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Executives

Michael F. Foust – Chief Executive Officer

A. William Stein – Chief Financial Officer and Chief Investment Officer

Pamela M. Garibaldi – Vice President, Investor Relations and Corporate Marketing

Analysts

Jordan Sadler – KeyBanc Capital Markets, Inc.

Paul B. Morgan – Morgan Stanley & Co., LLC

James C. Feldman – Bank of America Merrill Lynch

Emmanuel Korchman – Citigroup Global Markets, Inc.

George D. Auerbach – ISI Group, Inc.

Tayo T. Okusanya – Jefferies & Co., Inc.

Vincent Chao – Deutsche Bank

William A. Crow – Raymond James & Associates, Inc.

Lukas Hartwich – Green Street Advisors, Inc.

Gabriel Hilmoe – UBS Securities, LLC

Jonathan Schildkraut – Evercore Partners, Inc.

Chris R. Lucas – Robert W. Baird & Co., Inc.

Digital Realty Trust, Inc. (DLR) Q4 2011 Earnings Call February 17, 2012 1:00 PM ET

Operator

Good afternoon. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Digital Realty 2011 fourth quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Ms. Pamela Garibaldi, Vice President, Investor Relations and Corporate Marketing. Ms. Garibaldi, you may begin your conference.

Pamela M. Garibaldi

Thank you, Sarah. Good morning and good afternoon to 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 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 our dividend policy, rents to be received in the future periods and lease terms, development and redevelopment plans, supply and demand for data center space, targeted returns and cap rates, acquisitions and investment activities, capital markets and finance activities, and the company's future financial and other results, including the company's 2012 guidance and underlying assumptions.

For a further discussion of the risks and uncertainties related to our business, see the company's Annual Report filed 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 or 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 fourth 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 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 and welcome to the call everyone. Before we get start with our formal remarks, I would like to thank everyone who participated in our Investor Day a few weeks ago. We greatly appreciate the positive feedback we received, and we are glad you found the information useful. Now I'll proceed with the call. I will begin with my remarks and then turn the call over to Bill who will review our exceptional fourth quarter and full-year 2011 financial results.

As we previously announced, 2011 was a record setting year for DLR. We signed new leases for approximately 1.3 million square feet, representing over $136.6 million of annual GAAP rental revenue, which represents a 22% increase over 2010. We were able to achieve these results by leveraging our global platform and expanding relationships with several multinational customers in markets ranging from Amsterdam to Dallas and Silicon Valley to Singapore.

We also achieved excellent results serving the local customer base in markets such as Paris, Los Angeles, and Melbourne, Australia. We believe that the strength of our leasing program lies in our geographically diverse portfolio, supported by local experts who deliver service and solutions to customers with a consistent commitment to excellence regardless of location. At the same time, our global portfolio enables us to provide data center solutions where our customers need them while mitigating our exposure in any one geographic market.

Heading into 2012, we have a healthy backlog of signed leases totaling approximately $84 million of annual GAAP revenue, of which $62 million will commence in 2012 and the bulk of the remaining backlog in 2013. The increase in our build-to-suit activity in 2011 certainly helped to contribute to this strong backlog. Lease terms continue to trend on the longer side. Leases signed in the fourth quarter for data center space averaged 152 months or 12.7 years, up from 110 months in the third quarter.

We also had good renewal activity in the fourth quarter, rolling over approximately 413,000 square feet of space or a 5.6% increase in GAAP rents. The renewals included approximately 90,000 square feet of turnkey space, which increased 2.2% on a GAAP basis, and approximately 290,000 square feet of Powered Base Building, which increased 15.3% on a GAAP basis. Overall, tenant retention remained very high. On a square foot basis, 100% of expiring turnkey space renewed during the fourth quarter.

On a revenue basis, turnkey leases renewed at approximately 102% of GAAP, with an average lease term of over 135 months. Again, on a square foot basis, 99% of expiring Powered Base Building leases were renewed in the quarter at 114% of GAAP rents, with an average lease term of 82 months. Portfolio occupancy increased to 94.8% in the fourth quarter compared to 93.7% in the third quarter, reflecting new leasing activity and our high renewal rate.

Same-store occupancy also increased to 95.3% from 94.2% in the third quarter. Fourth quarter same-store NOI increased to $136.7 million, up 3% from $132.6 million in the previous quarter. Same-store cash NOI, which we define as same-store NOI adjusted for straight-line rents and adjusted for non-cash purchase accounting adjustments, was up to $124.1 million in the fourth quarter, up 3.8% from $119.6 million in the third quarter.

As we discussed at our Investor Day, we see active demand from new data center space virtually across all of our markets. We are currently tracking over 2 million square feet of demand, which is consistent with what we reported on our last call. This compares to 1.4 million square feet of identified requirements at year-end 2010, so we're certainly seeing an uptick in overall customer requirements that we've identified.

For the benefit of those who were unable to participate in our Investor Day last month, I'll briefly run through the supply and demand statistics we're tracking in a few of our major markets. As you know, our strategy is to maintain a disciplined approach to managing inventory market by market by utilizing our flexible POD architecture that's designed to deliver data center space in approximately 1-megawatt increments.

This enables us to meet customers' just-in-time requirements across our global portfolio while limiting our financial exposure in any one market. Year-over-year, lease rates in our major markets remained relatively flat. Although we've seen increased supply in Silicon Valley, Northern Virginia, and New York/New Jersey, we continue to have strong demand for product and we've been able to maintain rents in line with our historical rates while achieving our unlevered cash return on invested capital on our new developments of between 11% and 14%.

