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Executives

Pamela Matthews – Director, IR

Michael Foust – CEO

Bill Stein – CFO and Chief Investment Officer

Analysts

Irwin Guzman – Citigroup

Will Marks – JMP Securities

Jordan Sadler – KeyBanc Capital Markets

Siri Anampra [ph] – Albert Heimers and Company [ph]

Tayo Okusanya – UBS

Michael Bilerman – Citigroup

Craig Mailman – KeyBanc Capital Markets

Phillip Gutfleish – Elm Ridge Capital Management

Digital Realty Trust, Inc. (DLR) Q2 2008 Earnings Call Transcript August 6, 2008 1:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Digital Realty Trust second quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, this call is being recorded today, Wednesday, August 6, 2008. And now, I'd like to turn the conference over to Ms. Pamela Matthews, Director of Investor Relations. Please go ahead Ma'am.

Pamela Matthews

Thank you, and good morning – good afternoon to everyone. By now, you should all have received the copy of the Digital Realty Trust earnings press release. If you have not, you can access one in the Investor Relations section of Digital's website at www.digitalrealtytrust.com or you may call 415-738-6532 to request a copy.

Before we begin, I would like to remind everyone that the management of Digital Realty Trust may make forward-looking statements on this call that are based on current expectations, forecasts, and assumptions that involved risks and uncertainties, that could cost actual outcomes and results to differ materially from expectations. You can identify forward-looking statements by the use of forward-looking terminology such as believe, expects, may, well, should, or similar words or phrases. You can also identify forward-looking statements by discussions of future events or trends, or discussions that do not rely solely on historical matters including statements relating to pricing and demand, leasing expectations, redevelopment delivery expectations, the company's future liquidity and access to debt and equity capital, and the company's expected financial results for 2008, including projected FFO per sharing unit and assumptions related thereto. For 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 31st, 2007 quarterly report on form 10-Q for the quarter ended March 31st, 2008 and subsequent filings with the SEC. The company disclaims any intention or obligation to update or revise any forward-looking statements as a result of new information, future events, or otherwise. Traditionally, this call will contain non-GAAP financial information including Funds From Operations or FFO, Adjusted Funds From Operations or AFFO, Earnings Before Interest Taxes Depreciation and Amortization or EBITDA, same store – Net Operating Income or NOI, and same store tax net operating income. Digital Realty Trust is providing this information as a supplement to information prepared in accordance with generally accepted accounting principle. Explanations of such non-GAAP items and reconciliations net income are contained in the company's supplemental operating and financial data for the second quarter of 2008 furnished with the Securities and Exchange Commission and this information is available on the company's website at www.digitalrealtytrust.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. To manage the call on timely manner, questions will be limited to two 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 Foust

Great. Thank you, Pamela. Welcome to the call everyone. I will begin with a brief overview of Digital Realty Trust, then I'll review the success of our portfolio of operations during the quarter and conclude with the discussion of market trends and supply-demand conditions. Following my remarks, Will Stein will address our financial performance and our revised guidance for 2008.

First, a brief introduction. Digital Realty Trust is the leading owner and manager of technology real estate. Our portfolio currently contains 74 properties containing 12.9 million rentable square feet of property excluding one property, the Westin Building in Seattle that's held as an investment in an unconsolidated joint venture. Our properties are located in 27 metro areas across North America and Europe. The portfolio now includes approximately 1.9 million square feet of space held for redevelopment, a very important source of growth for the company. DLR provides a variety of datacenter facility solutions including turn-key datacenter, power base building, and build-to-suit datacenter. For domestic and international corporate customers, our properties serve a wide range of industry political market including information technology, internet enterprises, financial services, telecom network providers, energy companies, and other Fortune 1000 firms.

Turning now to our portfolio operations. Our team turned in another very successful quarter in all fronts. Leasing, operations, acquisitions, and finance. Portfolio occupancy excluding space held for redevelopment, increased to 95.2% at the end of the second quarter, compared to 94.7% for the previous quarter, and 94.6% for the same period in 2007. Our leasing program continues to capture demand for new facilities by corporate enterprise customers and by I.T. service providers.

