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Digital Realty Trust (NYSE:DLR)

Q2 2013 Earnings Call

July 26, 2013 1:00 pm ET

Executives

Pamela M. Garibaldi - Vice President of Investor Relations & Corporate Marketing

Michael F. Foust - Chief Executive Officer and Director

Arthur William Stein - Chief Financial Officer, Chief Investment Officer and Secretary

Analysts

Michael Bilerman - Citigroup Inc, Research Division

Gabriel Hilmoe - UBS Investment Bank, Research Division

Robert Stevenson - Macquarie Research

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Vance H. Edelson - Morgan Stanley, Research Division

John Stewart - Green Street Advisors, Inc., Research Division

Omotayo T. Okusanya - Jefferies LLC, Research Division

George D. Auerbach - ISI Group Inc., Research Division

Vincent Chao - Deutsche Bank AG, Research Division

William A. Crow - Raymond James & Associates, Inc., Research Division

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Steve Sakwa - ISI Group Inc., Research Division

Operator

Good afternoon, and welcome to the Digital Realty 2013 Second Quarter Earnings Call. My name is Mary Ann, and I will be facilitating the audio portion of today's interactive broadcast. [Operator Instructions] At this time, I would like to turn the show over to Pamela Garibaldi, Investor Relations of Digital Realty. You may begin.

Pamela M. Garibaldi

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 Investors 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, expects, 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 include statements related to rents to be received in future periods, 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 loan, 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, please 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 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 operation or FFO, adjusted funds from operation 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 in 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. [Operator Instructions] I will now turn the call over to Mike.

Michael F. Foust

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 activities and the 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 health care sectors, among others, often require large, multisite builds that deliver high-quality, long-term revenue for Digital Realty.

Looking forward, we're 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 and raising [ph] 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 revenue enhancement strategy by targeting mid-market customer segments within specific verticals selected for their growth potential. These targets will include companies that meet Digital's ideal customer profiles and as such, represent latent market demand and are positioned within verticals that represent higher probabilities of closure for Digital. Together, we're confident that the new strategic account management and mid-market strategies will capture incremental demand and provide us with a more diversified and predictable view toward 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 by the growth prospects from these initiatives and believe they further increase the high barriers to entry in our business.

During the second quarter, leases were signed representing $16 million of annualized GAAP rental revenue. And we're pleased to report that the remaining leases we expected to sign by June 30 have been complete since the quarter end. These additional lease signings totaled $19.6 million of annualized GAAP rental revenue, bringing the total combined total to approximately $35.6 million of annualized GAAP rental revenue. And this is in line with our original expectations and reflects level demand we're experiencing across our portfolio. It is important to note that with the exception of the one lease that was completed yesterday, the July signings are not included in 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 Ashburn, 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 foot, and that's on a GAAP basis, which includes 2 power expansions signed in the second quarter. Excluding the power expansions, the rates averaged $177 per square foot, up significantly from our rolling 4-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 to date, totals $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, '15 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 health care. Our unparalleled global footprint, which spans over 30 markets around the world, played a key role in capturing this demand. Markets where we experienced most activities 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 at year 1 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 prospect pipeline for new facilities stands at 1.8 million square feet, down from last quarter, largely due to the volume of leases we signed since the end of the first quarter. This figure represents current prospects in our sales funnel to whom we've made proposals and which we believe have 30% or greater likelihood 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 application. Furthermore, the move to the cloud is driving a transition to internal cloud platforms that answer the data center space and power needed by enterprises, while they continue to support their legacy environments. To the degree to which growth is incurring in the public cloud and hybrid cloud spaces, we are also seeing positive impact to our business from both the growth of cloud providers, whom we count as customers, as well as enterprise connectivity to multiple cloud service providers, which can now be supported by our new global network ecosystem.