In New York Metro, including New Jersey, we're tracking nearly 31 megawatts of potential demand. We believe the increase in demand over previous quarters reflects pent-up demand from financial services as well as system integrators and managed services cloud providers that support the financial vertical. This compares with approximately 23 megawatts of available supply that is either built out or currently under construction.

At DLR, our New York Metro exposure is relatively small at present. We currently have three TKD PODs or about 3.5 megawatts available. We believe that DLR represents about 60% of the 17.6 megawatts of supply that was absorbed in 2011. In Northern Virginia, we're tracking approximately 18.5 megawatts of current demand. This compares to approximately 29.5 megawatts of available supply that's either built out or under construction.

Again, we have a very manageable current exposure in this market with 2 megawatts of available built-out supply in the DLR portfolio. We estimate that DLR represents approximately 49% of the 43.3 megawatts of supply absorbed in Northern Virginia in 2011. Dallas has continued to be a very active market for us, with very limited available built-out supply. We've identified approximately 24.5 megawatts of demand compared to 7.2 megawatts of net new built-out supply.

During the quarter, we signed leases with separate customers at two buildings that are under construction currently at our Datacenter Park Dallas property. That's in Richardson, Texas. The first lease is for a 112,000 square foot build-to-suit, and the second is for 42,000 square feet. As a result, we're moving ahead with the construction of two new buildings in the park in addition to the two that we've leased. In the Dallas market, we estimate that digital lease signings represented approximately 62% of the 2011 absorption.

And finally, in Silicon Valley, we're currently tracking about 3.6 megawatts of demand compared to about 24 megawatts of currently available supply. As we discussed at our Investor Day, with more than eight years of experience leasing in Silicon Valley, we recognize that it has rather unique demand characteristics. Internet based companies have traditionally been major consumers of data center space in the Valley. Their growth and subsequent data center requirements are extremely difficult to predict, even for the enterprises themselves, which are growing so quickly.

While there appears to be a significant supply surplus today, new requirements can and will emerge and absorb supply quickly. Our exposure at present is a very manageable just 4 megawatts of available supply either currently or that we currently have under construction. We estimate DLR represented approximately 19% of the over 36 megawatts of absorption in Silicon Valley in 2011. In addition, we're seeing strong demand in markets such as Phoenix and Boston, where we're generating significant leasing momentum.

Let me turn to our acquisitions program. We acquired four properties during the quarter for a total purchase price of $157 million, bringing total acquisitions for the year to $246 million. Fourth quarter activity included the Dublin development site we discussed on our last call as well as two income-producing properties, one in San Francisco, CBD, and one in Atlanta.

In addition, we acquired a development side in Northern Virginia that was subsequently contributed to a joint venture partnership with an existing customer for another build-to-suit project. As soon as we receive customer approval, we plan to provide additional information on this transaction in the coming weeks. We continue to take a prudent approach to expanding our European portfolio, which currently represents 11% or $91 million of total annualized rent in the portfolio.

As of December 31, 2011, the stabilized portfolio was 92% leased in Europe. In Asia-Pac, we've signed leases for 40% of our building in Singapore, and this is more than 18 months ahead of our underwriting assumptions, so we're seeing very good activity in the Singapore market. We're currently tracking over 51 megawatts of potential demand, as we continue construction on the remaining 11 megawatts of available IT capacity at that building.

In Melbourne, we held a groundbreaking ceremony to mark the start of construction on a 50,000 square foot facility fully leased to National Australia Bank, NAB. We have additional expansion capacity at this location, and we're currently tracking about 4 megawatts of demand. Construction is also underway at our Sydney site. We're building a 90,000 square foot facility designed to support four of our 1,440-kilowatt PODs. We expect to deliver the first two PODs in the fourth quarter of 2012.

In Sydney, we're tracking about 8 megawatts of demand. Our development program continues to be very active, supplying new facilities that will fuel our ongoing growth. During the fourth quarter, we completed over 224,000 square feet of data center space, which was 93% leased. This consisted of 36,000 square feet of turnkey that was over 56% leased, 5,000 square feet of Powered Base Building 100% leased, and over 183,000 square feet of build-to-suit space that was also 100% leased.

At quarter-end, we were under construction in turnkey space totaling about 489,000 square feet, including 284,000 square feet in the United States, 44,000 square feet in Europe, and approximately 161,000 square feet in Singapore and Australia. Approximately 31% of this space is pre-leased. For Powered Base Building space, we're under construction on about 341,000 square feet in the U.S. In Europe, we had about 88,000 square feet under construction, which includes the new Chessington redevelopment property in London that we acquired in the third quarter.

So we've started building on that straightaway. Lastly, we had approximately 275,000 square feet of build-to-suit space under construction in the U.S., which is 100% pre-leased. Including pre-construction work and common area building improvements, the total construction work in progress at the quarter was $221 million. The estimated cost to complete the ongoing December 31 work in progress is $486 million.

So this concludes my prepared remarks. And now, I'd like to turn the call over to our CFO, Bill Stein. Bill?

A. William Stein

Thank you, Mike. Good morning and good afternoon everyone. I will keep my remarks quite brief and will focus primarily on fourth quarter and full-year 2011 results that were not addressed on our Investor Day.