During the quarter, leases commenced an approximately 138,500 rentable square feet of space. This includes 86,200 square feet of Turn-Key Datacenter space, leased at an average annual GAAP rental rate of $185 per square foot, and also includes 52,000 square feet of non-technical space, leased at an average annual GAAP rental rate of $26 per square foot. In addition, we signed leases during the quarter, totaling 121,800 square feet of space consisting of 106,700 square feet of Turn-Key Datacenter leased at an averaged GAAP rental rate of $173 per square foot. We leased 600 square feet of Powered Base Building at an averaged annual GAAP rental rate of $67 per square foot, and 14,500 square feet of non-technical space at an averaged annual GAAP rental rate of $25 per square foot.

Tenants include major financial institutions, a large international telecom network provider, and a major tech-component manufacturer.

After June 30, we assigned additional leases totaling 60,000 square feet of Turn-Key Datacenter at an averaged annual GAAP rental rate of $150 per square foot. New tenants include a major financial services company and a large system integrator. Overall, we continue to see a very attractive pricing and strong demand for our top market, particularly for our Turn-Key Datacenter product.

The sales team currently is engaged with well over 4 million square feet of new customer prospects, representing over 420 megawatts of data center demand. We continue to see a significant lack of supply necessary to meet this demand and DLR is one of the few data center provider to actively billing speculative Turn-Key space across our major markets. The depth and experience of our technical team makes DLR a preferred infrastructure solution provider for many large corporations and system integrators.

Turning to our redevelopment program. We currently are underway on construction projects in high demand markets in the U.S. and Europe. These projects will add approximately 510,000 gross rental square feet of additional Turn-Key Datacenter to our operating portfolio in the second half of 2007 – I'm sorry, second half of 2008, including 124,500 square feet for Aircom in Dublin. Approximately, 428,000 rental square feet of Turn-Key space was delivered in the first two quarters of 2008. Overall, we plan to deliver a total of 57 MW of new Turn-Key space in 2008. Our leasing and product delivery programs are on track to contribute strong results this year and end of 2009.

Turning now to our acquisitions program. In June, we acquired 650 Randolph Road in Franklin Township, New Jersey. The recently completed purpose built datacenter cell totals 128 7,800 square feet and is capable of supporting approximately 70,000 square feet of raised floor. We contribute the property to our redevelopment inventory and are making additional improvements to the building to meet our powered base building specifications. We are marketing the facility to financial services company, system integrators, and every Fortune 1,000 companies looking for large blocks of high-quality space in the very active metro New York/New Jersey market.

Also in June, we acquired Reynolds House Datacenter located in Manchester, England. The 38,000 square foot income producing facility was purposed built as a data center in 2001 and contains nearly 23,000 square feet of raised floor with a potential for an additional 7,000 square feet of raised floor. The facility is fully leased to three tenants on long-term basis. On June 30, we acquired a 50% interest in 1201 Comstock Street a site in Santa Clara, California, continuous to 1,100 Space Parks and next to the 1,500 Space Park Drive joint venture property. We immediately began construction on a 24,000 square foot data center which will contain approximately 14,000 square feet of raised floor. Concurrent with the acquisition, we signed a lease with a leading technology company for the entire building. The tenant is scheduled to take occupancy in January, 2009 upon completion of the facility.

On last quarter's call, I discussed results of a study we commissioned that focused on the current drivers demand for datacenters in the U.S., including immediate and longer term growth prospects. Consistent with these results, and despite the challenging economic environment, Fortune 1000 companies, Internet enterprises, and the system integrators continue to make significant investments in IT infrastructure. And this reflects the critical nature of these assets to today's corporations. Our teams are experiencing strong demand in the major markets in the U.S. and Europe especially for our Turn-key product.

