Digital Realty Trust Inc (DLR) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to the Digital Realty 2013 second-quarter earnings call.

My name is Marianne, and I will be facilitating the audio portion of today's interactive broadcast.

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

For those of you on the stream, please take note of the options available on your event console.

(Operator Instructions)

At this time, I would like to turn the show over to Pamela Garibaldi, Investor Relations of Digital Realty.

You may begin.

Thank you very much.

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'd 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 believe, expect, may, will, should, pro forma, or similar words and phrases, and by discussions of strategies, plans, intentions, future events or trends, or discussions that do not relate solely to historical matters.

Such forward-looking statements and such statements related to rents to be received in future period, lease terms, rental rates, leasing and development plans, supply and demand drivers, data center sector growth, strategic initiatives, acquisitions and investment plans, returns, cap rates, capital markets and finance plans, including our funding strategy, our global revolving credit facility and term loans, debt maturities, capacity and covenant compliance, and the Company's financial growth, financial resources and success.

Our connectivity initiative and deployment plans, and the Company's future financial and other results, including 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, 2012 and subsequent filings with the SEC, including the Company's quarterly reports on Form 10Q.

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 FFO, earnings before interest, depreciation, taxes, and amortization or EBITDA, adjusted EBITDA, net operating income or NOI and cash NOI.

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

Explanation of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental operating and financial data package for the second quarter of 2013, furnished to the SEC, and available on the Company's website at www.DigitalRealty.com.

Now I'd like to introduce Mike Foust, CEO, and Bill Stein CFO and Chief Investment Officer.

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

Questions will be limited to one per caller.

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

I will now turn the call over to Mike.

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

I will begin today's call with a brief summary of our second-quarter operations.

After my comments, Bill will discuss our second-quarter financial results, capital markets activity, and revised 2013 guidance.

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

We continue to experience strong leasing momentum and demand across our portfolio, particularly with our traditional customer base.

That base consists of large corporate enterprise users, cloud infrastructure providers, and Internet-based applications and services, including e-retail.

They rely on Digital Realty to provide a dependable and secure environment for storage and processing of mission-critical electronic information, as well as housing primary IT applications.

These corporate enterprise customers, representing leading companies from financial services, consumer, and healthcare sectors, among others, often require large multi-site builds that deliver high-quality long-term revenue for Digital Realty.

Looking forward, we are implementing several strategic initiatives that will make our best-in-class data center platform more accessible to a wide range of enterprise customers and IT service providers.

One such initiative is the transition of our sales team from one highly focused on opportunity management, to a more diversified approach, embracing a heightened focus on strategic account management under the leadership of Matt Miszewski, our Senior Vice President of Sales.

This transition will match our market segmentation to our strategic sales effort, and is designed to result in higher average deal sizes, shorter deal cycles, and increased pricing power.

We've also been working to implement a diversification of revenue enhancement strategy, by targeting mid-market customer segments within specific verticals selected for their growth potential.

These targets will include the companies that meet Digital's ideal customer profiles, and as such, represent latent market demand, and our position within verticals that represent higher probabilities of closure for digital.

Together we are confident that the new strategic account management and mid-market strategies will capture incremental demand, and provide us with a more diversified predictable view towards our quarterly leasing results.

These programs, combined with our connectivity Ecosystem initiative, and the data center infrastructure management, the DCIM offering, are critical components of our evolution.

By leveraging our scale, operational expertise, global footprint, and financial resources, our goal is to capitalize on our first mover advantage, by creating an unmatched data center offering for large and small enterprise requirements that would be very difficult to replicate in the marketplace.

We are excited about the growth prospects from these initiatives, and believe they further increase the high barriers to entries in our business.

During the second quarter, leases were signed representing $16 million of annualized GAAP rental revenue, and we are pleased to report that the remaining leases we expected we expected to sign by June 30 have been completed since the quarter end.

These additional lease signings totaled $19.6 million of annualized GAAP rental revenue, bringing the combined total to approximately $35.6 million of annualized GAAP rental revenue.

And this is in-line with our original expectations, and reflects the level of demand we are experiencing across our portfolio.

It is important to note that with the exception of one lease that was completed yesterday, the July signings are not including our third-quarter leasing goals, which are tracking as expected.

We remain confident that we will meet our new leasing expectations for the year.

Evidence of positive trends in the leasing environment is the solid pricing we've achieved, which we believe reflects improved market conditions in some markets, such as Ashford Virginia.

