Digital Realty Trust Inc (DLR) 2011 Q4 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Digital Realty 2011 fourth quarter 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)

I would now like to turn the call over to Ms.

Pamela Garibaldi, Vice President Investor Relations and Corporate Marketing.

Ms.

Garibaldi, you may begin your conference.

Thank you, Sarah.

Good morning and good afternoon to everyone.

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

If you have not, you can access one in the investor section of our website at www.digitalrealty.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 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 believe, expects, may, will, should, pro forma, or similar words or phrases.

You can also identify forward-looking statements by discussions of strategy, plans, intentions, future events or trends, or discussions that do not relate solely to historical matters; including such statements that relate to our dividend policy, rents to be received in the future periods and lease terms, development and redevelopment plans, supply and demand for data center space, targeted returns and cap rates, acquisitions and investment activities, capital markets and finance activities; and the Company's future financial and other results, including the Company's 2012 guidance and underlying assumptions.

For a further discussion of the risks and uncertainties related to our business, see the Company's annual report filed 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 revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Additionally, this call will contain non-GAAP financial information, including funds from operations, or FFO; adjusted funds from operations, or AFFO; core funds from operations; 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 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 fourth quarter of 2011, furnished to the SEC; and this information is available on the Company's website at www.digitalrealty.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.

Questions will be limited to one per caller.

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

I will now turn the call over to Mike.

Thank you, Pamela.

Welcome to the call, everyone.

Before we get started with our formal remarks I would like to thank everyone who participated in our Investor Day a few weeks ago.

We greatly appreciate the positive feedback we received and we are glad you found the information useful.

Now I'll proceed with the call.

I will begin with my remarks, and then turn the call over to Bill, who will review our exceptional fourth-quarter and full-year 2011 financial results.

As we previously announced, 2011 was a record-setting year for DLR.

We signed new leases for approximately 1.3 million square feet, representing over $136.6 million of annual GAAP rental revenue, which represents a 22% increase over 2010.

We were able to achieve these results by leveraging our global platform and expanding relationships with several multinational customers in markets ranging from Amsterdam to Dallas, and Silicon Valley to Singapore.

We also achieved excellent results serving the local customer base in markets such as Paris, Los Angeles, and Melbourne, Australia.

We believe that the strength of our leasing program lies in our geographically diverse portfolio, supported by local experts who deliver service and solutions to customers with a consistent commitment to excellence regardless of location.

At the same time, our global portfolio enables us to provide data center solutions where our customers need them, while mitigating our exposure in any one geographic market.

Heading into 2012, we have a healthy backlog of signed leases, totaling approximately $84 million of annual GAAP revenue, of which $62 million will commence in 2012; and the bulk of the remaining backlog in 2013.

The increase in our Build-to-Suit activity in 2011 certainly helped to contribute to this strong backlog.

Lease terms continue to trend on the longer side.

Leases signed in the fourth quarter for data center space averaged 152 months, or 12.7 years, up from 110 months in the third quarter.

We also had good renewal activity in the fourth quarter, rolling over approximately 413,000 square feet of space for a 5.6% increase in GAAP rents.

Renewals included approximately 90,000 square feet of Turn-Key space, which increased 2.2% on a GAAP basis; and approximately 290,000 square feet of Powered Base Building, which increased 15.3% on a GAAP basis.

Overall, tenant retention remains very high.

On a square foot basis, 100% of expiring Turn-Key space renewed during the fourth quarter.

On a revenue basis, Turn-Key leases renewed at approximately 102% of GAAP, with an average lease term of over 135 months.

Again, on a square foot basis, 99% of expiring Powered Base Building leases were renewed in the quarter at 114% of GAAP rents, with an average lease term of 82 months.

Portfolio occupancy increased to 94.8% in the fourth quarter, compared to 93.7% in the third quarter, reflecting new leasing activity and our high renewal rate.

The same-store occupancy also increased to 95.3% from 94.2% in the third quarter.

Fourth quarter same-store NOI increased to $136.7 million, up 3% from $132.6 million in the previous quarter.

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 up to $124.1 million in the fourth quarter, up 3.8% from $119.6 million in the third quarter.

As we discussed in our Investor Day we see active demand for new data center space virtually across all of our markets.

We are currently tracking over 2 million square feet of demand, which is consistent with what we reported in our last call.

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

So we're certainly see an uptick in overall customer requirements that we've identified.

For the benefit of those who were unable to participate in our Investor Day last month I'll briefly run through the supply and demand statistics we're tracking in a few of our major markets.

As you know, our strategy is to maintain the disciplined approach to managing inventory market by market, by utilizing our flexible POD Architecture that's designed to deliver data center space in approximately 1 megawatt increments.

This enables us to meet customer just-in-time requirements across our global portfolio, while limiting our financial exposure in any one market.

