Digital Realty Trust Inc (DLR) 2012 Q4 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the Digital Realty 2012 fourth-quarter earnings conference call.

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

After the speakers remarks there will be a question-and-answer session.

(Operator Instructions)

Please note there is a limit of one question per analyst during the Q&A session.

Thank you.

At this time I will now turn the floor over to Ms. Pamela Garibaldi.

Madam, the floor is yours.

Thank you.

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 this call.

Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially.

You can identify forward-looking statements by the use of forward-looking terminology such as believes, expects, may, will, should, pro forma, or similar words or phrases.

And by discussions of strategies, plans, intentions, future events or trends, or discussions that do not relate solely to historical matters.

Including statements and expectations related rent to be received in future periods, lease terms and rental rates, development plans, supply and demand, data center sector growth, returns, cap rates, acquisitions, leasing investment, capital markets and finance activities, debt maturities, compliance -- covenant compliance, the Company's growth future -- the Company's growth, financial resources and success, and the Company's future financial and other results included in the Company's 2013 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 FFO or AFFO, core FFO, earnings before interest, taxes, depreciation and amortization or EBITDA, adjusted EBITDA, net operating income or NOI, and cash NOI.

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

Explanations of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental operating and financial data package for the fourth quarter of 2012, furnished to the SEC and available on the Company's website at www.digitalrealty.com.

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

Following managements' remarks, we will open the call to your questions, which will be limited to one per caller.

And following your question, the operator will be putting the line on mute in order to sort of manage it in an orderly fashion.

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

I will now turn the call over to Mike.

Great, thank you, Pamela.

Welcome to the call, everyone.

I would first like to thank everyone who participated in our Analyst Day two weeks ago.

We greatly appreciate your interest and all of the positive feedback we have received since that event.

I will begin today's call with a few comments on our sector, a brief summary on our 2012 operations, as well as our progress to date in 2013.

After my remarks, Bill will discuss our fourth quarter, as well as our first-year 2012 financial results.

And we will address some of the questions we have received since Investor Day with respect to our 2013 guidance.

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

Much has changed in our sector since Digital became the first data center REIT in 2004.

Today there are four data center REITs with different backgrounds, management teams, design philosophies, growth strategies, and claims of competitive advantages.

It is clearly an exciting sector, with attractive growth prospects.

But also one that requires a high level of expertise around operations, innovative engineering, design and construction, finance, as well as acquisitions and investment management.

Digital Realty is well-positioned, with deep professional resources in all of these areas.

¶ As we indicated at our event last month, we finished 2012 with a solid performance, and we are very encouraged by the level of activity going into 2013.

Highlights on the year include -- first, an exceptional 22% growth in adjusted EBITDA over fiscal year 2011.

Secondly, strong and consistent EBITDA margins of approximately 70%, adjusted for transaction expenses and utility reimbursements.

Furthermore, we have record-high leasing commencements of $135 million of annualized GAAP revenue, and acquisitions of $1.6 billion US.

In addition, we have record first-quarter leases signed to date in Q1 2013, representing $31.4 million of annual GAAP rent revenues.

Let me turn first to our leasing activity.

The record-level of commencements in the fourth quarter of 2012 drove our strongest annual performance to date, totaling $135 million in annualized GAAP rental revenue, up 36% from 2011.

Since Analyst Day, I am pleased to report that we have signed additional leases totaling $13.4 million, bringing total lease signings for the first quarter to date to $31.4 million of annualized GAAP rental revenue.

This compares favorably to nearly $18 million of lease signings for the entire first quarter of 2012, and nearly $19 million for the first quarter of 2011.

In fact, we are on track to exceed 2012's highest quarter for lease signings of $32.2 million.

The additional signings increase our backlog to $99.5 million of annualized GAAP rent, of which $61.6 million is expected to commence in 2013, $20.4 million expected to commence in 2014/2015 timeframe, and $17.5 million expected to commence between 2016 and 2018.

We are very encouraged by our progress so early in the year.

Enterprise customers appear to be moving ahead with their new data center requirements, as are cloud and managed services providers.

Furthermore, we are seeing this activity across our portfolio, including Phoenix; New Jersey; Ashford, Virginia; London, and Sidney from industry verticals, including financial services, social media, internet enterprises and managed hosting cloud providers.

We continue to track approximately 1.9 million square feet of demand for new facilities.

This consistent demand represents prospects in our sales funnel, to which we made proposals that we believe have a 30% or greater likelihood of signing.

For detailed supply and demand information on our major investment markets, please see the appendix section of our Analyst Day presentation, which is posted on our website.

Turning now to our 2012 lease renewal activity.

