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Digital Realty Trust (NYSE:DLR)

Q3 2011 Earnings Call

October 27, 2011 1:00 pm ET

Executives

Michael F. Foust - Chief Executive Officer and Director

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

A. William Stein - Chief Financial Officer, Chief Investment Officer and Secretary

Analysts

Emmanuel Korchman

Ross T. Nussbaum - UBS Investment Bank, Research Division

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

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

James C. Feldman - BofA Merrill Lynch, Research Division

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Vincent Chao - Deutsche Bank AG, Research Division

Michael Bilerman - Citigroup Inc, Research Division

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

Lukas Hartwich - Green Street Advisors, Inc., Research Division

David Rodgers - RBC Capital Markets, LLC, Research Division

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Mitchell B. Germain - JMP Securities LLC, Research Division

Operator

Good afternoon. My name is Kerry, and I will be your conference operator today. At this time, I would like to welcome everyone to the Digital Realty Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the conference over to Ms. Pamela Garibaldi, Vice President of Investor Relations and Corporate Marketing. Thank you. Ms. Garibaldi, you may begin your conference.

Pamela M. Garibaldi

Thank you. Good morning and good afternoon to everyone. By now, you should've received a copy of the Digital Realty earnings press release. If you've not, you can access one in the Investor Relations section of Digital's website at www.digitalrealty.com or you may call (415) 738-6500 to request a copy.

Before I begin, I'd like to remind everyone that the management of Digital Realty may make forward-looking statements on this call that are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially from expectations.

You can identify forward-looking statements by the use of forward-looking terminology such as believes, expects, may, will, should, pro forma or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans, intentions, future events or trends or discussions that do not relate solely to historical matters, including such statements that relate to rents to be received in future periods and lease terms, development and redevelopment plans, supply and demand for data center space, targeted returns and cap rates, acquisitions activities, Capital Markets activities, the expanded revolving credit facility, and the company's future financial and other results, including the company's 2011 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, 2010, and subsequent filings with the SEC including the company's quarterly reports on Form 10-Q. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Additionally, this call will contain non-GAAP financial information including funds from operations or FFO, adjusted funds from operations or AFFO, core funds from operations, earnings before interest, taxes, depreciation and amortization or EBITDA, adjusted EBITDA, same-store net operating income or NOI and same-store cash NOI.

Digital Realty is providing this information as a supplement to information prepared in accordance with Generally Accepted Accounting Principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the company's supplemental operating and financial data package for the third quarter of 2011 furnished to the SEC, and this information is available on the company's website at www.digitalrealty.com.

Now I'd like to introduce Michael Foust, CEO; and Bill Stein, CFO and Chief Investment Officer. Following management's brief 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.

Michael F. Foust

Thank you, Pamela. Welcome to the call, everyone. My comments today will focus on providing additional color around our leasing results and our recent acquisitions activity. I will also briefly discuss details of our Build-to-Suit program and its progress thus far.

My concluding remarks will include a review of the current supply-demand dynamics in Santa Clara, New Jersey, as well as an overview of our construction activity. Following my remarks I'll turn the call over to Bill who will review our strong financial performance and revised 2011 guidance, we'll discuss our financial strategy, and the key role it plays in funding our growth.

The market for DLR's data center solutions continues to be very strong with good demand from providers of cloud services, collocation, network peering and financial services. As reported, our leasing results for the third quarter were in line with expectations and new leases will generate approximately $22 million of annualized GAAP revenue.

While not as strong as our exceptional second quarter results, we continue to see steady demand from customers for our suite of data center solutions. We're expanding existing customers in multiple markets including SoftLayer and IBM in Singapore, Net2EZ in L.A., as well as the recently announced new Build-to-Suit for Equinix in Seattle. We also signed new customers, such as the Build-to-Suit for NetApp in Hillsborough, Oregon, a suburb of Portland.

We have a good funnel of prospects under negotiation and expect to meet our projections for new leasing in 2011. We believe that our strategy of offering the market a variety of flexible solutions that are truly customer-driven will continue to deliver strong results for our shareholders.

Relatively long lease terms are the norm. The average lease terms for all leases signed in third quarter was 123 months over 10 years. For turnkey space the average lease term was 110 months, or a little over 9 years. These lease terms have trended toward the high end of our average target range of 7 to 10 years, and we believe this reflects the quality of our data center solutions and that customers’ confidence in our long-term commitment to them.

For the Build-to-Suit transaction, initial lease terms are typically between 10 and 15 years. We have a good leasing backlog for the balance of 2011, totaling nearly 270,000 square feet and $21.8 million of annual GAAP rent. This includes the 153,000 square-foot Build-to-Suit with Equinix in Northern Virginia that's scheduled to commence in the fourth quarter. We have strong momentum heading into next year, as well. The backlog at the end of the third quarter for leases commencing in 2012 is over 226,000 square feet, representing almost $37 million of annual GAAP rent.

Our acquisitions activity is picking up in all regions. As mentioned on our last call during the third quarter, we expanded our Asia-Pacific footprint, entering the Australian market with the closing of a development site with 20 megawatts of allocated power in Sydney, Australia. This site was acquired for AUD $10.1 million, approximately USD $10.9 million. We have secure planning permission to develop 2 100,000 square-foot buildings, each delivering at least 6 megawatts of IT load. Construction on the first building began this month.