Year-over-year, lease rates in our major markets remain relatively flat.

Although we've seen increased supply in Silicon Valley, Northern Virginia, and New York-New Jersey, we continue to have strong demand for product; and we've been able to maintain rents in line with our historical rates, while achieving our unlevered cash return on invested capital on our new developments of between 11% to 14%.

In New York Metro including New Jersey, we're tracking nearly 31 megawatts of potential demand.

We believe the increase in demand over previous quarters reflects pent-up demand from financial services, as well as system integrators and managed services cloud providers that support the financial vertical.

This compares with approximately 23 megawatts of available supply that is either built out or currently under construction.

At DLR, our New York Metro exposure is relatively small at present.

We currently have three TKD PODs, or about 3.5 megawatts available.

We believe that DLR represents about 60% of the 17.6 megawatts of supply that was absorbed in 2011.

In Northern Virginia, we're tracking approximately 18.5 megawatts of current demand.

This compares to approximately 29.5 megawatts of available supply that's either built out or under construction.

Again, we have a very manageable current exposure in this market, with 2 megawatts of available built-out supply in the DLR portfolio.

We estimate that DLR represents approximately 49% of the 43.3 megawatts of supply absorbed in Northern Virginia in 2011.

Dallas has continued to be a very active market for us, with very limited available built-out supply.

We've identified approximately 24.5 megawatts of demand, compared to 7.2 megawatts of net new built-out supply.

During the quarter we signed leases with separate customers of two buildings that are under construction currently at our Datacenter Park Dallas property.

That's in Richardson, Texas.

The first lease is for a 112,000-square foot Build-to-Suit, and the second is for 42,000 square feet.

As a result, we're moving ahead with the construction of two new buildings in the Park in addition to the two that we've leased.

In the Dallas market, we estimate that Digital lease signings represented approximately 62% of the 2011 absorption.

Finally, in Silicon Valley we're currently tracking about 3.6 megawatts of demand, compared to about 24 megawatts currently available supply.

As we discussed at our Investor Day, with more than eight years of experience leasing in Silicon Valley, we recognize that it has rather unique demand characteristics.

Internet-based companies have traditionally been major consumers of data center space in the Valley.

Their growth and subsequent data center requirements are extremely difficult to predict, even for the enterprises themselves, since they're growing so quickly.

While there appears to be a significant supply surplus today, new requirements can and will emerge and absorb supply quickly.

Our exposure at present is a very manageable, just 4 megawatts of available supply, either currently or that we currently have under construction.

We estimate DLR represented approximately 19% of the over 36 megawatts of absorption in Silicon Valley in 2011.

In addition, we're seeing strong demand in markets such as Phoenix and Boston, where we're generating significant leasing momentum.

Let me turn to our acquisitions program.

We acquired four properties during the quarter, for a total purchase price of $157 million, bringing total acquisitions for the year to $246 million.

Fourth-quarter activity included the Dublin development site we discussed in our last call, as well as two income-producing properties, one in San Francisco's CBD and one in Atlanta.

In addition, we acquired a development site in Northern Virginia that was subsequently contributed to a joint venture partnership with an existing customer for another Build-to-Suit project.

As soon as we receive customer approval, we plan to provide additional information on this transaction in the coming weeks.

We continue to take a prudent approach to expanding our European portfolio, which currently represents 11%, or $91 million, of total annualized rent in the portfolio.

As of December 31, 2011, the stabilized portfolio was 92% leased in Europe.

In Asia-Pac, we signed leases for 40% of our building in Singapore, and this is more than 18 months ahead of our underwriting assumptions.

So we're seeing very good activity in the Singapore market.

We're currently tracking over 51 megawatts of potential demand as we continue construction on the remaining 11 megawatts of available IT capacity at that building.

In Melbourne, we held a ground-breaking ceremony to mark the start of construction on a 50,000-square foot facility, fully leased to National Australia Bank, NAB.

We have additional expansion capacity at this location.

We're currently tracking about 4 megawatts of demand.

Construction is also under way at our Sydney site.

We're building a 90,000-square foot facility designed to support four of our 1,440 kilowatt PODs.

We expect to deliver the first two PODs in the fourth quarter of 2012.

In Sydney we're tracking about 8 megawatts of demand.

Our development program continues to be very active, supplying new facilities that will fuel our ongoing growth.

During the fourth quarter we completed over 224,000 square feet of data center space, which was 93% leased.

This consisted of 36,000 square feet of Turn-Key that was over 56% leased; 5,000 square feet of Powered Base Building, 100% leased; and over 183,000 square feet of Build-to-Suit space that was also 100% leased.

At quarter end, we were under construction of Turn-Key space totaling about 489,000 square feet; including 284,000 square feet in the United States, 44,000 square feet in Europe, and approximately 161,000 square feet in Singapore and Australia.

