Digital Realty Trust Inc (DLR) 2011 Q2 法說會逐字稿

Good afternoon, my name is Christy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Digital Realty Trust 2011 second quarter earnings conference call.

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

After the speaker's remarks, there will be a question and answer session.

(Operator Instructions)

Thank you, I will now turn the conference over to Pamela Matthews Garibaldi.

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 expectations.

You can identify forward-looking statements by the use of forward-looking terminology such as believes, expects, may, will, should, proforma, 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 for data center space, targeted cash returns, acquisitions activities, Capital Markets activities, and the Company's future financial and other results, including the Company's 2011 guidance 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, 2010 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 advise 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, 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 package for the second quarter of 2011, furnished to the Securities and Exchange Commission.

And, this information is available on the company's website at www.digitalrealtytrust.com.

Now, I would like to introduce Michael Faust, CEO, and Bill Stein, CFO and Chief Investment Officer.

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

To stay within our 1 hour time limit, questions will be limited to 1 per caller.

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

I will now turn the call over to Mike.

Great.

Thank you, Pamela.

Welcome to the call, everyone.

My comments today will focus on providing some additional color around our leasing results, including renewals and pricing trends, as well as our recent acquisitions and construction activity.

I'll also provide our view of the supply and demand fundamentals, including absorption rates for New Jersey and Santa Clara markets.

Following my remarks, I'll turn the call over to Bill, who will discuss our recent financial performance, provide an update on our Capital Markets activity, and 2011 guidance.

As reflected in our leasing results for the quarter, this was the second best leasing quarter in our history, and best since the third quarter of 2008.

We continued to see strong demand for our turn key data center solutions across 3 major regions, North America, Europe, and Singapore.

In addition, lease signings consist of customers representing a wide range of industry verticals, including software solution providers, managed services, Cloud providers, financial services, and internet enterprises.

We made excellent progress in Singapore where we signed leases for approximately 80,000 square feet of turn key space, including a lease with Adobe in the second quarter.

We are in active negotiations with several other customers, and are tracking over 45-megawatts of potential demand in the Singapore market.

Other markets had experienced good activity during the quarter including Dallas, Santa Clara, San Francisco, Boston, Northern Virginia, and Amsterdam.

As we've stated in the past, leasing volume for both our turn key and powered based building products can vary quarter to quarter, evidenced by our leased signings through June 30, 2011, which totaled 262,000 square feet of turn key, and 186,000 square feet of powered based building.

We continue to experience strong demand across our markets for both solutions.

In terms of leasing backlog for the second half of 2011, we expect 137,000 square feet of TKU leases to commence, including approximately 112,000 square feet in the third quarter, and 25,000 square feet in the fourth quarter.

Expected PBB lease commencements for the balance of the year total 263,000 square feet, which include 110,000 square feet in the third quarter and 153,000 square feet in the fourth quarter.

In other leasing activity, we renewed approximately 123,000 square feet of turn key and increased rates by square foot -- and increased,-- I should say per square foot rates, by 8% on a GAAP basis, with a weighted average lease term of over 6 years.

We also renewed approximately 113,000 square feet of PBB space, and increased rates per square foot by 14% on a GAAP basis, with a weighted average lease term of nearly 12.5 years.

Lastly, we renewed over 166,000 square feet of non-technical space for a weighted average lease term of just over 8 years.

The majority of this represents leases extending our non-data center property in Fremont, California.

Tenant retention was 94% on a square foot basis for turn key leases.

On a revenue basis, turn key leases renewed at approximately 98% of GAAP, or 95% of cash rents.

Over 90% of expiring PBB space was renewed during the quarter, at 107% of GAAP, or 103% of cash rental revenues.

Customer demand remains strong, as reflected in our new leasing renewal results.

We currently are engaged with potential customers representing over 2.1 million square feet of new requirements, and that's slightly ahead of the 2.0 million square feet we reported in our last call.

This 2.1 million square feet compares to 1.4 million square feet of new requirements at year end 2010.

These customer prospects continue to come from a variety of industry verticals, such as financial services, and this includes internal Cloud deployments, energy, consumer products, telecom networks, managed services, including Cloud services, managed hosting, co-location, and system integrators.

In New Jersey, on an aggregate basis, we are tracking 25.7-megawatts of demand compared to 24.8-megawatts of available built-out supply.

This data indicates that the market is essentially in equilibrium.