Our ability to deliver this highly improved product quickly and consistently continues to drive our performance and will be an important source of growth per DLR over the coming years. We believe that these important trends combined with our business model, strong balance sheet, and proven ability to act as capital for multiple sources, will drive strong, long-term FFO growth for DLR.

I now would like to turn the call over to our CFO, Bill Stein, who will discuss our second quarter financial results, the success for our capital program, and our revised 2008 FFO guidance. Bill?

Bill Stein

Thanks, Mike. Good morning, and good afternoon everybody. I'd like to begin with a review of our second quarter 2008 financial results and then discuss our liquidity position and finally conclude with our revised guidance for 2008. Following my remarks, we will open the call to your questions.

FFO on a diluted share in unit basis was $0.59 in the second quarter of 2008, up 15.7% from $0.51 in the same quarter last year and up 1.7% from $0.58 in the first quarter this year. As I discussed on the last call, in the first quarter of 2008, non-recurring items accounted for approximately $0.02 per diluted share in unit of additional FFO. When adjusting for these items, the quarter-over-quarter increase was 5.4%. Adjusted FFO or AFFO for the second quarter of 2008 was $30.4 million, or $0.41 per diluted share in unit. This compares to our first quarter AFFO of $27.5 million, or $0.37 per diluted share in unit. The AFFO payout ratio for the second quarter was 75.6%, down from the first quarter AFFO payout ratio of 83.8%.

EBITDA adjusted for preferred dividends and minority interest, was $68.1 million in the second quarter, up 4.4%, from $65.2 million in the first quarter and up 23.8% from $55 million in the second quarter of 2007. Net income for the quarter was $13.8 million, up 24.3% from $11.1 million in the first quarter of 2008 and up 76.9% from $7.8 million in the same period in 2007. Net income available to common shareholders in the second quarter was $3.7 million, or $0.05 per diluted share, up $2.9 million, or $0.04 per diluted share, in the previous quarter. Net income available to common shareholders in the same period in 2007 was $2.6 million, or $0.04 per diluted share.

Same-store NOI was $69.1 million in the second quarter of 2008, up 0.6% from $68.7 in the first quarter of 2008 and up 16.3% from $59.4 million in the second quarter of 2007. Same-store NOI adjusted for straight line in FASB 141, which referred to as same-store cash NOI, was $61 million in the second quarter, up 1% from $60.4 million in the first quarter of 2008 and up 17.1% from $52.1 million in the second quarter of 2007. These increases were primarily the result of new leasing in our properties commencing during the 12 month period ended June 30, 2008.

I will now review specific items in the statement of operations to provide additional color on the results of the quarter. For the second quarter, rental revenues increased $98 million, up 5.7% from $92.7 in the previous quarter. The increase was primarily due to the commencement of leases signed in the prior quarters. Tenant reimbursement increase 17.9% to $25.7 million from $21.8 million in the first quarter of 2008. The increase in tenant reimbursement was partially offset by property operating in maintenance expenses which was $36.4 million in the second quarter of 2008, up 15.2% from 31.6% in the previous quarter due to new lease commencements. Approximately 75% of the increase in reimbursements in property operating and maintenance expenses were related to utility cost of the properties. G&A increased during the quarter to $9.8 million, up from $8.8 million the previous quarter due in part to local business taxes, occupancy expenses related to our new London office, IT professional fees, and a full quarter of amortization expense related to our long term incentive compensation plans.

Turning now to our balance sheet, during the second quarter, we capitalized 24%, or $4.5 million, of interest related to construction projects which compares to 23%, or $4.4 million, in the first quarter of 2008. The increase was due to additional construction expenditures during the quarter. In addition, we capitalized approximately 27% to $2.9 million in compensation expenses compared to approximately 29%, or $2.6 million, in the first quarter of 2008.

