Digital Realty Trust Inc (DLR) 2012 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the Digital Realty Trust 2012 second 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).

Thank you.

I would now like to turn the conference over to Pamela Garibaldi, Vice President of Investor Relations and Corporate Marketing.

Please go ahead.

Thank you, Kimberly.

Good morning and good afternoon, 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 would like to remind everyone that the management of Digital Realty may make forward-looking statements on its 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.

You can identify such forward-looking statements by the use of forward-looking terminology such as believes, expects, may, will, should, pro forma, or other similar words or phrases and by discussions of strategy, plans, intentions, future events or trends, or discussions that do not relate solely to historical matters, including statements related to rents to be received in future periods, lease terms, development and redevelopment plans, supply and demand for data centers, data center sector growth, targeted returns, cap rates, acquisitions, leasing and investment activities, capital markets and finance activities, debt maturities and covenant compliance, expectations about the Company's growth, financial resources, and success, and the Company's future 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 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 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 as a supplement to information prepared in accordance with generally accepted accounting principles.

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 second quarter of 2012, 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, feel free to return to the queue.

If we are unable to take all of your questions on the call, we would be happy to discuss them with you offline.

I will now turn the call over to Mike.

Great.

Thank you, Pamela, and welcome to the call, everyone.

In response to last week's leasing results press release, our primary goal today is there any uncertainty around the state of our industry and our Business.

After my brief introduction, Bill will discuss our 2012 guidance, second quarter financial results, and recent capital markets activities.

Following his remarks, I will provide an overview of our operations, as well as an update on our activity in major markets, before opening the call for your questions.

Like most global businesses we are mindful of the current uncertain economic and political environment.

However, we believe that the data center sector will continue to be a growth area in the context of the broader economy.

In fact, our Business has benefited significantly from a number of recent trends since the downturn of 2008, including the outsourcing of data center requirements by corporate enterprises, including large financial institutions, as well as the growth of managed service providers.

With our track record of reliability and financial resources, as well as our design and construction expertise, we continue to attract enterprise customers, especially financial institutions that are looking for a data center provider to house mission-critical applications.

In addition, we are attracting many new customers to DLR.

We have consistently said that the great opportunity for our Business is to convert the large enterprise users from building their own data centers to outsourcing that function to DLR.

While this has contributed to a longer sales cycle in the short term, in part due to extensive procurement processes as many of the larger institutions, it does not represent a reduction in demand.

We firmly believe that providing long-term data center solutions to these customers delivers sustained value and growth for our Business and for our shareholders.

I will now turn the call over to Bill.

Thank you, Mike.

Good morning and good afternoon, everyone.

To address the concerns that have been raised since we issued our second quarter leasing results last week, I will begin my remarks today with a detailed discussion of our 2012 guidance, followed by a review of our financial performance and capital markets activities.

Please note that all per share results are on a diluted share and unit basis.

The original guidance range of $4.34 to $4.48 per share assumed that items did not represent ongoing revenue and expense streams would net out to zero over the course of the year.

Therefore, core FFO and reported FFO would be essentially identical.

As a result of the transaction costs, including debt extinguishment costs associated with the Centrum acquisition, core FFO will now be significantly greater than reported FFO in 2012.

We estimate that the Centrum portfolio acquisition and the upsized equity offering will add approximately $0.08 per share of FFO in the second half of 2012.

Furthermore, we believe that the delay in the timing of lease commencements will result in a decrease of $0.05 to $0.08 of FFO.

As a result, we have revised the 2012 core FFO guidance range to $4.37 to $4.48 per share, increasing the low end by $0.03 per share and maintaining our high end.

With respect to the changes underlying our revised 2012 guidance leasing assumptions, as of June 30, 2012, we commenced leases totaling approximately $56 million in annualized GAAP rental revenue, and we have a backlog of $41 million that we expect to commence during the second half of 2012, which results in approximately $97 million of annualized GAAP rental revenue.

While we are very confident about our prospect funnel, the timing of the signings and commencements at this point in the year is difficult to predict.

However, as Mike said, this does not represent a deceleration in demand.

Rather, with many large corporations, including financial institutions, there is often an elaborate and structured procurement process, particularly for major IT deployments.

Nevertheless, new customers continue to be a very important component of our growth strategy, contributing stabilized income in the form of long-term lease commitments while providing additional growth opportunities for potential future deployments at our sites worldwide.

We have therefore revised our assumption for 2012 lease commencements to range between $130 million and $170 million in annualized GAAP rental revenue from $145 million to $180 million in annualized GAAP rental revenue.

By comparison, last year, we commenced approximately $100 million in annualized GAAP rental revenue.

It is important to note that our revised range of $130 million to $170 million represents an increase in annualized GAAP rental revenue over last year of 30% at the low end, 50% at the midpoint, and 70% at the high end.