During the year, we signed approximately 621,000 square feet of Turn-Key Flex and Powered Base Building space at renewal rates that increased 9.3% on a GAAP basis, and decreased slightly 3.7% on a first-year cash basis.

This includes over 212,000 square feet of Turn-Key space at an average GAAP rental rate of $165 per square foot, up 5.2% on a GAAP basis and down 6.4% on a cash basis in the quarter.

In addition, we renewed a large amount of Powered Base building space, over 408,000 feet.

And that's up 20.3% on a GAAP basis, and up 3.4% on a first-year cash basis.

The combined average retention rate for data center space for the year was over 84%.

On a square-foot basis, 74% of Turn-Key space, or 82% of GAAP rent, renewed on an average term of nearly 90 months.

We also renewed 90% of expiring Powered Base building, reflecting 106% of GAAP rent, at an average lease term of over 105 months.

The healthy length of renewals, along with the annual 2.5% to 3% contractual increases, allows us to recapture any declines in cash rents after year-three of the new lease term on average, with continuously growing cash flow thereafter.

Last month, we presented estimated mark-to-market annual GAAP rental rate increases on data center renewals and releasing of increased conservatively of 5% to 10% expected for 2013 to 2015.

On a cash basis over that same period, we are projecting the first-year cash rent and renewals to decrease slightly by 3% from relatively high expiring rents.

As further evidence of the strength and resiliency of our portfolio, occupancy increased in the second quarter in a row to 94.4% in the fourth quarter, compared to 94.2% in the third quarter.

The increase was driven by the addition of over 165,000 square feet of space that was leased from our existing operating portfolio.

Secondly, the acquisition of two 100% occupied properties.

And thirdly, the commencement of leases totaling nearly 187,000 square feet from our development program.

These additions were partially offset by new available data center space converted from our development program, and lease explorations noted above.

Turning now to our acquisitions program.

We completed over $1.6 billion of strategic acquisitions in 2012, another record-high for the Company.

Our acquisition programs remains a very important component of our growth strategy, and accounted for approximately 57% of our NOI growth in 2012.

Included in that figure are the Bouygues Telecom sale leaseback properties located outside of Paris that we acquired in the fourth quarter for US dollars $79 million.

Bouygues Telecom is a triple-B-plus rated wireless telecom provider in France.

And the three properties are mission critical to their operations.

We expect to see more sale leaseback opportunities in 2013, reflecting part of the growing outsourcing trend.

The blended going-in unlevered cash cap rate for the fourth quarter acquisitions, consisting of the Bouygues Telecom sale leaseback properties and the single-tenant Sidney property -- this unlevered cash cap rate was slightly over 9%.

So far in 2013, we have completed two acquisitions totaling $32.5 million.

The first property is an operating data center totaling 61,750 square feet located in Dallas, Texas area, approximately 3.5 miles from our digital data center campus in Richardson.

The single-tenant facility is leased on a long-term basis to a leading provider of business information technology and communication solutions.

The second property is located in Phoenix, Arizona, and consists of -- actually in the Chandler market -- and consists of three buildings totaling approximately 227,000 square feet.

The first building, which totals about 109,000 square feet, will be added to Digital Realty's inventory of space held for development, and is capable of supporting, initially, 7.2 megawatts of IT capacity.

The [cylinder] current tenant occupies the remaining two office buildings on a short-term basis, offsetting the near-term carrying cost for the property.

Significant additional data center development is possible on this property.

And the site provides added future inventory to the Phoenix market, where we have experienced significant absorption at our existing facilities, along with continued strong demand from enterprise customers in particular.

We remain committed to maintaining our dominant position as the market consolidator.

We have an extensive pipeline of prospects for acquisition totaling almost $1 billion.

These prospects include high-quality stabilized properties, value-add opportunities, round-up development sites, as well as sale leaseback transactions.

Finally I will briefly review our development program.

In addition to adding inventory through our acquisitions, we continue to ramp up construction to add supply in select markets to meet current demand.

Current development activity includes nearly 460,000 square feet of Turn-Key Flex space that is 21% pre-leased, over 153,000 square feet of Custom Solutions space that is 100% pre-leased, and approximately 760,000 square feet of Power Based building space for future inventory in key markets.

Detailed information in our development activity by market can be found on page 29 of our fourth-quarter supplemental package.

As stated in our 2013 guidance we plan to invest somewhere between $850 million and $950 million in new construction this year, the largest amount in our history.

We believe that our scale and proven development program, combined with our disciplined investment management approach and our superior balance sheet, allow us to better manage market risks by diversifying our capital deployment across geographies and product types, while achieving unmatched returns on invested capital.

We have a great deal to be optimistic about in 2013.

In addition to our outstanding team of dedicated real estate, financial and technical professionals, we have added significant new talent in key positions within the organization.