Liquidity continues to be a significant concern for real estate companies and maintaining a strong balance sheet with financial flexibility to continue to fund our construction activities is a priority for us. Accessing capital from multiple sources even more critical in time such as we are experiencing today. We recently completed the following transactions. On July 17, we closed an $80 million secured financing in our three Corporate Place facility located at Piscataway, New Jersey. The loan is a three-year maturity with two one-year extensions at an interest-only rate of 6.72%. On July 21st, we completed a Common Stock offering of $5.75 million shares, which generated $211.6 million in net proceeds which were utilized temporarily repaid borrowings under our revolving credit facility to fund the acquisitions development and redevelopment activities, and for general corporate purposes. On July 24th, we successfully closed on the $200 million uncommitted, unsecured Prudential Shelf Facility. The three-year, multi-currency facility provides for draws, from time to time, as approved by Prudential, with an average life and final maturity up to seven years and ten years, respectively. Concurrently with the close of the Facility, we made an initial draw of $25 million at an interest-only rate of 7% with a three-year maturity. The Prudential Shelf Facility is subject to covenants that are substantially similar to the covenants contained in our revolving credit facility. When we executed the Prudential Shelf Facility, an amendment to our revolving credit facility permitting the execution of the Prudential Shelf Facility became effective.

Finally on July 25th, we increased the commitments under our revolving credit facility to an aggregate commitment of $675 million by adding a new $25 million commitment by Deutsche Bank through the accordion feature of the revolver. In Europe, we are currently negotiating and documenting a secured construction current debt financing for Datacenter Facility located on London's perimeter. Estimated proceeds are up to £53.9 million with a five-year term, no amortization, and a swap interest rate on the permanent debt currently in the range of 6.5% to 6.75%. The loan is subject to completion of documentation, various closing conditions, and is expected to close within the next two weeks.

We are also negotiating and documenting another secured financing of a domestic property held by Joint Venture. This financing will generate total proceeds to the Joint Venture of approximately $44 million with a 5-year term subject to 15-year amortization and an interest currently ranging from 6.25% to 6.5%.

Currently, we have $67.8 million outstanding on our revolving credit facility including letters of credit. Based on the covenants in our credit facility and the new shelf facility, we have total borrowing capacity of over $957 million, consisting of $607 million of immediate liquidity under the credit facility without any future additions to the borrowing base and additional secured debt capacity of approximately $350 million. If this capacity were fully utilized, our pro forma total debt-to-market value would be approximately 45%. Our total debt at quarter end was $1.4 billion and our ratio of debt to total market value was 27.2%. Our non-GAAP fixed charge coverage ratio was 2.5 times and our non-GAAP debt service coverage was 4.6 times.

As of June 30th, our weighted average cost of debt was 5.3% and the weighted average maturity was 5.3 years including debt extension options. A break down of how we calculate these ratios can be found in our supplemental operating and financial data report furnished to the FCC and available on our website.

I would now like to return to our – like to turn to our revised guidance for 2008. With better visibility towards our full year 2008 results, we are raising FFO guidance by $0.05 to a range of $2.40 to $2.50 per diluted share in unit. The new guidance reflects a shift in our leasing mix towards our Turn-Key Datacenter solution and is based on the following assumptions. Total acquisitions for the full year in the range of $115 million to $200 million, consisting of $65 million to $100 million of vacant properties for our redevelopment program and $50 million to $100 million of income producing properties with an average cash cap rate of 8%. I'd like to note that these represent a slight change from the assumptions that were in the earnings release.

The commencement of leases were approximately 840,000 square feet to 950,000 square feet of Turn-Key Datacenter and powered-based building space at an average annualized gross rent of $115 per square foot. You will note that there's a slight increase here in the assumed rent per square foot, from $90 to $115 per square foot. The commencement of leases for 100,000 square feet to 125,000 square feet of basic commercial space at an average annualized gross rent of $23 per square foot. This is an increase from $19 per square foot and total CapEx for our redevelopment program of $600 million, of which $237 million was spent as of second quarter end. Finally, G&A will remain, we believe, at $41 million. This concludes our formal remarks. We would now be happy to take any questions that you might have.