The average annual rental rate for leases signed in the second quarter in North America for our Turn-Key Flex space was $209 per square foot, and that is on a GAAP basis, which includes two power expansions signed in the second quarter.

Excluding the power expansions, the rates averaged $177 per square foot, up significantly from our rolling four-quarter average rate of $153 per foot.

On a per-kilowatt per-month basis, the weighted average rate was approximately $178.

Our current backlog, including leases signed today, totaled $95.2 million of annualized GAAP revenues, of which $43.2 million are expected to commence in 2013, $31.6 million expected to commence in 2014 and 2015, and $20.5 million are expected to commence between 2016 and 2018.

Please note that our backlog represents committed lease contracts that have been signed, but have not yet commenced.

These lease signings represent a wide variety of industry verticals, including financial services, colocation, IT services, online retailing and healthcare.

Our unparalleled global footprint, which spans over 30 markets around the world, played a key role in capturing this demand.

Markets where we experienced the most activity were Boston, northern Virginia, Chicago, Houston, Austin, Phoenix, our new site in Toronto, as well as internationally, London, Sydney, and Singapore, outside of North America.

The weighted average projected year one stabilized return on investment for Turn-Key Flex leases signed in the first half of 2013 was approximately a healthy 12.4%, and this is consistent with historical trends, and in line with our projected range of ROI of 11% to 14%.

The current leasing prospects pipeline for new facilities stands at 1.8 million square feet, down from last quarter, largely due to the volume of leases we have signed since the end of the first quarter.

This figure represents current prospects on our sales funnel, to whom we've made proposals, and which in which we believe have a 30% likelihood or greater of signing.

In addition to the new strategies I mentioned, macro trends reflect a solid demand outlook that we believe will add to the current pipeline.

First, big data has started to result in real large-scale enterprise data center demand.

In addition, the computational effort needed to accomplish the analytics attached to big data further increases both the space and power needed by our customers and our prospects.

This is in addition to the network capacity demanded and utilized by these users.

Second, the mobile revolution has increased back office computational needs, and has driven the adoption of internal clouds to service newly-developed mobile enterprise applications.

Furthermore, the move to the cloud is driving a transition to internal cloud platforms that add to the data center space and power needed by enterprises, while they continue to support their legacy environments.

To the degree to which growth is incurred in the public cloud and pirate cloud spaces, we are also seeing positive impact to our business from both the growth of cloud providers who we count as customers, as well as enterprise connectivity to multiple cloud service providers, which can now be supported by a new global network Ecosystem.

Turning now to our releasing activity, turn-key flex rates on renewals were up nearly 1% on a cash basis and up 8.6% on a GAAP basis in the quarter.

Powered Base Building renewal rates were up 1.7% on a cash basis, and up fully 27.5% on a GAAP basis.

And co-location renewal rates were up 3.6% on a cash basis, and up 14.7% on a GAAP basis.

These releasing spreads were stronger that we projected, and for the remainder of year, we are projecting rent spreads for data center space overall to be up 2.8% on a cash basis, and up approximately 28.6% on a GAAP basis.

However, there are a few Turn-Key Flex leases that we expect to renew during the second half of the year, which we expect to roll down from currently very high rates.

We expect releasing spreads for Turn-Key space to be down approximately 13.6% on a cash basis, and up 3% on a GAAP basis, for the remainder of the year.

Offsetting the decrease, we expect releasing spreads for powered base building, which include early renewals, to be up approximately 12.9% on a cash basis and up a very healthy 44.5% on a GAAP basis.

Occupancy decreased slightly during the quarter, primarily due to the expiration of non-data center leases.

Excluding the non-technical space, data center occupancy remained strong at 95.5% in the second quarter, compared to 95.9% in the first quarter.

In terms of supply and demand in our major US markets, we are tracking a 12.8 megawatt shortfall of space nationwide overall.

Specifically, we are enthusiastic about the dynamics we are seeing in Northern Virginia, in the New York-New Jersey Metro, Houston, Austin, Chicago, London, Amsterdam, and generally in Asia-Pac.

Turning now to our acquisitions program, our strategy consists of targeting institutional quality operating data centers, including sale-leaseback transactions, wherein users are looking to monetize the real estate asset, while partnering with an operator that can support their ongoing data center operations.

In addition, we acquired development sites that feature inventory in top global markets, where our customers need to locate third data center operations.

During the second quarter, we added one development site and two infant properties to our portfolio, including the sale-leaseback transaction we announced earlier this week in the Netherlands with international network provider KPN.