I would also like to note that our leases commenced for the first half of this year plus our backlog, totaling $97 million, is just $3 million, or 3% shy of what is commenced -- what was commenced for all of last year.

We believe this growth rate range in commencement further illustrates the strength of our Business and the confidence we have in our leasing program.

As we stated in our leasing results press release last week, we are adding sales directors and sales engineers to our team to address the additional demands in these markets, as well as to support the growth of our Business in markets like suburban Chicago.

To a large extent, these positions are budgeted and have no impact on guidance.

We consider these hires to be the normal course of business and a positive indication of the growth prospects for our Company.

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

As stated in today's earnings release, second quarter 2012 FFO was $1.09 per share, up 2.8% from the first quarter FFO of $1.06 per share, and up 6.9% from second quarter 2011 FFO of $1.02 per share.

Adjusting for items that do not represent ongoing expenses or revenue streams, second quarter 2012 core FFO was $2.6 million lower than reported FFO, or $1.07 per share.

Adjustments to FFO in the second quarter included termination fees and other non-core revenues of approximately $7.8 million, primarily consisting of a $4.1 million termination fee related to the Solyndra lease.

It is important to note that we recognized approximately $1.5 million in rent for this lease through March and received a termination fee during the second quarter.

We also received a $2.3 million fee associated with another lease termination for space that was subsequently released during the quarter.

Lastly, we recognized a foreign currency gain of approximately $1.4 million associated with the repayment of inter-Company loans denominated in sterling and Singapore dollars with proceeds from the $750 million term loan.

Partially offsetting the non-core revenue items during the quarter were items that do not reflect ongoing expenses.

These items consisted of $4.6 million in transaction expenses, the majority of which was related to the Centrum acquisition; a $303,000 non-cash loss on early extinguishment associated with mortgage loans that were repaid during the quarter; and a $337,000 in tenant expense adjustments related to the second lease termination.

In addition, we incurred approximately $30 million to $31 million of debt extinguishment costs in the third quarter associated with the repayment of third-party debt in conjunction with the Centrum acquisition.

Adjusted funds from operations, or AFFO, for the second quarter of 2012 was $11.2 million, up from $1.5 million in the previous quarter.

The diluted AFFO payout ratio for the second quarter of 2012 was 85.4%, up from 84.6% in the last quarter.

Adjusted EBITDA at quarter end of $182.2 million grew by 5.9% from $172 million the previous quarter and by 17.6% from $155 million in the second quarter of 2011.

Turning now to the income statement.

Net operating income increased by $7.1 million to $189.7 million in the second quarter of 2012 from $182.6 million last quarter.

Overall, this increase was primarily due to incremental revenue from new leasing and acquisitions.

Looking down the Income statement, tenant reimbursements increased to $60.4 million in the second quarter from $57.9 million in the previous quarter, primarily due to increases in utility reimbursements.

The increase in other revenues reflects the termination fees previously described.

On the expense side, rental property operating and maintenance expenses increased to $87.6 million from $79.8 million in the previous quarter, primarily due to seasonal utility rate increases, as well as lease commencements.

The transaction and other expenses were discussed in my earlier comments regarding FFO.

Our NOI margins remain in the mid-60% range.

The slight fluctuation within this range is generally attributable to timing of recording of various one-time adjustments related to CAM, reconciliations, and other true-ups.

The increase in equity earnings of unconsolidated joint ventures was due to the $2.3 million gain associated with the disposition of 700 and 750 Central Expressway and Office Complex loaded in Santa Clara -- located in Santa Clara, California.

This gain was not included in FFO.

Tax expense increased to $1.2 million from $721,000 in the previous quarter, primarily due to deferred tax expenses related to our foreign operations.

Lastly, preferred stock dividends increased due to the issuance of Series F preferred stock in April, which was partially offset by the conversion of the Series C preferred stock.

Finally, I would like to review recent capital markets activities.

Over the last few months, we've executed interest rate swaps converting approximately 75% of the five-year term loan balance from floating to fixed-rate.

As of today, the all-in weighted average interest rate on the term loan is 2.29%.

This is consistent with our strategy of minimizing our financial risks while seeking to achieve the lowest possible cost of capital, given market conditions.

Year to date, we've raised nearly $1.8 billion in new capital.

Since our last call, in connection with the Centrum acquisition, on July 2, we completed the sale of 11.5 million shares of common stock, which included 1.5 million shares issued upon the exercise of the underwriters' option to purchase additional shares at a price of $72.25 per share.

Net proceeds totaled approximately $796.8 million after deducting underwriting discounts and commissions and offering expenses.

The proceeds were used to fund a portion of the purchase price for the Centrum portfolio acquisition and to temporarily replay borrowings under our global revolving credit facility.

Given the amount of capital raised from the stock offering, it was not necessary to utilize the previously negotiated bridge loan to fund a portion of the acquisition price.

Rather, funds were drawn in sterling on our global revolving credit facility.