Year to date, we estimate that the market has absorbed approximately 16-megawatts of supply, surpassing 2010's full year absorption estimated to be 13-megawatts.

Our turn key product continues to represent an important solution for New Jersey's enterprise customers, with its dedicated UPS infrastructure, especially for the financial services, as well as system integrators and managed services Cloud providers that support the financials.

In Santa Clara, on an aggregate basis, we are tracking 21 to 27-megawatts of demand compared to 27.7-megawatts of currently available supply.

Year to date, we estimate that the market has absorbed approximately 29-megawatts of supply, which also surpasses last year's total absorption estimated to be 25.6-megawatts.

At DLR, we are currently under construction on 2 turn key pods, and have one-half pod available for a total near-term availability of 2.8-megawatts in Santa Clara.

We continue to closely monitor this market and maintain our disciplined approach to managing our exposure.

As we've said on many occasions, our development strategy is to bring on supply incrementally to meet market demand for our turn key solution on a just-in-time basis.

This approach allows us to closely manage our capital allocations, while satisfying our customers' data center requirements.

With our global footprint, sales and operating platform, and our ability to deliver data center in 20 weeks or less, we believe that we are in excellent position to capture customer demand while maintaining our targeted un-levered cash returns of 11% to 14%.

In fact, year to date, for our turn key solution, we've achieved a weighted average un-levered cash return on costs of 13.9%.

Portfolio occupancy was up 0.4% to 93.9%, as several leases signed earlier in the year commenced during the quarter.

This was offset in part from new turn key data center space that was delivered during the second quarter.

Same-store occupancy increased to 94.2% in the second quarter, up from 93.8% in the previous quarter.

Also benefited from the commencement of new leases.

Second quarter same-store NOI increased to $132.2 million, or 3.7% over the first quarter.

This primarily related to increased rental revenues at properties in the same-store pool.

Same-store cash NOI, which we define as same-store NOI adjusted for straight line rents, and adjusted for non-cash purchase accounting adjustments, was $118.6 million in the second quarter, up 3% from $115 million in the first quarter.

Moving on to our construction activities, during the quarter, we completed and converted over 374,000 square feet of data center space.

This consists of over 98,000 square feet of turn key space, that was over 50% leased, and nearly 276,000 square feet of powered based building space that was over 90% leased.

At quarter end, we are under construction on turn key space totalling over 245,000 square feet in the US, over 66,000 square feet in Europe, and nearly 61,000 square feet in Singapore.

Approximately 37% of this space in total is pre-leased.

For PBB space, we were under construction on approximately 492,000 square feet in the US, including 800 Central Expressway in Santa Clara, Bow Meade Circle in Northern Virginia for Equinex, and the major expansion project underway at our Chandler property in the Phoenix market.

In Europe, we had about 24,000 square feet of PBB space under construction.

Combining US and Europe, approximately 34% of this space is pre-leased.

Lastly, we are nearing completion of the build to suit project in Amsterdam, which is 100% leased to Terremark and Verizon.

Including pre-construction work and common building improvements, the total construction work in progress at quarter end was just under $200 million.

The estimated costs to complete the ongoing June 30, 2011 work in progress is $335 million.

Turning now to our acquisition activity, earlier this week, we announced our entry into the Australian data center market with a purchase of an 8.6-acre development site in Sydney for approximately AUD$10.1 million.

This site, located in Erskine Park, which is an industrial precinct in the western Sydney employment hub, adds an important market to our expansion in the Asia-Pac region.

We have permits in place to developed up to approximately 200,000 square of data center space, which we will develop in 2 equal phases.

We plan to break ground in September in the first phase, 100,000 square feet of shelf, and, which will be capable of supporting 4 1440kw turn key pods.

The first 2 pods are scheduled to be delivered upon completion of the shell and core in approximately 12 months.

The Sydney market is a robust business environment with a limited supply of data center space available to meet customer demand.

Traditionally, co-location, managed services, and regional telecom providers have been the source of data center space in Australia, aside from the do-to-yourself option.

We believe that our suite of flexible data center solutions will be of significant benefit to customers who are expanding their IT operations in the region.

We're very excited about this development and look forward to updating you on our progress there.

On Tuesday, we completed the acquisition of a redevelopment site in Kensington, England, about 17 miles southwest of central London, and 8 miles inside the M25.

The purchase price was GPB12.9 million.

With our existing facilities nearly fully leased, this acquisition provides us with additional inventory to meet customer demand in London, a key market for financial services, corporate enterprise, telecom network providers, large system integrators, and managed services companies.

