Digital Realty Trust Inc (DLR) 2012 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Digital Realty Trust 2012 first-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 today's conference over to Ms.

Pamela Garibaldi.

Please go ahead, ma'am.

Thank you, and welcome to the call, 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 Relations section of our website at www.DigitalRealty.com or you may call 415-738-6500 to request one.

Before I begin, I would like to remind everyone that the management of Digital Realty may make forward-looking statements on this call.

Forward-looking statements 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.

Forward-looking statements may include discussions of strategy, plans, future events or trends, including statements related to supply and demand for data center space and the Company's future financial and other results.

For a further discussion of the risks and uncertainties related to our business, see the Company's report on Form 10-K for the year ended December 31, 2011 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 FFO, AFFO, core FFO, EBITDA, adjusted EBITDA, NOI and same-store NOI.

Digital Realty is providing this information as a supplement to information prepared in accordance with GAAP.

Explanation of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental operating and financial data package for the first quarter of 2012, furnished to the SEC.

This information is available on our website.

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

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

Questions will be limited to one per caller to manage it in a timely manner.

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

I will now turn the call over to Mike.

Thank you, Pamela.

Welcome to the call, everyone.

I will begin my remarks today with an overview of our operating results, followed by a brief review of our markets and current acquisition and development activities.

Following my prepared comments, Bill Stein will go through our financial results.

Following our record leasing results in the fourth quarter 2011, we had a relatively modest first quarter, which was in line with our expectations.

As I previously mentioned, our leasing activity tends to be seasonal with stronger results often occurring later in the year.

During the quarter we signed 94,000 square feet of turnkey space at an average these rate of $163 per square foot, with an average rate for US turnkey leases at $136 per square foot.

Over the past five quarters, average rental rates per square foot for turnkey in US have ranged from between $122 to $176 per square foot.

Rental rates have historically varied by building and by market and by customer application.

Therefore, we do not feel that the sample size of lease in the first quarter indicates a turnkey and overall turnkey lease rates.

Excluding collocation, the average term for leases signed their first quarter for data center space was 148 months, or 12.7 years, exceeding our average range of 7 to 10 years for the second straight quarter.

Other leasing highlights during the quarter include a signed lease for an entire 47,000 square foot building at our Data Center Park Dallas property in Dallas, which continues to be a very good market for us.

The building was leased on a PBB basis to a leading information management and data security company.

On the West Coast we signed new leases in San Francisco and Los Angeles with one of our top 10 customers, supporting the growth of their collocation interconnection business.

In London, we continue to see steady demand with two new leases signed at our Redhill facility, where we are now nearly fully leased.

In addition, we're on track to complete the first phase of the redevelopment of our Chessington property later this year in suburban London.

In Asia-Pacific, we signed two new leases at our Singapore property with a strong funnel of prospects for the balance of the building.

We've also signed our first lease in Hong Kong and plan to issue a press release on this in the coming weeks.

In addition to the current build to suit projects underway, we are actively pursuing a number of new opportunities.

Because of their size and complexity, the timing of these deals tend to be lumpy.

Leveraging our experience and site selection acquisitions, building design and construction management, our dedicated build to suit team is focused on working closely with prospective customers to create tailored data center solutions to meet their specific requirements.

We are also expanding our collocation offering in certain of our Internet gateway data centers and other select DLR facilities.

Our goal is to convert underutilized space and facilities where we believe we can achieve a higher ROI if converted to collocation space.

This space is typically located in buildings and markets that are currently under served.

Turning to our lease renewal activity, we are quite pleased with our continued success, signing over 264,000 square feet of space for an average of 2% increase in GAAP rents.

Renewals included approximately 78,000 square feet of turnkey space, and average GAAP rental rate per square foot of $186.

This compares to the $187 per square foot for the expiring leases.

The small $1 per square foot decrease was primarily driven by two leases that renewed at a property we acquired in 2010 that had in place above market rents.

The new rates yield very attractive returns on this asset.