As Mike mentioned, 2011 was another year of exceptional performance by Digital. On Tuesday, our Board approved a quarterly common stock dividend increase of 7.4% or $0.05 a share to $0.73 per share. This is our tenth dividend increase in a little over seven years since our 2004 IPO. Since our first full quarter of operations, we've grown our dividend by a compounded annual growth rate of nearly 17%.

This increase reflects our optimism for continued growth, the need to meet REIT distribution requirements, and is consistent with our existing policy to distribute 100% of taxable income to minimize corporate level federal income taxes. As we disclosed in our Investor Day presentation, we raised $2.8 billion in capital during the year from a variety of sources to fund the growth of our company, which includes our $1.5 billion global revolving credit facility that closed during the fourth quarter.

This substantial increase in borrowing capacity will accommodate our growing global investment program and provide immediate liquidity for potential acquisitions. During the fourth quarter, we generated $42.4 million of net proceeds from our At-the-Market equity distribution program from the issuance of 668,000 shares at an average price of $64.08, bringing the total for the year to $456.8 million of net proceeds under the current and previous programs at an average share price of $59.68.

Since January 2012, we have issued approximately $63 million of common stock at an average price of $66.19 per share. We have $53.8 million remaining under the current program. We have $1.1 billion of immediate liquidity, including $26.6 million in short-term investments, plus the funds that can be drawn on our credit facility. If this capacity were fully utilized, we would remain in compliance with covenants contained in the credit facility, our Prudential shelf facility, and other secured debt.

After the payoff of two European secured loans in January for $73.4 million and assuming extension options are exercised, in 2012 we have $68 million remaining principal amortization and debt maturities, including $53 million for a secured loan maturing in October. In 2013, we have $260 million of ongoing principal amortization and debt maturities. Let me now turn to our fourth quarter and full year 2011 results. All per-share results are on a diluted share and unit basis.

As stated in today's earnings release, the fourth quarter FFO per share was $1.02. Adjusting for items that do not represent ongoing expenses or revenue streams, fourth quarter 2011 core FFO was $600,000 higher than reported FFO or $1.03 per share. This reflects a 7.3% increase from the fourth quarter 2010 FFO of $0.96 per share. For the full year 2011, FFO per share was $4.06, up nearly 20% from 2010 FFO per share of $3.39.

When adjusting for non-core items, 2011 FFO per share was $4.09, up over 17% from 2010 core FFO of $3.49. Adjusted funds from operations, or AFFO, for the fourth quarter of 2011 was $94.9 million, up from $92.5 million in the previous quarter. The diluted AFFO payout ratio for the fourth quarter of 2011 was 81.9%, up slightly from 81% last quarter. Adjusted EBITDA grew by 9.3% or 6% quarter-over-quarter, which improved our debt to adjusted EBITDA ratio to 4.4 times in the fourth quarter, down from 4.5 times last quarter.

Our fixed charge coverage ratio was 3.2 times at year end 2011 compared to 3.4 times in the previous quarter. This decrease is due to the issuance of our 7% Series E cumulative redeemable preferred stock in third quarter of 2011. For the full year, adjusted EBITDA was $622.9 million in 2011, up nearly 22% year-over-year from $512.1 million in 2010. As disclosed in our Investor Day presentation, at the midpoint of our 2012 guidance, we forecast 18% growth in 2012 adjusted EBITDA of $733 million versus 2011 adjusted EBITDA of $623 million.

Turning to the income statement, net operating income increased by $6.8 million to $173.1 million in the fourth quarter of 2011 from $166.3 million last quarter. This increase is primarily attributed to growth provided by incremental leasing, lower net utilities in the quarter and a favorable property tax adjustment that resulted from a final tax assessment, a portion of which was passed on to tenants.

Although total reimbursements of $52 million in the fourth quarter of 2011 decreased from $56.7 million in the third quarter, the operating margin for the overall portfolio in the fourth quarter of 2011 is higher at 65%, compared to 63.1% in the third quarter of 2011, reflecting lower OpEx in the fourth quarter. G&A decreased by 14.4% to $12.5 million in the fourth quarter, compared to $14.6 million in the previous quarter, primarily due to year-end accrual adjustments.

Interest and other income decreased to $398,000 in the fourth quarter, compared to $2.2 million in the last quarter, primarily due to third quarter 2011 foreign exchange transaction gains. Finally, we are maintaining our 2012 FFO guidance range of $4.34 to $4.48 per share that we announced on January 30, 2012, with the same assumptions that were set forth in that press release.

That 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 the line of Jordan Sadler from KeyBanc Capital Markets. Your line is open.

Jordan Sadler – KeyBanc Capital Markets, Inc.

Thanks and good morning out there. I just wanted to follow up on markets and market rents specifically. I know that you guys do a nice job of providing some demand and supply statistics. I'm just curious. And I know you have a lot of different -- you have a broad product array and a broad number of markets now. But if you could maybe just generically talk about what you're seeing in market rents across your different product types?

Michael F. Foust

Well, rents --

Jordan Sadler – KeyBanc Capital Markets, Inc.

Oh, go ahead.

Michael F. Foust

Oh no, I'm good. Go ahead, Jordan.

Jordan Sadler – KeyBanc Capital Markets, Inc.

That's the question. And then as a follow-up, I was just curious if you could maybe talk about any large tenant requirements you were seeing in the market.

Michael F. Foust

Sure. By and large, for the leases we've been executing on, we were looking at the last five or six quarters in some of these markets where there is some growing supply like in Silicon Valley, in Virginia, and New Jersey. And our lease rates have been remarkably flat and really not declining on what we've been executing on. I would say probably, generally, in Silicon Valley, rents might be down 10% to 15% in some cases.