The building delivers -- will deliver approximately 130,000 square feet and is capable of supporting 5 1440 turn key pods, with total IT capacity of over 8-megawatts.

We are currently tracking approximately 30-megawatts of demand in the market.

This includes a number of requirements of 6-megawatts or more of contiguous space.

At this time, few facilities are capable of meeting these specifications in the greater London area.

In June, we acquired the non-controlling ownership interest in Data Center Park Dallas from our joint venture partner for approximately $53 million.

This follows the recent completion in lease-up of 1232 Alma Road, which is Phase I of the development.

The 105,000 square-foot multi-tenant facility is fully leased to customers that reflect Dallas' diverse data center customer base.

We're currently under way on the second phase of the development, at 900 Quality Way, and expect to deliver the first 1125kw turn key pod in the first quarter of 2012.

The total building size of that phase is 112,000 square feet and is designed for 6 turn key pods, with 6750kw of total IT load.

We are currently tracking approximately 32-megawatts of total demand, with only about 3-megawatts of completed inventory available.

As I mentioned in our last call, on April 15, we acquired a 39-acre site that is contiguous to our campus in Ashburn, Virginia, for a purchase price of just over $17 million.

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

We have remaining 28,700 square feet of turn key, or just over 2-megawatts of IT capacity in building F.

In the market overall, we're tracking about 37-megawatts of demand, and this is compared to an estimated available supply of 34.4-megawatts.

In terms of the balance of our acquisition pipeline, we are under contract on a number of sites in markets that would have future supplies to meet customer demand.

We anticipate closing on a site in Melbourne in the third quarter.

Both Sydney and Melbourne are markets that have strong demand for wholesale data center space from financial services, managed services, coloc, as well as from government applications.

In addition to the new London redevelopment property, in Europe, we're in the process of acquiring development sites that will provide inventory for Paris and Dublin.

We expect these transactions to close by year end 2011.

We are actively pursuing and negotiating the acquisition of a number of stabilized assets and build to suit opportunities.

We're tracking approximately $200 million to $300 million of potential income properties, and about $300 million of build to suit opportunities that are under consideration right now.

The market is competitive for income properties and we are maintaining our investment discipline.

This concludes my prepared remarks, and I now would like to turn the call over to our CFO, Bill Stein.

Thank you, Mike.

Good afternoon, everyone.

I will begin by reviewing our year-to-date Capital Markets activities, and then briefly discuss our financial performance and revised guidance for the year.

Year to date, we've raised approximately $615 million of new capital from the following sources.

The $400 million unsecured 10-year note offering, with an interest rate of 5.25% per yield -- per anum rather, yielding 5.79%.

The issuance of approximately 3.6 million shares on the Company's at the market equity distribution programs for net proceeds, totalling about $215 million at an average price of $60.79.

We currently have approximately $361.6 million of availability remaining on the new ATM program.

Consistent with our goal of migrating towards an unsecured debt financing strategy, and reducing interest expense, we paid off $116.5 million of secured debt this quarter, with interest rates ranging from 5% to 6.72%.

Subsequent to quarter end, we repaid a maturity the $25 million of 7% Series A unsecured notes, under the Prudential shelf facility.

As of the end of the day yesterday, the balance on our $750 million revolving credit facility, net of unrestricted cash was $344.7 million.

We've notified the administrative agent that we intend to exercise the 1-year option to extend the maturity date of the revolving credit facility to the end of August 2012.

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

As stated in today's earnings release, second quarter 2011 FFO of $1.02 per diluted share and unit, was unchanged with the first quarter 2011 FFO of $1.02 per diluted share unit, and up 34.2% from the second quarter 2010 FFO of $0.76 per diluted share end unit.

After adjusting for items that do not represent ongoing expenses of revenue streams, second quarter 2011 core FFO was approximately $1.1 million higher than reported FFO, but rounded to $1.02 on a per diluted share unit basis.

These non-core expenses included a non-cash expense related to the exchange of $4.6 million of our 4 1/8 exchangeable debentures, a prepayment fee associated with the payoff of the mortgage at 3 Corporate Place, and transaction expenses incurred in connection with potential acquisitions.

Second quarter 2011 core FFO per diluted share end unit was down 1% from first quarter core FFO of $1.03 per diluted share end unit, primarily related to the issuance of nearly 2.9 million shares under our at the market equity distribution program during the second quarter, and increased interest resulting from the $400 million 5.25% 10-year unsecured notes issued in early March, which was used to pay down our revolving credit facility.