Turning now to our re-leasing 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 colocation renewal rates were up 3.6% on a cash basis and up 14.7% on a GAAP basis. These re-leasing spreads were stronger than we projected. And for the remainder of the 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 re-leasing 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 re-leasing 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 nontechnical space, data center occupancy remains 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 U.S. markets, we're tracking a 12.8 megawatt shortfall of space nationwide overall. Specifically, we are enthusiastic about the dynamics we are seeing in Northern Virginia, 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 their real estate assets while partnering with an operator that can support their ongoing data center operations. In addition, we acquired development sites to add future inventory in top global markets, where our customers need to locate their data center operations. During the second quarter, we added 1 development site and 2 income 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 6-building complex in Austin that is home to several data center network providers and other technology firms.

Excluding the development site in Metro London, the average going-in cash cap rate for the second quarter transaction 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, roundup development sites, as well as sale-leaseback transactions. This excludes larger portfolios that we continue to track.

Pricing in the U.S. has risen rapidly for stabilized long-term lease properties in major markets. Cap rates in the high 5s to mid-6s are becoming the norm, largely driven by core institutional investors and a couple of nontraded REITs. While this is a great reflection of the true NAV of our digital portfolio, it does make purchasing income properties become more challenging. However, with our operating, leasing and development platforms, we are quite competitive in situations were some in-place leases have less than 7 or 10 years remaining or there might be a value-add component that we can underwrite as a developer of data centers.

I would now like to provide a brief update on the progress we are making on our digital ecosystem connectivity initiative. Our digital Ashburn, Virginia and Richardson, Texas campuses and our London sites 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 U.S. deployment expectations by year-end 2013. In addition, at our North American locations, we can now directly provide customers with IP network services, greatly facilitating new data center deployments and expansions.

In fact, we're already seeing results, including from our London deployment. We were able to expand a subsidiary of a Fortune 100 customer 2 sites at Woking and Redhill, in large part due to the site's 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 have been controlling in support of their heavy content distribution needs between the 2 sites. In addition, the 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 the 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 to our customers as they continue to embrace new technologies and compete in a globalized economy. More importantly, we believe that our talented professional team, superior delivery and 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.

Arthur William Stein

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 supplementary 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 costs totaling $10,000 or less, including those incurred in the first quarter. Previously, these costs were being expensed. In addition, we conformed [ph] our policy covering construction period offering 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 nondata 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 nonrecurring capital expenditures. These modifications have been made to further clarify how we define capital expenditures.

On Page 10 of the supplemental, capitalizing 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 and 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 consists 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 earnout, which were partially offset by $1.5 million of transaction expenses and a $500,000 write-off of deferred financing costs associated with the payoff of the mortgage at the Clonshaugh property in Ireland. As noted in the past, a fair value assessment of a 3-year Sentrum earnout obligation is required for each reporting period and is likely to result in some quarterly earnings fluctuations. Changes in fair value are considered noncore 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 earnout.

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 an adjustment related to the Sentrum earnout. During the quarter, repairs and maintenance expense was $22.3 million, down from $23.6 million in the first quarter, primarily due to 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 noncash 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 the 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 earnout, the NOI margin will 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 noncash 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 be $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 in 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're looking to take advantage of improved bank pricing in the loan market in light of the overall of 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're 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 the new source of capital at a cost 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 to $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 immediate liquidity, including funds that can be drawn on our existing global revolving 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. 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've paid off 3 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 $474 and -- $4.74 to $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, 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 the 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?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Emmanuel Korchman of Citi.

Michael Bilerman - Citigroup Inc, Research Division

It's Michael Bilerman here with Manny. Bill, I just wanted to just dive into the accounting things just for a moment. So you didn't restate first quarter results at all from FFO, you just adjusted FFO for the CapEx disclosure. But I'm more concerned about sort of earnings. So this $3.4 million change is effectively that $0.025 all in the second quarter?

Arthur William Stein

That's right. So roughly $0.01 of that would have been in the first quarter.

Operator

Your next question comes from the line of Gabe Hilmoe of UBS.