But depending on the requirement, the level of resiliency in the facility, we've been pretty flat. Now we haven't had a lot of product to lease in Silicon Valley. We'll be bringing on a couple more PODs in a couple of months because we always want to have some product even in markets that are a little more frothy. But I think by and large, our lease rates are holding well in some of these markets.

Jordan Sadler – KeyBanc Capital Markets, Inc.

Is that in the U.S., or is that everywhere?

Michael F. Foust

Now in other markets, we've seen maybe prices, the rates tick up a bit in places like Dallas and Phoenix. Certainly internationally, in Australia and Singapore, pricing is very good for us and we're looking at healthy returns in those markets. But across the board in the U.S. markets, we're still on our spec buildings achieving 11% -- 14% unlevered return on costs. So that continues to be very consistent for us.

Jordan Sadler – KeyBanc Capital Markets, Inc.

Thanks. And just the follow-up on the large tenant requirements, are you seeing large tenants in any of these markets? I know you don't have a tremendous amount of availability, but I was curious in terms of what you're seeing out there for demand there.

Michael F. Foust

Yes, it's interesting. In New Jersey, we're seeing some very large requirements from major Wall Street firms. And those will be ones that we can accommodate either in our Powered Base Building product that we have built out in Piscataway. We have space in Weehawken as well, a little bit less, smaller space in Weehawken, a couple PODs there and we've got a combination of build-to-suit requirements in Somerset and other sites that we have that we've identified.

And we're seeing a couple of very large requirements potentially in London, certainly in Dallas, a number of good medium-size requirements for Phoenix, Boston. So across the board, it's pretty active. What's interesting, especially interesting are the large requirements that are percolating out there, some maybe in early stages for the New Jersey area.

Jordan Sadler – KeyBanc Capital Markets, Inc.

Thank you.

Operator

Your next question comes from the line of Paul Morgan from Morgan Stanley. Your line is open.

Paul B. Morgan – Morgan Stanley & Co., LLC

Hi, good morning. Could you talk a little bit in terms of your visibility about the ramp in development spend over the course of the year relative to your full-year guidance? And then just in terms of plans for funding, how comfortable are you with growing the volume of equity issue to the ATM versus other forms of capital raise?

A. William Stein

Paul, I can speak to the funding piece of it. The good news is we're coming into the year with a relatively low leverage. We're at 4.4 debt-to-EBITDA. We'd like to manage it up to five, higher if need be. So given the growth of EBITDA, there's clearly plenty of room for additional leverage, and our needs for equity are relatively modest. So given the modest needs for equity, I'm very comfortable that we can fund through the ATM.

And one of the alternatives for us, which we demonstrated in August of last year, is that we're willing to go to the perpetual preferred market as well. And those rates, if anything, are more attractive today than they were when we issued in August. So we view that as extraordinarily attractive permanent capital.

Michael F. Foust

And then in terms of the ramp, I think we're fairly steady now. I don't have a schedule in front of me that breaks it out by quarter, but I think we're relatively steady quarter-by-quarter at this point with the amount of activity that we have underway.

Paul B. Morgan – Morgan Stanley & Co., LLC

Okay, great. Thanks.

Operator

Your next question comes from the line of Jamie Feldman with Bank of America. Your line is open.

James C. Feldman – Bank of America Merrill Lynch

Thank you. Bill, I was hoping you could talk a little bit more about the year-over-year change in operating expenses in the same-store portfolio and walk us through the different line items and your expectation for this year.

A. William Stein

I've got the Q4 to Q3 comparison for same-store margins here and let's -- I'll pull up the same-store from the sub.

James C. Feldman – Bank of America Merrill Lynch

And also versus 4Q last year, it seems like there were some pretty big spikes.

A. William Stein

The operating margins in Q4 versus Q3 improved about 150 basis points, so 67.3% Q4 versus 65.8% Q3.

Michael F. Foust

And I think you'll probably see a similar uptick in margins compared to the fourth quarter of last year as well. And I think one of the things you have to remember is on fourth quarters there are a lot of reconciliations going on. And when you look at annualized year-over-year, our margins are holding or improving.

A. William Stein

The other that will happen and which has happened during this period is that we've brought online quite a bit of turnkey data center space, which has the effect of increasing the operating expenses quite a bit when it comes on. And to the extent that it's vacant, there's no revenue, obviously, so there may be some of that going on versus the fourth quarter of 2010.

James C. Feldman – Bank of America Merrill Lynch

So if you look, I'm just looking at the supplemental feed. It shows 40 basis points of year-over-year occupancy growth. Do you think some of that space last year was dormant even though it was leased?

A. William Stein

Yes.

James C. Feldman – Bank of America Merrill Lynch

And then you've got utilities are showing 12% growth. Your other maintenance and operating is showing 20% growth. Taxes is 24%. What would drive such a big increase on each of those lines?

A. William Stein

In taxes or in the whole thing?

James C. Feldman – Bank of America Merrill Lynch

No, like those are three of the ones that really stick out. Do you think all that space --

Michael F. Foust

Your portfolio is growing quite a bit year-over-year. And once again, really what's more meaningful is looking at the entire year of 2010 with the entire year of 2011 gives you a better idea because the operating margins are actually improving and there are just a lot of reconciliations that go on the fourth quarter. So fourth quarters are hard to -- it's hard to extrapolate from a fourth quarter alone.

A. William Stein

Yeah, I think you need to ignore the utilities because the utilities are increasing 11.8% but the reimbursements are increasing 14.4%.