These 2 items were partially offset by increased net operating income.

Adjusted funds from operation, or AFFO, for the second quarter of 2011 was $92.5 million, compared to our first quarter 2011 AFFO of $93.7 million.

The decrease is primarily due to higher straight line rents and cash leasing commissions paid.

This was partially offset by higher non-cash real estate depreciation.

The diluted AFFO payout ratio for the second quarter 2011 was 79.1% compared to last quarter of 75.4%.

EBITDA, adjusted for preferred dividends and non-controlling interest, was $155 million for the second quarter of 2011, up 3.3% from $150.1 million in the first quarter 2011, and up 34.8% from $115 million for the second quarter of 2010.

Our net debt to adjusted EBITDA ratio was 4.9 times at quarter end versus 5 times in the first quarter.

Our GAAP fixed charge ratio remains steady at 3.2 times at the end of the second quarter.

Turning to the income statement, Our Pod Architectural Services had construction management revenues of $13.8 million, and expenses of $11.2 million for the quarter, which netted to an earned fee for a specific contract of $2.6 million versus $80,000 last quarter.

Total earned fees today, under this contract, represent approximately 59% of total currently budgeted revenues for the entire project.

We expect to earn the remaining fees over the next 2 quarters.

G&A was $14.1 million, up 13.5% from $12.4 million in the first quarter.

The increase primarily due to the continued international growth of the company, which has resulted in increased staffing requirements, including ex-pat taxes and professional fees.

In addition, our Board of Directors annual stock award grants were issued fully vested, and were expensed during the second quarter.

As a percentage of total revenue, G&A expenses were 5.3% in the quarter compared to 6.4% in the second quarter of 2010.

The important take-away here is that as we continue to grow our business, we are nevertheless increasing our operating leverage.

I

nterest expense was also higher in the second quarter over the first quarter due to a full quarter of additional interest expense from the issuance of the $400 million of notes mentioned earlier.

Preferred dividends decreased to $4.7 million at the quarter end, from $6.5 in last quarter, due to the conversion activity during the second quarter.

Finally, turning now to our revised guidance.

As stated in the press release, we are revising our 2011 FFO guidance to between $3.99 and $4.05 per diluted share end unit, an increase of $0.02 at the midpoint.

Due to the potential for higher transaction expenses, and uncertainty around the timing of lease commencements, we are not increasing the high end of our guidance at this time.

However, excluding transaction expenses, and other non-core items, we expect 2011 core FFO to meet, or potentially exceed, the high end of our revised guidance range.

This concludes my prepared remarks.

We can now open the call up to your questions.

Operator?

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Sloan Bohlen of Goldman Sachs.

Hi, good morning.

Mike, just quick question for you.

Obviously, it's a topic that's come up before about internet gateway users, potentially shifting to owning their own facilities, but a recent article showed that they are also in leasing space from wholesalers leasing at shorter term leases.

I wondered if, one, that's a trend that you guys are seeing in your own portfolio.

And two, if you could, maybe, frame what percentage of demand outstanding is made up of these internet gateway users.

Well, if I understand what you're asking about, telecom network providers, colocation, managed services providers, financial services companies, it's a pretty wide range of -- and financial services trading, securities trading, commodity trading.

It's a pretty wide range of users that are attracted to the network density in the internet gateways, so--.

I guess, Mike, I was, maybe, trying to get more at the Googles and the Facebooks of the world.

Those aren't internet gateway customers for us.

Those customers are more stand-alone, and often times in some multi-tenant, but more often in single-tenant facilities.

And as has always been the case, those -- I tend to call them internet enterprise customers, your Microsofts, Googles, Facebooks, they always have and always will rely mostly on their own owned facilities.

That's a trend that hasn't changed in the seven years we've been public.

So, it's a good category for us.

It's about 10% of our revenues, which has been a pretty stable over the years, but we don't see any change there in our portfolio experience.

We think that it will continue -- that group will continue to be around 10% of our revenues.

Your next question comes from the line of Michael Bilerman of Citi.

Hi guys, it's Manny here with Michael.

I just had a question, in Dallas there's been a significant amount of new development recently, and, was wondering what gives you enough confidence to buy the rest of the Data Center Park asset.

Well, we haven't seen much development actually of built out space in Dallas.