Gabriel Hilmoe - UBS Investment Bank, Research Division

Bill, just a question on the joint venture. I guess, can you talk a little bit about potential size, who the -- what kind of partner might that be? And is this, in terms of the deal, like one large deal? Or is this kind of a staggered transaction that could close over a period of time?

Arthur William Stein

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'll say, between $350 million and $400 million. It's one institutional investor. It's, I believe, a highly regarded institutional investor in the real estate space. And right now, we're expecting just -- I think I said one close, and that will -- I expect that will be in the third quarter.

Operator

Your next question comes from the line of Rob Stevenson of Macquarie.

Robert Stevenson - Macquarie Research

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?

Michael F. Foust

Sure. I'd be happy to. So we're seeing new opportunities in Japan. We expect to be closing soon on a development site outside of Osaka. We're 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, we'll see where that goes. And then we're seeing a pickup in leasing now in Singapore. It was a little slow for a couple of quarters, and now we're seeing requirements pick up in that market, which we know is going to be a very strong market ongoing for. 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.

Operator

Your next question comes from the line of Jonathan Atkin of RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Yes. So I was interested in what you're seeing in terms of competitive behavior. You talked a little bit about supply being scarce in a number of markets, the competitive behavior, and when deals go away from you, what's the most common reason? And then maybe just an update on the connectivity strategy. You mentioned where you hoped to be by yearend. But if you could elaborate on your ability to fully pursue that business in the U.S., given some of the exclusivity that Telx has to offer the interconnects within several of your sites.

Michael F. Foust

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's 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're 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 peering points, whether they're at in an 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'll be driving more connectivity and Internet traffic back to these various peering points, whether they're in a Digital building or in another location. I'm sorry, the other question. Sorry, when we're seeing competitors -- competitor pricing. Typically, when a deal is done away with us, it's 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 1 or 2 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, 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. And that's very powerful as well as having fully dedicated UPS and cooling to the suites. And having that dedicated backup power and cooling is a very important criteria, especially among the corporate enterprise financial services groups.

Operator

Your next question comes from the line of Jordan Sadler, KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

A couple of questions. One question, 2 parts. So on the potential joint venture, the size was helpful. Should we expect pricing to be the range, Mike, that you offered up that you're seeing pricing in the private market, high 5s and mid-6s? And 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 is it appropriate to annualize that, get to $7 million for the full year essentially of additional capitalized OpEx?

Arthur William Stein

Yes. Roughly $0.05 for the year from that, Jordan.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

$0.05 benefit?

Arthur William Stein

Roughly. Yes, I'd qualify [ph] that. And then in terms of the JV again, we're in negotiations with a partner now. So I'm reluctant to say too much. You can assume the cap rates are -- they'll be in rates that are attractive to us.

Michael F. Foust

Yes. I mean, they'll be significantly below our guidance for new acquisitions because of the long-term leases and stability in those assets.

Operator

Your next question comes from the line of Jonathan Schildkraut of Evercore.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

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

Michael F. Foust

Sure. Yes, it's a -- the leases were almost entirely Turn-Key Flex or fully fitted-out Custom Solutions that we'll be building. And in colo space, that's fully fitted-out colo space. And that's consistent with the trends we're seeing now. We are doing a few Powered Base Building leases but well over 90%. I think of the deals we're doing now are Turn-Key. And rates being pretty consistent with what we've been doing historically, probably be a little higher in that case. So a nice combination of existing customers, new customers and seeing a lot of expansion in multiple sites, as we mentioned around trends with big data and cloud and hybrid cloud.

Operator

Your next question comes from the line of Vance Edelson of Morgan Stanley.

Vance H. Edelson - Morgan Stanley, Research Division

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 signed 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's any acceleration in leasing in July versus what the monthly average throughout the second quarter was.

Michael F. Foust

Yes. Actually the great, great majority of what we achieved in the last 3 weeks were leases we expected to close by June 30 and spilled over. There might be a couple million dollars of revenue, $1.5 million to a couple million that we would consider third quarter deals. And we expect to third quarter to meet our expectations in terms of leasing velocity. So we're very comfortable that we're on track. It's hard to keep in the course of business to keep too specific dates and quarter-by-quarter. And so it's -- as you all can appreciate it, it's often better to view things on longer timeframes. But yes, the leasing velocity is very good, we think.