In addition we acquired the six building comp, then Austin that has home to several data center network data providers and other technology firms.

Excluding the development site in Metro London, the average going-in cash cap rate for the second-quarter transactions was 8.5%.

As of June 30, we have completed $138.1 million in acquisitions, at an average going-in cash cap rate for the income-producing properties of 10%.

And this is well ahead of our guidance range of 7.25% to 7.75%.

Our current pipeline of potential acquisitions totaled approximately $750 million, including high-quality stabilized properties, value-add opportunities, ground-up development sites, as well as sale leaseback transactions.

This excludes larger portfolios that we continue to track.

Pricing in the US has risen rapidly for stabilized long-term lease properties in major markets.

Cap rates in the high 5%s to mid-6%s are becoming the norm, largely driven by core institutional investors and a couple of non-traded REITs.

While this is a great reflection of the true NAV of our digital portfolio, it does make purchasing income properties more challenging.

However, with our operating, leasing, and development platforms, we are quite competitive in situations where some in-place leases have 7 or 10 years remaining, or there might be a value-added component that we can underwrite as a developer of data centers.

I would now like to provide a brief update on the progress we're we are making on our digital Ecosystem connectivity initiative.

Our digital Ashburn, Virginia, and Richardson, Texas campuses, and our London site are all tied together via dark fiber.

Chicago, Boston, San Francisco, Silicon Valley, and New York metro, including New Jersey, are in the final planning phases, and we are well on our way to meeting our US deployment expectations by year-end 2013.

In addition, in all North American locations, we can now directly provide customers with IT network services, greatly facilitating new data center deployments and expansions.

In fact, we are already seeing results, including from our London deployment.

We were able to expand a subsidiary of a Fortune 100 customer at two sites, at Woking and Redhill, in large part due to the sites' interconnectivity.

Essentially the dual site requirement was predicated on the customer's ability to access and procure a significant number of dark fibers, which the customer could then control and support of their heavy content distribution needs between the two sites.

In addition, with direct access we provide to key London and European Internet exchange facilities was an important prerequisite for the customer.

Overall, we significantly reduced this customer's annual network cost, further lowering their total cost of occupancy in digital properties.

We continue to see growing demand from customers for enhanced Metro connectivity, and the Ecosystem initiative greatly expands the value we deliver to our customers.

We are very pleased with the progress we are making throughout our business, and across our portfolio.

2013 is in some ways a transitional year for the Company, as we make significant enhancements to our portfolio, and to our processes.

We are already seeing results of these efforts, and expect to fully realize the benefits in 2014 and beyond.

Ours is a dynamic and exciting sector that we believe requires both innovation and a global presence to address the future needs of our customers, as they continue to embrace new technologies and compete on the globalized economy.

More importantly, we believe that our talented professional team, superior delivery in operating platform, financial strength and investment expertise, Digital Realty has unparalleled competitive advantages as a global provider of data center solutions.

As we work to further enhance and grow the business, we remain focused on enhancing our shareholder value.

I'd now like to turn the call over to Bill.

Thank you, Mike.

Good morning, and good afternoon, everyone.

I will begin by discussing changes to our accounting policies, as well as new disclosures in our quarterly supplemental report.

I will then review our quarterly results, provide an update on our funding strategy and capital markets activities, and address our revised guidance.

In terms of our accounting policies, to be more in line with GAAP accounting practices, in the second quarter, we began capitalizing all eligible portfolio-related cost totaling $10,000 or less, including those incurred in the first quarter.

Previously, these costs were being expensed.

In addition, we conformed our policy covering construction period operating cost with our interest capitalization policy, such that completion dates are now consistent.

Our effective completion date is tied to receipt of certificate of occupancy.

As a result, in the second quarter, we capitalized $3.4 million of additional operating repairs and maintenance and real estate tax expenses, of which $1.5 million relates to the first quarter.

Separately, in response to requests from our shareholders, we have made additions and clarifications to our quarterly supplemental report.

This includes a new schedule on page 26, titled Portfolio Overview By Property Type.

This schedule provides further visibility into our portfolio, by consolidating our properties by corporate data center, internet gateway, data center, and non-data center properties.

Within each property type, we have also provided detailed information around the annualized base rent by product type.

In addition, on our historical capital expenditures schedule on page 29, we have modified the footnotes to improve the definitions of how we categorize recurring and non-recurring capital expenditures.

These modifications have been made to further clarify how we define capital expenditures.

On page 10 of the supplemental, capitalized internal leasing commissions are now separately disclosed on the AFFO reconciliation.