There is a significant lack of supply for enterprise solutions in the market and customer interest in the site is good. We followed up with a second transaction in Australia, with the acquisition of a development site in Melbourne for AUD $4.1 million, that's about USD $4.3 million. We are already in negotiations with the financial services firm for the first 60,000 square-foot building. We're confident that our commitment to the Sydney and Melbourne markets will lead to a significant presence in Australia for DLR.

In terms of our plans to further expand in the Asia Pac region, we continue to explore development opportunities in Hong Kong where we see very attractive corporate demand from new and existing multinational customer of ours. While it remains a very challenging market to enter we have interesting prospects that we're working diligently to secure.

In Europe, we closed on the 130,000 square-foot redevelopment property in suburban London that we acquired during the quarter and discussed in our last call. In spite of the challenges in the European Capital Markets, demand in London from international financial services firms is good and we are in discussions with interested parties already on this project.

In addition, we closed this week on another development site in Dublin, Ireland for a purchase price of EUR 4.5 million. There's quite a bit of data center activity in London -- I'm sorry, in Dublin by international firms. We are virtually 100% leased in Dublin, so we want to have the ability to deliver inventory for the new requirements that we see emerging.

Consistent with our strategy, these acquisitions provide DLR with future inventory enabling us to bring new products online incrementally to meet visible customer demand in our key European markets, while maintaining our investment discipline. We also completed the acquisition of a 69,000 square-foot data center facility in Sacramento for a purchase price of $30 million. The facility is fully leased on a long-term basis to a quality data center services tenant, and will contribute approximately $3.3 million of annualized GAAP rental revenue.

As we mentioned on previous calls, the market for acquiring income-producing data center assets is somewhat limited, which is reflected in our revised guidance assumptions for the year. However, we do expect to close on over $200 million of income properties in 2011 that would generate attractive risk adjusted returns for our shareholders.

Turning to our Build-to-Suit program, during the quarter we acquired the first of 2 development sites in the Pacific Northwest. The first site was acquired for $1.6 million in conjunction with the Build-to-Suit agreement with NetApp to lease a 58,000-foot facility. It is located in the Hillsborough Oregon enterprise zone, approximately 18 miles west of Portland. Hillsborough is the home to numerous high-tech and clean tech manufacturing companies and emerging data centers.

In addition to the favorable tax treatment offered by the enterprise zones, the development will benefit from the mild Northwest Oregon climate. This is ideal for air site economization, which uses the outside air to cool the data center, resulting in lower overall power costs. All of these attributes were important considerations for NetApp as we worked with them during the site selection process. The second project in Northwest, which closed in October, is located in downtown Seattle. The redeveloped site for a 50,000 square-foot data center was acquired in a joint venture partnership with Clise Properties, our JV partner in the adjacent Westin Building.

In conjunction with the acquisition, we signed a long-term lease agreement with Equinix for the entire facility. And finally, during the third quarter we signed a Build-to-Suit agreement with an existing customer at one of our Silicon Valley properties. The project expands the building's existing footprint by approximately 40,000 square feet, with completion schedules for the end of first quarter of 2012.

As reflected in our results this quarter, we are expanding our Build-to-Suit program to more broadly address the trend for corporate enterprises and IT services companies to outsource their data center facilities to DLR. This option allows companies to invest their capital in growing their businesses while leveraging our real estate and data center design and construction expertise, as well as our supply chain and financial resources.

Though challenging, we believe that over time we can increase our market share by offering a robust Build-to-Suit program along with our other flexible data center solutions. As to return expectations for the Build-to-Suit program, we are targeting a return on investment range of approximately 9% to 11% on an unlevered basis, which we believe is consistent with our philosophy on risk-adjusted returns. This range falls between our target cash cap rates for more stabilized assets of between 8% and 9%, and our general spec development returns projected to be 11% to 14% upon stabilization.

As stated in our leasing press release, we had good renewal activity, rolling over approximately 646,000 square feet of space resulting in a healthy 16.9% increase in GAAP rents. The majority of the renewals consisted of approximately 74,000 feet of turnkey data center renewed, which resulted in a 7.6% increase on a GAAP basis, and a small 2% decrease on a first year cash basis. And this will be made up typically in the second year with our usual rent bumps in the leases. In addition, we renewed 557,000 square feet of Powered Base Building, which renewed for a 32% increase on a GAAP basis and a 4% increase on a cash basis.

Center retention was very strong, 91% on a square foot basis for turnkey leases. On a revenue basis, turnkey leases renewed at approximately 99% of GAAP or 90% of cash rents with an average lease term of over 66 months.

Over 97% of expiring Powered Base Building space was renewed during the quarter at 120% of GAAP rents or over 94% of cash rental revenues with an average lease term of over 83 months. Across all of our market, we see active demand for new facilities. We're currently engaged with potential customers representing over 2.1 million square feet of new requirements, which is consistent with what we reported in our last call. This identified 2.1 million square feet compares to a much less 1.4 million square feet identified at year-end 2010, so we've seen over the last 10 months, quite a buildup of potential new requirements across our markets.