Because of our global platform, financial resources and dominant position in industry that has tremendous growth prospects, we are fortunate -- we are in a very fortunate position to continue to attract and retain professionals that we consider among the best in the business.

We believe their commitment to excellence and innovation, delivering superior data center solutions to our customers, will continue to drive solid earnings growth for our shareholders.

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

Thank you, Mike.

Good morning and good afternoon, everyone.

I will keep my remarks brief and focus primarily on fourth-quarter and full-year 2012 results, and elaborate on 2013 guidance.

As Mike indicated in his comments, 2012 was another year of exceptional performance by Digital.

As a result, on Tuesday our Board approved a quarterly common stock dividend increase of 6.8%, or $0.05 a share, to $0.78 per share.

This is our 11th dividend increase in a little over eight years since our 2004 IPO, and reflects the quality of our earnings and optimism for continued growth.

Since our first full quarter of operations in 2005, we have grown our dividend by a compounded annual growth rate of over 15%.

In 2012, we raised over $2.4 billion of new capital.

Our balance sheet strength, combined with our excellent lender and investor relationships, continue to provide us access to multiple capital sources globally to fund the growth of our Company.

For example, last month we were the first US REIT to access the sterling bond market, with a GBP400 million sterling 12-year unsecured note offering at a coupon of 4.25%.

Proceeds from this offering were used to repay borrowings under the global revolving credit facility, drawn to fund the Centrum acquisition and to further hedge our FX exposure to foreign markets.

This transaction is consistent with our strategy of minimizing our financial risk by lengthening our maturities at attractive rates.

Currently, we have $1.5 billion of immediate liquidity, including $48.5 million in short-term investments, plus funds that can be drawn on our credit facility.

If this capacity were fully utilized, we would remain in compliance with covenants contained in the credit facility, term loan, Prudential Shelf facility and other unsecured debt.

In 2013 we have $228 million remaining principal amortization and debt maturities, with a weighted average cost of 6%.

Which we plan to retire initially with the revolver and eventually replace with additional long-term unsecured debt and/or preferred stock.

For the full-year 2012, we sold approximately 957,000 shares of common stock through our at-the-market equity distribution program, for net proceeds totaling $62.7 million, at an average price of $66.19 per share.

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

Let me now turn to our fourth-quarter and full-year 2012 results.

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

As stated in today's earnings release, the fourth-quarter FFO per share was $1.16.

Adjusting for items that do not represent ongoing expenses or revenue streams, fourth-quarter 2012 core FFO was $4.1 million higher than reported FFO, or $1.19 per share.

This reflects a 15.5% increase from the fourth-quarter 2011 core FFO of $1.03 per share.

The non-core expenses consist of transaction expenses, largely due to our recent acquisitions in Paris and Sidney.

These expenses were partially offset by a change in fair value of contingent consideration related to the Centrum portfolio that was recorded as a reduction to rental property operating expenses, accounts payable, and other liabilities.

A fair value assessment on the three-year Centrum earn-out obligation is required for each reporting period.

Changes in fair value are considered non-core adjustments.

For the full-year 2012, FFO per share was $4.44, up over 9% from 2011 FFO per share of $4.06.

When adjusting for non-core items, 2012 core FFO per share was $4.46, up 9% from 2011 core FFO per share of $4.09.

Adjusted funds from operations or, AFFO, for the fourth quarter of 2012 was $115.8 million, up from $115.6 million from the previous quarter.

The diluted AFFO pay-out ratio for the fourth quarter of 2012 was 82.6%, unchanged from last quarter.

Adjusted EBITDA at quarter-end of $204 million grew by 25% from $163.6 million in the fourth quarter of 2011, and by 2% from the $205.5 million last quarter.

Excluding transaction costs, adjusted EBITDA grew by 27.5% and 4.1%, respectively.

Our net debt to adjusted EBITDA ratio was 5.2 times at quarter-end, up from 5 times last quarter.

Which is mostly due to higher transaction costs in the period, as well as a higher drawn balance on our global revolving credit facility at year-end.

The ratio is within our new guideline of maintaining debt-to-adjusted EBITDA ratio of 5.5 times, up from 5 times.

This increase in debt capacity is in line with our triple-B Baa2 investment grade ratings, and was discussed with the rating agencies at our recent annual meetings.

The higher balance decreased our weighted average cost of debt to 4.25% at quarter-end from 4.35% last quarter.

Our GAAP fixed charge ratio was 3.8 times compared to the previous quarter of 3.7 times.

For the full year, adjusted EBITDA was $758.7 million in 2012, up 22% year-over-year from $622.9 million in 2011.