Approximately 31% of this space is pre-leased.

For Powered Base Building space, we're under construction on about 341,000 square feet in the US.

In Europe we had about 88,000 square feet under construction, which includes the new Chessington redevelopment property in London that we acquired in the third quarter.

So we started building on that straight away.

Lastly, we had approximately 275,000 square feet of Build-to-Suit space under construction in the US, which is 100% pre-leased.

Including pre-construction work and common area building improvements, the total construction work in progress at the quarter was $221 million.

The estimated cost to complete the ongoing December 31 work in progress is $486 million.

This concludes my prepared remarks.

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

Bill?

Thank you, Mike.

Good morning and good afternoon everyone.

I will keep my remarks quite brief and we'll focus primarily on fourth quarter and full year 2011 results that were not addressed on our Investor Day.

As Mike mentioned, 2011 was another year of exceptional performance by Digital.

On Tuesday, our Board approved a quarterly common stock dividend increase of 7.4%, or $0.05 a share, to $0.73 per share.

This is our tenth dividend increase in a little over seven years since our 2004 IPO.

Since our first full quarter of operations we've grown our dividend by a compounded annual growth rate of nearly 17%.

This increase reflects our optimism for continued growth, the need to meet redistribution requirements, and is consistent with our existing policy to distribute 100% of taxable income to minimize corporate level federal income taxes.

As we disclosed in our Investor Day presentation, we raised $2.8 billion in capital during the year from a variety of sources to fund the growth of our Company, which includes our $1.5 billion Global revolving credit facility that closed during the fourth quarter.

This substantial increase in borrowing capacity will accommodate our growing global investment program, and provide immediate liquidity for potential acquisitions.

During the fourth quarter, we generated $42.4 million of net proceeds from our At-the-Market equity distribution program, from the issuance of 668,000 shares at an average price of $64.08, bringing the total for the year to $456.8 million of net proceeds under the current and previous programs, at an average share price of $59.68.

Since January 2012, we've issued approximately $63 million of common stock at an average price of $66.19 per share.

We have $53.8 million remaining under the current program.

We have $1.1 billion of immediate liquidity, including $26.6 million in short-term investments, plus the funds that can be drawn on our credit facility.

If this capacity were fully utilized, we would remain in compliance with covenants contained in the credit facility, our Prudential shelf facility, and other secured debt.

After the payoff of two European secured loans in January for $73.4 million, and assuming extension options are exercise;, in 2012 we have $68 million remaining principal amortization and debt maturities, including $53 million for a secured loan maturing in October.

In 2013, we have $260 million of ongoing principal amortization and debt maturities.

Let me now turn to our fourth quarter and full year 2011 results.

All per share results are on a diluted share and unit basis.

As stated in today's earnings release, the fourth quarter FFO per share was $1.02.

Adjusting for items that do not represent ongoing expenses or revenue streams, fourth quarter 2011 core FFO was $600,000 higher than reported FFO, or $1.03 per share.

This reflects a 7.3% increase from the fourth quarter 2010 FFO of $0.96 per share.

For the full year 2011, FFO per share was $4.06, up nearly 20% from 2010 FFO per share of $3.39.

When adjusting for non-core items, 2011 FFO per share was $4.09, up over 17% from 2010 core FFO of $3.49.

Adjusted funds from operations, or AFFO for the fourth quarter of 2011 was $94.9 million, up from $92.5 million in the previous quarter.

The diluted AFFO payout ratio for the fourth quarter of 2011 was 81.9%, up slightly from 81% last quarter.

Adjusted EBITDA grew by 9.3%, or 6% quarter-over-quarter; which improved our debt to adjusted EBITDA ratio to 4.4 times in the fourth quarter, down from 4.5 times last quarter.

Our fixed charge coverage ratio was 3.2 times at year end 2011, compared to 3.4 times in the previous quarter.

This decrease is due to the issuance of our 7% series E cumulative redeemable preferred stock in the third quarter of 2011.

For the full year, adjusted EBITDA was $622.9 million in 2011, up nearly 22% year-over-year from $512.1 million in 2010.

As disclosed in our Investor Day presentation, at the midpoint of our 2012 guidance, we forecast 18% growth in 2012 adjusted EBITDA of $733 million; versus 2011 adjusted EBITDA of $623 million.

Turning to the income statement -- net operating income increased by $6.8 million, to $173.1 million in the fourth quarter of 2011; from $166.3 million last quarter.

This increase is primarily attributed to growth provided by incremental leasing, lower net utilities in the quarter, and a favorable property tax adjustment that resulted from a final tax assessment, a portion of which was passed on to tenants.