Turning to a couple of individual markets. In New Jersey, on an aggregate basis, we're tracking over 42 megawatts of demand plus nearly 33 megawatts of earlier stage opportunities. We believe that the increase in demand over last quarter reflects the pent up demand from financial services as well as system integrators and managed services and cloud providers that support financials and other large corporates. This compares to approximately 24 megawatts of available built out supply. At DLR, our New Jersey financial exposure is relatively small. We currently have 2 turnkey pods built or about 2.2 megawatts currently available of fully fitted-out space.

Aside from a 5,600 square-foot lease that we signed at our Piscataway property, to our knowledge no significant wholesale data center leases were signed in the third quarter. We estimate that DLR represents approximately 68% of the 16 megawatts of supply that we believe the New Jersey market has absorbed year-to-date.

In Silicon Valley, the market also appears to be in equilibrium. On an aggregate basis we're tracking nearly 26 megawatts of demand compared to 27 megawatts of currently available built out supply. Year-to-date we estimate that the market has absorbed approximately 29 megawatts of supply, and that includes a 40,000 square-foot 3 megawatts Build-to-Suit requirement we signed during the quarter.

As of New Jersey, our financial exposure at present is very manageable. We currently have 0.5 ton available in our Alfred Street property and are at conclusion on 2 turnkey pods for a total near-term availability of 2.8 megawatts in Santa Clara. Year-to-date, we estimate DLR represented approximately 16% or 14.5 megawatts of these Silicon Valley absorption. Portfolio occupancy was steady at 93.7% in the third quarter compared to 93.9% in the second quarter. This very small decrease was primarily due to new turnkey data center space that was delivered during the third quarter.

Approximately 53,000 square feet of the turnkey space that was delivered, has been leased, but not yet commenced. It's important to note that the amount of space actually under lease in the portfolio increased by 244,000 square feet in the third quarter.

Same-store occupancy remained steady at 94.2% in the third quarter. Same-store NOI was relatively unchanged from the previous quarter at $132.6 million. 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 a $119.6 million in the second quarter -- I'm sorry, in the third quarter, $119.6 million in the third quarter, up slightly from $118.6 million in the second quarter.

We continue our robust construction program delivering new products to meet demand in the U.S., in Europe and in Asia Pac. During the quarter we completed over 226,000 square feet of data center space. This consists of nearly 156,000 feet of turnkey space that was over 78% leased at completion, and 15,000 square feet of PBB, Power Based Building space, that was over 86% leased. We also completed construction and delivered a 56,000 square-foot Build-to-Suit project in Amsterdam that is 100% leased with Terremark.

At quarter end, we're under construction on turnkey space totaling over 350,000 square feet, including 229,000 square feet in the U.S., nearly 15,000 square feet in Europe, and approximately 106,000 square feet in Singapore, which has been a very active market for us. Approximately 16% of this space overall has been pre-leased. For Power Base space, we're under construction on just shy of 400,000 square feet in the U.S, in Europe we had about 148,000 square feet of PBB space under construction and this includes the new Chessington redevelopment property I mentioned earlier of 130,000 square feet.

Combining the U.S. and Europe, approximately 3% of the PBB space is pre-leased, which is to be expected. Lastly, we have approximately 251,000 square feet of Build-to-Suit space under construction in the U.S., which is 100% leased, including preconstruction work and common building improvements, the total construction work in progress at the quarter end was $173 million. The estimated cost to complete the ongoing September 30 work in progress is $468 million.

So we think we're running on all cylinders here and in a very, very good position to continue to deliver our data center solutions for our customers across multiple markets that will continue to drive good growth for our company. This concludes my prepared remarks and now, I'd like to turn the call over to our CFO, Bill Stein.

A. William Stein

Thank you, Mike. Good morning and good afternoon, everyone. I will begin by reviewing our financial strategy and year-to-date capital markets activities and then briefly discuss our financial performance and revised guidance for the year.

In anticipation of ongoing challenges in the global economy, we closely monitor the Capital Markets and executed during narrow windows in the third quarter to access attractively priced capital. In addition as reported in today's earnings release, we are in the process of closing a $1.5 billion unsecured, multicurrency revolving credit facility, which will double the size of the current $750 million facility that is scheduled to expire next August.

We initiated efforts to modify the facility this year in response to deteriorating market conditions emanating from the sovereign debt crisis in Europe. In addition, we saw to substantially increase the borrowing capacity to accommodate our growing global investment program and to provide immediate liquidity for potential acquisitions that may arise from the diminishing availability of capital for Commercial Real Estate in general.

Consistent with the current facility, cap rates will remain at existing levels. Key modifications to the upsides facility include covenant levels that are adjusted to be consistent with other BBB rated REITs, and guarantees which are no longer required from subsidiaries. A $1.5 billion facility also includes the ability to borrow in U.S., Canadian, Singapore, Australian, and Hong Kong dollars, as well as euro, pound sterling, Swiss franc and Japanese yen denominations.