We see a lot more demand than we see supply of built out space.

By acquiring the minority ownership from our partner, it gives us a lot more operating flexibility to accelerate our building of that site.

We've got 68 acres and over 750,000 feet of structures on the site, and, in addition, we have pads for Build-To-Suit.

We have potential for 90-megawatts.

We think this is a great long term -- we've got our Dallas portfolio demand set and supply set for the next several years there.

It worked out well for us, it worked out well for our partner, because we see a real lack of built out space in that Dallas market.

What's been your all-in cost for that asset and the yield, if you can give it?

We're not giving that detail out at this point.

Thanks.

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

Thank you, and good morning out there.

My first question is just really regarding the acquisition pipeline.

It sounds like things may be a bit more competitive, but maybe one or two deals may have slipped from the pipeline.

Can you, maybe, just provide a little bit more color around what you're seeing in the market and where you're seeing assets or flow?

Yes, I mean, there's a limited number of properties that are of the quality and tenant quality, If you're talking about income-producing properties that are more stabilized.

Yes, income-producing.

Yes, it's a relatively small universe.

Though, as I mentioned, we're tracking and engaging on about $200 million to $300 million of income properties today.

And, in addition, we're seeing a lot more activity on the Build-To-Suits.

For us, that's a really interesting way that we can effectively make income-producing investments utilizing our acquisition and development capability.

And, we think that's going to bear some really interesting fruit for us going forward.

And we're engaged or -- on about $300 million of Build-To-Suit opportunities right now that we've got under consideration.

And by markets, is it domestic or European, the acquisitions and the Build-To-Suits?

It's, it's mostly -- for the income properties and Build-To-Suits, right now, it's mostly domestic.

Though, internationally, there's always a couple of portfolios that are out there that may or may not be opportunities that we continue to monitor, but that's not part of that $200 million to $300 million.

Okay.

That's helpful.

Bill, just real quick, on the debt strategy here, I see you prepaying and reducing some of this secured debt, but, at the same time, the line of credit is being utilized increasingly.

What are your thoughts strategically here?

Is it the unsecured market looking attractive to you guys here, or what?

It's definitely the unsecured market.

10-year treasuries are under 3%, a pretty good benchmark.

And, so, I think that you could see us coming into the bond market once things stabilize in Washington.

We might also consider a perpetual preferred, which would be more of a retail product.

Thank you.

Your next question comes from the line of Rob Stevenson of Macquarie.

Good morning or afternoon out there.

Mike, can you just talk a little bit about the sort of trend on leasing?

I mean, you talked earlier on the pricing.

It seems very stable and that was very helpful.

Can you talk about what you're seeing today, in terms of tenants' desire on the length of lease, and then, also, what percentage of your leases are now phasing in over an extended period of time?

Sure, yes.

As -- if you look kind of quarter to quarter pricing has maintained very stable, overall, and at good levels, good strong returns, as I mentioned.

So, we're very satisfied with that and I think because of the quality of our product, and our ability to perform, we're able to sometimes achieve somewhat of a premium in the marketplace.

Lease lengths tend to be for the data center space, we are averaging 8 -- over 8 years lease terms, and I think that's been pretty steady, 7 to 8 years for our average, weighted average lease terms.

So, that seems to be very consistent.

We expect Build-To-Suits will be probably more the 10 years to 15 years range and so, as those start to execute, we'll be lengthening those a little bit.

Is that on percentage of leases that are phasing in over extended period of time?

Well, I wouldn't say extended.

Most leases, customers usually have a couple of months of ramp-up.

And, it will vary from tenant to tenant, lease to lease.

And, sometimes there might be a ramp-up based on our delivery of the space as well, where lease commencements will be upon completing different phases of turn key space.

Okay, but you're not seeing the need to, right now, to phase stuff in over 9-, 12-, even 18-month periods?

No, not usually, not that extended a period, no.

Okay.

Thanks, guys.

Your next question comes from the line of Jamie Feldman of Bank of America.

Thank you.

I was hoping you guys could discuss the recent government announcement of shutting down a bunch of data centers, and what you think the impact will be on the competitive landscape, and what you think the impact will be on DLR specifically?

Sure.

Our initial sense is it's not going to have very much of an effect at all, positive or negative.

I think it's more likely to be a positive effect, because if the government is going to consolidate, then, there could be a need to consolidate as we see in the corporate world.

You need new facilities into which to consolidate.