Question-and-Answer Session

Operator

Thank you. And ladies and gentlemen at this time we will conduct the question and answer session. (Operator instructions) Our first question comes from the line of Michael Bilerman from Citigroup. Please go ahead.

Irwin Guzman – Citigroup

Good afternoon. It's Irwin Guzman here with Michael. Mike, you talked about, I believe, finding 2000 square feet of Turn-key space delivering in the second half. Can you talk about how much that is leased and what the timing of commencement is between the third and the fourth quarter?

Mike Foust

It's coming online fairly well distributed – I would see more slanted toward the fourth quarter. About 124,500 square feet of that which would represent the Aircom building in Dublin. That is fully wrapped, and – I don't have a break – I would say probably about a third of that space overall is leased, maybe 40% and the rest is –

Irwin Guzman – Citigroup

That's including Aircom or excluding it?

Mike Foust

Let's see, that'd probably be excluding Aircom.

Bill Stein

Irwin, in terms of our signed but not commenced – the backlog, we've got 215,000 square feet that will commence in the third quarter, 30,000 in the fourth quarter, and 132,000 in the first quarter of 2009.

Irwin Guzman – Citigroup

And are you – in the redevelopment pipeline in general, are you seeing more of a shift toward Turn-key spaces as opposed to powered based building in terms of demand? You previously talked about a 50-50 spread. Is that moving more toward Turn-Key?

Bill Stein

Yes. The last quarter particularly was almost 100% Turn-Key space in terms of leases that we signed and now that trend will balance a little bit but we're seeing for the year should be significant majority of Turn-Key space.

Irwin Guzman – Citigroup

Can you talk a little bit about cloud computing? A lot of telecom and internet enterprise companies are out there offering cloud computing reduce sort of Datacenter storage demand? When you think about the 420 mega watts demand that you said you're tracking, how much of that do you think could be served by this type of product?

Bill Stein

Well, cloud computing means – it's private different types of applications. So, you have cloud computing or utility computing within a company, and that's what we're seeing a lot of the demand especially from the financial services industry where they are ratcheting up and down computing power for different applications, especially highly computational type applications and risk management and derivatives pricing in to such. You also have cloud computing referred to where you have online applications where instead of running your Microsoft applications on your PC, they'll be run out of a datacenter that Microsoft would host. That's another type. Sometimes, people call the software, the service.

It's very hard for me to break out what amount our sales force funnel right now is cloud computing per se but we are seeing a lot of the demand driven from the financial services industry for these internal grid computing, cloud type computing applications.

Irwin Guzman – Citigroup

You don't see that being a negative to the business?

Bill Stein

No. It's driving demand.

Michael Foust

It's the opposite, Michael.

Irwin Guzman – Citigroup

Yes. It's going to drive more demand into your assets.

Bill Stein

We think so. Yes. We are seeing it.

Irwin Guzman – Citigroup

Okay. Great. Thank you.

Bill Stein

Thank you.

Operator

Thank you. And our next question comes from the line of Will Marks from JMP Securities. Please go ahead.

Will Marks – JMP Securities

Thanks. Hello, Bill. Hello, Mike. Questions. Some questions. One on – I may have missed this, but on your guidance that you compared to after the first quarter on the commencement of leases. you took the square footage down but the rate is up substantially and does that have to do with you leased more space in the second quarter than you would have thought and is the rate up because of the difference between turn-key and power base?

Bill Stein

It's a shift towards more turn-key, Will.

Will Marks – JMP Securities

Okay.

Bill Stein

There's more turn-key in the blend rather than power base build.

Will Marks – JMP Securities

Great. Okay. And then, general thoughts, Will, on the rate side of things. Are rates continuing to go up for datacenter space in general and along the same lines, I've heard that in Silicon Valley there's basically – or San Francisco south, there's very little, if any, datacenter space available. Can you comment on that?