Excluding the new revolving credit facility year-to-date, we've sourced over $1.2 billion of capital, including $615 million since last quarter. These activities consisted of securing a $100 million U.S. dollar equivalent of Asia Pac revolving credit facility with a USD $100 million equivalent of accordion and the ability to borrow in Singapore and Australian dollars.

This facility is designed to act as a bridge to fund our development activity in these markets until the expanded revolver is finalized. A 7% Series E perpetual preferred offering of 11.5 million shares in September raising net proceeds of $277.4 million. Our at the market equity distribution program, which generated net proceeds during the third quarter of approximately $238 million from the issuance of approximately 4.1 million shares at an average price of $58.38.

We currently have a $160 million of availability remaining on our current ATM program. While maintaining a strong balance sheet, we reduced our overall cost of capital by exchanging the remaining $48.3 million principal balance with 4 1/8% exchangeable senior debentures due 2026 for $48.3 million for cash, and approximately 716,000 shares of common stock.

We've also converted year-to-date approximately 1,874,000 shares of Series C convertible preferred stock, with a liquidation preference value of $486.8 million into 1 million newly issued common shares at the request of voters pursuant to the terms of the Series C convertible preferred stock. This comprised approximately 26.8% of the Series C preferred stock outstanding at December 31, 2010.

Additionally, we have converted year-to-date approximately 5,933,000 shares of the Series D convertible preferred stock, with a liquidation preference of $148.3 million into 3,639,000 newly issued common shares at the request of owners pursuant to the terms of the series D convertible preferred stock. This comprised 43% of the Series D preferred stock outstanding at year-end 2010.

As of the end of the day yesterday, the balance on our $750 million credit facility and our $100 million Asia Pac facility was $139.2 million net of unrestricted cash. In the fourth quarter of 2011, we had $3.8 million of principal amortization remaining and no debt maturing. In 2012, excluding the revolving credit facility, and assuming extension options are exercised, we have approximately $157 million of ongoing principal amortization and debt maturities on secured debt, which we currently plan to pay off with the expanded revolver.

Our net debt to adjusted EBITDA ratio was 4.5x at quarter end, down from 4.9x at the end of the second quarter. This reduction is due to the pay down of our revolving credit facility with proceeds from the Series E preferred offering and additional ATM issuance during the quarter. Our GAAP fixed charge ratio was 3.4x at the end of the third quarter, up from 3.2x in the last quarter.

Let me now turn to the quarter’s financial results. As stated in today's earnings release, third quarter 2011 FFO of $1.01 per diluted share was down 1% from the second quarter 2011 FFO of $1.02. The decrease is primarily due to $3.6 million of transaction expenses associated with the acquisition of a redevelopment site in London and other acquisitions-related activity. And to the additional 4.1 million shares issued through our ATM program.

These expenses were partially offset by a nominal lease termination fee of $600,000 and $1.9 million in foreign exchange transaction gains associated with exchange rate movements on the euro and British pound sterling draws on our revolving credit facilities. The foreign exchange gains are shown in the interest and other income line item.

FFO on a diluted basis was $121.3 million in the third quarter of 2011, an increase from $119.6 million in the second quarter of 2011. After adjusting for items that do not represent ongoing expenses or revenue streams, third quarter 2011 core FFO was approximately 1.1 million higher than reported FFO or $1.02 per diluted share in unit. This is unchanged for the second quarter, and up 13.3% from third quarter 2010 FFO of $0.90 per diluted share and unit.

Adjusted Funds from Operations or AFFO for the third quarter of 2011 was $92.5 million, and was also unchanged from the second quarter. The diluted FFO payout ratio for the third quarter 2011 was 81%, up from 79.1% in the last quarter. EBITDA adjusted for preferred dividends and noncontrolling interest was $154.3 million for the third quarter of 2011, slightly down from $155 million in the second quarter of 2011, and up 17% from $131.9 million in the third quarter of 2010.

Turning to the income statement. Our digital design services formally known as POD Architectural Services, had construction management revenues of $9.4 million and expenses of $7.4 million for the quarter, which netted to an earned fee of $2 million. Due to an overlap of 2 additional contracts that commenced during the quarter along with an existing contract near completion, we recognize fees at a higher level in the quarter and we expect to recognize on a going forward basis.

Rental property operating and maintenance expense was $82.2 million in the third quarter, up 13.7% from $72.3 million in the second quarter. This increase was primarily due to expenses associated with new product coming online for future growth, and the seasonal increase in power consumption across the portfolio during the summer months. This increase was partially offset by higher tenant reimbursements.

In response to investor inquiries, we would also like to address the impact of the Solyndra bankruptcy and lease at our Fremont, California property. As of today, Solyndra is current on its rent, which is approximately $4.1 million on an annualized basis. We also have a $4.5 million letter of credit, which secures the rent obligation.

We would also like to bring your attention to the single tenant lease with a large Internet company at our Atlanta property that was scheduled to expire at the end of this year. When we acquired the asset in 2006, we attributed a portion of the purchase price to an intangible liability that has been amortized to rental revenue over the original lease term consistent with required purchase accounting rules. This liability will be fully amortized at the end of this year concurrent with the expiration of the original lease term. As a result, we estimate a reduction in non-cash rental revenue of approximately $3 million in 2012.