From looking at the preliminary list, I mean, they made this announcement about a year ago as well.

It's the second time around for this announcement.

And, from some of the additional comments that have been made, it sounds like a lot of these data centers are very small.

2000, 3000 feet embedded in office buildings, or other facilities, that aren't acquisition opportunities and they aren't additional demand, or additional supply I should say, putting in place in the market.

So, it remains to be seen as GSA and DOD and NSA and some of these other departments start bringing out these facilities.

Some of them --I would guess that the great majority of them will never see the light of day to the broader market, because they are embedded in already operating facilities.

And then, in terms of the opportunity set for you or your competitors?

It's unknown.

It's unknown.

Okay.

Thank you.

Your next question comes from the line of John Stewart of Greenstreet Advisors.

Thank you.

Mike, I was wondering, how much of the 16-megawatts of net absorption in New Jersey have you guys captured?

Oh, gosh, let me think.

I've got to -- I know it's probably close to 100,000 feet, roughly.

And, let's see, it's probably between 10 and 11-megawatts.

Okay.

And, with respect to the competitive pricing environment for income properties, what are you seeing on pricing, particularly on properties that you are -- can't make work?

That are going to somebody else?

Where we've lost business lately, it's really been for a lack of supply on our part rather than pricing.

I'm sorry.

I was referring to the acquisition pipeline.

Oh, I'm sorry.

So, you're asking if deals have gone away from us on a pricing basis?

Right.

What are you seeing?

There have been a couple, that have dropped either into low 7%s cap rates or mid-7%s cap rates.

And, we've got our capital allocation models, it's more fruitful not to dip that low.

I think, that we'll see a number of opportunities that are more in the 8%s or 9%s, depending on tenant mix and location and build out.

But, yes, for us, on a couple of these deals when they dip that low, it's better for us to maintain our discipline.

Sure.

Well, what markets would those be in and who is buying in the 7%s?

Private REITs primarily.

Looking for return, looking for cash flow even at prices that we might consider two times replacement cost.

We've seen a couple deals in the Texas markets like that.

Okay.

Thank you.

Your next question comes from the line of Suzanne Kim of Credit Suisse.

Good afternoon.

Just calling about the -- you had a 24% retention for the turn key properties.

Where did tenants go, if you could only retain 24%?

Do they go and build their own facilities?

Are they going to competitive product?

No, we had 94%, 94%.

I apologize.

I misread that.

Sorry.

That's okay.

And, the other question I had was in construction management costs.

You talked about that 59% was allocated in the second quarter.

So, I'm just trying to think of a good run rate in terms of modeling construction management revenue and expenses going forward.

Well, it's going to vary widely from project to project, and I think in the particular case that Bill was referring to, a lot of our costs are upfront, so the revenues coming in will be largely cash flow to us because our costs were incurred upfront.

But, it's going to vary so widely by project by project and geography to geography, I would hesitate to try to give you a rule of thumb on that.

That's really lumpy income.

Okay.

Thanks.

Your next question comes from the line of Bill Crowe of Raymond James.

Good morning, good afternoon.

Couple of questions.

Any update on the government consolidation efforts in Australia, and where your bid stands, and the timing of an announcement?

Yes, there are -- the near-term initiative is the State of New South Wales, and they have extended their decision-making timeframe by about another 6 months.

We're hoping that they will make a decision sooner than that.

We are one of 2 finalists for that requirement.

That would be in Sydney and then on a university campus north of Sydney.

We're hopeful, but we're not counting on it.

So, we're moving ahead with the first phase of the Erskine Park project, regardless, and planning that to be multi-tenant, the first phase if we're not successful on the government.

Though, if we are, then we'll start the second phase straight away to meet the multi-tenant demand that we're seeing in the market.

Can you just remind me the scope of that consolidation effort?

We would be -- it would take the entire phase-in over the entire 100,000-foot first phase, and then a smaller requirement on the university campus north of there.

And then, the second question is, we recognize that the redevelopment platform is a large driver of your same-store growth.

Help us understand what the deliveries are going to look like in 2012 versus 2011, so we can think about where same-store growth could potentially be.

That's a really good question.

We haven't published that information yet.

And, we probably will not put that out there until later this year.

What about an order of magnitude?

Probably with the third quarter call.

But, I would say that my sense is that it's probably going to be fairly similar to the same level of construction delivery as we're seeing this year.

Great.

Thanks, guys.

That's it for me.