Bill Stein

Sure. We're seeing – we really sell out pricing in almost all of our markets today. It varies – our rates that we're quoting on our per square foot basis vary by quarter-by-quarter, especially for the Turn-Key because of different utilizations and the way the spaces are laid out. On a kilowatt – per kilowatt basis, rates have gone up for us over the last four quarters. On an accumulative basis, about 30%. Now we don't see that trend continuing quite that same pace, but what we're seeing good trending and pricing on a kilowatt basis, and we think we'll continue to see good returns.

On Silicon Valley, going to your question there, right now there's not much space at all available and we're actually working on a couple of buildings on our Space Park Drive site that will be coming on online here in the next nine months – six to nine months or so. – So, we're hoping to get ahead of the market there for that. There are some large projects that are on the planning side that I will be coming online second-half of '09 and 2010, but right now there's definitely a lack of supply.

Michael Foust

Supporting that, Will, we've a large project that is leased to a major internet provider that leased before it finished. Still under – well I guess it's finished now. And then we leased a property simultaneously with a close down there, I read about in the property, to a tenant, and we've mentioned that I believe in our earnings release.

Will Marks – JMP Securities

Right. Okay. Couple other things, on page 11 of your Supplemental, the run rate NOI, is that straight line, the rental revenues?

Michael Foust

Yes.

Will Marks – JMP Securities

Okay.

Bill Stein

Yes.

Will Marks – JMP Securities

It is. Really? Okay. And then on – in terms of your comment Mike, about rates being up 30% or so in the last year, I guess, we should have see you of about 10% of your portfolio turning '08-'09, I think, and I guess, we can read into that. That would be – those leases have been through upside in market rates even above probably the straight line now?

Mike Foust

Yes. Well, we should see some good uplift in those rates. And we've seen them with some of the renewals we've done where rates are going up 20% – 30%. And they vary, some of the spaces is turn-key that's up for renewal. A lot of it is more priced at powered base building level. Because their space is where the tenants had put the improvements in themselves. And – but regardless, in the right buildings, our rates uplifts to 20% – 30%. I think that they're going to be typical.

Bill Stein

And Will, the straight line – since the straight line is the midpoint, it's typically lower than the end of term rent. So, it's actually a – the increase is substantially higher when you're comparing a straight line versus cash.

Will Marks – JMP Securities

Got it. Makes sense. Okay. Thanks, guys.

Operator

Thank you. And your next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Please go ahead.

Jordan Sadler – KeyBanc Capital Markets

Good morning, all. It's Jordan Sadler, here with Craig. Going back to the backlog, Bill, I didn't – you went rent to that real quick. It was 215 square feet in 3Q, 30,000 in 4Q, and 132 in 1Q?

Bill Stein

Yes. 1Q, correct.

Jordan Sadler – KeyBanc Capital Markets

Okay. Do you have – sorry.

Bill Stein

I'm sorry. 132.

Jordan Sadler – KeyBanc Capital Markets

Okay. Do you have the rents on those commencements?

Bill Stein

Yeah. We'll give you revenues.

Jordan Sadler – KeyBanc Capital Markets

Okay.

Bill Stein

Roughly 8.7 Q3, 1.2 Q4, about 12.5 Q1.

Jordan Sadler – KeyBanc Capital Markets

And those are the annualized numbers? Right?

Bill Stein

No, those are the revenues that are expect – the first one I gave you, the revenues expected in 2008, that (inaudible) expected 2009.

Jordan Sadler – KeyBanc Capital Markets

Okay, the full – contribution for 2008, got it, versus the contribution for 2009. Got it.

Bill Stein

Correct.

Jordan Sadler – KeyBanc Capital Markets

And then, the leases, well, that leases that were commenced during the second quarter, the 86,000 square feet at 185, what was the timing of that?

Bill Stein

Let me see. You know, I don't think I have it.

Jordan Sadler – KeyBanc Capital Markets

Was it that one – was there one sizeable lease in there?

Bill Stein

I have a very small (inaudible) spreadsheet here. This may take a little while given my eyes.

Jordan Sadler – KeyBanc Capital Markets

You could come back to me on it if you like. I'll ask another one.