We would also like to note that the customer exercised its five-year fixed-rate renewal option in the third quarter. This lease and its option rights were negotiated and agreed to by the former landlord. Despite these events, we expect to generate strong growth in NOI next year.

Finally, turning to our revised guidance. We increased our midpoint and narrowed the range for our 2011 FFO guidance to between $4.02 and $4.05 per diluted share. This guidance represents expected FFO growth of 18.6% to 19.5% over 2010 FFO of $3.39 per diluted share and unit. The low end of our reported FFO guidance for 2011 reflects the variability and timing related to lease commencements, acquisition closings and possible foreign exchange losses related to exchange rate movements.

After adjusting for non-core revenue and expense items, 2011 core FFO is expected to range between $4.07 and $4.09 per diluted share and unit, which represents expected core FFO growth of 16.6% to 17.2% over 2010 core FFO of $3.49 per diluted share and unit. The following revised 2011 FFO guidance assumptions represent our current view towards our full year results and include estimated total transaction expenses.

Acquisitions of income-producing properties for the year totaling $150 million to $180 million at average cap rates of 8% to 9%, commencement of leases which will contribute $95 million to $105 million of GAAP rental revenue on an annualized basis, development and redevelopment capital expenditures of $550 million to $600 million; total G&A of $55 million to $56 million, and total transaction expenses of $6 million to $7 million.

Since the fourth quarter of 2009, we have provided the following years guidance on our third quarter call or shortly thereafter. In each year since 2009, we have raised guidance when reporting our fourth quarter results primarily because we've had a significantly better view towards the new year's projected performance.

We surveyed the practices of the top 15 REITs and found that the majority of them provide guidance on their fourth quarter call. Therefore, we have decided to provide our 2012 guidance around the time of our Investor Day meeting in New York, which we are planning to host in mid-January. Once we secure the date and venue for this event, we will be sending out invitations. The current Street consensus for 2012 is a $4.43.

Based on our recent 2012 budget projections, we believe that our core 2012 FFO per share results will be in line with this consensus. This concludes our formal remarks. We can now open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from Jamie Feldman with Bank of America.

James C. Feldman - BofA Merrill Lynch, Research Division

Mike, I was hoping you could talk a little bit about your -- a little bit more about your decision to go to Oregon with your tenant? I'm just trying to get a sense of what the read through is for the business in general given that's where a lot of the internet companies have gone and the new technology is more kind of weather-related and better cooling based on the climate up there. Just trying to get a better sense of what this means for the future of DLR.

Michael F. Foust

Sure, and it's not really new technology. It's just using different techniques for different climates and different levels of perceived customer reliability. So it's really, from our perspective, it's about working with the customer and delivering a solution that fits what they need, and they require, for their set of applications and their business. So going to Portland is a very easy thing for us to do. We have a lot of experience looking at sites and evaluating the markets, both in Oregon as well as in central Washington. So in this case, we worked with the customer and looked at actually 3 different locations in the Western United States, and working with them for what they wanted to do decided that Hillsborough, Oregon was the best site for them. And NetApp is a great company, and we're very comfortable working with them. And Portland is a very nice tech market. So we're not out in some of the more remote areas where we would perhaps have a different view. So it's just a natural progression for us for doing these Build-to-Suit type projects, where we're delivering product for customer requirements on a long-term basis.

Operator

Your next question comes from Michael Bilerman with Citi.

Michael Bilerman - Citigroup Inc, Research Division

Yes, Bill, just you say you're not going to give guidance until January, but you certainly made a statement that you're comfortable based on your budgeting process of where the Street is at $4.42, which sort of implies a quarterly run rate of $1.10, $1.11 somewhere in that range. Yet in the fourth quarter you're at $0.99, this quarter, you're basically a little over $1. And so it's a pretty big gap to get over. So maybe you can talk about -- you talked about the $3 million negative on the straight-line rents for that one asset, which is $0.03 down. So what are the key items that we have to think about for 2012 that are baked in today, whether it's development that's completing, redevelopment, the acquisitions that you've bought that haven't been fully leased up, what are the big components that we should start thinking about that's driving that significant growth into next year?

A. William Stein

Well, first is the Solyndra deal, so get the $4 million of rent. They've obviously filed for bankruptcy, and we don't know whether they're going to affirm or reject the lease. So we're somewhat constrained in terms of what we can say given the fact that it is in bankruptcy and that we are potentially a creditor. But clearly I think in modeling it, it might be prudent to take out the annualized rent. It's a triple net lease, so there are also expenses associated with that asset. That's on the downside. On the upside, one of the reasons we haven't provided guidance is that we're looking at potentially a pretty significant quarter of leasing in the fourth quarter. There's an awful lot under discussion, which affects backlog. It also affects the capital plan for the quarter. But clearly, the Singapore asset in particular is performing extremely well. And we expect to be delivering space quite regularly, I guess would be the best way of putting it in 2012 in that asset. And given the -- given what's under discussion there in terms of potential leasing, I think you would see potential lease commencements occurring on a pretty regular basis sequentially in the year. So I mean the best way -- I don't know what else to tell you, Michael. There are a lot of variables right now and if we put out guidance, our core would have been right around where the Street is. I think you could look historically and see that when we’ve put out guidance at this time of year, almost invariably we raise it the next quarter because we have a better view of where the year is headed. And in fact, we frequently raise it in subsequent quarters as well in the year. So we're comfortable with where the Street is, in terms of core, I'm emphasizing core because there are transaction costs that affect reported. I don't know what else I can tell you.