We also renewed approximately 120,000 square feet of power based building space at rates that increased by 20.5% on a GAAP basis.

Overall tenant retention remains very high.

On a square foot basis, 95% of expiring turnkey space renewed in the first quarter.

On a revenue basis, turnkey leases renewed at approximately 96% of GAAP with an average lease term of 104 months.

Again, on a square foot basis, 100% of expiring hard base building leases renewed in the quarter at over 120% of GAAP rents, with an average lease term of 82 months.

Portfolio occupancy was unchanged at 94.8% in the first quarter, compared to the fourth quarter.

During the quarter we added over one million square feet of space to the portfolio through our acquisitions and development programs, which include seven new pods in Singapore and new space in Phoenix, arguably two of our strongest markets for new prospects along with Dallas.

The same store occupancy was relatively unchanged at 94.4%, compared to 94.6% in the fourth quarter.

The first-quarter same-store NOI increased to $176.5 million, up 2.4% from $172.4 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 $159.7 million in the first quarter, up 2.4% from $155.9 million in the third quarter.

We continue to track over 2 million square feet of prospective data center demand across our active markets.

Along with positive absorption, our pipeline is consistent with a steady stream of new customer requirements we see coming to the market.

Many of these requirements come from customers new to DLR.

While the sales cycle with the new customers typically is longer, the investment of time in securing new logos has historically provided us with significant long-term growth opportunities for our businesses.

Many of these new customers end up expanding in multiple locations with us.

I will now briefly run through some of the supply demand statistics we are tracking in a few of our major US markets, by which we received the most questions.

As you know, our strategy is to maintain a disciplined approach to managing inventory market by market, by utilizing our flexible pod architecture that is designed to deliver data center space in approximately 1 to 2 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.

Moving east to west, in the New York - New Jersey Metro, we are tracking nearly 41 million megawatts of potential demand.

That's an increase of 10 megawatts from what we are tracking last quarter.

We believe this reflects pent up demand from financial services, as well as system integrators and managed service cloud providers that support the financial vertical.

As a matter of fact, the financial vertical represents over 18% of our average base rents today.

This compares with approximately 25.8 megawatts of available supply, that is either built out or currently under construction in the market.

At DLR in New Jersey - New York exposure of built-out space remains relatively small with three turnkey pods, or about 3.5 megawatts currently available.

However, we do have a capability to accommodate virtually any requirement with our existing redevelopment inventory that we are poised to develop with entitlements.

In northern Virginia we are tracking approximately 37.7 megawatts of current potential demand.

This compares to approximately 35.9 megawatts of available supply that is either built out or under construction.

In our view, northern Virginia is currently the most competitive market in the country.

As a result, we are seeing some downward pressure on rent in that area.

Again, we have a very manageable current exposure in this market with 3.9 megawatts of available built out supply in the digital portfolio.

As I mentioned earlier, Dallas continues to be a very active market for us with limited available built out supply.

We've identified approximately 21.2 megawatts of demand, compared to about 8.7 megawatts of net new built out supply.

Finally, in Silicon Valley, we are currently tracking 12.8 megawatts of demand, which is up significantly from the 3.6 megawatts we discussed in our last call.

This increase is consistent with our experience with the growth of IT and Internet enterprise customers in the valley, which can be dramatic and difficult to predict.

Our exposure at present is very manageable with just under 4 megawatts of available supply, including 3.5 megawatts we have under construction currently.

Turning to our acquisitions program, we acquired the large convergence data center and office campus in Louisville, Texas in the DFW Metroplex during the quarter.

This property consists of over 819,000 square feet, is 99% leased and presents attractive future new development potential with excess entitled land and utility substation under construction.

We also announced earlier this month that we are under contract to acquire our first property in Hong Kong, a very robust yet quite under served global market.

We are doing this with our joint venture partner Savvis.

We plan to begin construction following the closing of the acquisition expected to occur in June, with completion of the first pods expected early in the second quarter of 2013.