Bill Stein

Yes, I know it's here. It's – it looks like it's spread more or less into the quarter. I'm trying convince (inaudible) date in the call.

Jordan Sadler – KeyBanc Capital Markets

So mid-quarter would be fine?

Bill Stein

Yeah. Mid-quarter's fine.

Jordan Sadler – KeyBanc Capital Markets

Okay. And then, what is the planned use of proceeds for the – quite the offering that you guys completed in July. Just kind of continue to build out the redevelopment pipeline or is there anything more imminent?

Bill Stein

Immediate use proceeds was to pay down the revolving credit facility.

Jordan Sadler – KeyBanc Capital Markets

Sure.

Bill Stein

And I think we had – we had some of our borrowings in Pounds and Sterling. So, we actually have something of a cash position too because we're waiting for the U.K. construction loan to fund – to match fund the pay down there. And then other than that, right now it's to continue to fund our CapEx, although as you might imagine that from time to time we see some interesting opportunities on the acquisition side.

Jordan Sadler – KeyBanc Capital Markets

Okay. There's nothing teed up above and beyond your guidance at this point. Its kind of what you are saying?

Bill Stein

Nothing that we would deem improbable.

Jordan Sadler – KeyBanc Capital Markets

Okay. And then, I think in the third-quarter your option on telex comes due or potentially expires? And, I'm just curious what your plans are.

Bill Stein

Yes, we're looking at that. We haven't made a determination yet whether we're going to exercise that are not. I mean they're doing quite well. As a company it represents more of a private equity type investment in the company. So, we just have to determine if we want to move ahead with that option. But, we haven't made a determination yet.

Jordan Sadler – KeyBanc Capital Markets

And, how does their leases in your media room sort of play into your decisions? Meaning wanting some participation in the upside there.

Bill Stein

The leases really, I guess I personally viewed as kind of a separate topic because, I think, we really have to look at the investment in terms of we'd be making a kind of strategic private equity investment in a company that we think is strong and has really good business plan. But it really doesn't affect the income coming from those leases at all. So, it's more kind of a separate capital allocation analysis for us.

Jordan Sadler – KeyBanc Capital Markets

Okay. That makes sense. Last question. Just coming back to the $4.2 million square feet of prospects you identified on the demand front.

Bill Stein

Yes.

Jordan Sadler – KeyBanc Capital Markets

What is your typical – I wasn't clear if that's what your tracking or how much your entertaining and bidding on or what but maybe you can clarify that and then maybe talk about the potential capture rate.

Bill Stein

Sure. Bill, those are prospects. Potential customers have various levels of interest in discussions that our team is tracking and talking to. So, kind of, represents some – kind of the demand that we're seeing, that we're touching today in our various major markets in the U.S and in Europe as well.

Jordan Sadler – KeyBanc Capital Markets

How's that like (inaudible)

Michael Foust

(inaudible) I would – I think, we've been tracking between 25 facility per center or so overtime. Maybe slightly higher because some of these end up being companies end up doing their own construction. A number of these. That's a guesstimate on my part. I have to go back and kind of do some more analysis on that.

Jordan Sadler – KeyBanc Capital Markets

Maybe it would be more useful. Do you know what that prospect pipeline look like three months ago, in the last call?

Michael Foust

Actually, the price – three months price similar size [ph].

Jordan Sadler – KeyBanc Capital Markets

Okay.

Michael Foust

Probably similar size.

Jordan Sadler – KeyBanc Capital Markets

Great. Thank you.

Operator

Thank you. And our next question comes from the line of Siri Anampra [ph] from Albert Heimers and Company [ph]. Please go ahead.

Siri Anampra – Albert Heimers and Co.

Good afternoon, thank you. I'll try to limit to two questions anyway. On the demand front, I know Michael, you talked about pretty healthy demand, but there's still few to be held (inaudible) of skepticism. Maybe if you could just give us – talk about what kind of a sale cycle are you guys seeing and how has that changed, let's say maybe three months ago, or six months ago, and also on the competitive front, are you guys seeing any new players out there, or any new bills obviously there's talked about the credit markets had definitely now not helping any kind of speculate or supply to come online. And also, do you see an instances where enterprises are taking some of the outsource data centers in-house, just because of the macro concerns? Thank you.