As disclosed in our Analyst Day presentation, at the mid-point of our 2013 guidance, we forecast 17% growth in 2013 adjusted EBITDA of $891 million versus 2012 adjusted EBITDA of $759 million, up slightly from the mid-point estimate of $757 million disclosed at that event.

Based on the information we provided on page 74 of our Analyst Day presentation entitled Return on Strategic Capital Investment, we expect incremental revenue in 2013 to be 47% of stabilized revenue which implies commencements are mostly back-end weighted in the year -- slightly back-end weighted, excuse me, modestly.

Turning to the income statement.

Net operating income increased to $219.6 million in the fourth quarter of 2012, up $7.8 million or 3.7% from $211.8 million last quarter.

This increase was primarily attributable growth provided by incremental revenue from new leasing and acquisitions which was partially offset by un-reimbursed landlord costs related to Hurricane Sandy, and an increase in property taxes, and a $1.6 million special reserve relating to one tenant which affected rental revenue.

Tenant reimbursements decreased by $3.8 million to $75.1 million in the fourth quarter, from $78.9 million in the previous quarter, primarily due to seasonal fluctuations in utility expenses.

Property taxes increased by $1.7 million to $19.7 million in the fourth quarter, from $18 million in the third quarter, due to supplemental taxes resulting primarily from reassessments of completed developments in Singapore and one US property.

NOI margins, including utility reimbursements, decreased 120 basis points in the fourth quarter versus third quarter, due to the previously discussed increase in property taxes, as well as un-reimbursed Sandy-related landlord costs.

NOI margins, including utility reimbursements, increased slightly in the fourth quarter versus third quarter, due to lower utility reimbursements in the period, as previously mentioned.

We prefer to look at NOI margin and EBITDA margin excluding utility reimbursements, because of the seasonal fluctuation that occurs in a given calendar year in utility expenses.

Likewise, fourth-quarter same-store NOI was relatively unchanged at $181 million compared to $181.4 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 $163.3 million in the fourth quarter, also relatively unchanged from $161.7 million in the third quarter.

This nominal decrease quarter-over-quarter was largely due to Sandy and the tax assessments previously mentioned.

It is important to note that, combined with a late weighting of lease commencements in the quarter -- i.e., December -- approximately 73% of fourth-quarter commencements occurred at new properties and are not included in the same-store pool.

G&A decreased 6.9% to $13.4 million in the fourth quarter, compared to $14.4 million in the previous quarter, primarily due to year-end accrual adjustments.

Transaction expense increased to $5.3 million in the fourth quarter, compared to $504,000 last quarter, due to costs incurred in connection with the recent international acquisitions activity previously mentioned.

Interest expense decreased to $40.4 million in the fourth quarter, compared to $41 million last quarter.

Although gross interest increased in the fourth quarter due to additional borrowings, we capitalized $3.4 million more interest in the fourth quarter than the previous quarter, primarily due to the inclusion of additional qualified activity in our unconsolidated joint ventures, and pre-purchases of heavy equipment, as well as higher construction in our portfolio.

Going forward, we expect capitalized interest to normalize around $5 million per quarter.

Finally, we are confirming our 2013 FFO guidance of $4.65 to $4.80 per share and our 2013 core FFO guidance range of $4.70 to $4.85 per share that we announced at our January 31 Analyst Day, with the assumptions that were set forth in the press release.

In response to inquiries that we have received regarding our 2013 guidance assumptions, we would like to provide some additional color on the expected ROI, or return on investment, of 10% to 12% on the $986 million of data center capital that we expect to deliver in 2013.

And how that range compares to our stated targeted returns of 11% to 14%.

There are two important factors that affect the total expected return of 10% to 12%.

First, the low end of the 10% to 12% ROI range reflects the potential lag associated with the timing of lease commencements.

By comparison, the 11% to 14% range is based on stabilized cash NOI.

For signings in 2011 and 2012, we achieved unlevered cash returns of 12.3% and 12.2%, respectively.

We expect to deliver returns on a stabilized cash basis in line with historical performance.

Second, based on the three-year earn-out agreement associated with the Centrum acquisition, there is a capped 9% return on leases signed at the [Wilking] property that we estimate will lower 2013 lease and returns by 50 basis points.

As is customary, we will revisit our guidance assumptions each quarter and revise them as necessary.

This concludes our formal remarks.

And we can now open the call to your questions.

Operator?

(Operator Instructions)

Jamie Feldman with Banc of America Merrill Lynch.

I was hoping you could talk a little bit more about lease pricing and the leasing spreads you are seeing across the different property types.

And if you think about the guidance you gave, how does it break out across the different types of properties?

Well, we tend to look across the Turn-Key Flex and the Powered Base buildings.