Recurring capital expenditures on our AFFO table now agrees to our historical capital expenditure table on page 29.

This modification was made to make reconciling the numbers easier.

On pages 9, 12, and 13 in the consolidated and same-store and new properties quarterly statements of operations, and same-store operating trend summaries, we also broke out the repairs and maintenance line items from rental property operating expenses.

As a reminder, this expense item is in addition to the recurring CapEx we spend to maintain our properties.

These additions and enhancements are consistent with our policy of ensuring best-in-class reporting practices, as well as greater transparency for our shareholders.

As always, we welcome your suggestions.

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

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

As stated in today's earnings release, second-quarter 2013 FFO was $1.22 per share, up 5.2% from the first quarter 2013 FFO of $1.16 per share, and up 11.9% from second-quarter 2012 FFO of $1.09 per share.

Adjusting for items that do not represent core expenses or revenue streams, second-quarter 2013 core FFO was $1.19 per share, or $4.1 million lower than reported FFO.

These adjustments consist of a $5.6 million insurance settlement gain related to disputed construction costs from activities dating back to 2009, a $370,000 adjustment related to the Sentrum earn-out, which were partially offset by $1.5 million of transaction expenses and a $500,000 write off of deferred financing costs associated with the pay-off of the mortgage at the Clonshaugh property in Ireland.

As noted in the past, a fair value assessment of the three-year Sentrum earn-out obligation is required for each reporting period, and is likely to result in some quarterly earnings fluctuations.

Changes in fair value are considered non-core adjustments.

Turning now to the income statement.

Net operating income increased by $7.4 million or 3.3% to $234.7 million in the second quarter of 2013, from $227.3 million last quarter.

The increase was primarily due to incremental revenue from new leasing, acquisitions and the present value accretion related to the Sentrum earn-out.

Looking at expense line items, rental property operating expense decreased by $2.2 million to $22.9 million in the second quarter of 2013, from $29.1 million last quarter, primarily due to the changes to our cost capitalization policy that I just discussed, and that adjustment related to the Sentrum earn-out.

During the quarter, repairs and maintenance expense was $22.3 million, down from $23.6 million in the first quarter, primarily due also to changes in our capitalization policy.

Looking further down the income statement, property taxes were $19.4 million in the second quarter, down from $21 million in the first quarter, primarily due to a favorable property tax adjustment for our 350 Cermak property that resulted from a lower tax assessment, a portion of which was passed on to our tenants.

G&A increased to $17.9 million in the second quarter, compared to $16 million last quarter.

The increase was primarily due to the continued growth of the company, as well as our independent directors' annual equity award grants that were fully vested and expensed during the quarter.

Interest expense decreased to $47.6 million in the second quarter, compared to $48.1 million last quarter.

Although gross interest increased in the second quarter due to additional borrowings, we capitalized $1.3 million of additional interest in the second quarter, primarily due to an aggregate increase in spending on qualified activities.

Tax expense decreased to $210,000 in the second quarter of 2013, compared to $1.2 million last quarter, primarily due to a non-cash deferred tax benefit from foreign operations.

Lastly, preferred stock dividends increased to $11.4 million in the second quarter from $8.1 million last quarter, due to the issuance of the Series G preferred stock in early April.

As a result of this changes in our cost capitalization policy, NOI margins, excluding utility reimbursements, increased by 180 basis points to 76.1%.

Excluding the expense reduction resulting from the changes in capitalization policy, and the fair market value adjustment related to the Sentrum earn-out, the NOI margin would be 74.9%, which is in line with historical levels.

Likewise, second-quarter same-store NOI increased by $4.8 million to $200.2 million, compared to $195.4 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 $181 million in the second quarter, up $6.3 million from $174.7 million last quarter.

The increase quarter over quarter was largely due to the incremental revenue from new leasing, and reduction to operating expenses related to capitalization policy changes.

Excluding the expense reduction resulting from the changes, same-store cash NOI would have been $177.7 million, up $3 million compared to last quarter.

I would now like to turn to our funding strategy and capital markets activities.

Our funding strategy includes issuing debt in local currencies to provide a natural hedge, and mitigating our exposure to foreign currency fluctuations, and our growing international operations.

Local debt as a percentage of regional assets ranges from 44% to 97%, depending on the currency.

As part of this strategy, we are currently engaged in discussions to refinance our $1.8 billion global revolving credit facility, as well as our $750 million senior unsecured term loan.

We are looking to take advantage of improved bank pricing in the loan market, in light of the overall volatility in interest rates.