In addition, to ensure ample liquidity in sterling, euros, and US dollars in future periods, we have exercised a portion of the global credit facilities accordion feature for $300 million US equivalent.

When it closes in early August, the total commitment on our global revolving credit facility will be $1.8 billion.

We have not sold stock for at-the-market equity distribution program since January.

Year to date, we have sold approximately 957,000 shares of common stock for net proceeds totaling $62.7 million, at an average price of $66.19 per share.

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

Currently, we have $1.1 billion of immediate liquidity, which includes $88.1 million in short-term cash investments and funds that have been drawn on our global revolving credit facility, but excluding the incremental $3 million of capacity from the exercise of our accordion.

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 shell facility, and other unsecured debt.

During the quarter, we repaid consolidated secured loans totaling $36.4 million and one unconsolidated secured loan totaling $25 million.

In addition, we have a $52.8 million secured loan that we expect to retire in early September.

The weighted average interest rate on these three loans was 6.09%.

In 2013, we have $224.4 million of ongoing principal amortization and debt maturities, which we plan to retire initially with proceeds from the revolver.

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

Our net debt to adjusted EBITDA ratio was 4.6 times at quarter end, down from 4.7 at the end of the first quarter.

Pro forma for the Centrum acquisition, net debt to adjusted EBITDA is expected to remain unchanged at 4.6 times.

Our GAAP fixed charge ratio was unchanged from the previous quarter at 4.3 times, and our weighted average cost of debt, including interest rate swaps, was 4.67% at quarter end, down from 4.75% in the first quarter.

Before turning the call back to Mike, I want to add that in response to many of your recommendations, we no longer plan to announce our leasing results ahead of earnings.

We believe that combining the leasing and earnings announcements will enable us to provide you with important detailed information on our results and address questions regarding leasing during our quarterly call.

As always, we welcome your comments and greatly appreciate your continued support.

I will now turn the call back to Mike.

Mike?

Thank you, Bill.

Turning first to our leasing results, during the quarter, we signed new leases totaling approximately 210,000 square feet.

This includes 189,000 square feet of turnkey space, of which 160,000 square feet was for leases signed in the US, and this is our highest quarterly volume of turnkey leases signed in the US in over two years.

We are very encouraged by this increase, and believe it reflects the strong demand we are tracking our major markets.

As we have said on many occasions, lease rates vary market by market across the US, as well as across our global markets.

The amount of leases signed in the quarter also impacts overall average lease rates, particularly when a number of leases are signed in oversea markets, where both lease rates and currency translation can impact results.

This way we prefer to focus on cash ROI targets between 11% and 14% for our spec leasing.

We also look at our current average lease rates by market by region, and compare them to annual rates on a rolling four- to six-quarter basis, particularly in the US, where the range is greatest across markets.

We believe this provides an accurate -- a more accurate view of lease rate trends.

For example, we reported that for our turnkey flex solution the second quarter, the average GAAP rental rate per square foot in the US was approximately $149.

Over the preceding four quarters, the average rental rates ranged from a low of $122 per square foot in the third quarter of 2011 to a high of $176 per square foot in the proceeding -- preceding second quarter of 2011.

On a rolling four-quarter basis, the average lease rate was $154 per square foot, very consistent with this quarter's average rental rate and indicative of stable pricing for our turnkey product.

Based on this stable pricing, increased leasing, particularly on our US portfolio for turnkey solutions and our strong pipeline of prospects, we are confident that we will continue to capture significant share of the growing demand for data center space in the US and globally.

Expansion of our co-location offering is on track as we continue to build our leasing and deployment team to address opportunities in certain of our Internet gateway data centers and other select DLR facilities.

During the first half of 2012, we signed leases for co-lo space totaling $2.1 million in annualized GAAP rental revenue.

Turning to our lease renewal activity, we signed approximately 331,000 square feet of turnkey and PBB space at an average 14.8% increase in GAAP rents.

This includes approximately 87,000 square feet of turnkey space at an average GAAP rental rate per square foot of $154, a 9.9% increase over the expiring GAAP rental rates on a square foot basis, 72% of expiring turnkey space renewed in the second quarter with an average lease term of 88 months.

In addition, we re-leased fully 100% of the remaining turnkey space that was not renewed during the quarter.

We also renewed approximately 244,000 square feet of power base building space at rates that increased by almost 23% on a GAAP basis and lease terms that averaged a healthy 124 months.

Portfolio occupancy decreased to 93.5% in the second quarter, compared to 94.8% in the first quarter.

The decrease was driven by the termination of 225,000 square feet of non-technical space, the majority of which was Solyndra's 183,000 square foot lease in Fremont, California.

The same-store occupancy was similarly affected by the Solyndra termination, and decreased to 92.9% from 94.4% in the first quarter.

Despite the decrease in same-store occupancy, second quarter same-store NOI actually increased to $181.6 million, up 2.9% from $176.5 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 $161.1 million in the second quarter, up from $159.7 million in the first quarter.