We have a strong pipeline of additional acquisitions that are in various stages of negotiation for both income-producing, as well as development properties.

As you know, our development program is a very important component of our business that fuels much of our growth.

During the first quarter, we completed approximately 153,000 square feet of turnkey facilities that were over 35% pre-leased and 53,000 square feet of power based building that was 100% leased.

At quarter end, we are under construction on turnkey space totaling about 485,000 square feet.

This includes 326,000 square feet in the US, 44,000 square feet in Europe, and approximately 114,000 square feet in Singapore and Australia.

Approximately 25% of this space under construction is pre-leased.

For power based building space, we are under construction on about 638,000 square feet, including 503,000 square feet in the US, 4,000 to 8,000 square feet in Asia PAC, and 88,000 square feet under construction in Europe, which includes the new Chessington redevelopment property in London that we acquired in the third quarter of 2011.

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

Including the pre-construction work and common area building improvements, the total construction work in progress invested in the first quarter was $305 million.

The estimated cost to complete ongoing March 31 work in progress is $447 million.

This concludes my prepared remarks.

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

Thank you, Mike.

Good morning and good afternoon, everyone.

I will begin by reviewing our financial strategy and capital markets activity, and then discuss our financial performance and guidance.

Last week we announced the closing of a $750 million, US dollar equivalent unsecured, multi-currency term loan, which can be increased by $100 million to $850 million.

It matures in April 2017 and includes the ability to borrow in US dollar, Singapore dollar, Australian dollar and Hong Kong dollar, as well as euro, pound sterling and Japanese yen denominations.

We accessed the bank term loan markets to take advantage of attractive five-year borrowing interest rates and to place debt on foreign subsidiaries, which allows us to naturally hedge our growing international balance sheet.

In line with our overall capital strategy, the term loan also enhances our financial flexibility to accommodate our growing global investment program and to provide immediate liquidity for potential acquisitions.

We've made an initial draw of $525 million USD equivalent in US dollars, Singapore and Australian dollars, as well as British pound sterling and euros and have up to 90 days to draw the remaining $225 million.

Over the next several months we expect to execute interest rate swaps to hedge at least 0.5 of our total exposure.

Including the term loan, year-to-date we've raised nearly $989 million of new capital.

Additional financings include the 6.625% series F cumulative redeemable preferred stock offering of 7.3 million shares in April, raising net proceeds of $175.8 million, which is the lowest yielding perpetual preferred stock that the Company has ever issued.

And the issuance of 957,000 shares of common stock under our at the market equity distribution program for net proceeds totaling $62.7 million at an average price of $66.19.

All of these shares were issued in January, prior to our last earnings call.

We currently have approximately $54 million of availability remaining on the ATM program.

We have $1.7 billion of immediate liquidity, which includes $68 million in short-term investments, funds that can be drawn on our global revolving credit facility and the delay draw in the term loan.

If this liquidity were fully utilized, we would remain in compliance with all covenants contained in the global revolving credit and term loan facilities, our Prudential shelf facility and other unsecured debt.

During the quarter, we paid off two European secured loans totaling $73.4 million, and have $79.5 million remaining principal amortization and debt maturities in 2012.

This includes a $16 million secured loan that we expect to retire this week, as well as a $52.8 million secured loan that we expect to retire in September.

In 2013, we have $247.6 million of ongoing principal amortization and debt maturities, unsecured debt, which we plan to retire with proceeds from the revolver.

These activities are consistent with our practice of lowering overall cost of debt.

As of the end of the day yesterday, the balance on our $1.5 billion global revolving credit facility was $20.7 million, and we held unrestricted cash of $68 million.

Our net debt to adjusted EBITDA ratio was 4.7 times at quarter end, up from 4.4 times at the end of the fourth quarter last year.

Pro forma for the recently issued preferred equity net debt to adjusted EBITDA was 4.6 times.

This increase is due to a higher level of borrowings on our global credit facility.

Our GAAP fixed charge ratio increased to 3.4 times at the end of the first quarter, compared to 3.2 times in the previous quarter.