Your next question comes from the line of Vincent Chao of Deutsche Bank.

Good morning, everyone.

Just another follow-up on the acquisition pipeline of income producing.

Can you give us a sense of how many projects that entails, just so we can get a sense of the size of the deals you're looking at?

I would rather not talk about that at this point, because we're in various stages of discussion.

But, I would say a typical deal would be in the $50 million range.

Okay, thanks.

And then, just trying to get a better understanding, too, of how you're thinking about deployment between development properties versus acquisition income.

Sounds like the income producing, maybe, is dropping off a little bit as pricing gets more competitive.

Do you look at the development projects completely separately, or is it balancing the entire pie?

I tend to think of the Build-To-Suits and the income investments as part of one category because we're -- it's not the spec development that our construction program, development program is focused on.

And, if you look at the combination, we've got $500 million to $600 million of active opportunities combining the Build-To-Suits and the income properties.

And then, we'll complete or about $550 million of construction this year we're planning in that range.

And, that's more our spec development, ground-up, as well as redeveloping from our redevelopment inventory.

So I tend to -- I put the Build-To-Suits, because they are income producing upon completion, in a similar category as the income producing properties, because the returns are similar as well.

Okay.

So, it's safe to say if the income producing opportunity set, inclusive of Build-To-Suits, was looking even more robust than it is, it wouldn't have any impact on your decision to go forward with the other development properties that you've been buying?

No.

No, not at all.

Because, on our more spec development, that $500 million to $550 million of construction, that's really delivering product where we're seeing demand in these various markets that we're active in.

Okay, thank you.

Your next question comes from the line of Todd Weller of Stifel Nicolaus.

Yes, thanks.

Two questions.

First question is in Northern Virginia, Equinix appears to be marketing larger business suites, I see Morick in the wholesale offering versus colo, in their DC10 data center that is leased from digital.

Wanted to get your thoughts on this, also, latest thoughts on wholesale colo convergence, and how think about the potential dynamics where existing tenants could become more competitive with you guys?

Yes, that's a good question, and, it's really not a new phenomenon.

For folks like Equinix, they have a lot of customers that continue to grow and expand, and grow in their facilities in the larger customers.

And so, you're going to get overlap.

And, sometimes we'll have customers in some of our smaller footprint requirements that -- they are more smaller footprint colo types as well, though, the great majority of our focus is on the larger footprint customers.

And, the great majority of somebody like Equinix is on the smaller footprint customers that need more hands-on and network services.

So, the dividing line often times is more what level of additional services does the tenant require, and on how much hands-on requirements, or network requirements do they require, and are they an existing customer as well.

And then, the second question is on the Silicon Valley market, if we rewind two quarters ago, a lot of concern around that market.

I think you guys were pretty cautious in saying, look, we have some capacity, we'll lease it up, and see how things shake out.

It does feel like there's been a fair amount of healthy activity in that market, and it seems like you're a bit less cautious on that market.

Is that the right read?

Yes, you could say that.

We're confident on the market.

We're confident on the demand.

There's certainly a lot of products come online, over the last quarter even, that had been under construction, obviously, for the past year.

And, we have been more cautious about bringing on a lot of turn key space.

In retrospect, we probably should have been more aggressive, and we'll maintain a reasonable pace of deliveries because we are seeing demand grow.

What's interesting about Silicon Valley is that new demand comes out of nowhere.

And, you'll see very large requirements from a lot of the technology companies, social networking, software services providers, and their businesses are growing so quickly that demand builds pretty rapidly in that market.

So, we think while there's a lot of supply, it will get absorbed in an orderly fashion.

Thanks for the color.

Your next question comes from the line of Dave Rodgers of RBC Capital Market.

Hey, Mike, can you update us on Savvis' activities in the market, I guess since their merger, and have you been able to continue to do deals with them?

Yes, as you know, now that Savvis is part of CTL, as we've seen in the press, the Savvis organization and management team is taking the lead for the data center business in CTL broadly.

A lot of that was historically from the Qwest side, and Qwest has always been a very large top five customer of ours as well.

So, we continue to be actively engaged with the Savvis management team.

They are a great customer of ours, and we're exploring different ways that we can continue to help them to grow, because they certainly have a very strong growth plan for their portfolio.

So, I'm confident we'll continue to be -- see us doing more business with the Savvis team.

Great, and then second question, I know you've never been a huge fan of the Chicago suburbs.

Seems like some of the public and private competitors have had more success there recently with Cloud applications and other services.