Although total reimbursements of $52 million in the fourth quarter of 2011 decreased from $56.7 million in the third quarter, the operating margin for the overall portfolio in the fourth quarter of 2011 is higher at 65%, compared to 63.1% in the third quarter of 2011, reflecting lower OpEx in the fourth quarter.

G&A decreased by 14.4% to $12.5 million in the fourth quarter, compared to $14.6 million the previous quarter, primarily due to year-end accrual adjustments.

Interest and other income decreased to $398,000 in the fourth quarter, compared to $2.2 million last quarter, primarily due to third quarter 2011 foreign exchange transaction gains.

Finally, we're maintaining our 2012 FFO guidance range of $4.34 to $4.48 per share that we announced on January 30, 2012; with the same assumptions that were set forth in that press release.

That concludes our formal remarks.

We can now open the call to your questions.

Operator?

(Operator Instructions)

Jordan Sadler, KeyBanc Capital Markets.

Just wanted to follow up on markets, and market rents, specifically.

I know that you guys do a nice job of providing some demand/supply statistics.

I'm just curious -- and I know you have a broad product array and a broad number of markets now -- but if you could generically talk about what you're seeing in market rents across your different product types.

And maybe -- go ahead.

I'm good.

Go ahead, Jordan.

I mean, that's the question; and then as a follow-up I was curious if you could talk about any large tenant requirements you were seeing in the market.

Sure.

You know, by and large, for the leases we've been executing on, we're looking at last five or six quarters in some of these markets, where there is some growing supply, like in Silicon Valley and Virginia and New Jersey.

And our lease rates have been remarkably flat, and really not declining on what we've been executing on.

I would say probably, generally in Silicon Valley, rents might be down 10% to 15% in some cases.

But depending on the requirement, the level of resiliency in the facility, we've been pretty flat.

We haven't had a lot of product to lease in Silicon Valley.

We would be bringing on a couple more PODs in a couple months, because we always want to have some product, even in markets that are a little more frothy.

But I think, by and large our lease rates are holding well in some of these markets.

That's in the US or --?

Yes.

Is that everywhere?

In other markets, we've seen maybe prices -- rates tick up a bit in places like Dallas and Phoenix.

Certainly internationally, in Australia and Singapore, pricing is very good for us, and we're looking at healthy returns in those markets.

But across the board, in the US markets we're still on our spec buildings, achieving 11%, 14% unlevered return on costs.

So that continues to be very consistent for us.

Just the follow-up on the large tenant requirements -- are you seeing large tenants in any of these markets?

I know you don't have a tremendous amount of availability, but curious in terms of what you're seeing out there for demand.

Yes, it's interesting.

In New Jersey, we're seeing some very large requirements from major Wall Street firms.

And those will be ones that we can accommodate, either in our Powered Base Building product that we can build out in Piscataway.

We have space in Weehawken as well -- a little bit less, smaller space in Weehawken -- a couple PODs there.

And we can accommodate some Build-to-Suit requirements in Somerset and other sites that we have that we have identified.

And we're seeing a couple of very large requirements in -- potentially in London, certainly in Dallas, number of good medium-size requirements for Phoenix, Boston.

So across the board, we're seeing it's pretty active.

What's interesting -- especially interesting -- are the large requirements that are percolating out there.

Some may be in kind of early stages for the New Jersey area.

Paul Morgan, Morgan Stanley.

Can you talk a little about the -- in terms of your visibility about the ramp in development spend over the course of the year, kind of relative to your full year guidance?

And then, in terms of plans for funding it -- how comfortable are you with growing the volume of equity issued through the ATM, versus other forms of capital raises?

I can speak to the funding piece of it.

The good news is, we're coming into the year with relatively low leverage.

We're at 4.4 debt-to-EBITDA.

We would like to manage it up to 5; higher if need be.

So given the growth of EBITDA, there's clearly plenty of room for additional leverage; and our needs to equity are relatively modest.

So given the modest needs for equity I'm very comfortable that we can fund through the ATM; and one of the alternatives for us, which we demonstrated in August of last year, is that we're willing to go to the perpetual preferred market as well.

And those rates, if anything, are more attractive today than they were when we issued in August.

So we view that as extraordinarily attractive permanent capital.

And then, in terms of the ramp, I think we're fairly steady now.

I don't have a schedule in front of me that breaks it out by quarter, but I think we're relatively steady quarter by quarter at this point, with the amount of activity that we have under way.

Jamie Feldman, Bank of America.

Bill, I was hoping you could talk a little more about the year-over-year change in the operating expenses in the same-store portfolio, and kind of walk us through the different line items and your expectation for this year?

Yes.

I've got the Q4, Q3 comparison for same-store margins here.

I'll pull up the same-store from the supp.

Also versus 4Q last year.

It seems like there was some pretty big spikes.

So the Q4 -- the operating margins in Q4 versus Q3 improved about 150 basis points.

So 67.3% in Q4 versus 65.8% in Q3.