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

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

As stated in today's earnings release, first quarter 2012 FFO was $1.06 per share, up 3.9% from the fourth quarter 2011, and first-quarter 2011 of $1.02 per share.

Adjusting for items that do not represent ongoing expenses or revenue streams, first-quarter 2012 core FFO was $677,000 higher than reported FFO.

We are essentially unchanged at $1.06 per share.

This reflects a 2.9% increase from fourth quarter 2011 core FFO of $1.03 per share.

Adjusted funds from operation, or AFFO, for the first quarter of 2012 was $102.8 million, up over 8% from $94.9 million in the previous quarter.

The diluted AFFO payout ratio for the first quarter of 2012 was 82.8%, up from 81.9% in the last quarter.

Adjusted EBITDA at quarter end of $172 million grew by 5%, from $163.6 million last quarter, and by 15% from $150.1 million in the first quarter of 2011.

Turning now to the income statement, net operating income increased by $9.5 million to $182.6 million in the first quarter of 2012, from $173.1 million last quarter.

This increase was primarily due to incremental revenue from new leasing and acquisitions.

As we discussed on our last quarter, fourth-quarter 2011 property taxes included a favorable tax assessment, a portion of which was passed onto tenants.

G&A increased by 14.4% to $14.3 million in the first quarter, compared to $12.5 million the last quarter, primarily due to 2011 year end accrual adjustments of $1.4 million, which lowered the fourth quarter 2011 run rate.

Tax expense was $721,000 in the first quarter of 2012, compared to a tax benefit in the previous quarter of $1.2 million.

This increase of $1.9 million was primarily due to fourth quarter true-up of about $1.8 million deferred taxes relating to foreign operations and taxable REIT subsidiary activities.

Finally, we are not revising our 2012 FFO guidance range of $4.34 to $4.48, or its underlying assumptions.

While we do not give quarterly guidance, I would like to remind you that I discussed at our investor day in January that we expect growth in 2012 recognized revenue, NOI and FFO resulting from new leasing to be back end loaded in the year.

Also, because of the success of our recent term loan and the preferred equity offering, we do not expect to issue additional capital in 2012, unless our acquisition volumes exceed our current guidance assumptions of $300 million to $400 million.

Our 2012 outlook remains positive.

The combination of our leasing funnel, investment opportunities and access to attractively priced capital, make us well-positioned to capture a variety of market opportunities that we are tracking worldwide in order to increase shareholder value.

We look forward to sharing our progress with you in the months and quarters ahead.

This concludes our formal remarks.

Mike and I would be happy to take your questions.

Operator?

(Operator Instructions).

Jordan Sadler, KeyBanc Capital Markets.

I wanted to follow-up on the bit about acquisitions and the pipeline, Mike, it sounds like it is strong, both on the income side and otherwise.

I am curious, if you would have interest at the enterprise level, it is been telegraphed that Cincinnati Bell is looking to monetize CyrusOne and I know it's in some different markets.

I'm wondering if that would even be on the radar for you guys?

We are always looking at opportunities, both on individual assets, portfolio, corporate levels.

We are definitely open to any opportunity.

Our understanding is that they are pursuing an IPO for the CyrusOne division, so we will have to see how that plays out.

Can you give us a little bit of color on the recent departure of the head of sales?

If there's been any disruption in leasing at all as a result of sort of that transition?

No, no disruption at all.

We are fortunate that we have a very strong team of leaders in place, as well as the local sales team and our listing brokers and asset managers who all work together.

We don't expect to skip a beat in that regard.

We hate to see Brad leave, great guy, but the organization moves on because we have built a very deep organization here.

Did he have a non-compete?

No.

Non-competes aren't enforceable in California.

It's a matter of public policy.

And law.

Chris Caton, Morgan Stanley.

I had a question on the redevelopment pipeline.

Two-parter.

First, in Boston, you started, as you mentioned, last time expanding your Needham project.