We saw significant increase in demand for higher revenue and higher NOI turnkey space in many of our major markets.

Moving east to west, in the New York/New Jersey metro, we are tracking nearly 47 megawatts of potential demand, up from 41 megawatts in the last quarter and 31 megawatts at our Investor Day in January.

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

This compares at 23.8 megawatts of available built-out supply.

We signed new leases at a number of our facilities in New York/New Jersey metro during the quarter and commenced on the build-out of additional turnkey space.

We currently have 1.5 megawatts of supply available, as well as the capacity to accommodate virtually any requirement with our existing redevelopment inventory in the region.

In Northern Virginia, we are tracking over 40 megawatts of potential demand, up from 37.7 in the previous quarter.

This compares to approximately 27 megawatts of available supply that is either built out or currently under construction.

With less than 500 kilowatts or 0.5 megawatt of available supply in our inventory, we broke ground during the quarter on a new, 214,000 square foot facility on our Ashburn campus.

The building's shell and core is scheduled to be completed by the end of 2012, followed by the first three 1125-KW data centers -- turnkey data centers to be delivered in the second quarter of 2013.

Dallas remains a very active market for us, with limited available built-out supply.

We've identified currently 29 megawatts of potential demand, compared to about eight megawatts of built-out supply.

Our current supply consists of only 960 kilowatts or 0.96 megawatts of co-location space available at our 2323 Bryan facility in downtown Dallas.

In response, during the quarter, we broke ground on two new buildings on our Richardson campus.

Each building will total approximately 120,000 square feet and will be capable of supporting 6.75 megawatts of IT capacity.

The building's shell and core is scheduled to be completed by the end of 2012, followed by the first two 1125-KW turnkey data centers, to be delivered in the first quarter of 2013.

In Silicon Valley, demand has increased significantly for the second quarter in a row, to nearly 27 megawatts of identified potential demand.

That's up from about 12.8 megawatts on our last call, reflecting the demand fluctuations in the Valley that are dramatic and sometimes difficult to predict.

But we are seeing a very positive trend here.

We delivered a new turnkey pod during the quarter, bringing our total availability to approximately 1.7 megawatts, with 2.2 megawatts currently under construction.

Like New Jersey, with our existing development inventory, we have the capacity to accommodate virtually any requirement and are poised to develop new buildings with entitlements.

I would like to conclude with a few comments regarding the success of our acquisitions program.

We acquired three properties in the US during the quarter, including two income-producing assets and an average unleveraged cash cap rate of 8.5%, in line with the higher end of our guidance.

We also expanded our footprint in the greater Chicago market with the acquisition of a significant redevelopment property in the suburban metro.

Internationally, we entered the very important Hong Kong market by completing the acquisition of a redevelopment facility with our joint venture partner, Savvis.

And finally, we completed the acquisition of the Centrum portfolio in London on July 11.

With Centrum, not only did we acquire top-quality facilities with a very strong tenant base, but we welcomed into the Digital Realty family a strong team of professionals who operate the portfolio.

This expert team provides us with additional strength and scale to take advantage of the market opportunities in London and in Europe more effectively.

Including the Centrum properties, we expect our European portfolio to contribute approximately $187 million US on an annualized rental revenue basis, representing almost 20% of our total portfolio.

Our European portfolio consists of 18 properties across six major markets, totaling 2.1 million square feet, approximately 54% of which serves the important greater London market.

We currently are tracking nearly 55 megawatts of potential demand in London, which includes a number of fairly large requirements.

This compares to 20.5 megawatts of supply that is currently either built or under construction.

Including our one megawatt of available built-out space in the Centrum portfolio, we have a total of 2.9 megawatts of currently built out availability in the London metro at DLR.

Similar to the US, the sales cycle can be long and difficult to predict selling to large international enterprises.

However, we are very well-positioned to capture a significant portion of this demand with a combination of our move-in ready space and construction-ready redevelopment inventory.

This was clearly an unusual quarter for us in terms of our acquisition activity and illustrates the expertise and capacity of our team to underwrite and negotiate complex transactions.

These strategic acquisitions enable us to grow our Business in new markets and expand our footprint and other legacy markets, while providing attractive returns for our shareholders.

We are very proud of these accomplishments and attribute them to the talent and dedication of our team.

We also would like to thank our shareholders for your continued support and look forward to sharing our growing success with you.

This concludes my formal remarks.

We will now open the call for your questions.

Operator?

(Operator Instructions).

Your first question comes from the line of George Auerbach.

Great.

Thanks very much.

Hey guys, just wanted to touch on the slowdown in enterprise leasing.

I guess at sort of what point in the spring did you start to see those tenants pull back?

And maybe how is this experience different than past cycles in dealing with the large tenants?

Well, I don't think we've seen anyone pull back on requirements.

In fact, we are seeing the actual amount of enterprise requirements, especially in major markets like New York and London, actually growing.