Michael F. Foust

Yeah, we've actually added quarter-over-quarter,12/31/2010 to 12/31/2011, we've added over 770,000 square feet of occupied square feet and the great majority of that is turnkey data centers that are gross rents -- I'm sorry. It's actually over 1 million.

James C. Feldman – Bank of America Merrill Lynch

Okay, all right. Thank you.

Michael F. Foust

It's actually over -- I'm sorry. It's over 1 million square feet, 1.2 million square feet we added.

James C. Feldman – Bank of America Merrill Lynch

Is that considered same-store even though you add square footage?

Michael F. Foust

A lot of that's in the same -- in operating buildings, yeah, not all of that. And I don't know exactly the proportion, but a lot of that is in current operating buildings, yes.

James C. Feldman – Bank of America Merrill Lynch

Okay, I guess it will be useful to know what was utilized square feet year-over-year also in this presentation.

Michael F. Foust

If you look at our EBITDA margins year-in, year-out on an annual basis, we're going to be on an EBITDA margin basis 60% or a little better very steadily.

A. William Stein

And the NOI margin of the rents 75%.

Michael F. Foust

Right.

James C. Feldman – Bank of America Merrill Lynch

Okay, I appreciate it.

Operator

Your next question comes from the line of Michael Bilerman from Citi. Your line is open.

Emmanuel Korchman – Citigroup Global Markets, Inc.

Hey, guys. It's Manny Korchman here with Michael. Just looking into 2012 and your acquisition guidance, can you help us think about how those might flow in? I think at your Investor Day, you had talked about a big acquisition happening in 1Q. Is that still on pace?

A. William Stein

That's still on pace. And I think for purposes of -- with the exception of that acquisition, when that acquisition happens, you'll see how much it is. Subtract it from our guidance and then I would assume mid-quarter convention for the balance.

Michael F. Foust

Yes, it may be a little back-ended because that seems to be the way that real estate transactions occur. There seem to be more in the second half of the year than the first half of the year, but that's probably as good a convention as any.

Emmanuel Korchman – Citigroup Global Markets, Inc.

Just for modeling purposes at this point, is that half of what you're talking about? Is it three-quarters, or can you give us some idea of magnitude?

A. William Stein

Of the first quarter?

Emmanuel Korchman – Citigroup Global Markets, Inc.

Of the 1Q, yes.

A. William Stein

It's roughly one-third at the low end.

Emmanuel Korchman – Citigroup Global Markets, Inc.

Okay. And then so going back to, I guess, Mike's comment, a pretty slow 2Q and then a pickup in 3Q and 4Q?

A. William Stein

That would be safe. These acquisitions --

Emmanuel Korchman – Citigroup Global Markets, Inc.

Okay.

A. William Stein

To the extent they come in later in the year, really don't move the needle that much for the current year FFO. It's more of a subsequent year FFO item.

Emmanuel Korchman – Citigroup Global Markets, Inc.

Yes, perfect. Thanks guys.

Operator

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

George D. Auerbach – ISI Group, Inc.

Great, thanks. Bill, just I guess to follow up on Jamie's question, maybe asked a different way, the non-utility OpEx jumped by about $5 million in the fourth quarter. So should we expect that to go back to a $25 million or so run rate going forward?

A. William Stein

Let me see.

Michael F. Foust

Once again, we're adding properties because we're doing a lot of construction and, hopefully, a lot of leasing along with it. And we have a good backlog, as I mentioned earlier, that will be coming online, and a lot of that's in those same-store buildings. But I think we're going to -- on a percentage basis, we ought to be pretty steady.

A. William Stein

I think it should be flat, flatter.

George D. Auerbach – ISI Group, Inc.

Flat with the $30 million going forward?

A. William Stein

Flat to the $30 million.

George D. Auerbach – ISI Group, Inc.

Okay. And I guess on the rental rate side, the gap spreads on the turnkey leasing were about 2% positive this quarter. But can you help us understand what the cash roll-down was? I'm assuming it was negative.

Michael F. Foust

Is this on the renewal activity?

George D. Auerbach – ISI Group, Inc.

Yes.

Michael F. Foust

Yes. So on renewals, we had two transactions with two very large, very long-term customers that renewed in the quarter. And we did have a roll-down somewhat in the cash based on those two. And both of these were long-term leases; one was 10 years and one was 13 years. And they had both been going up, one like 4% a year, one 3% a year and they renewed. Each one renewed for like another 10 to 12 years each.

So when you get that compounding, sometimes you get an occurrence where that rent has gotten so high at the end of 12 years that when you're resetting to have a reasonable lease rate, especially for big customers of ours, we're willing to be flexible so that the overall rent going forward on a straight-line basis is a significant uptick for us.

But they get a little bit of relief at the front end, so the cash goes down 2% or 10% or 12% in one case where it was a PBB lease. But on an overall basis, it went down 12% on this Powered Base Building, but on an average, it's going to be up almost 17%. And we're not talking about -- we're talking about rents in the $20s, $20 per square foot per year.

So, all-in-all, it's actually a net increase in value for the buildings because we're renewing these big tenants at higher average rents for a 10 to 12 year basis. And if you took those two out, then the cash uptick would be 4% for turnkey and 3% for Powered Base Building if you take those two out on a cash basis.

George D. Auerbach – ISI Group, Inc.