Can you give us a little more detail on that?

Second, you had talked about wanting to expand activities in Chicago on the last call as well.

Wondered if you were pursuing development or redevelopment opportunities that may show up in the future, or is that going to be more like an acquisition?

The Needham site is underway.

In fact I was just out there a week before last and we are going full bore.

I believe we will be delivering somewhere approximately 150,000 square feet of new construction in that facility.

That will nicely augment the existing operating site there in Needham.

We are very excited about that market.

In Chicago, we are definitely pursuing opportunities there to create more product for the customer demand that we are seeing in the Chicago market.

We are actively pursuing development opportunities in that area.

To follow up on Boston, what type of customer verticals are you servicing in Needham and is there anything specific or is it general?

Boston is a good regional market.

The majority, the great majority of your demand is coming from New England and Boston region.

It's financial services including large money managers, banks, life companies, healthcare, we have such a strong healthcare market in that area and in other corporate headquarters types in that area.

Gabriel Hilmoe, UBS.

Given the capital plan in terms of acquisitions in development, can you talk a little bit about where you expect the focus to be over the next few years beyond what is in the current pipeline, whether it is domestic or overseas and what you expect the portfolio to look like on a pro forma basis?

We will continue to focus on a combination of deploying capital.

It's difficult to look out beyond the next 24 months specifically but certainly, the major markets in the US where we are seeing continued demand and that would be places like New Jersey, Dallas, Phoenix, Bay Area, Boston, Chicago.

These will all be, among others, important markets for us.

I think you will continue to see the majority of growth because the United States is so large with so many markets, but you will see increased volume certainly in Asia Pac where we are quite excited about the Australian markets we are in, Sydney and Melbourne, we think Singapore has a very good long-term potential for us and we think Hong Kong has very long-term potential for us.

I think you will see us deploying significant capital in those areas.

We will selectively continue participating in the major markets in Europe, especially London, Paris, Dublin and Amsterdam in particular, will continue to be areas of focus for us.

Can you quickly give the cash releasing spreads on the signed turnkey renewal in the quarter?

We've been focusing on the GAAP and we want to be consistent and keep giving out the GAAP numbers.

I don't have the cash at my finger tips.

Michael Bilerman, Citi.

Good morning, it's Manny here with Michael.

A couple questions for you, in Hong Kong I know previously you had discussed buying in place assets and now you've gone on this JV to do a development.

Just wondering if that was a change in strategy or just taking the opportunity to do something with Savvis?

No, this is actually exactly the strategy we've been pursuing to find existing building that has the power and the fiber available that we can we could redevelop as data center space.

This is what we've been pursuing for the last couple of years, to find that kind of an asset that would be readily adaptable for data center use.

The park that we are in is a really attractive place because of the significant amount of power that is available and the tremendous fiber access and other corporate data centers, Hong Kong Stock Exchange, et cetera.

It's really a very attractive location and one we've had our eye on for some time.

Turning to the US for a second, if we look at the supply that you have in any given market, how would you classify that as being -- is more sensitive to price and if you priced it correctly you would have tenant that would come in and take any of that space?

Or, is it really a demand trigger thing from the tenant where if they need the space they will come and pay whatever price you are asking for it?

I would say it's -- customer demand is specific to markets.

In different markets, no surprise, New York, New Jersey is very heavily financial service oriented.

Silicon Valley, is very tech, social networking oriented.

Dallas, you've got a wide range of corporate enterprise, a number of different verticals, as well as IT services in there.

It really depends on the particular market and the mix of customer demand and then, pricing is generally driven by supply and demand dynamics and relationships.

Dave Rodgers, RBC Market.

Question for you on the colocation business.

With regard to your 2012 investor day presentation, you had a slide in there that said I think you wanted to double the size of colo from 5% to 10% of revenues.

Can you talk about why you're making that push into that side of the business?

How far along that is and when that hurdle is to be reached?

The second question along those lines would be, are you doing this yourselves, are you pushing into the interconnect business?