They are large requirements in many cases, and so we see the potential funnel of potential requirements actually as larger now than they were previously.

So, but it is saying a longer time frame when you are working with larger enterprises.

And that is certainly offset by the leasing we are doing with smaller requirements.

They may be big companies and with the managed services and cloud providers, who often times move more quickly than some of the larger enterprises.

I guess two follow-ups.

First, I guess maybe the question should have been, at what point did you see the sales cycle start to lengthen out?

Maybe it is not a demand issue.

It is more on the timing from discussions to signings.

At what point did tenants start to become more hesitant to sign leases?

And also, it sounds like the mix of tenants is changing a bit more, more corporate than managed services.

Are there any tenants within the corporate side that you see are being a bit more skittish or cautious at this time?

No.

On the contrary, we are seeing more potential demand from the large enterprise users, especially looking to create more efficiencies and lower their operating costs, often times looking to get the data centers out of high-rise office buildings or suburban office locations into proper mission-critical facilities that have that the power backup, mechanical system backup, and resiliency that they require, and also to allow them to be able to expand as they need to expand.

So, I would say it's more -- and this is kind of real putting my finger in the air here as to time frame.

So maybe where we saw 6- to 9-month time frames, those time frames are -- can be 6 to 12 months, working with customers.

And that is a guess, but we are seeing larger potential requirements that we are almost uniquely positioned to acquire, because we have the professional team with the engineering staff, the design staff, construction, technical operations, facility staff.

So, we are really well-positioned to serve these large customers.

Okay.

And I guess just last, Bill, on the straight line rent that went from $15 million and change to $19 million and change this quarter, is that a better run rate to use going forward, or was that impacted by the Celindra lease termination?

It wouldn't have been affected by the Celindra lease termination.

I think there might have been one or two deals in the quarter that had some free rent that affected the free rent in the quarter.

So we should expect that to sort of burn down towards 15 again?

I think 15 is a better rate.

Okay.

Thank you.

Your next question comes from the line of Jamie Feldman.

Great.

Thank you.

Focusing on the terminations for a minute, I know you had mentioned Celindra.

Can you first talk about the plans for that space?

I think you said non-technical.

But then, I guess, bigger picture, what are you seeing in terms of your actual technical tenants taking lease terminations, then moving out, and kind of where are they going, if anywhere, and in what markets?

Sure, for the -- regarding Celindra, that is a two-building property, very highly improved clean-room manufacturing.

And so, they are pretty high really improved facilities.

So we think that this is an attractive facility to either sell to a user or lease to someone in Silicon Valley who can utilize this kind of space.

So we think this is a pretty valuable space, and we can be positioned to lease it at very competitive rates for the improvements.

In terms of other -- we have very, very few terminations.

I mean, I think we had one or two this quarter of data center tenants, and those that -- we initiated those in order to put in longer-term tenants.

One was a -- we had a tenant in Dallas who wasn't fully utilizing their space, and we had no space in Dallas.

And we had another brand-new customer who wanted to lease space with us in Dallas on a 10-year basis, so we were able to trade out 2 years remaining for a 10-year lease at significantly higher overall rents.

So, I give credit to our asset management team for being really creative and being able to take advantage of and work to negotiate really interesting deals that allow us to add to the overall value of the portfolio, pretty significantly in that case.

So, it's not very typical that we would do that, but where we can add significant value to the asset, we will be creative about doing those kinds of transactions.

I guess what I'm trying to figure out is, are you seeing instances that are in certain markets where tenants are just trying to -- or competitors are trying to poach tenants with a more attractive options?

No.

No.

That is rarely the case.

It's very expensive and awkward in most cases for customers to move.

The switching costs, in other words, are high, and it is very disruptive to operations.

And also, tenants have had a very good operating history with us, and that five nines of uptime represents a very high level of resiliency and security in the operations.

So, we continue to have a very high level of renewals.

Jamie, just to be clear, too, the facility in the East Bay and Fremont that was leased to Celindra is not a data center.

It was not a data center.

It was owned by GI Partners prior to the IPO, so it is a legacy property.

And I think at this point, it is most likely to be disposed of.

Okay.

Thank you.

Your next question comes from the line of Jonathan Schildkraut.

Thanks for taking the questions.

I was just wondering if we could, from a housekeeping perspective, get what the backlog was at the end of Q1?

And then, in terms of the acquisition of Centrum, I was wondering if you could give us a sense as to what the run rate revenue was out of that asset?

And just trying to understand how the inclusion of that might change the margin profile.

And in terms of the lease commencements looking forward, are any -- is there any expectation of new lease commencements within that asset?

Thank you.

Sure, focusing on Centrum, actually, the operating margins are high in that portfolio.

They are very efficient buildings.

So while our current NOI margin in our broader portfolio is in the mid-60s, off the top of my head, I believe the Centrum NOI margin is in the mid-70s, I believe.