Okay, that's helpful. And I guess just finally, Bill or Mike, what should we expect in terms of land acquisitions this year? And can you just remind us on that million or so square feet of re-dev space that aren't under construction, are you capitalizing any costs on those land or they all sort of a drag to FFO?

Michael F. Foust

Well, land, you can't capitalize land under any circumstance. So our land holdings are really -- we're really in good shape in terms of kind of feeding demand, so our significant land holdings would be our next phase in Virginia, the smaller piece that we acquired in Dublin. We have land for development at our Richardson Datacenter Park, Dallas.

So those three locations are probably where we have actual land. And then where we have re-development space, shelf space in the re-dev portfolio, if it's not under construction, we are not capitalizing. But the acquisition that should close this quarter has some land that we'll be able to use at a later date; about 10 acres and a lot of power.

George D. Auerbach – ISI Group, Inc.

Okay, thank you.

Operator

Your next question comes from the line of Tayo Okusanya from Jefferies & Company. Your line is open.

Tayo T. Okusanya – Jefferies & Co., Inc.

Hi, guys. Good afternoon. Going back to Jamie's question on G&A, the $12.5 million of G&A this quarter, how much of accruals were actually in? And if you were to take that out, what would be the normalized run rate?

A. William Stein

Well, I think what we should do is look at the guidance for 2012.

Tayo T. Okusanya – Jefferies & Co., Inc.

I think it's the reconciliation I was just trying to do basically, figuring out if that guidance actually does make sense.

A. William Stein

Well, $14 million is sort of a normal.

Michael F. Foust

Yes. And, Tayo, if you look at -- especially if you look at G&A as percentage of revenues, we're very steady there. So if you look at the G&A and our guidance on G&A, it's very much in line with the previous years and even ticked down a snitch, but we're very consistent as G&A as a percentage of revenues, which I think is a meaningful number, meaningful ratio if you look at how we're managing our business.

Tayo T. Okusanya – Jefferies & Co., Inc.

Okay, that's helpful. Bill, second question goes to you. As I look at your credit metrics, they're just really, really strong at this point. Just kind of curious what you think your chances are in regards to getting yet another credit rating upgrade.

A. William Stein

It's awfully hard to anticipate the rating agencies' actions. I think clearly, we maintain a very strong balance sheet. I think one of the criteria that the agencies rely upon is knowing how long a company has been operating as a public company, but how long it's been operating as a rated entity. And in our case, I think it's been a couple of years now.

But the agencies publish their criteria for the ratings of these various -- and what the criteria needs to be on per-credit metrics. And I think that certainly you could make the argument that we should be a BBB plus or a Baa, one. And in fact, we do make that argument every time we see them. But clearly, to-date, we've not been successful in winning that argument. But that's not to say we won't try it the next time we see them.

Tayo T. Okusanya – Jefferies & Co., Inc.

Okay, makes sense. And then just last question in regards to any markets that you're not in right now where you do feel those markets are attractive and you could take a look at, a strong to look at?

Michael F. Foust

Certainly, we like the Hong Kong market a lot and we'd like to be there and we're working on being there. We're hopeful that we're going to be participating in that market before the end of the year. That's probably the main one. Frankfurt's an interesting market as well that we're not in. I'd say those are probably the two main larger markets that have a lot of appeal.

Tayo T. Okusanya – Jefferies & Co., Inc.

Nothing domestically?

Michael F. Foust

We're in so many markets now. Now, that's not to say on a build-to-suit basis, we wouldn't expand into some new markets, but yes, the latest one being with our build-to-suit operation with NetApp in suburban Portland, in Hillsboro, Portland, that's kind of an interesting market, so that -- but if you look around, we're in Seattle meaningfully, San Francisco, Silicon Valley, LA, Phoenix, Dallas, Chicago.

You'll probably see us doing more in Chicago. We like that market a lot and we're virtually 96% leased there. We'll be doing more in Boston, expanding our footprint in the Boston market and expanding in our Needham facility and continue to expand the operations in Wakefield. Virginia, we continue to be very active, as we are in New Jersey.

And I could see us perhaps -- we made a nice acquisition of income, stabilized property at Linton, and that's a market we'll look at potentially doing more in. But I think we've got the U.S. pretty covered from a major market per spec building, but that's not to say on a build-to-suit basis we wouldn't go to new markets in the U.S.

Tayo T. Okusanya – Jefferies & Co., Inc.

Great, thank you.

Operator

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

Vincent Chao – Deutsche Bank

Hi, everyone. I just wanted to clarify something, I'm not sure if I have missed it but it sounds like you're ready to move forward with some work in the Silicon Valley, even though there's somewhat of a supply -- over supply situation there today currently based on the quirkiness. In New Jersey, are you guys ready to move forward on new stuff there? It seems like your commentary in terms of the supply demand has been more positive than I think a lot of people looking at that market would think, and I just wanted to get your thoughts there.

Michael F. Foust

Yes, certainly. In New Jersey, I think we have three PODs available right now, about 3.5 megawatts that's built out, ready to go, but we also have hard-based building, probably a couple of 100,000 feet that we have available that we can build out custom or build out more or leases as Power Base Building. The folks want to use their own capital to build out.

And we are talking to customers about doing more customized build-to-suit within those buildings if you will. And we continue to look at new sites to accommodate some of these larger requirements that are out to there that are more build-to-suit-oriented. So we're definitely very busy in New Jersey right now.

A. William Stein

And Vincent, we think that New Jersey is more so than other markets, a market where demand is characterized by corporate enterprise as opposed to Internet. And we believe that we've demonstrated that our product is well suited to the corporate enterprise market. And so, to the extent that you might hear from others that demand is not looking as strong in New Jersey that might be a function of whether their product meets the corporate enterprise market as well as ours does.