I think you'll probably see a similar uptick in margins compared to the fourth quarter of last year as well.

And I think one of the things you have to remember is, on fourth quarters there's a lot of reconciliations going on; and when you look at annualized year-over-year, our margins are holding or improving.

The other thing that will happen is -- which has happened during this period -- is that we've brought on line quite a bit of Turn-Key data center space, which has the effect of increasing the operating expenses quite a bit when it comes on; and to the extent that it's vacant, there's no revenue, obviously.

So there may be some of that going on versus the fourth quarter of 2010.

So if you look -- I'm just looking at the supplemental.

It shows 40 basis points of year-over-year occupancy growth.

You're saying some of that space last year was dormant, even though it was leased?

Yes.

And then you've got utilities is showing 12% growth.

Your other maintenance and operating is showing 20% growth.

Taxes is 24%.

What would drive such a big increase on each of those lines?

In taxes or in the whole thing?

No, like those three are the ones that really stick out (multiple speakers).

Your portfolio is growing quite a bit year-over-year; and once again, really what's more meaningful is looking the entire year of 2010 with the entire year of 2011 gives you a better idea, because the operating margins are actually improving, and there's just a lot of reconciliations that go on the fourth quarter.

So fourth quarters are hard to -- it's hard to extrapolate from a fourth quarter alone.

I think you need to ignore the utilities, because the utilities are increasing 11.8 but the reimbursements are increasing 14.4.

We've actually added quarter-over-quarter -- 12/31/10 to 12/31/11 -- we've added over 770,000 square feet of occupied square feet, and the great majority of that is Turn-Key data center that are gross rents.

I'm sorry, it's actually over 1 million.

I'm sorry, over 1 million square feet -- 1.2 million square feet we added.

That's considered same-store, even though you add square footage?

A lot of that's in the same -- in operating buildings, yes -- not all of that, and I don't know exactly the portion -- but a lot of that is in current operating buildings, yes.

I guess it would be useful to know what was utilized square feet year-over-year also in this presentation.

If you look at our EBITDA margins, year in and year out, on an annual basis we're going to be on EBITDA margin basis 60% or a little better very steadily.

And the NOI margin's up around 75.

Right.

Michael Bilerman, Citi.

It's Manny Korchman here with Michael.

Looking into 2012 and your acquisition guidance -- can you help us think about how those might flow in?

I think at your Investor Day you had talked about a big acquisition happening in 1Q.

Is that still on pace?

That's still on pace, and I think for purposes of -- with the exception of that acquisition, when that acquisition happens, you'll see how much it is.

Subtract it from our guidance, and then I would assume mid-quarter convention for the balance.

It may be a little back-ended, because that seems to be the way that real estate transactions occur.

There seem to be more in the second half of the year than the first half of the year.

But that's probably as good a convention as any.

I mean, just for modeling purposes at this point, is that half of what you're talking about?

Is it three quarters?

Or can you give us some idea of magnitude?

Of the --

Of the 1Q.

Of the first quarter?

Yes.

Oh.

It's roughly one-third at the low end.

And then, going back to Mike's comment -- kind of a pretty slow 2Q, and then a pickup in 3 and 4Q?

That would be safe.

I mean, these acquisitions, to the extent they come in later in the year, really don't move the needle that much for the current year FFO.

It's more of a subsequent year FFO item.

George Auerbach, ISI Group.

Bill, just to follow up on Jamie's question, maybe asked a different way -- the non-utility OpEx jumped by about $5 million in the fourth quarter.

Should we expect that to go back to $25 million or so run rate going forward?

Yes, once again, we're adding properties, because we're doing a lot of construction; and hopefully a lot of leasing along with it.

And we have a good backlog, as I mentioned earlier, that will be coming online.

A lot of that's in those same-store buildings.

But I think we're going to -- on a percentage basis, we ought to be pretty steady.

I think it should be flat.

Flat with the 30 going forward?

Flat to the 30.

And, on the rental rate side, the GAAP spreads on the Turn-Key leasing were about 2% positive this quarter.

But can you help us understand what the cash roll-down was, assuming it was negative?

Is this on the renewal activity?

Yes.

So on renewals, we had two transactions with two very large, very long-term customers that renewed in the quarter, and we did have a roll-down somewhat in the cash based on those two.

And both of these were long-term leases -- one was 10 years and one was 13 years -- and they had both been going up -- one 4% a year, one 3% a year -- and they renewed, each one renewed for another 10 to 12 years each.

So when you get that compounding, sometimes you get an occurrence where that rent has gotten so high at the end of 12 years that when you're resetting to have a reasonable lease rate, especially for big customers of ours, we're willing to be flexible; so that the overall rent going forward on a straight line basis is a significant uptick for us.