But I would have to go back and get the exact number, but it's definitely higher than in the rest of our portfolio.

So, it definitely had a positive uptick in that regard.

We are clearly expecting to achieve additional leasing, especially at the Woking property, which is the largest of the three buildings and the latest one to come online, where we have potentially a couple hundred thousand square feet of space that we can build out for new users.

And there is a -- definitely a funnel of customers for that space with whom we are in discussions currently.

I would have to go back and look at what the revenue -- operating revenue was from the Centrum.

I don't have that number at the tip of my fingers.

John, I think it is about 108.5.

$108.5

US.

US dollar.

Great.

I guess my question about the leasing was is that you made an adjustment here on your lease commencements expectation for the year.

I think you did a very nice job of explaining that.

But I'm wondering, as the number came down if there was any add back for potential lease commencements in Centrum.

So, trying to get like a sort of organic-to-organic compare.

Yes.

No, we have not added any potential from Centrum.

There is no Centrum in the forecast right now.

All right.

Super.

Thanks a lot.

I appreciate taking the questions.

Thank you.

No, though, we do have activity on that asset.

I understand.

It just wasn't part of our forecasting process because of when it closed.

It probably will be in the next quarter.

Great.

Thank you.

Your next question comes from the line of Jordan Sadler.

Thanks, and good morning out there.

Bill, could you clarify?

You said in your guidance there is an $0.08 contribution from Centrum in the larger than originally anticipated equity offering.

So it's those two factors combined, assuming the rest of the portfolio was financed on the line, would contribute to $0.08 contribution for the second half?

Is that the way to think about it?

I'm not sure I totally understand your question, but --

How do you get to the $0.08 contribution?

We upsized the equity offering from $600 million to $800 million.

So the $0.08 reflects the additional $200 million of equity that was raised.

So, there will probably be another -- it will probably be $0.10 of accretion if we had issued just the $600 million worth of equity.

Is that your question?

Yes, I mean, the portfolio -- so basically, if you are layering -- from a modeling perspective, you are layering in that $1.1 billion acquisition, it would be financed with an $800 million net equity offering, and the rest of the financing would be drawn off the line of credit or the term loan?

The line of credit, that -- that's fine.

I think as a practical matter, sometime in the fourth quarter, probably mid-quarter, we will be going to market in the sterling bond market to hopefully issue 10-year debt.

And I think the rates will be, say mid-fours.

At least that's what they look like today.

And what size would an inaugural offering there be, you think?

I think a minimum, just for liquidity, would be 250 million pounds.

250 million.

And the other question I would have, just as a follow-up there, is just on the offering, I'm curious what the remaining capital requirements are for the year in terms of the remaining capital spend, as well as any additional acquisitions you have teed up.

Well, there are a couple of acquisitions that I guess it is fair to say are under LOI, so we would hope that they would close.

And I think they were roughly $100 million, maybe a little more than $100 million.

And the CapEx, I think --

Of the seven -- you've got $700 million to $900 million in the guidance.

How much is left to spend there?

I would just assume that half has been spent to date.

Take the midpoint, $800 million.

Okay.

And that would be financed how?

On the line of credit, you think?

Off the line initially.

I mean, the debt to EBITDA, as I said, is in pretty good shape, so I don't see any additional equity this year, unless we do another large portfolio acquisition.

So it would be off the line and then a combination of various fixed income instruments.

So, sterling bonds, potentially US bonds, if we have enough balance on the revolver.

And the preferred stock market continues to look attractive as well on the rates on the preferred stock.

That is helpful.

Thank you.

The last thing, on the leverage target, you are trying to stay under 5 times debt to EBITDA or 5.5?

We are targeting 5 to 5.5.

But we are happy to be in the mid-fours as well.

Thank you.

Yes.

Your next question comes from the line of Rob Stevenson.

Good afternoon, guys.

Can you talk a little bit about the joint venture acquisition in Hong Kong with Savvis, what you guys spent on that and what you guys anticipate spending on the redevelopment, and whether or not you're looking to do additional projects with them in Asia as well?

Sure.

Hong Kong, as you might guess, is really one of the major financial hubs of the world and thus one of the major financial data center markets in the world.

So, we see a significant opportunity there with Savvis as our partner.

So, Savvis can deliver the managed services and cloud services out of the data center, which are definitely in high demand.

And we can also be leasing space on a more wholesale basis, if you will, to the enterprise.

And we are essentially a 50/50 joint venture with them.

Certainly, we will welcome the opportunity to do more in the region on that basis, and we think that is going to be a really great project for us.

We are redeveloping an existing industrial building.

And I think we are going to even be able to add on more power capacity by adding another floor to the building, which is a real attractive value-add opportunity for us that our team was able to put together and working to finalize the entitlements and permits on that.

Overall, we are not giving out the amounts of our budgets on this project.

Specifically, it is a bit proprietary at this point.