Operator

Your next question comes from Mitch Germain with JMP Securities.

Mitchell B. Germain - JMP Securities LLC, Research Division

Mike, just curious about the CenturyLink relationship, and how that's progressed now that it's been about 6 months since the merger was announced.

Michael F. Foust

It's very good. The team that we've been working with at Savvis has stayed in place from the CEO on down. So it's been very consistent working relationship, and we're looking at new opportunities to expand the relationship, both in U.S. and internationally. So it's a very good program.

Operator

Your next question comes from Jordan Sadler with KeyBanc.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Regarding the balance sheet, Bill, looks like quite a bit of I'd call it maybe pre-capitalizing ahead of what could be this significant 4Q leasing activity and the Build-to-Suits you would have. I'm just -- I'm curious as to sort of your thought process on the ATM going forward. Obviously, you viewed it as a pretty good tool in the third quarter. And just how we should be thinking about your financing activity in the sort of near to midterm.

A. William Stein

Well, we did raise a lot of equity preferred and common in the third quarter, and I did that because I was concerned -- and frankly I'm still concerned about macroeconomic risk. And I thought, in view of that, it was appropriate to delever and derisk the balance sheet, which is what we did. We’re at 4.5x net debt to EBITDA this quarter. Without any equity issuance in the quarter, in the fourth quarter, we'll be at roughly at the same level at the end of the fourth quarter. So there is really no pressing need to issue equity in the fourth quarter through the ATM. So whether or not we do so would be really opportunistic on our point, from our standpoint. We also, as I noted, we're doubling the size of the credit facility, and that's going to give us a lot more flexibility in terms of when we access the capital markets. The $750 million was a little small for us given the size of our development program, as well as some of the acquisitions we were looking at. So it's not only a $1.5 billion credit facility but it has a $750 million accordion feature so we could increase it to $2.25 billion. And I think that's -- you'll probably see the balances obviously higher now on short-term debt than they were under the former revolver simply because it's larger. I think our next -- you frequently ask the question, what is our next capital raise? And I think our next large capital raise would be unsecured bonds. Clearly, the unsecured bond market for REITs is -- hasn't -- it's basically been nonexistent since the S&P downgrade of the U.S. And we don't need to access that market immediately, clearly, but I think logically, we would be looking to term out revolver debt and we might be looking to term out in currencies in addition to the U.S. dollar to match fund on some of our non-U.S. investments.

Michael F. Foust

I would just like to add that the work that Bill and the finance team has done well all along, but especially this year in light of all the uncertainties around the Capital Markets, has really been outstanding from an operating and growth perspective. We are incredibly well-positioned to continue our growth program and to continue to deliver our solution across multiple markets and multiple continents. We were in good shape before, and now we're in terrific shape now. And that is a very powerful competitive advantage for us in the marketplace because we can provide these solutions on a go-forward basis, very readily without financing contingencies, which is very, very powerful in the market today.

Operator

Your next question comes from Dave Rodgers with RBC Capital Markets.

David Rodgers - RBC Capital Markets, LLC, Research Division

Maybe just, I guess, help with the thought about leasing next year, to talk about the supply side and what you have available. I know you've got a lot of details in the supplement, and we'll try to go through them, but in terms of the megawatts of supply that you have available today, and then what you would be delivering without additional acquisitions over the course of next year to kind of lease up so that we can kind of think about what type of revenue number we're building up to based upon what you have and will be available, could you give some color around that, please?

Michael F. Foust

Well, we typically don't give out our KW megawatt inventory. We prefer to do it in terms of square footage because requirements can vary so much, and markets can vary so much. I can tell you right now that we have spread across 12 or 13 markets about 323,000 square feet of built out turnkey space that we expect will be absorbed in pretty short order. Similarly we have about 322,000 square feet of Powered Base Building space that's ready for customers to either use their own capital or for us to build out incrementally, so we can really manage our exposure to any particular market. And we're probably looking at completing, overall this year, about $600 million or $650 million of construction and certainly next year we'll be on that same track probably somewhat accelerated as well.

David Rodgers - RBC Capital Markets, LLC, Research Division

With a similar mix between Power Base and turnkey?

A. William Stein

I would have to look at that because we really are looking at this on a market-by-market basis. Certainly, in the Asia Pac region, in Singapore and Australia, those will be almost probably entirely turnkey product in those markets. So I would expect it to probably skew further toward the turnkey.

Operator

Your next question comes from Ross Nussbaum with UBS.

Ross T. Nussbaum - UBS Investment Bank, Research Division

On the leasing activity, on the renewals that where signed, can you add a little color to the cash rents spread? I think you said it was negative 2%. I'm just trying to understand that in the context of whether or not the roughly 5 year lease terms that were signed, was this some contractually agreed to new lease rate? Or what caused the new rents to be lower than the old rents?