But they get a little bit of relief at the front end, so the cash goes down 2%, or 10% or 12% in one case, where it was a PBB lease; but on an overall basis it went down 12% on this Powered Base Building, but on an average it's going to be up almost 17%.

And we're not talking about -- we're talking about rents in the 20s, right?

$20 per square foot per year.

So all in all, it's actually a net increase in value for the buildings, because we're renewing these big tenants at higher average rents for 10 to 12 year bases.

And if you took those two out, then the cash uptick would be 4% for Turn-Key and 3% for Powered Base Building, if you take those two out on a cash basis.

Finally, Bill or Mike -- what should we expect in terms of land acquisitions this year?

Can you remind us, on the million or so square feet of redev space that aren't under construction, are you capitalizing any costs on those land, or are they all sort of a drag to FFO?

Well, land -- you can't capitalize land under any circumstance, so our land holdings are really -- we're really in good shape in terms of feeding demand.

So our significant land holdings would be our next phase in Virginia; the smaller piece that we acquired in Dublin.

We have land for development at our Richardson Datacenter Park Dallas.

So those three locations are probably where we have actual land.

And then, where we have redevelopment space, shelf space in the redev portfolio -- if it's not under construction, we are not capitalizing.

The acquisition that should close this quarter has some land that we'll be able to use at a later date.

About 10 acres.

And a lot of power.

Tayo Okusanya, Jefferies & Company.

Going back to Jamie's question on G&A -- the $12.5 million of G&A this quarter -- how much of accruals are actually in?

And if you were to take that out, what would be the normalized run rate?

I think what you should do is, look at the guidance for 2012.

I think it's the reconciliation we're trying to do, basically -- trying to figure out if that guidance actually does make sense.

Well, 14 is sort of a normal.

Yes, Tayo, if you look at -- especially if you look at G&A as a percentage of revenues, we're very steady there.

If you look at the G&A, and our guidance on G&A, it's very much in line with the previous years.

It may even tick down a smidge.

But we're very consistent SG&A as a percentage of revenues, which I think is a meaningful number -- meaningful ratio if you're looking at how we're managing our business.

Bill, second question goes to you -- as I look at your credit metrics, they're really strong at this point.

Just curious what you think your chances are in regards to getting yet another credit rating upgrade?

It's awfully hard to anticipate the rating agency's actions.

Clearly, we maintain a very strong balance sheet.

I think one of the criteria that the agencies rely upon is knowing how long a company's been operating as a public company, but how long it's been operating as a rated entity.

In our case I think it's been a couple years now.

The agencies publish their criteria for the ratings, and what the criteria needs to be for credit metrics; and I think it's certainly -- you could make the argument that we should be a BBB-plus or BAA-1.

In fact, we do make that argument every time we see them.

But clearly to date we've not been successful in winning that argument.

That's not to say we won't try the next time we see them.

And last question -- in regards to any market that you're not in right now, where you do feel those markets are attractive and you could take a look at, a stronger look at?

Well, certainly we like the Hong Kong market a lot, and we would like to be there and we're working on being there.

We're hopeful that we're going to be participating in that market before the end of the year.

That's probably the main one.

Frankfurt's an interesting market as well, that we're not in.

I'd say those are probably the two main larger markets that have a lot of appeal.

Nothing domestically?

You know, we're in so many markets now.

Now, that's not to say on a Build-to-Suit basis, we wouldn't expand into some new markets.

But the latest one being with our Build-to-Suit operation with NetApp in suburban Portland, in Hillsboro, Portland -- that's kind of an interesting market.

But if you look around, we're in Seattle, meaningfully; San Francisco, Silicon Valley, LA, Phoenix, Dallas, Chicago -- you'll probably see us doing more in Chicago; we like that market a lot.

We're virtually 96% leased there.

We'll be doing more in Boston, expanding our footprint in the Boston market; and expanding in our Needham facility and continue to expand operations in Wakefield.

Virginia -- we continue to be very active, as we are in New Jersey; and I could see us perhaps -- we made a nice acquisition of income -- stabilized property in Atlanta.

That's a market we'll look at potentially doing more in.

I think we've got the US pretty covered for major markets for spec building.

But that's not to say, on a Build-to-Suit basis we wouldn't go to new markets in the US.

Vincent Chao, Deutsche Bank.

I wanted to clarify something -- I'm not sure if I had missed it -- but it sounds like you're ready to move forward with some work in the Silicon Valley, even though there's somewhat of an oversupply situation there today, currently, based on the quirkiness.

In New Jersey, are you guys ready to move forward on new stuff there?

Seems like your commentary in terms of supply demand has been more positive than I think a lot of people looking at that market would think.

And wanted to get your thoughts there.

Yes, certainly.