And also, the fact that we are in a joint venture with Savvis, we want to be cognizant of their sensitivities around disclosing information from the joint venture.

So at some point, we will provide more details on this project as we are about to bring forward the first pods for lease.

I guess, then, a question is what at this point is the size when you add the floor and do everything else?

What in terms of square foot or megawatts is that as expected to be at full build-out?

Yes.

I think we will be able to get somewhere between six and seven megawatts of IT load in that facility.

Okay.

And is construction cost in that market similar to Singapore?

Cost may be a little bit less in Hong Kong on the actual construction.

Land is always a challenge here.

We are on a long-term ground lease, but we may be a little bit more efficient on development cost than in Singapore.

Okay.

And then, just lastly, while we're in Asia, can you talk about what -- where leasing there in Singapore is going, relative to expectations?

Yes, we are actually a little bit ahead of our original pro forma timelines.

We are about 65% leased on the data center on the Jurong Township data center.

And really good, really good funnel of prospective tenants there.

And as you might guess, similar to the tenants that we've already signed up, and it's a nice mixture of international financial institutions, as well as international managed services and some network providers as well.

So, we are very bullish on the Singapore market.

I think between Singapore, some of the new leasing prospects in both Sydney and Melbourne, Hong Kong, Asia-Pac is going to be a really exciting region for us and will have a good material addition to our growth in the coming years.

Okay.

Thanks, guys.

Your next question comes from the line of Michael Bilerman.

Good morning there.

I am on the phone with Manny Schwartzman as well.

Can you just provide a little bit more color?

You talked about $6 million to $10 million or I guess $0.05 to $0.08, which would be the dilution, effectively, from the commenced leases being pushed out.

And then looking at the amount of commenced dollars, you have reduced the range to a midpoint of 150.

That was from 162.5, and that is revenues.

So the NOI impact on an annualized basis would only be like $8.5 million, $9 million.

And so, I'm trying to figure out how guidance would go down by so much if that is all that was just -- that's been pushed out completely, how much was it a delay in the second half commencements versus a delay in the first half commencements that didn't start as you thought you would, right?

So, you did $56 million in the first half.

Did you think you were going to do $70 million and you just sort of fell short, versus is now you are expecting to do $94 million of annualized revenue commencements in the second half, of which already have $41 million of backlog, and that's down from $107 million.

When does that $94 million start?

Did you think it was going to start at the end of the third quarter, and now it is going to start all at the end of the fourth quarter?

Can you sort of just bridge all the numbers together?

Well, virtually all of it is in the second quarter -- or the second half, I'm sorry, not the first half.

There was one deal in the first half that delayed that actually thought was going to commence last year, and that was with a large bank much like your own, but not yours.

But I'd say virtually all of it is second half.

And so how do you reduce FFO by $6 million to $10 million, push out $13 million of commencements on an annualized basis of revenue?

How much of a delay shift is this causing?

And maybe you can break down that $94 million in terms of when does it commence between quarter and the timing in the quarter?

I don't have that handy in terms of when in the quarter.

And I can't really tell you what the specific delay is for these commenced leases, but this was a bottoms-up approach.

But it sounds like --

I think it is important, though, that the amount of increase year-over-year has been pretty steady, and so the revenue growth and earnings growth continues to be good.

And it might be a delay and it might be our people fully taking into account the additional shares and the timing of that.

I know, but if FFO is being reduced for the commencements by $8 million at the midpoint, $8 million, right, so $12 million of annualized -- of impact from a revenue perspective for the full year, that would imply significant pushback of what these start lease commenced leases are.

Or you've baked in more of a cushion in saying $6 million to $10 million of FFO, because I'm just having a hard time from a -- if you've only pushed out $13 million of commenced leases, things must have been really delayed until late into the year.

It is delayed until late in the year.

Make sure you take, by the way, the margins.

So it's about 65%.

Right.

I grossed up the FFO impact for 65%.

How much more backlog -- you mentioned $41 million of backlog for the second half -- how much more backlog do you have signed but not commenced going forward into '13 and '14?

About $26 million for 2013.

Okay.

Thank you.

Your next question comes from the line of Jonathan Atkins.

I wanted to circle back a bit on the segueway from Centrum into kind of Europe.

Europe, I think, is 50% or more weighted to the UK.

And I wondered if you feel like that is the right mix or if there are other markets that you would begin to focus on from an M&A or new development perspective.

And then with respect to Asia, you commented how strong the demand is, and I wondered if you had -- you could share some perspectives on whether you've seen any change in the competitive environments.

Sure.

Well, in Europe, we always focus on these major markets where we see a lot of enterprise activity and activity from the IT services world.

Certainly in our minds, right now London and Amsterdam and to a certain extent Dublin, because of all the international companies, many US companies in Dublin are interesting places for data centers.

Certainly, London being the largest potential market, Amsterdam next, Dublin after that, of markets that we are in where we see potential for growth.