And the Powered Base building renewals tend to -- and I think as we mentioned, if you are talking about renewal activity, those generally are up probably around 10% on a GAAP basis, and 3% or 4% on a cash basis, generally.

I think on the Turn-Key Flex, our experience has been those increase on a GAAP basis a little over 5%.

And last quarter they were down 6%, but I think we are generally seeing that they would be down on a first-year cash basis on average more like 3% going forward, on the Turn-Key Flex.

So overall, we are looking at -- projecting somewhere in high single-digits, 10% on a GAAP basis going forward and on that first-year cash, about 3% overall.

Jonathan Schildkraut with Evercore Partners.

Just following up on some stuff that came to us this morning.

I had a question about the capitalized lease commissions.

Just wondering the terms of the timing.

Do you pay those out when the leases are commenced or at the time you sign the leases?

Thanks.

Half when signing, half on commencement.

Thanks, Bill.

George Auerbach with ISI Group.

Mike, could you give some color on the leasing pipeline?

I know you've had some success in the first quarter.

But help us understand what the pipeline looks like going forward.

And of the $31 million of leases that were signed so far in the first quarter, how much of that would you say was business that you may have thought was going to close in the fourth quarter drifted into the first quarter?

And how much of it do you think represents an acceleration of underlying demand?

Sure.

I think probably, I don't know, $5 million or $6 million of annual revenue was items that drifted, I think, from fourth quarter to first quarter.

And the remainder of things that were closing in the natural course of business.

So overall, we are very encouraged by the amount of leasing activity.

And it includes enterprises, financial services, our cloud and managed service providers, even some of the large social networking and internet commerce companies.

So we are seeing a really good general growth in demand.

And I think the trend for outsourcing of enterprises is definitely driving that continued trend upward in signings this quarter.

Emmanuel Korchman also with Citigroup.

Just going back to the TIs and leasing commissions for a second.

They looked particularly high, especially in the renewal portfolio.

Was wondering what would make them jump up so much over your recent run rate?

Emmanual, there was one deal in particular that involved a tenant in a high rise building-- it was an anchor tenant, and it involved not only a renewal but a relocation.

They were in two different locations in the building.

So one was an eighth floor location and one was a second floor location.

So the second floor suite was located adjacent to the eighth floor, and there was also expansion associated with that.

And just because of the nature of the building, it was fairly expensive to relocate them.

I guess additionally, this is a tenant that we would hope to do additional business with on a global basis.

It's important.

It's a strategic customer for us.

Jordan Sadler with KeyBanc Capital Markets.

I wanted to circle back, Bill, to -- you gave some color helpful on the G&A change sequentially, and the capitalized interest.

But if you could flesh those out a little bit more for us.

It sounded like G&A was down because of a reversal of accruals, the source of that.

And then on the cap interest, I think you said -- it seemed like a very big spike to me, up $3 million, $4 million.

Given that your average borrowing cost has come down, it seems like a lot of money would have to -- a lot of additional investment would have to be capitalized.

If you could walk through the mechanics of those two, that would be helpful.

Sure.

So in the case of the G&A, that was predominantly a reversal in the bonus accrual for the year.

Because the Company didn't make the high end of its internal targets.

And that's what accounted for that.

In the case of the capitalized interest, there's a catch-up associated with this, and there's new methodology as well.

But as a result, there was a $3.5 million catch-up.

As I said, it would normalize it around $5 million going forward.

David Toti with Cantor Fitzgerald.

Just a question around your development cost.

It appears that some of the estimates went up in the quarter on a sequential basis.

Can you give us a little bit of detail as to what's driving this and if you expect any yield impacts?

Or is that all pass-through costs at this point?

Our development costs are going up actually as a result of more projects.

So on a unit basis, actually Jim Smith and our team have really driven down unit costs on per kW per square foot.

So the increase in the amount of construction we are doing and our guidance is a direct result of taking advantage of more opportunities that we are seeing in the markets around the US and around the globe.

So it's more opportunities, so we are building more.

Jonathan Atkin with RBC.

Yes.

I was interested the revenues that you are classifying as retail and what types of returns you're seeing on those deals versus the rest of the business.

Is this retail captured business that you're winning from your existing wholesale customers?

Or given there's a broader set of competitors like Telex and Aquinex that might be bidding into the business, is it a different dynamic?

If you could flesh that out a bit it, that would be helpful.

Well, those are smaller footprint customers we are just designating.

And it may be big companies with a small footprint requirement, it might be an existing customer that has a smaller requirement in a particular geographic market.

And that's where our colocation and remote hands program really comes into play, to be able to serve that broad range of customers.

And so we are really focused on expanding those opportunities to be able to serve our customer base broadly.