Michael F. Foust

Yes, I mean, so when you're looking at -- and that was only on the turnkey rents, I would say, we had dramatic increases, in some cases, on the Power Base Building rents. Really, if you're looking at the turnkey space these are typically gross rents and these gross rents are at relatively high per square foot basis and KW basis because it does include all the operating expenses net of power typically. So your increasing -- so these leases have been increasing over many times, a 7- to 10-year period or even a 5-year period, and a 3% clip on a high number. And it's very good economics for us. So sometimes when we get the end of these leases, oftentimes there is a market rent criteria in the rollover in the renewal option, and so in this case, in this particular quarter, some higher, some lower, it averaged about a 2% decrease on a cash basis, but that's going to be made up in the second year of lease with the 3% bumps that are almost entirely in there. And there are actually 2 contractual situations that were set beforehand not around market, which contributed that. So the good news is with these 3% bumps that we generally have in the leases, that small 2% decrease will be made up in the second year of the lease and then accelerate pretty rapidly going forward.

Operator

Your next question comes from Bill Crow with Raymond James.

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

A 2-part question. First of all, Bill, you mentioned using the ATM because of your fears over the macro environment. What does that say about capital flows into the space in particular into the private developers and owners? And then the second question is, with you kind of embracing consensus for next year, how should we think about the dividend? I know that's a board decision; we were a little surprised you didn't -- they didn’t increase the dividend this quarter. How do we think about dividend increase commensurate with, say, FFO growth?

A. William Stein

Okay. Second question first. As you said, the dividend is a board decision. We are -- I think it'll be 12 months from the next board meeting since the last board increase. So we're trying to do it on an annual schedule. I know that we got off of that a little bit and we were increasing it twice a year, but we're trying to increase it just once a year and put a more meaningful increase in place on that 1 date. So the board will have a view and we will, as a management team, will have a view of the 2012 results including taxable income at the next board meeting. And I think everyone will be in a good position to decide what the appropriate increase should be. And the increase will be, most likely, whatever the increase in taxable income is. And that's since we're paying out -- actually, we're paying out a little less than 100% of taxable income. So we end up pulling back from the next year to meet the 100% requirement. I'm sorry now, what was the other...

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

The other question was the capital flows into the private owners and developers.

A. William Stein

So the -- I think it’s -- the private debt is very challenging for this space. It has been for a while, really since the CNBS market went away. Life companies are lending to real estate in general, but we haven't seen them lending to data centers. And life centers or life companies are also focused on lending to best of class operator/sponsors. And the private companies would be less likely to fall into that category than the public companies. There is obviously the possibility to obtain bank financing, because the banks I think are looking to lend money today. So that may be one source of financing. But that's short-term money, and that's a -- as I think we all recognize, that's a risky way to finance a longer-term asset. And I think that's it. I mean private equity is certainly out there, and there's a lot of private equity to be deployed in just about anything today that moves. I mean, real estate operating companies, you name it, the private equity companies are flushed with funds. So there is really no accounting for that piece of it. I think, that clearly there are some private equity funds that have -- that are in our space that and everyone -- I think everyone on the call knows who they are. We're not aware of any new entrants from the private equity world, but it's possible that if a private equity fund has a lot of capital that it needs to deploy it may be willing to invest for a while at 100% equity with no leverage. My question, how they will achieve their return thresholds for their limiteds. And we do, frankly. But in some ways the motivation maybe more retaining asset management fees on that capital by putting it out the door rather than achieving return hurdles.

Operator

Your next question comes from Sloan Bohlen with Goldman Sachs.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Just a big picture question. Mike, you laid out what you thought the pipeline in terms of demand was. It seems like more and more that demand is coming in the form of Build-to-Suits, and I'm wondering if you could comment on how that changes, if at all, your view on holding PBB space versus building out TKD space or whether at some point building out additional spec space makes more sense.

Michael F. Foust

We'll continue to deliver spec space and we can do that very cost effectively with our POD program. And frankly, I think that will continue to be a majority of turnkey space that we deliver and lease. The Build-to-Suit program is interesting and it will add, I think, materially to our growth. But at the same time we think that combination of our spec building and the PBB where customers want to use their own capital, will continue to be strong contributors. The Build-to-Suit program is really interesting and exciting to us. But at the same time, the deals are even more lumpy than during our spec turnkey developments. So it's hard to project how much contribution they'll have. But we've laid out a pretty good track record now in the last 3 years with these more customized projects and I think we're establishing ourselves as one of the go to groups for these kinds of projects.

Operator

Your next question comes from Lukas Hartwich with Green Street Advisors.

Lukas Hartwich - Green Street Advisors, Inc., Research Division

Mike, it's been about a year now since you acquired 365 Main, and I was just hoping you could share your thoughts on the collocation part of that business. Do you like it? And I guess if you want to get -- do you want to get more involved with it?