Operator

Your next question comes from the line of John Stewart, Green Street Advisors.

John Stewart - Green Street Advisors, Inc., Research Division

Bill, just a couple additional follow-ups 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 closer to the sale of a 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?

Arthur William Stein

So the $350 million is the total asset value. We are looking at 20-80 joint venture, where we'd be 20% and our partner would contribute 80%. So 80% of that $350 million to $400 million will be coming back to us. And we've seen no sensitivity as a result of those changing rates.

Operator

Your next question comes from the line of Tayo Okusanya of Jefferies.

Omotayo T. Okusanya - Jefferies LLC, Research Division

I'm trying to get my hands 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 kind of thinking about the back half of the year and where you were last year, you had $135 million, how comfortable you feel with the ability to kind of do better than that this year, given your outlook for the back half.

Michael F. Foust

We're certainly on track -- probably maybe even -- we're certainly on track to meet our budgets and our revenue expectations. We're probably lagging a little bit from a timing perspective, especially with these leases that are falling over by 3 or 4 weeks, do have an impact in terms of timing. But I mean, we're confident we'll be in our guidance range.

Operator

Your next question comes from the line of George Auerbach of ISI Group.

George D. Auerbach - ISI Group Inc., Research Division

Mike, you mentioned that the leasing in the second quarter was consistent with kind of the new expectations for the year. I guess, can you just update us on the -- your sort of targets for leasing commenced space here in the 2013 and how that relates to what you achieved in 2012?

Michael F. Foust

We're certainly, on the lease signings, we're 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.

Arthur William Stein

Roughly $80 million into mid-July equates to, I think, the first 3 quarters of last year for signings.

Michael F. Foust

So on signings, we're...

Arthur William Stein

2.5 months ahead.

Michael F. Foust

Right. So we're making very good progress on signings. As I said, the commencements have been delayed a little bit from our expectations, especially with the latest batch of signings in July, which is great. But they're a few weeks later than we anticipated. So that will have a bit of an effect on the higher end of commencements.

Operator

Your next question comes from the line of Vincent Chao of Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

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, are you -- and just in relation to the comments about the commencements, but are you seeing any shortening in the leasing cycle today just as a result of changing business conditions or improving business conditions?

Michael F. Foust

Not with our larger enterprise customers, and for a variety reasons there. These are large deployments for them and in large internal budgets for their own IT deployment and their own costs over and above the data center we're providing. As you can imagine, there's 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's taking some additional time as we go through the design and engineering project with our -- process with our customers for our Turn-Key Flex POD approach.

Operator

Your next question comes from the line of Bill Crow of Raymond James & Associates.

William A. Crow - Raymond James & Associates, Inc., Research Division

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 -- well, let's just leave it there with that question.

Arthur William Stein

Bill, that's one of the alternatives, for sure. So when we close the venture, we'll have to look at what our investment opportunities are at 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 to retire equity in accordance with our pro forma capitalization. And of course, we could do anything along that spectrum.

Operator

Your next question comes from the line of Jamie Feldman of Bank of America. There is no response from that line. Your next question comes from the line of Emmanuel Korchman, Citi.

Michael Bilerman - Citigroup Inc, Research Division

Yes, it's Michael Bilerman again. Bill, I was wondering maybe you can just explain a little bit more sort of 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 of putting that in the press release and the supplemental as sort of forewarning people beforehand just given how much scrutiny CapEx overall has received and the materiality of that being $0.05. And then lastly, from an FX perspective, I guess, I'm surprised at the magnitude. I know the U.S. 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 of you really saying in FX is a $0.05 hit.