Or, is this another way to create space for resellers in your portfolio?

It's really an opportunity for us to create value at the asset level in existing Internet gateway buildings that enjoy the high connectivity with having many networks and ISPs, and other assets that we think lend themselves well for the colocation.

The smaller footprint business.

We look at it as the spectrum of size of customer requirements.

It may be a big company, but in a particular geography they may need a small footprint.

We have space available that we think we can add a lot of value on a property level by building it out and leasing to these smaller footprint requirements.

It's really an asset driven strategy and being able to utilize our in place operating staff, because we do have folks that are operating these facilities and doing a very good job of it.

Piggybacking with the business we have now, which if you look at total gross revenues of our current colo business, it is about $55 million and we would like to see that double in three to four years.

That may be a little ambitious, but I think with the space that we have available, it's something that we can achieve and the margins are very good because they are smaller footprint deals.

Would these be add-on spaces to Telex or somebody else who manages that gateway site within the larger facility or were you guys pushing ahead into this on your own and would we see you get into more interconnect business in the future?

The colo space that we refer to as space that we're managing and leasing ourselves.

We've pretty much given other folks who are large customers of ours first crack at the space and more often than not if other service providers want the space, we are happy to lease it to them more on a wholesale basis, if you will.

It is space that we see -- that's shallow right now that we can add a lot of value with and add value at the asset level.

The interconnect business is probably something we'll continue to do in certain locations where we don't have a Telex meeting room set up, but it's really more focusing on space, power, warm hands, and being more network neutral on the network side.

Bill Crow, Raymond James.

Mike, could you talk about the sensitivity in the demand side in Europe given the economic issues they are having there?

We are certainly not seeing as much demand as we are seeing generally in the US markets and the Asia-PAC markets we are in.

I don't want to give the impression that nothing is going on.

I think in markets like London and Amsterdam we are going to see continued good demand requirements.

Amsterdam is such a big network location and London, with corporate and financial services, it's pretty robust.

We're seeing a lot of demand in London right now, probably almost 32 megawatts of potential demand.

Even in Paris, we are seeing requirements out there at different stages of purchasing of between 12 and 13 megawatts.

It is certainly not totally quiet.

We will continue to be very focused in bringing on space, utilizing our pod architecture so we don't get ahead of demand with supply and I think we're very well positioned to nab, hopefully more than our fair share of those requirements.

We will be very incremental as we bring new space on in London, Paris and Dublin.

We are looking for another project in Amsterdam because we are fully leased in that market.

At your analyst day you talked about potentially entering Latin America, following your customers, if you will.

Any update on that opportunity?

We are doing some consulting work with our digital design services in Mexico City with a customer on a development that they are doing.

We are definitely only in conversation mode regarding Brazil, although that continues to be an intriguing opportunity and one I think we will explore in more earnest here this year, but nothing to announce at this stage.

Bill, if I could ask you one question.

We all heard you at the analyst day about the back end loaded year.

I think consensus is $1.17 for the fourth quarter.

Do you have any commentary on that?

Obviously it is important as we start thinking about '13.

As you know, we don't quarterly guidance.

But, I would say given the slope of the growth in the year, the $1.17 would be light.

Tayo Okusanya.

(technical difficulty) -- the acquisition pipeline a little bit, if you could give some color on if most of that is focused internationally or domestically, that would be helpful?

For income properties, it's primarily US.

That is where we are seeing most of the prospects for us for income acquisitions.

The development, the joint venture in Hong Kong.

Could we get a better sense of pricing, what kind of development yields you expect and just how much you spent on it and how much it actually cost to develop it out?

We are not prepared to give out that information at this point, partially for competitive reasons and -- as well as we do have a partner in this.

Especially for competitive reasons, we don't want to give out those kind of metrics.

Thanks for your commentary on northern Virginia in pricing in that market.

Could you give us a sense of what you are seeing in New Jersey and Santa Clara pricing wise?

I would say New Jersey and Santa Clara are holding pretty steady.