And we are pretty -- we are very bullish, actually, on being able to increase that opportunity so we can capture the broad range.

Our returns are probably somewhat higher than on our larger footprint leases.

If you look at unlevered return on costs, we are clearly on a higher returns, so we like that business all around.

Dave Rodgers with Robert W. Baird.

Maybe a follow-up to John's questions on the co-lo business.

The occupancy is 365 Main sell in the quarter.

Should there be any particular read-throughs on what you might want to do with that space internally?

And then along the co-lo lines, do you have any earmarked money in either acquisitions or development CapEx this year kind of geared toward that retail co-lo business?

Yes, so at 365 Main, I mean, yes, that was just -- we just built out more space in that building.

So we are taking advantage of the opportunity to add value.

Our folks are really clever and creative.

And we have been able to capture space, add the UPS power required, and be able to expand there.

And certainly we are deploying a significant amount of capital -- I don't have the directly to building out that co-lo business, if you will.

I don't have it at my finger tips.

But a significant portion of our $850 million to $950 million projected CapEx -- development CapEx for this year is devoted toward adding value at our assets with the co-lo program.

Mitch Germain with JMP Securities.

Just interested, Mike or Bill, in terms of allocating capital outside the US.

Seems like you are full in Europe.

Is the goal to beef up your Asia-Pac exposures at this point?

Well, we are definitely looking at opportunities in both Europe as well as Asia-Pac.

And we are at a point now in Europe where we are pursuing a couple of opportunities on the continent to add to our portfolio.

So while the capital spending actually I think is probably going to go up a little bit as a percentage in Europe, right now we are projecting about 9% of our CapEx spend to be in Europe.

And the CapEx spend in Asia-Pac, probably mostly due to timing, going down from 21% of the total bucket to 16%.

But the bucket has grown also.

So you're probably looking at almost the same amount in terms of dollar investment.

Yes, Asia is roughly flat on an absolute dollar basis.

And Europe was up by, I think, about one-third in absolute dollars.

Rob Stevenson with Macquarie.

Just to follow up on that.

Can you contrast the US, Europe and Asia in your core markets for us, both in terms of the ability to drive cash rents, where you see the best pricing power, and where it's lagging at this point?

And then what you're seeing in terms of acquisition cap rates in those three regions for core income-producing assets?

Well, in terms of income-producing assets, we are projecting, I believe in our guidance, 7% to 8% roughly?

7.25% to 7.75%.

And we were able to achieve somewhat over 9% in the fourth quarter with a combination of a Sidney deal and a Paris deal.

So we think that our guidance numbers are conservative.

But there is going to be a range there, and clearly it's averaging somewhere between that 7.25% and 7.75%.

It's hard to make a sweeping statement about regions like that, because every market in the US has different characteristics, as well as in Asia-Pac, as well as in Europe.

And a lot has to depend with who the tenants are, what the lease durations are.

I think it's safe to say that generally for investment properties, across-the-board cap rates have declined over the last of couple years.

For data center billings, we are not seeing a rapid decline for the properties we are looking at.

But also there's properties that trade at of 6% to 6.5% caps that we just don't bid on.

There is a property, a couple things that we have taken a look at in Europe that have been potentially 5.5% to 6%.

So we are looking for those opportunities where we can either create value or be in a position to underwrite tenants and buildings, and releasing risk that other core investors will have a difficult time doing.

In terms of lease rates, we are generally seeing lease rates have stabilized in most markets in the US.

And they've been pretty flat year-over-year.

But we did have an uptick in the fourth quarter of 2012 that was encouraging.

And broadly, every market is a little different, in Europe, in Asia-Pac.

Europe is pretty steady at rates that have declined.

I would say London is pretty steady.

Paris doesn't have a lot of activity right now.

Amsterdam will continue to be a healthy market.

And we are still seeing a good activity in London.

So all-in all, I think flat rates are probably the norm.

In Asia-Pac, lease rates are very healthy.

Demand is healthy generally.

And we see typically good pricing power in the Asia-Pac markets.

Yes, Rob one thing I'd like to add to that is that in Europe, on the acquisition side, there are situations where the seller of the asset is seeking liquidity.

And there is limited liquidity in Europe today.

So in those situations, we can really achieve a pretty attractive risk-adjusted return.

Tayo Okusanya with Jefferies.

So a quick question in regards to deferred rents.

Just when I look at the growth on that line item relative to how much rent has been growing, it seems like deferred rent has been growing a little bit faster over the past few quarters.

Was wondering whether you could address that?

Yes, well, we bought a pretty large portfolio in July, which was the Centrum portfolio.

And that would account for a significant component of that.

It was $1.1 billion US, Tayo.

Ross Nussbaum with UBS.