Arthur William Stein

I'll start with the FX, Michael. I think there must have been a misinterpretation there. So the FX is, I think, probably $0.01 hit at most, maybe $0.02. In terms of the -- what was the question on the -- oh, capitalization. So a little additional clarification on the capitalization. So we had -- and previously, we had been expensing all capital expenditures of $10,000 or less. And today, we are capitalizing what's 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 holdover from our IPO days. $10,000 was a holdover 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 -- honestly, we didn't consider $0.01 in the first quarter to be particularly material.

Michael F. Foust

That's really to bring ourselves in line with GAAP and what we see as the capitalization policies of most of our peers and other companies. But we're still being fairly conservative.

Arthur William Stein

Yes. I mean, 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 is obviously not consistent. So now the operating expenses and the capitalization of interest line up. And the split between those 2 was roughly 50-50 in terms of effect.

Operator

Your next question comes from the line of Dave Rodgers of Robert W. Baird.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

So Mike, in your prepared comments, I know you talked about delayed leasing commencements over the course of between now and, I think, through 2018. You don't have to go through those again, but maybe if you could break them down between stabilized assets, what's under construction and what needs to be started from a development perspective to deliver on those leases.

Michael F. Foust

Yes. Well, generally, I wasn't speaking anything beyond 2013. So I wasn't projecting out beyond this year. So I do want to make that clear. And really the timing is not around so much around construction in most markets. It's because we're continuing to deliver data center inventory where we need it, both Powered Base Building and Turn-Key, and we can build a Powered Base Building very rapidly. So it's really the timing, which I wouldn't say timing is longer, but we're still seeing pretty elongated discussions and planning with our larger customers. And that's 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're not really focused on quarterly completions themselves. So you'll get these different deals extending as long as we need to make sure that the customer is getting the right solution.

Operator

Your next question comes from the line of Steve Sakwa, ISI Group.

Steve Sakwa - ISI Group Inc., Research Division

I guess, I just 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 went up, I just want to be clear, that's really all due to the capitalization policy change and not due to faster leasing? And then secondly, you mentioned that tenants were taking space in some of the outyears, but I was surprised that tenants were committing to space to '16, '17 and '18. And I'm just trying to understand the thought process behind, I guess, the tenant committing to space effectively 5 years out and your committing to space 5 years out.

Arthur William Stein

So the answer to the second question, Steve, is that we have a build-to-suit one deal that has some long pickups, if you will, where we're delivering space in the outyears.

Michael F. Foust

And very big.

Arthur William Stein

Yes, it's a very large deal. And answer to the first question is yes. The -- about a $0.05. There's $0.05 in the forecast that's related to the change in accounting policy. And commencements, as Mike said, have been delayed, which affects revenue recognition and acquisition. And that would drive the guidance.

Operator

Your next question comes from the line of Jonathan Schildkraut of Evercore.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Yes. Just a follow-up on the offsets. Were there any other offsets to the capitalization change, policy change other than the FX?

Arthur William Stein

I mean, 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.

Michael F. Foust

And I think 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're now looking entirely at capitalization policy as driving what we think could be our higher end of our range.

Operator

Your next question comes from the line of Tayo Okusanya of Jefferies.

Omotayo T. Okusanya - Jefferies LLC, Research Division

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. But 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 deliveries meant to come from the CIP [ph] pipeline?

Michael F. Foust

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

Arthur William Stein

We'd have to get back to you on that.

Michael F. Foust

Yes. I mean, we have how much we spent. But you can see on Page 30 of the supplemental, the construction in progress by market breaks down the relative amount of activity in the different markets.

Omotayo T. Okusanya - Jefferies LLC, Research Division

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

Michael F. Foust

I think, overall, we're delivering about a total of them of 1 million square feet, a little more than that.

Arthur William Stein

A lot of the capital deliveries is back end-weighted in the year, Tayo. That's when the project completions are.

Michael F. Foust

And when we're building out the Turn-Key components.

Operator

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.

Michael F. Foust

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 on continuing to deliver a high level of service for our customers and very good, consistent earnings for our shareholders. Thank you very much, everybody.

Operator

Thank you for participating in today's conference. You may now disconnect.

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