Michael F. Foust

It's performed quite well for us. And that project as well as several others, especially where we have high concentrations of telecom networks, the Internet Gateway buildings, and some others in central CBD markets. Where we have pockets of space that lend themselves very well to the colo business. So we see it as a very good adjunct for us to be able to utilize space for enterprises who may not necessarily be small companies but have smaller footprint requirements. And so we'll continue to focus in that area. And I think it can be another adjunct for growth for us in 2012 in going forward. So we quite like the space. It will always be a relatively small percentage of our revenue, but it can be a meaningful adjunct to our other product especially in those more CBD locations.

Operator

Your next question comes from George Auerbach with ISI.

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

Bill, I know you're not giving 2012 guidance, but this year with the most recent guidance, you're calling for $550 million or $600 million of development or redevelopment CapEx. I was we look forward to 2012, is that a good guidepost for the kind of capital you want to put out next year, in development?

A. William Stein

I think it will be at least that. Probably a little more.

Operator

Your next question comes from Vincent Chao with Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

Just wanted to follow up on the comments about the fourth quarter leasing, which sounds like it's shaping up to be pretty strong. Is that basically your tenants delaying the decision-making into fourth quarter? Or are you seeing an acceleration of demand there? I know the pipeline is kind of stable at 2.1 million square feet, but can you provide some color there?

Michael F. Foust

I think it's kind of the typical rhythm of real estate and deals. Oftentimes, fourth quarters, you see a lot of activity. People need to get budgets deployed. They're looking forward there at their 2012 budgets, and their operating budgets. So I think it's just part of it is seasonality. I think it's kind of a typical rhythm in the real estate world. But we have a good funnel of prospects, and continue to be working in a number of different markets as you know. So there are -- a bit of it is good momentum and a bit of is I think is seasonality.

Operator

Your next question comes from Tayo Okusanya with Jefferies & Company.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Just following up on Vincent's question. Could you talk a little bit about just markets where you are expecting to kind of see that improved leasing velocity in the fourth quarter? Is it a specific market, or is it kind of across the board? And is it domestic versus international?

Michael F. Foust

Sure. It's pretty well spread out. Certainly Singapore and Australia, relatively new markets where we're getting a lot of activity. Working with folks in London. We do have some space at Redhill. I think we have some good activity in Dallas and Phoenix, and then pockets of space in other markets we're working on with some customers in New Jersey as well, Boston, smaller requirements and we have some requirements actually in Santa Clara, Silicon Valley that we're working on as well. But it's pretty well spread out, which is good, having a diversified portfolio from investment basis as well as from a customer service basis is working very, very well for us.

Operator

Your next question comes from Michael Bilerman with Citi.

Emmanuel Korchman

It's actually Manny here with Michael. You guys have discussed kind of your spending requirements and sort of what you expect to put out next year and also the amount of capital you've raised this year. But how far does that equity capital get you before you think you have to revisit the equity or preferred markets, in order to keep your debt ratios where they are?

A. William Stein

This is pretty far. We could go deep into the year. We clearly have the choice of issuing equity through the ATM to more or less match fund development when we like the share price or to issue equity in bulk. I think it's more likely that we'd issue in bulk if we have an acquisition that’s sizable, and we want to make it on a leverage neutral basis but with the growth in EBITDA and where we stand right now in terms of our debt to EBITDA, I think we have quite a bit of flexibility.

Michael F. Foust

It's really a great position to be in because we can really see clear how we're going to execute our business plans and our growth plans across 4 continents. And that's a very powerful position for us to be in.

Operator

Your last question comes from Jordan Sadler with KeyBanc.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

So I keyed in on your mention of cloud, colo, network pairing, and then of course financial services, as the drivers of demand that you identified at the beginning of the call, Mike. Can you maybe compare and contrast the demand you're seeing for your Internet Gateway properties versus the more traditional data center space right now and what rent trends are in each subset? So is demand stronger in one? Are rents more elastic or inelastic in one? I'd be interested in your thoughts.

Michael F. Foust

Boy it's hard to characterize. Typically, we have a limited amount of space available in the Internet Gateway buildings. And the ones where we do have space, it's pockets of space that will generally lend themselves to a smaller footprint, more colo-type customers or colo-providers that want to take the space. The pricing for the Internet gateways has always been strong and probably going up somewhat year-over-year after enjoying some good uplifts from 2007 to 2009, and so I don't think there's a real pattern there because of our larger footprint customers that tend to be in more suburban locations, the demand there is good as well. I wish I could give you a more clear-cut answer, but it's more kind of the footprint-size of the customers tend to, not exclusively, but tend to be smaller footprints in the CBD because of demand for colo and kind of the nature of the customers for those markets.

Operator

Ladies and gentlemen, we have reached our allotted time for questions. Gentlemen, are there any closing remarks?

A. William Stein

I'm just very pleased with the great work that our team has done to really deliver the consistent program for our customers across a wide range of markets and regions. And that's a theme, being able to deliver what the customer needs for their data center solution is something that we're really focused on, top to bottom, in our company. And so I congratulate our teams on the great work, and we're very appreciative of the support from the investor community, and continue to drive good returns for our shareholders. So I appreciate everyone's time today. Thank you.

Operator

This does conclude today's conference. You may now disconnect.

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