We expect to upsize both facilities, extend final maturities, and modify certain covenants.

In addition, we expect to have access to a number of additional currencies to help accommodate our growing global investment program.

We are also exploring a potential joint venture on a pool of our existing assets.

With this joint venture, we would seek to establish a private market valuation on the contributed assets, while maintaining significant equity ownership and operational control of the assets, access a new source of capital at costs well below the returns we expect to achieve on new investment opportunities, and generate management fees, and thus a higher return on investment on our retained investment.

Turning to our balance sheet, total assets grew $9.2 billion in the second quarter of 2013, compared to $9 billion last quarter, which is consistent with the continued growth and scale of our business.

Total debt for the second quarter was unchanged from last quarter at $4.7 billion.

We currently have $1 billion of remedial liquidity, including funds that can be drawn on our existing global credit facility.

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

As of the end of the day yesterday the balance on our $1.8 billion global revolver was $784 million.

Since the end of the second quarter, we have paid off three loans totaling $56.9 million.

We now have $158 million remaining in principal amortization and debt maturities in 2013, with a weighted average cost of 6%.

We plan to retire the remaining amount initially with the revolver and eventually refinance with additional long-term unsecured debt, secured debt, and/or preferred stock.

As stated in today's earnings release, with better visibility towards our year-end results, we are narrowing our 2013 core FFO guidance range to between $4.74 and $4.83 per share, increasing the low end by $0.04, and reducing the high end by $0.02.

As a reminder, core FFO excludes items that do not represent core expenses or revenue streams.

In addition, we are raising our 2013 FFO guidance range to between $4.73 and $4.82 per share, and increasing the low end by $0.08 and increasing the high end by $0.02.

The incremental increase in FFO guidance compared to core FFO guidance is primarily driven by the one-time gain related to the insurance settlement of approximately $0.04 to FFO.

Furthermore, we now expect core FFO and FFO to be in line for the year.

As a result, this guidance represents expected core FFO growth of 6.3% to 8.3% over 2012 core FFO of $4.46 per share, and FFO growth of 6.5% to 8.6% over 2012 FFO of $4.44 per share.

These revisions do not include the impact of the potential joint venture.

With respect to the change underlying our revised 2013 guidance FX assumption, the impact from this change was more than offset by higher margins from the changes to our cost capitalization policy.

This concludes our formal remarks.

Mike and I would be happy to take your questions.

Operator?

(Operator Instructions)

Emmanuel Korchman with Citi

Michael Bilerman here with Manny.

Bill, just wanted to dive into the accounting thing, just for a moment.

So you did not restate first-quarter results at all from an FFO, you adjusted AFFO for the CapEx disclosure, but I'm more concerned about earnings.

This $3.4 million change -- is effectively that $0.025 essentially all in the second quarter?

That is right, so roughly $0.01 of that would be in the first quarter.

Gabe Hilmoe, UBS.

Bill, just a question on the joint venture.

Can you talk a little about potential size, who -- what kind of partner that might be?

And in terms of the deal, is this one large deal or is this a staggered transaction that could close over a period of time?

I'm reluctant to go into too much specificity before we close.

But I will tell you it is one deal approximate deal size, we will say between $350 million and $400 million.

It is one institutional investor, it is I believe a highly regarded institutional investor in the real estate space.

And right now we are expecting, just I think I said, one close, and I expect that will be in the third quarter.

Rob Stevenson, Macquarie.

Can you talk a little bit about the Asia-Pacific business as to what you're seeing there in terms of opportunities to both expand and from a leasing standpoint?

Sure, be happy to, so we are seeing new opportunities in Japan.

We expect to be closing soon on a development site outside of Osaka.

We are moving ahead on schedule with our new development and joint venture with Savvis in Hong Kong and have very good interest in that new development.

Also, continue to discuss potential joint ventures with IT services companies in China, and we will see where that goes.

And then we are seeing a pick-up in leasing now in Singapore.

It was a little slow for a couple of quarters, and now we are seeing requirements pick-up in that market, which we know is going to be very strong market ongoing for us.

So, Asia, we see as having really good opportunities.

And we have good activity in Sydney and Melbourne on those developments, as well.

You may recall in Melbourne, NAB is the anchor tenant there and we have a couple of international firms as our anchor tenants in Sydney.

Jonathan Atkin, RBC Capital Markets.

Yes, I was interested in what you're seeing in terms of competitive behavior.

You talked a little bit about supply being scarce there in a number of markets by competitive behavior, and when deals go away from you, what is the most common reason?