Mike, a couple of your tenants focused over in the ISP and cloud arena had a rough week in the stock market, mainly Rackspace and CenturyLink and Level 3. And I am curious, as you look at the way the market responded to what those companies had to say -- I don't know if you had a chance to look at what they said to the market.

But what was your read on how their businesses are doing and what you think that foretells in terms of the space that they are going to be demanding going forward from companies like Digital?

Sure.

That's a really good question.

And actually, where we are sitting, both of those companies in particular, continue to see good demand and very good growth.

It seems like the market did not like CenturyLink's decision to use cash flow and to shift that cash flow from dividends to stock repurchase.

I think that, in my opinion, had a very, very big effect on their stock, rather than actual operating results.

If you look at CenturyLink's enterprise market -- both network and enterprise market data hosting, which are our tenants -- that would be your -- generally, your Savvis and your historic Qwest, operating revenues in their hosting business was up almost 13% year-over-year on the quarter, colocation revenues were up almost 10%.

You know, they are seeing quite a bit of increase in their geographic expansion, including expanding further in Germany.

And they've got -- adding to their portfolio of cloud services.

So it's a very attractive, growing business.

Which is why CenturyLink brought them on board.

The enterprise network market, those revenues were up almost 6% quarter-over-quarter, to $671 million.

Their other revenues up 4.5% year-over-year.

So that business is showing good growth too.

And those are the businesses that would -- that do occupy and continue to take more space in our facilities.

And if you look at CenturyLink overall, they have operating cash flow of about $7.7 billion US, and in the quarter is up -- it was $1.9 billion, which was an increase year-over-year from the year before.

And net income was up.

So their business overall and cash flow from operations and those sorts of help metrics look good.

And as I said, the enterprise hosting and enterprise network are doing quite well.

Rackspace -- it appears the market didn't like that.

They only grew 57% quarter-over-quarter instead of 65% quarter-over-quarter revenues.

So their revenues and new business is still growing tremendously well, and they need more space in many markets.

I think it is a natural adjustment.

And sometimes when stocks get a little frothy on valuations -- but their business is extremely healthy and growing.

John Stewart with Green Street Advisors.

On the TI on the Turn-Key Flex renewals.

I guess, first of all, can you tell us which market that was?

Secondly, is it fair to assume a -- call it a 65% NOI margin, so $100 net rent?

And then lastly, can you tell us what the book value per square foot was before you capitalized the additional $130 a square foot in leasing costs?

John, your question was cut off.

We didn't hear all of it.

I asked which market the Turn-Key renewal space was in.

Is it fair to assume $100 net rent?

And what was the existing book value per square foot before you capitalized $130 of additional leasing costs?

We don't have the book value for you.

It was in Chicago.

And we don't have the other information for you right now.

We can talk about that offline.

Vincent Chao with Deutsche Bank.

(technical difficulty) Specifically, it sounded like you're seeing pretty good demand there, and recently bought another portfolio of office buildings to add to the inventory.

Can you talk about what verticals are really -- you're seeing strength there?

And what the sort of sweet spot is for deal sizes?

I'm sorry, Vincent.

The first part of your question didn't come through.

Oh.

Yes, I was wondering about Phoenix.

It sounded like you had positive comments there and recently added some more inventory.

Just trying to get a sense of what the demand looks like, where the strength is coming from in terms of industry verticals.

And also what is the sweet spot in terms of size of deployments that you're seeing demand for there?

Yes, Phoenix is very active.

We have seen a wide range of large requirements, multiple megawatts, as well as growing smaller footprint requirements.

And it's a combination of enterprise, web-based commerce, retail, hosting, managed services.

So a pretty good mix of customers in Phoenix.

Phoenix has always been, historically, a very broad-based tech market, broad-based data center market for enterprises and financial services companies.

And we already have a big stable of financial services companies in Phoenix, and particularly in Chandler.

Jamie Feldman with Bank of America Merrill Lynch.

I was hoping to get a little bit more color on your conversations with the largest corporate enterprise users.

I mean, it seems like last year they were in the pipeline, they are still in the pipeline.

What changed for those guys after the first of the year?

What do they need to see to really get more active here?

And how are they thinking about their needs going forward that -- if we do start to get a better economy here and more visibility on earnings, that you'll really start to see a pick-up?

Or maybe that's the wrong way to think about it?

Well, I think, in 2012, there was a lot of consideration going on about outsourcing.

And a lot of internal strategic planning around capital allocation in a lot of the big companies, in many, many big enterprises.

And especially in financial services.

And I think, our -- indications are to us a lot of these plans have been formulated, and they're ready to be implemented.

And we see almost across-the-board the plans include outsourcing and -- of new space, and consolidation of space, and outsourcing that is more of a leasing model as opposed to a build-and-own yourself model.