Do you look more aggressively to Chicago given your success in the CBD market to expand there?

Yes, and both for the more CBD, as well as some suburban sites.

We're virtually, I don't know, we might be 100% full at 350 Surmack at this point.

We do have some space at Printer Square on Federal Street that's more network oriented type space.

So, we're definitely looking at new opportunities to expand in Chicago.

Thank you.

Your next question comes from the line of Chris Lucas of Robert W.

Baird

Hi, good morning, everybody.

Mike, just a bigger picture question.

Some of the market dynamics you've described suggest that a number of the US markets are much more mature and in balance right now.

I guess I'm just wondering as you look out, how you're thinking about capital allocation in the US relative to Europe and Asia, and how your incremental capital spend will look going forward.

Certainly we're seeing good opportunities in Asia and in Western Europe as well in our -- in the markets in which we've been active.

So, I think you'll -- well, I'm confident you'll see more capital allocation in Asia-Pac, certainly because it's a new region for us.

And, the Singapore project is going extremely well, and we're confident on Sydney and Melbourne, and we're working hard to try to acquire our first opportunities in Hong Kong.

So, you'll definitely see us allocate more capital internationally on a dollar amount.

As a percentage, it's hard to tell right now because we've got so much great opportunity, development opportunity here in the states, with a lot of different markets.

Silicon Valley, Phoenix, Northern Virginia, Northern New Jersey, Boston, if we find new opportunities in Chicago.

So, there's, there's just a lot of markets here in the US that are going to continue to keep us busy, but you'll certainly see a greater dollar amount invested in both Asia and in Europe.

Thanks.

Your next question comes from the line of John Peterson of Jefferies.

Thank you.

Piggy backing on the last question, talking about the Sydney, and I guess the Melbourne market as well, just wanted to get some color on how you see the supply/demand characteristics in those markets?

Maybe compare them to some of the US markets, like where do we draw the closest comparisons?

And, what do rents look like there compared to other markets in the world?

Sure.

We like both Sydney and Melbourne because they are such major hubs of commerce, finance, technology, and that's where -- that's our first priority when we're looking at new markets, or deploying capital in existing markets.

Is there a lot of commercial activity and growth?

And, we're certainly seeing that in both of those markets.

And, what's interesting, is that there's very little built out space available.

So, for these new requirements that we are pursuing, the space has to be built.

There is literally no existing space that for larger enterprise deployments, there's colocation space for smaller footprint deployments, but, there's really existing today, very little built out space.

So, we see it as a really ripe opportunity for us.

I think we'll see returns on our speculative builds similar to what we're seeing in our North American markets.

So, lease rates and costs, development costs, are certainly higher in the Australian markets.

Okay, and then, I guess looking at -- you guys signed Adobe to the development that you guys have going in Singapore.

Did you guys see it as a niche focus for you as you expand to some of the new Asian markets, to be able to market to some US-based companies that they are expanding internationally?

And, I guess on the other side of that, do you find you have a difficult time being an outsider appealing to local tenants?

Yes and no.

To the first part and second part.

In terms of international customers, especially existing customers, US multi-nationals, a lot of our demand in Singapore are -- come from existing relationships, and relationships that we have with customers in Silicon Valley and across the US, and a lot of existing customers.

So, that's almost half, probably, of our potential demand for Singapore, are existing customers of ours who are looking to expand, or companies with whom we have banking relationships.

Singapore is a very interesting market because it is a hub of international commerce, overall.

Everything from shipping to finance.

It's a natural for us, and we don't feel any inhibitions or that we're at a disadvantage at all by being an international firm in that market.

I think we have a great presentation and a great reception from international companies, and in companies that are domicile in the region.

Similarly, well, actually, Sydney and Melbourne, the Australian markets in general are different because those markets really are the large amount of domestic, Australian domestic activity, and our reception there has been extremely positive.

We have a very good, and I think well deserved, reputation internationally, because of our platform, our ability to deliver high end Enterprise Solutions, and frankly, our financial stability and strength is really pretty widely recognized, especially in Asia-Pac.

Okay, thank you.

I think at this point, we've come up against our hour time limit, so, we're -- we appreciate everyone's focus, and good questions today and focus on DLR, and I want to thank our team for continuing to perform in a very extraordinary way and we're very, very positive about what we see ahead for our data center markets.

Thank you very much.

This concludes today's conference call.

You may now disconnect.