted to follow up on that.

First, on the supplemental on the last page, you've got a few new lines talking about -- I think -- is this previously what was considered preconstruction, for the base building improvements, the current progress, et cetera?

And so is this repositioning a warehouse property or an old office property into something that could be -- could either go power base or turnkey?

Is that what that is?

Yes, I believe so.

That's right.

And then, second, with your buildout of POD 2.0, how much of an inventory, if any, will you build up ahead of anticipated but not signed demand for being able to deliver these things to market as quickly as possible?

Well, it's really building the inventory pretty much just in time for our planned development.

So in all of our -- in all of our developments we will build on a spec basis one and usually two spec PODs.

And so those POD 2.0 electrical rooms, or prefabricated electrical rooms will be installed in each of those spec builds that we're doing -- that were underway and in our work in progress.

So it's really that schedule of fabrication is pretty well laid out here for the next year.

And if we have more custom builds or new leasing that comes up, which we inevitably will, we can add to the construction program.

So it's more just in time?

It doesn't -- yes, it doesn't -- exactly.

It doesn't need to be a continuous process.

And the way we've set this up.

We can build to our development plans.

Thanks very much.

This is the allotted time of today's Q and A session.

We will turn the call back over to the speakers.

Thank you very much, everyone, for your time this morning.

And as Pamela mentioned we are very open to chatting about the results with folks off-line.

And thank you to the team here at Digital for another really good quarter and we're looking forward to a great 2011.

Thanks very much.

This does conclude today's conference call.

You may all disconnect.