We think that's going to add significant new business in 2013 and 2014.

So we are really encouraged by that.

And I think financial services are going to lead the way in that.

Other verticals are already looking at that hard -- healthcare I think will be another vertical that we will see more business coming out of.

Certainly the cloud services, computing, managed services -- they're already focused in outsourcing.

And I think that's a very positive trend for us all around.

George Auerbach with ISI Group.

Bill, thanks for the additional color on the development yields.

I guess I wanted to make sure I understood what they mean.

So the 10% to 12% is the year-one cash return, the 11% to 14% is the stabilized return.

And I guess -- how should we think about the timeframe, in your view, to hit the 10% to 14%?

Is that a six- to eight-quarter lease up?

Okay, so the 10% to 12% would be taking all of the commencements over the course of the year and basically establishing a run rate on 12-31, divided by investment capital deployed.

And the 10% assumes that some of the investment capital doesn't lease.

So that's the reason for the delta between the 10% to 12%.

And you could see the 12% is pretty close to what we achieved in 2011 and 2012.

And in fact, adjusting for the 50 basis point reduction due to the Centrum earn-out, the 9% earn-out, you could argue that we are expecting to do better this year than we did in prior years.

The 11% to 14% is where we expect yields to fall.

So some yields will be at 11%, some yields will be at 14%.

And some actually could be higher than 14%, and in fact, have been higher than 14% in prior years, particularly in Asia.

So the 11% to 14% is really a range of outcomes.

And it just so happens that if you look at our results as adjusting for the Centrum earn-out, the 12.5% is really, in essence, right in the middle of the 11% to 14%.

Jordan Sadler with KeyBanc Capital Markets.

I just wanted to circle back.

There was some commentary surrounding colocation.

And this was a discussion topic in point, the co-location strategy, at the Investor Day that I didn't get to hit on.

But you identify the Firm's current markets as a broad swath, including the major metros like New York and Boston and Northern Virginia, Chicago, et cetera.

And I was curious.

I know colocation had -- you know, you picked up this business through 365 Main and you've grown it in markets where some of your major tenants who are in the co-lo business haven't wanted to necessarily expand into, such as Dallas, for instance.

Or certain buildings in Dallas, if you will.

How are you thinking about the business today?

I mean, are you willing to put your own colocation business to the extent -- with an existing customer in buildings with existing tenants, and essentially going head-to-head?

Well, our co-lo offering does not include managed services.

So if they overlap -- and we see very little overlap, because most of our folks -- you know, colocation in our vernacular is really -- is just a small footprint.

Now, we will provide the remote hands, the rack and stack, the cabling, and these are all normal, typical data center services that we do for large customers as well as small customers.

Actually we do more of that type of work for the large-footprint customers than the small ones, in reality, in actuality.

So we don't see a big differentiation around our product type.

And we don't see a lot of overlap.

But we are going to go ahead and continue to work hard to fill our buildings and serve our customers who have a wide range of footprint requirements.

But I think in actuality that there's not much overlap between our customers that are providing a broader set of managed services and inter-connect network services offerings.

Jonathan Atkin with RBC.

The robust pace of leasing year-to-date, just wondered if you can comment.

Is that reflective of all three regions in terms of broader market trends or primarily US-centric?

Well, we certainly have more markets in the US.

So the US is always going to drive more volume.

But we have also had success with significant new lease requirement in London for Build-to-Suit.

In Singapore, a smaller TK Flex requirement for an international bank.

New York Metro with one of our larger Wall Street customers.

Some office space in Philadelphia.

So it's a pretty wide range of requirements.

And I think that's reflective of the amount of leasing activity we are seeing across the board, whether it's Singapore or Sidney or in Phoenix or Northern Virginia or Chicago.

So it's -- Dallas.

I mean, certainly all of these markets -- New Jersey -- we are seeing good activity.

So it's pretty broad-based.

Which is great for us because we still have customers -- obviously many customers who want to be in multiple markets with us.

And we will be able to take advantage of that throughout the year as well.

And we have reached the end of the allotted time for questions and answers for today.

I would now like to turn the call over back to the management for any closing remarks at this time.

Well, thank you.

And thank you, everyone, for spending the time with us today on the call.

As you can tell, we are very positive about the opportunities for our business, and for our customers' businesses as well.

The secular demand drivers that we reviewed on Investor Day continue to be in play and are only pointing toward greater demand as we move ahead.

And we are probably in a better position to capture that demand than anybody else in the market.

So thank you, everyone, and we will be speaking with you again soon.

Ladies and gentlemen, this concludes today's conference call.

We thank you for your participation.

You may now disconnect.