And then maybe just an update on the connectivity strategy?

You mentioned where you hope to be by year-end, but if you could elaborate on your ability to fully pursue that business in the US, given some of these exclusivities that Telex have to operate the interconnects within several of your site?

Thanks.

Sure, we have certainly a very large footprint in North America and globally, which allow us to provide a wide range of space, both in our Internet Gateway buildings, as well as in our suburban data center facilities.

So, we can provide that space, whether it is smaller colo space or larger wholesale space, over a megawatt, to these different corporates and IT services companies that are delivering cloud services and require that connectivity.

So, all in all, I think we are incredibly well positioned to deliver the space and the connectivity within our buildings, within our business parks, and as we mentioned, back to the major network and Internet caring points whether they are at in Equinix facility or driving more business as well to an Equinix or Savvis or other folks.

So, it generally should be a win-win because hopefully we will be driving more connectivity and Internet traffic back to these various pairing points whether they are in a Digital building or in another location.

I'm sorry the other question?

About the competitors.

Sorry, so when we are seeing competitors, competitor pricing, typically when a deal is done away with us, it is usually on price.

Where in some cases we just feel we won't go as low as some of the competitors might, especially some of these folks that have one or two sites, and don't have a portfolio approach to their business necessarily.

But oftentimes, we are able to achieve a premium over our competitors because of our service, and our professional operational platform, and the fact that we can, because of our modular pod architecture approach, we can customize spaces, even within our Turn-Key Flex designs to meet the application requirements of the IT department.

That is very powerful, as well as having fully dedicated UPS and cooling to the suites.

And having that dedicated power, back-up power and cooling is a very important criteria, especially among the corporate enterprise financial services groups.

Jordan Sadler, KeyBanc Capital Markets.

Couple of questions, one question two parts.

So, on the potential joint venture, the size was helpful.

Should we expect pricing to be in the range, Mike, that you offered up, that you are seeing pricing in the private market high-fives, mid-sixes back then separately, as it relates to the guidance adjustment, what portion in total related to the accounting change?

I think you said it was $3.5 million or $3.4 million of additional OpEx for the first half.

So it is appropriate to annualize that and get the $7 million for the full-year for additional capitalized OpEx?

Roughly $0.05 for the year from that, Jordan.

$0.05 benefit?

Roughly, yes, I would multiply that by two.

And then in terms of the JV, again, we are in negotiations with a partner now, so I am reluctant to say too much.

Okay.

You can assume the cap rates are -- very attractive to us.

They will be significantly below our guidance for new acquisitions.

Right.

Because of the long-term leases and stability in those assets.

Jonathan Schildkraut, Evercore.

Thanks for giving us the extra color on the leases that occurred in July.

I was wondering if you might give us a little background there?

Maybe we can get a sense as to whether it was Turn-Key or Powered Base Building and if the rates were in line with what you saw in the second quarter?

Thanks.

Sure, yes, it -- the leases are almost entirely Turn-Key Flex or fully-fitted-out custom solutions that we will be building.

And in colo space that is fully fitted out colo space, and that is consistent with the trends we're seeing now, where we are doing a few Powered Based Building leases, but well over 90% I think of the deals we are doing now, are Turn-Key.

And rates being pretty consistent with what we have been doing, historically probably maybe a little bit higher in that case.

So, nice combination of existing customers, new customers, and seeing a lot of expansions in multiple sites, as we mentioned, around the trends with big data and cloud and hybrid cloud.

Vance Edelson, Morgan Stanley.

Just another question on July.

Could you quantify how much of July's strong leasing, in other words how much of that $19.5 million in rental revenue side, would you characterize as having been delayed from the second quarter versus what might just be ordinary July signings so to speak?

I'm just trying to get a feel for whether there is any acceleration in leasing in July versus what the monthly average throughout the second quarter was.

Yes, actually the great majority of what we achieved in the last three weeks were leases we expected to close by June 30, and spilled over.

There might be a $2 million of revenue, $1.5 million to $2 million that we would consider third-quarter deals.

And we expect our third quarter to meet our expectations in terms of leasing velocity.

So, we are very comfortable that we are on track.

It is hard to keep, in the course of business, to keep too specific dates and quarter-by-quarter.

So, it's -- as you can appreciate, it is often better to view things on a longer time frames, but the leasing velocity is very good, we think.

John Stewart, Green Street Advisors.

Bill, just a couple additional call follows on the JV.

First of all, the $350 million to $400 million amount that you referenced, is that the transaction size or is that proceeds?