Paris I think will be a good market.

We are taking it more slowly.

We are almost -- we are virtually fully let in Paris.

We're going to take a little bit slower tack on that market to see how things progress economically over the second half of the year.

But Paris is a nice market, because there is a lot of corporate entities, including financials but not necessarily financials, that make up the typical marketplace there.

One market that we're not in that we would like to be in would be Frankfurt.

And that common theme of very important financial center where we are seeing demand for data centers, especially as the financial institutions are consolidating out of office buildings, out of older facilities that they are not capable of expanding in.

So, Frankfurt would be a very interesting market that we're not in that we would like to be in in Europe.

Asia-Pac might, like most markets, is from a competitive perspective, it's very fragmented.

You don't have -- while these are mature economic markets, they are not mature from a data center perspective.

So I think we have a good early mover advantage in these markets, especially being positioned as we are to be able to finance and execute instantly on these very large projects without having to look for secured debt.

And that puts us in a competitive advantage, especially vis-a-vis your more kind of private developer-type competitors that pop up market by market.

So, we think we are in a very good position, both from spec leasing perspective with spec projects, as well as very well-positioned for potential build-to-suit opportunities with some of these larger institutions.

And then, just on the co-lo business, I know that is non-core, but can you share which markets you are doing the most business in that line?

Sure.

San Francisco is a very important market for us.

Dallas is growing.

St.

Louis, I think, as a regional market we're going to see a lot of traction there.

And Boston and New York metro, those would be the most active markets where we are in.

And as a reminder, we are doing co-lo in existing buildings of ours that are network-rich buildings, usually the Internet gateways like in Dallas, 2323 Bryan, where we have space and power capacity and network capacity.

And then, can you talk about the average footprint of -- in your core wholesale business, the average size of requirement you're bringing in?

And did that vary significantly by market?

Yes, I mean -- and this is a very rough qualitative comment.

We're seeing one to two megawatts to start is pretty typical.

That might be 10,000 to 20,000 feet, maybe a little larger, on a rentable square foot basis.

But, boy, it can run the gamut to 5,000 feet to 30, 40, 50.

But I would say if there is kind of a median, it would probably around that one to two megawatts.

Are there geographic trends that you could kind of point to in terms of where it falls at the lower end versus the larger end of that range?

Not really.

Yes.

Great.

Thank you very much.

Thank you.

Your final question will come from the line of Paul Morgan.

Hi, good morning.

On the development CapEx spend, you still have the same range for the year.

We've only got five months left for the $700 million to $900 million.

I mean, is there any particular reason for having the same range?

Is any of the gap between the bottom and the high end of the range related to the lease commencement timing issues, or is it anything else?

No.

I think it is just the way the construction projects, development projects have been commenced and scheduled.

I don't think it's -- it's not tied directly to leasing.

In many cases, we are developing product so we have product to lease and for revenues next year is a lot of what we're up to.

I guess another way of saying it is kind of what would make you hit the high end as opposed the low end?

Are there particular markets or leasing that would be a catalyst for the need for future space?

I think it is more the -- how fast our people are deploying their current budgets.

Okay.

And then just one more last hit at the sales cycle issue.

You mentioned something about financials, and I just wondered if you could maybe characterize -- is it -- is the longer duration of the decision process concentrated in a vertical?

I mean, you mentioned the enterprise, but kind of within enterprise, how much of it could be related to financials and just kind of broader issues in that vertical, versus a broader trend of more complex deals and longer planning horizon?

I think it is the latter.

I think it is more general with large enterprises.

There's a lot of different constituents, because it is not just the rent.

It is not just the lease.

It's the IT applications, their design, network.

You've got budgets coming from different departments often times into these projects.

And because of the high ticket, especially after the recession, capital expenditures and operating expenditures are being scrutinized at higher and highest levels of organizations these days.

So even if the budget's already in place, there is often times additional approvals, many times at the board level, even with large -- very large organizations.

Because these are so impactful and they are such important strategic decisions, that there is often times a lot of different departments working on these.

And that is where it comes into play the fact that we have a dedicated leasing team that is focused on working with the enterprises, working with the IT departments and the treasury CFO office, that puts us in such a good position to win these types of large important deals, because we've made the big investment.

And we've made the big investment in our engineering design teams, because this is very much a solution sale, consultative sale.

So, our investment in our professional staff and infrastructure positions us really well to meet the -- what we see as a growing funnel of potential demand from the enterprises and especially financial institutions.

Okay, great.

Thanks.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

I would now like to turn the call back over to Mike Foust for closing remarks.

Thank you, everyone, and thank you for your time and attention today.

And just want to reiterate the confidence that we have as a management team and the good continued secular growth in our markets and demand for our data center product.

And want to thank our team members for another job well done and a very good quarter in the second quarter this year.

Thank you very much.

Ladies and gentlemen, this concludes today's conference.

You may now disconnect.