We did see in Santa Clara, Silicon Valley, a decline in the second half of last year.

I think it is holding steady at those levels.

Definitely in Virginia with a couple of players choosing to be very aggressive on lease rates.

That's probably the biggest decline that we have seen.

We've been fortunate, we've been working to meet the market and still maintain double-digit yields on our investments by and large.

With a lot of the talk around the Pacific Northwest becoming a hotter data center market, how do you think of that relative to the current assets you own and whether that's going to create an incremental competition on a going forward basis?

We've been very active in Seattle and expanding our portfolio there with our new developments and continue to build out the existing Weston building as well with our partners, Clise Properties, they are a fabulous partner.

We're really excited and looking at other opportunities working with them to expand the Seattle footprint.

We are currently underway, well underway on a build to suit for NetApp in Hillsboro, Oregon, which is suburban Portland which is another very attractive sub market for corporate data center users.

We will continue to look at that greater Portland area as well.

Potentially, maybe even do some spec development and continue on with the Seattle business, which continues to expand.

Silicon Valley, you gave the typical stats of the demand you are tracking on your current inventory in the market.

But, you didn't give us a sense of what market supply is.

I think Silicon Valley, we are looking at current supply under construction of, either existing or under construction, around 20 megawatts perhaps.

I don't have my notes in front of me on that one off hand.

I will follow up off-line on that one.

Build to suit, just curious what your outlook is at this point, whether you are still seeing strong demand for that?

We are seeing good demand.

These are a little bit trickier opportunities and tricky I mean, because they take a lot of face-to-face planning work with the customers because these are more customized solutions, sometimes including site selection and acquisition as well.

I think this is going to continue to be a growing area for us because we are so uniquely positioned with our site selection, our design, our project management, our supply chain management.

It is hard for me to put a number on it like what percentage of our overall growth it's going to represent, but they do tend to be larger requirements.

I think in 2013 and 2014, we will definitely see the impact of that work.

Vincent Chao, Deutsche Bank.

A question on back to the acquisition pipeline, particularly the income producing.

In the past you have talked about the pipeline in dollar terms in terms of what you are tracking.

Is that something you can talk about here?

Yes, I think we're looking at various phases of prospecting probably around $750 million of suspect deals but, like I said, they are in various stages of review.

That's both income and for development projects.

It sounds like those are probably smaller, not really portfolios you're looking at; is that correct?

Yes.

Tend to be one off individual deals.

Bill, on the term loan, you said I think 50% of it you would like to fix via swaps.

Can you talk about what your expectations would be if you were to fix that today?

What kind of rates you would get?

I actually said at least 50%.

The swap rates vary a fair bit by currency.

The US dollar would swap basically mid-twos.

In fact, just about everything swaps mid to high twos, but mostly mid-twos, except for the Aussie dollar which would swap mid-fives.

On the colo discussion, to get to the 10% over time, and you are doubling of the revenues from where you are today, do you see yourselves having the infrastructure today to do that?

Or, do you need to step up to get to those levels?

We have a great majority of that staff in place because these are buildings we are already operating.

We can utilize a lot of that facility staff.

We have been adding in terms of management, as well as leasing and marketing.

Those are the main areas that we have been adding to the staffing.

Lukas Hartwich, Green Street Advisors.

I am just curious how competitive you think your older space is?

Is there still demand for a lower power density product or does that stuff just get redeveloped?

I think you are making an assumption that it's necessarily lower power density, which isn't the case relative to new product.

The power densities tend not to be an issue.

I think you see in our renewals that we are renewing a very high percentage and typically what we label as powered base building renewals because that is where the customers put in the improvements, have been renewing over the last couple of years at least in the high 90%s, I think this quarter was 100% at 20% uplift in overall rents.

As you see by the renewal activity, that continues to be very valuable space.

George Auerbach, ISI Group.

Two related questions on the balance sheet.

First, you mentioned you won't need any new capital this year.