And are you talking about a closer to the sale of 50% interest, or an 80% interest?

And last but not least, have you seen any sensitivity from your partner on pricing, given the recent move in rates?

So the $350 million is the total asset value.

We're looking at a 20/80 joint venture where we would be 20% and our partner would contribute 80%.

80% of that $350 million to $400 million would be coming back to us.

And we have seen no sensitivity as a result of the change in rates.

Tayo Okusanya, Jefferies & Company.

Congrats on a solid quarter, trying to get my hand around the outlook for lease commencements.

You've done about $53 million year-to-date.

You have about another $43 million of leases signed but haven't commenced.

Just thinking about the back half of the year and where you were last year at $135 million, how comfortable you feel with the ability to do better than that this year, given your outlook for the back half?

We are certainly on track to meet our budgets and our revenue expectations.

We will probably lagging a little bit from a timing perspective.

Especially with these leases that are falling over by three or four weeks, do have an impact in terms of timing.

But we are confident we will be in our guidance range.

That's helpful.

Thank you.

George Auerbach, ISI Group.

Mike, you mentioned that the leasing in the second quarter was consistent with new expectations for the year.

Can you just update us on your target for leasing commenced space here in 2013 and how that relates to what you achieved in 2012?

We are certainly on the lease signings, we are well ahead of where we were at this point in time in July of 2012.

I don't know off the top of my head how far ahead we are in terms of lease signings.

Will roughly $80 million in mid July-equates to the first three quarters of last year for signings.

So on signings we are --

2.5 months ahead.

Right, we are making very good progress on signings.

As I said that commencements have been delayed a little bit from our expectations, especially with the latest batch of signings in July, which is great, but they are a few weeks later than we anticipated.

So that will have a bit of an effect on the higher-end of commencements.

Vincent Chao, Deutsche Bank.

Just curious on the comments about the sales force initiatives, you mentioned one of the benefits being hopefully getting some shorter leasing cycles, there.

I'm just curious if -- just in relation to the comments about commencements or are you seeing any shortening in the leasing cycle today just as a result of changing business conditions are improving business conditions?

Not with our larger enterprise customers.

And for a variety of reasons these are large deployments for them and large internal budgets for their own IT deployment and their own costs, over and above the data center we are providing.

As you can imagine, there is more levels of approval now even for budgeted items within most organizations of substance that we're dealing with.

And we're doing more customization, as well.

With our Turn-Key Flex product, we're doing a lot of tailoring to the IT application requirements themselves, and customers' operating program.

So, that is taking some additional time as we go through the design and engineering process with our customers, for our Turn-Key Flex pod approach.

Bill Crow, Raymond James & Associates.

Two questions, Bill, any interest in using proceeds from the joint venture to buy back stock at the current price?

And then the second question is -- well let's just leave it there with a question.

Bill, that is one of the alternatives, for sure.

So, when we close the venture, will have to look at what our investment opportunities are with the Company, and depending upon investment opportunities we would either use all the proceeds to pay down the revolver.

Or the other alternative would be to make the use of proceeds leverage neutral, which is to say partially to retire debt and partially retire equity, in accordance with our pro forma capitalization.

And of course, we could do anything along that spectrum.

Jamie Feldman, Bank of America.

There is no response from that line.

Emmanuel Korchman, Citi.

Yes, it's Michael Bilerman again.

Bill, I was wondering maybe you can just explain a little bit more, what exactly when you went through the maintenance and the change in capitalization policy?

A, just really what the driver of the change was?

Two, I guess why you felt that, that wasn't really material, putting that in the press release and supplemental, and sort of forewarning people beforehand is given how much scrutiny CapEx overall has received and the materiality of it being $0.05?

And then lastly, from an FX perspective, I guess I'm surprised at the magnitude.

I know the US dollar has strengthened a lot, but just given the fact that you have local debt in a lot of these markets helping to offset some of the impact, I guess I'm surprised at the magnitude if you are really saying FX is a $0.05 hit?

I will start with the FX.

Michael, I think there must have been a misinterpretation there.

So I'm of the FX I think is probably $0.01 hit, at most maybe $0.02.

In terms of -- what was the question on the -- oh capitalization, so a little additional clarification on the capitalization.

So, we had -- previously we had been expensing all capital expenditures of $10,000 or less and today we are capitalizing what is appropriate to capitalize, down to any amount, which is really consistent with GAAP.