In New Jersey, I think we have three PODs available right now, about 3.5 megawatts that's built out ready to go; but we also have Powered Base Building, probably a couple hundred thousand feet that we have available that we can build out custom, or build out more, or lease as Powered Base Building that folks want to use their own capital to build out.

We are talking to customers about doing more customized Build-to-Suit within those buildings, if you will.

We continue to look at new sites to accommodate some of these larger requirements that are out there, that are more Build-to-Suit oriented.

We're definitely very busy in New Jersey right now.

Vincent, we think that New Jersey is, more so than other markets, a market where demand is characterized by corporate enterprise as opposed to Internet; and we believe that we've demonstrated that our product is well-suited to the corporate enterprise market.

And so to the extent that you might hear from others that demand is not looking as strong in New Jersey, that might be a function of whether their product meets the corporate enterprise market as well as ours does.

Yes -- just this week we became aware of maybe another 20 megawatts of potential projects for major firms.

So there's a lot going on, potentially, in New Jersey.

Just trying to understand, because to me it does sound like there's some activity there, and your product, if it fits better, why not go ahead more aggressively with spec?

Your commentary just now seems more oriented toward Build-to-Suit type stuff, which obviously carries a little bit lower risk.

But if there's already demand, under-supply of space for the type of space that's needed, why not go ahead with more spec?

We can build out very quickly in our existing Powered Base Buildings.

So in Somerset, in Piscataway, in Weehawken -- in all those places we have Powered Base Buildings.

In the case of Weehawken, it's actually built out beyond Powered Base.

We have one POD and one POD that is about halfway built out.

In Piscataway and Somerset right now we have space that we can build out very quickly on a customized basis.

Instead of building out the spec POD, if we can deliver something in 12 or 14 weeks for a customer, and we could do it on a more customized basis, it's definitely for everyone's benefit to do that.

And we have the just-in-time product available for those who do want to move in, in 30 days.

So we kind of have the best of both worlds there.

Bill Crow, Raymond James.

Quick question here for you -- you clearly have the capacity to be an industry consolidator.

What are you seeing on the private side from a potential acquisition perspective?

And I'm talking, not just one-offs, but larger transactions and -- we've seen CyrusOne being mentioned as potentially coming public or being spun off.

Anything you can comment on there that could give us a road map to where you guys may end up?

The opportunities that we're seeing right now that we think are executable are individual property acquisitions.

And we're really not seeing, other than speculation, other M&A opportunities, though we always have our feelers out, and we're always inquiring with companies about potential for larger, more enterprise M&A-type investments.

But really can't say that there's anything percolating at this point.

If the right opportunity came along, we would be clearly interested.

And we have the balance sheet today to acquire just about anything.

So --

We're very open to the ideas.

And then one final question, hopefully, on New Jersey, which is -- you talked about pent up demand from financial services tenants.

Is there any concrete evidence now that they're out in the market more aggressively?

Are the [tours] increasing?

Have you actually seen some deals signed, or is this just still on the come?

Well, the demand that we're talking about and that we put in our stats, are projects that we're bidding on; that we have at least preliminary proposals out to, or proposed LOIs at least.

And then there's some very large potential Build-to-Suits that are out in the market with RFPs and RFIs, currently.

Lukas Hartwich, Green Street Advisers.

Mike, I was hoping you could talk about how you think about the relative risks and rewards when you're weighing whether to deploy capital domestically or internationally.

Well, you know, it's interesting, because the markets that we're looking at, where we're actively building, both US and internationally, are major markets.

So whether it's London, or Dallas, or Singapore, or Northern Virginia, we're not taking emerging market risk at all.

So the initial risk, I guess, that we think we mitigate very well with our processes and procedures, is going into a new market, whether it's a new market domestically or a new market internationally.

And we mitigate those risks because we have a tried and true, very specific program on design, contracting, project management, commissioning, and property operations.

And when we go into a new market, whether it's in the US or in international, we have market leaders come in from other digital regions to get things set up, trained, establish our program, and while we're training local folks.

And a lot of our employees are international folks, too, who have a lot of experience; so they're -- for example, our folks in Australia and Singapore are long-time data center experts and operators in those markets.

So it's more of entering a new market, rather than an international market, because we're not going into emerging markets, we're staying in mature.

A lot of our customers, frankly, especially a place like Singapore and London, and even Paris, are existing customers of ours, and working with us in multiple markets.

Same for Amsterdam as well.

Ross Nussbaum, UBS.

It's Gabe Hilmoe, here with Ross.

I was wondering, can you maybe talk a little bit about Equinix evaluating the possibility of converting some or all of their business to a REIT, and how you maybe view that relationship going forward from a potential competitive standpoint?

Well, we're really good partners, and we're doing work together all the time.

All the time.

And new things all the time, including currently.

So with our relationships and the value that we bring, being able to deploy in so many markets, has been very value-add for them.