Given where unsecured debt rates are, where your stock is trading on an implied cap rate basis, how do you think about some earnings dilution versus locking in long-term financing?

Second, given the spread between your stock price and where most people have your NAV, why not accelerate the ATM issuance to capture that spread and lock in the financing?

George, right now we are effectively sitting on cash.

We have still $220 million to $230 million to drawn on the term loan.

We're going to take that down over the next 90 days which is what the term loan provides for.

As far as the long-term market is concerned, the rates are certainly attractive and our strategy there is to consider a swap lock out probably 12 months.

That would really, at least for a portion of our long-term financing needs in the first quarter of next year, so basically, lock in at today's treasury.

We can't hedge the spread, but we can hedge the treasury.

I think on the equity, we will be opportunistic.

There is no need to issue equity and that's the point I want to make.

If we exceed our acquisition targets, we would raise equity so that the acquisition is leverage neutral.

It may make sense to issue some equity as well, but I'm not going to issue equity and just put the cash on the balance sheet.

I was thinking more in terms of not drawing down as much on the term loan, given what the stock kind of in the sixes on an applied basis?

That sort of made sense on a long-term basis?

We really have to take the term loan within 90 days.

That is how it is structured.

The balance of it.

James Feldman, Bank of America.

A question on the seasonality that you talked about at the beginning of the call.

Can you explain again how that impacts the new lease rents on the turn-key for the quarter?

It's more on a timing basis and a market basis.

Lease rates can vary pretty widely by market.

In terms of the overall volume, it's timing and activities generally seems to be a little more back end loaded for us in terms of new signings and the lease rates are going to vary considerably market by market.

The type of asset as well and the type of applications, whether it's a smaller footprint for a very dense trading or whether it's a more typical power density for more general corporate applications.

Does that mean that the development yields are still intact even though, let's say, that new lease rent was slightly lower than what we saw in the fourth quarter?

Yes, I think we are definitely in that 11 to 13 range domestically for stabilized returns, higher internationally.

Our yields are good, are very good.

Focusing a little bit more on that, can you give us any additional information since the quarter end?

Anything new that has surprised you to give us a little bit more comfort that the first quarter was just seasonal?

We've seen results from some of your peers today and we saw some strong numbers in the data center industry, is there anything you have seen since the quarter end to give us some additional comfort?

Since the quarter ended three weeks ago, but we are seeing good activity in the leasing.

The activity is very good and you can't just separate out the first quarter from the fourth quarter, we're seeing a trend with very good activity over the last four quarters.

I think if you look in totality, the trajectory is good and we are in a number of different markets.

Having the diversity of product and customer verticals I think will definitely benefit us and our shareholders.

Your JV with Savvis in Hong Kong, now that we are a couple quarters into their acquisition by CenturyLink, is there anything different in that structure now that's a combined company or any different way that they are working with you guys then when they were on their own?

No.

They are a very good customer, obviously, of ours and along with other folks, but they are combined with the Savvis and Qwest combination into CenturyLink, they are our largest customer.

We continue to look at opportunities with them across the US and in some of these international locations.

I wouldn't say this represents a different trend other than continue to hopefully be able to be a good partner and help them expand their footprint domestically, as well as internationally.

One final detailed question, on the colocation leases, you said that they are much longer now than they used to be.

Is there a reason for that?

Anything we should think about when we see that?

No.

I think we are saying the non-colocation leases continue to be very long-term.

I believe we are well over 10 years.

I think for the larger footprint leases, we continue to see a good term.

Tenants are committing to a long-term so we like that because we think that reflects a higher asset value and very predictable cash flow stream, earnings stream from our asset base.

Sir, please go ahead with your closing remarks.

I will turn the call back over to you, Mr.

Foust.

Definitely appreciate everybody's time and good questions today.

I want to congratulate our team for very good financial results and the good efforts across the globe in driving our new customer relationships and driving what we think will be a very good year results for Digital Realty.

Thank you again.

Thank you.

This does conclude today's conference call.

You may now disconnect.