Michael F. Foust

Just this week, we became aware of maybe another 20 megawatts of potential projects from major firms. So there's a lot going on potentially in New Jersey.

Vincent Chao – Deutsche Bank

Okay. I guess I'm just trying to understand for the minute, it does sound like there's some activity there and your product if it fits better, why not go ahead more aggressively with spec. Your commentary just now just seems more oriented towards build-to-suit type of stuff, which obviously carries a little bit lower risk. But if there's already a demand, under supply of space for the type of space that's needed, why not go ahead with more spec?

Michael F. Foust

We can build that very quickly in our existing Powered Base Buildings. So in Somerset, in Piscataway, and Weehawken, in all those places we have Powered Base building -- in the case of Weehawken, it's actually built out beyond Powered Base. We have one POD and one POD that is about halfway built out. In Piscataway and Somerset right now, we have space that we can build out very quickly, customized space.

So instead of building out the spec POD, if we can deliver something in 12 or 14 weeks for a customer and we could do it on a more customized basis, it's definitely for everyone's benefit to do that. And we have the just-in-time product available for those who do want to move in, in 30 days. So we have the best of both worlds there.

Vincent Chao – Deutsche Bank

Okay, thank you.

Operator

Your next question comes from the line of Bill Crow from Raymond James. Your line is open.

William A. Crow – Raymond James & Associates, Inc.

Hey, good morning, guys, a quick question here for you. You clearly have the capacity to be an industry consolidator. What are you seeing on the private side from a potential acquisition perspective? And I'm not talking not just one-offs, but larger transactions. We've seen CyrusOne being mentioned as potentially coming public or being spun off. Anything you can comment on there that could give us a roadmap to where you guys may end up?

Michael F. Foust

The opportunities that we're seeing right now that we think are executable are individual property acquisitions. And we're really not seeing other than speculation other M&A opportunities, though we always have our feelers out and we're always inquiring with companies about the potential for larger, more enterprise M&A type investments. But I really can't say that there's anything percolating at this point.

William A. Crow – Raymond James & Associates, Inc.

Okay.

A. William Stein

If the right opportunity came along, we'd be clearly interested.

William A. Crow – Raymond James & Associates, Inc.

Okay.

A. William Stein

And we have the balance sheet today to acquire just about anything.

Michael F. Foust

Yes. We're very, very open to the ideas.

William A. Crow – Raymond James & Associates, Inc.

And then one final question, hopefully on New Jersey, which is you talked about pent-up demand from financial services tenants. Is there any concrete evidence now that they're out in the market more aggressively? Are tours increasing, or have you actually seen some deals signed, or is this just still on the come?

Michael F. Foust

The demand that we're talking about and that we put in our stats are projects that we're bidding on or that we have at least preliminary proposals out to or proposed LOIs at least. And then there are some very large potential build-to-suits that are out in the market with RFPs and RFIs currently.

William A. Crow – Raymond James & Associates, Inc.

Thank you. That's it for me.

Operator

Your next question comes from the line of Lukas Hartwich from Green Street Advisors. Your line is open.

Lukas Hartwich – Green Street Advisors, Inc.

Thank you. Hey, guys. Mike, I was hoping you could talk about how you think about the relative risks and rewards when you're weighing whether to deploy capital domestically or internationally.

Michael F. Foust

It's interesting because the markets that we're looking at, where we're actively building, both the U.S. and internationally, are major markets. So whether it's London or Dallas or Singapore or Northern Virginia, we're not taking emerging market risk at all. So the initial risk that we think we mitigate very well with our processes and procedures is going into a new market, whether it's a new market domestically or a new market internationally.

And we mitigate those risks because we have tried and true very specific programs on design, contracting, project management, commissioning, and property operations. And when we go into a new market, whether it's in the U.S. or in international, we have market leaders come in from other Digital regions to get things set up, trained, establish our program while we're training local folks. And a lot of our employees are international folks too who have a lot of experience.

So there, for example, our folks in Australia and Singapore, our long-time data center experts and operators in those markets. So it's more of entering a new market rather than an international market because we're not going into emerging markets. We're staying in mature, where are a lot of our customers, frankly, especially a place like Singapore and London and even Paris are existing customers of ours and working with us in multiple markets, the same for Amsterdam as well.

Lukas Hartwich – Green Street Advisors, Inc.

That's helpful. Thanks.

Operator

Your next question comes from the line of Ross Nussbaum from UBS. Your line is open.

Gabriel Hilmoe – UBS Securities, LLC

Hey, guys. It's Gabe Hilmoe here with Ross. I was wondering. Can you maybe talk a little bit about Equinix evaluating the possibility of converting some or all of their business to a REIT and how you maybe view that relationship going forward from a potential competitive standpoint?

Michael F. Foust

We're really good partners and we're doing work together all the time and new things all the time, including currently. So with our relationships and in terms of value that we bring, in being able to play in so many markets, it has been very value-add for them. We've got great relationships top to bottom throughout the organization. So we expect to continue to have a great relationship with them.

Gabriel Hilmoe – UBS Securities, LLC

Thank you.

Operator

Your next question comes from the line of Jonathan Schildkraut from Evercore Partners. Your line is open. Jonathan Schildkraut, your line is open.

Jonathan Schildkraut – Evercore Partners, Inc.

I'm sorry. Can you hear me? Hello?