We've got great relationships, top to bottom, throughout the organization.

Jonathan Schildkraut, Evercore Partners.

I had a question about New Jersey.

Bill, you talked about tracking a lot of demand, and demand from financial services.

We're tracking actually a bunch of demand from financial services as well.

And one of the things that we are hearing is that some of these clients are very interested in dedicated backup systems -- generators and other equipment -- and you noted that perhaps your facilities were better suited to fill some of the demand in the New Jersey market.

I was wondering if you could tell us if that was one of the items that you were seeing, and if not maybe you could elucidate us a little bit on what it is about your facilities that places you in a better competitive position.

Mike here.

I'll go ahead and answer that.

Yes, definitely, our POD Architecture, where we have dedicated power and UPS backup power infrastructure is critical.

And especially for financial services, but really for almost all corporate enterprises, they really don't want to be in a position where they're sharing the power systems and parts of the cooling systems with other customers.

So our buildings are designed, essentially, to be buildings within a building.

So that power and backup power infrastructure is fully dedicated to the individual customers.

And that's -- really is a primary criteria for your financial services and corporate enterprise in general.

If I could sneak one more -- it's more of a mathematical question -- but we were trying to calculate churn, and it looks like churn, at least for 2011, is falling somewhere -- or fell somewhere -- in the 7% on an annual basis range.

Is that in the range of correct number?

I don't believe -- if you look at our renewal overall, our overall renewals on a revenue basis -- GAAP revenue basis -- I think we're probably around 100%.

Are you looking at square footage?

No, I was trying to look at the revenue run rates, incremental lease commencements, and then realized incremental revenue growth.

You know what, I can take that question offline.

I apologize.

Okay.

No worries.

Chris Lucas, Robert W.

Baird.

Just a couple of quick questions.

Going back to New Jersey real quick -- Mike, just so I'm clear -- latency is not an issue for a lot of these users at this point, it is really -- it is more of a back-office functional demand issue in New Jersey for those corporate users?

You know, it varies.

It varies widely.

Yes, I'd say it's a range.

There's still a significant amount of latency sensitive; even if it's not necessarily trading, there are databases that need to be concurrently maintainable.

And then there are a number of -- significant amount of -- applications that are less latency-critical; some of the more cloud-oriented grid computing types.

And some of those actually applications we've taken with Wall Street firms down in Virginia and some other locations that maybe they can enjoy a little bit lower power costs especially.

So it really runs the gamut.

We're seeing a lot of consolidation, where -- and we've been seeing this across the board now for a couple years, and it's starting to accelerate, where companies in general will have data centers in different departments.

It's in the converted broom closet, the converted conference rooms in high rise buildings; and the IT departments are getting their arms around all these disbursed applications in different departments and bringing them under one roof.

And that typically means coming into a new facility that has been built for them.

So I think we're seeing a lot of that.

That does represent a pretty wide range of applications and equipment.

And then, talking about consolidation -- there is money in the federal budget for data center consolidation.

I guess I'm curious as to what you're seeing in terms of actual movement along that front, and then also what your sense is to the ultimate size of that opportunity?

We're clearly seeing more activity and more interest in leasing as opposed to owning, with government.

We think it's going to be a trend.

We speculate it's going to be a trend.

It's a little too early to tell, especially in an election year.

But we are starting to see some requirements, and we've actually executed on government requirements recently in Virginia that represent that kind of consolidation into a new facility.

So I'm guessing we'll continue to see that, and maybe start to build after this year.

So we're encouraged that there's going to be more government demand, especially as looking more at operating model versus an owning model.

Last question, Bill -- relative to guidance, there's been a little deterioration in the dollar relative to some of the other currencies.

I just wanted to get a sense as to how much of variance off of the guidance, dollar to the other currency denominations, do you need to see in order to have a meaningful impact on the outcome of the results for 2012?

Right now our guidance, our assumptions for currency exchange rates for guidance purposes are conservative, in the sense that I think the euro and the pound and the [singa] are all quite a bit higher -- not quite a bit, but higher than what we stated in our assumptions.

So at this point, if today's exchange rates were to hold for the balance of the year and there were no fluctuation whatsoever, it would add another couple pennies to the existing FFO.

It actually goes the other way.

This concludes the Q&A portion of today's call.

I'll turn the call back over to Mr.

Mike Foust for any closing remarks.

Once again, thank you, everyone, for taking the time to be with us today, and taking the time for our great turnout for the Investor Day as well.

And I would just like to thank all of our team members here at Digital Realty.

Our team has done a terrific job, record-breaking year in leasing and developing our customer relationships more deeply.

And the team here is doing a terrific job delivering those data center solutions across a wide range of markets.

So, my thanks to the DLR team, and we're looking forward to a really good 2012.

Thank you.

This concludes today's conference call.

You may now disconnect.