The $10,000 and lower policy I think was more or less a hold-over from our IPO days, when we had limited resources and there was a question of our ability to track, from a capitalization standpoint, expenditures of $10,000 or less.

And we just -- I honestly we did not consider $0.01 in the first quarter to be particularly material.

And it is really bringing ourselves in line with GAAP and what we see as the capitalization policies of most of our peers and other companies.

And we are still being fairly conservative.

The other change, on operating expenses, we were -- we started to expense operating expenses, recognize expenses prior to the cessation of the capitalization of interest, which was obviously not consistent.

So, now the operating expenses and the capitalization of interest line up.

And the split between those two is roughly 50/50 in terms of effect.

Dave Rodgers, Robert W Baird.

Mike, in your prepared comments, you talked about delayed leasing commencement over the course between now and through 2018.

You don't have to go through those again but maybe if you could break that down between stabilized assets, what is under construction and what needs to be started from a development perspective to deliver on those leases?

Yes, well, generally, I wasn't speaking anything beyond 2013.

So I wasn't projecting out beyond this year.

So I didn't want -- to make that clear.

And really the timing is not around so much around construction, in most markets, it is because we are continuing to deliver data center inventory, where we need it, both Powered Based Building and Turnkey and we can build a Powered Base Building very rapidly.

So it is really the timing, which I wouldn't say timing is longer, but we are still seeing pretty elongated discussions and planning with our larger customers, and that is one of the reasons why we also want to focus in addition on middle-market customers, where we might be able to move more rapidly and smooth out the lumpiness of our signings and commencements.

And the other thing, these transactions just don't follow hard and fast quarter-by-quarter rules.

They take the amount of time that the customer needs.

So, they are not really focused on quarterly completions themselves.

So, you will get these different deals extending, as long as we need to make sure that the customer is getting the right solution.

Steve Sakwa, ISI Group.

I want to clarify, Bill, so it sounds like you're having better leasing signings, but the commencements are a bit delayed.

So, the fact that guidance when up, I just want to be clear.

That is really all due to the capitalization policy change and not due to faster leasing?

And then secondly, you mentioned that tenants were taking space and in some of the out years, but I was surprised that tenants work committing to space in '16, '17, and '18 and I'm just trying to understand the thought process behind, I guess, the tenant committing the space effectively five years out and you're committing to space five years out.

Well the answer to the second question, Steve, is that we have a build-to-suit in one deal, that has some long pickups if you will where we are delivering space in the out years.

It's very big.

And it's a very large deal.

And the answer to the first question is yes, about $0.05 there is about $0.05 in the forecast that is related to the change in accounting policy.

And commencements, as Mike said, have been delayed which affects revenue recognition and that was an acquisition, and that would drive the guidance.

Jonathan Schildkraut, Evercore.

Just a follow-up on the offsets.

Were there any other offsets to the capitalization change, policy change, other than the FX?

Thanks.

There are ins and outs, Jonathan, that we would expect to -- the G&A might come in a little bit lower, OpEx might come in a little bit lower but it's no more than $0.01 or $0.02 around the edges.

And I think in looking at our overall guidance and projections, on the high-end, we think we have an opportunity to achieve additional leasing, as well as additional operational efficiencies.

So we are now looking at entirely at capitalization policies, as driving what we think could be our higher-end of our range.

Tayo Okusanya, Jefferies.

Yes just one quick follow-up around development.

The guidance is for $980 million of development deliveries.

From the supplemental you can get a sense of you've done about 400 square feet of deliveries year-to-date that we don't really have a dollar value behind that.

Could you give us a sense of how much dollar-wise you've delivered and how much is still to go?

And where that additional development for delivery is might come from, is it from the CIP pipeline?

I don't know if we have the dollar amount available.

We would have to get back to you on that.

Yes, we have a much we spend, but you can see on page 30 of the supplemental the construction progress by market breaks down the relative amount of activity in the different markets.

But which of these pieces are delivering in 2013 as part of your overall guidance?

I think overall we're delivering a total of them of a million square feet, a little more than that.

A lot of the capital deliveries are backend weighted in the year Tayo, that's when the project completions are.

And we are building up the Turn-Key components.

That does conclude the allotted time for our Q&A session for today.

I would like to turn the call back over to the speakers for closing remarks.

Thank you for your time, everyone, and your attention to the Company.

Much appreciated, and I want to congratulate everybody here on the Digital team for a terrific effort and continuing to deliver high level of service for our customers and very good consistent earnings for our shareholders.

Thank you very much, everybody.

Thank you for participating in today's conference.

You may now disconnect.