Michael F. Foust

Yes, we can.

A. William Stein

Now we can.

Jonathan Schildkraut – Evercore Partners, Inc.

All right, I apologize for that. I had a question about New Jersey. Bill, you talked about tracking a lot of demand and demand from financial services, and we're tracking actually a bunch of demand from financial services as well. And one of the things that we are hearing is that some of these clients are very interested in dedicated backup systems, generators, and other equipment.

And you noted that perhaps your facilities were better suited to fill some of the demand in the New Jersey market. I was wondering if you could tell us if that was one of the items that you were seeing. And if not, maybe you could elucidate us a little bit on what it is about your facilities that places you in a better competitive position. Thanks.

Michael F. Foust

Sure. Mike here. I'll go ahead and answer that. Yes, definitely, our POD architecture, where we have dedicated power and UPS backup power infrastructure, is critical, especially for financial services, but really for almost all corporate enterprises. They really don't want to be in a position where they're sharing the power systems and parts of the cooling systems with other customers.

So our buildings are designed essentially to be buildings within a building, so that power and backup power infrastructure is fully dedicated to the individual customer. And that really is a primary criteria for your financial services and corporate enterprise in general.

Jonathan Schildkraut – Evercore Partners, Inc.

All right, excellent. If I could sneak one more, it's more of a mathematical question, but we were calculate churn. And it looks like churn, at least for 2011, is falling somewhere or fell somewhere in the 7% on an annual basis range. Is that in the range of a correct number?

A. William Stein

I don't believe. If you look at our renewal overall, our overall renewals on a revenue basis, GAAP revenue basis, I think we're probably about 100%.

Michael F. Foust

Are you looking at square footage?

Jonathan Schildkraut – Evercore Partners, Inc.

No. I was just trying to look at the revenue run rates, incremental lease commencements and then realized incremental revenue growth. You know what; I can take that question offline. I apologize.

Michael F. Foust

Okay, no worries.

Operator

And your last question comes from the line of Chris Lucas from Robert W. Baird. Your line is open.

Chris R. Lucas – Robert W. Baird & Co., Inc.

Good morning, guys, just a couple of quick questions. Just going back to New Jersey real quick, Mike, just so I'm clear, latency is not an issue for a lot of these users at this point. Really it is more of a back-office functional demand issue in New Jersey for those corporate users?

Michael F. Foust

It varies. It varies widely. Yes, I'd say it's a range. There's still a significant amount of latency sensitive. Even if it's not necessarily trading, there are databases that need to be concurrently maintainable. And then there are a number of -- a significant amount of applications that are less latency critical, some of the more cloud-oriented, grid-computing types.

And some of those actually applications we've taken with Wall Street firms down in Virginia and some other locations that maybe they can enjoy a little bit lower power cost especially. So it really runs the gamut. We're seeing a lot of consolidation, and we've been seeing this across the board now for a couple years and it's starting to accelerate where companies in general will have data centers in different departments.

It's in the converted broom closets, the converted conference rooms, in high-rise buildings. And the IT departments are getting their arms around all these dispersed applications in different departments and bringing them under one roof. And that typically means coming into a new facility that's built for them. So I think we're seeing a lot of that. That does represent a pretty wide range of applications and equipment.

Chris R. Lucas – Robert W. Baird & Co., Inc.

Okay, and then just talking about consolidation. There is money in the federal budget for data center consolidation. I guess I'm just curious as to what you're seeing in terms of actual movement along that front and then also sort of what your sense is to the ultimate size of that opportunity.

Michael F. Foust

We're clearly seeing more activity and more interest in leasing as opposed to owning with the government. We think it's going to be a trend. We speculate it's going to be a trend. It's a little too early to tell, especially in election year, but we are starting to see some requirements and we've actually executed on government requirements recently in Virginia that represent that kind of consolidation into the new facility.

So I'm guessing we'll continue to see that and maybe start to build through this year. So we're encouraged that there's going to be more government demand, especially as looking more at operating model versus an owning model.

Chris R. Lucas – Robert W. Baird & Co., Inc.

Okay. And then last question, Bill, just on -- relative to guidance. There's been a little deterioration in the dollar relative to some of the other currencies. I just wanted to get a sense as to how much variance off of the guidance dollar to the other currency denominations do you need to see in order to have a meaningful impact on sort of the outcome of the results for 2012?

A. William Stein

Right now, our guidance or assumptions for currency exchange rates for guidance purposes are conservative, in the sense that I think the euro and the pound and the Sing dollar are all quite a bit higher -- not quite a bit, but higher than what we stated in our assumptions. So, at this point, if today's exchange rates for the balance of the year and there were no fluctuation whatsoever, it would add another couple of pennies to the existing FFO.

Chris R. Lucas – Robert W. Baird & Co., Inc.

Great, thanks a lot. That was helpful.

A. William Stein

It actually goes the other way.

Operator

And this concludes the Q&A portion of today's call. I'll turn the call back over to Mr. Mike Foust for any closing remarks.

Michael F. Foust

Once again, thank you everyone for taking the time to be with us today and taking the time for a great turnout for the Investor Day as well. And I'd just like to thank all of our team members here at Digital Realty. Our team has done a terrific job, record-breaking year in leasing and developing our customer relationships more deeply. And the team here is doing a terrific job delivering those data center solutions across a wide range of market.

So my thanks to the DLR team and we're looking forward to a really good 2012. Thank you.

Operator

And this concludes today's conference call. You may now disconnect.

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