Michael Foust

Sure. Really not seeing a trend on going in-house and if anything, we're saying much more of a trend of outsourcing, either outsourcing on wholesale basis, like we provide or outsourcing to system integrators who are customers of ours, or other IT service providers, like the EquaNet [ph] and Savitzes [ph]. So we're seeing – I guess I would say, we definitely see more outsourcing than insourcing. Also, you ask about kind of a sales cycle, we're working with many larger corporate enterprises, and large international companies, and the sales cycle pricing with those types of companies, could be anywhere, 6 to 12 months to complete all these transaction and that's fairly – that's pretty much the same what we've been seeing for the last nine months or so, so I don't think that trend has really changed. I'm sorry I think you had another question about demand?

Siri Anampra – Albert Heimers

Yes. On the demand, maybe if you can just give us a little more color. Are there any particular verticals that you guys are seeing increase demand or has that pretty much remain the same during the past six months?

Mike Foust

It's been pretty much the same and with a large emphasis on the financial services and system integrators. I'd say – I think I've mentioned this before probably that our current revenues are about 12% financial services, and financial services probably represent about a third of our current prospects. So a lot of demand from the major international services, Wall Street trading platforms. We're seeing a lot of demand there, and the system integrators, and broadly Fortune 1000.

Siri Anampra – Albert Heimers

Good. And then just one follow up question. On the lease expirations, I know you guys have recently good size of space that expiring over the next two years. Could you guys give us a mix of how much over this is Turn-Key, and how much of this is Power Based?

Mike Foust

I don't have that at my finger tips. I think probably it's – this year '08 and '09 has a very small number. It's a larger number I think around 14% or so of square footage in 2010 but I think most of it, even though it's built out, a lot of it would be priced as power based building because the tenants put the investments in themselves. And so, if they want to renew, now, ironically because a big upside in some of these spaces is that the tenants move out and we can release it as Turn-key space. So then take advantage of the improvements that the tenants have put in but that typically not the case. The tenants usually when they have built out space that they've invested in, they usually like to stick around.

Siri Anampra – Albert Heimers

Okay. Fantastic. Thanks a lot guys.

Operator

Thank you. (Operator instructions) Our first question comes from the line of Tayo Okusanya. Please go ahead.

Tayo Okusanya – UBS

Thanks. Good afternoon. Congratulations on the great quarter. A quick question in regard to – can you talk a little bit about in the shift in mix between the power based versus the turnkey. What's driving client demands towards more to the – of the turnkey solutions right now? And if you expect that saving of that particular product to continue over the next two quarters?

Mike Foust

I think, Kale, I think, we will see it continue with the emphasis on the Turn-key space. I think, customers are – like the idea of being able to utilize our capital to fit out and, I think, as importantly, are recognizing the quality of our development engineering schemes and our ability to lever the space. So, besides being a good financial solution, I think operationally and engineering wise, we're very good solutions for these large corporate. So, I think, we continue to develop that level of security and reliability with the customer. So, it seems our turn-key base is a very good solution. And also willing to customize spaces for customers too that might have some more specialized applications. So, I think that plays into it as well.

Bill Stein

And Tayo, the nice thing about the Turn-key space is, from our standpoint, there are significant barriers to entry. And the most significant barrier to entry is capital. So, for a private developer, they simply – unless they have a lot of access to equity, they really can't provide this product.

Michael Foust

And because where we are, we do have financial wherewithal and engineering capability to build the space and to do some speculative space. Speed the market is very important. We can provide that speed to market to get the customers up and running in a much shorter timeframe than virtually any one else out there. And that's a really good competitive advantage for us. Because the tenants, as I've mentioned, recognize that engineering expertise and in our operational capabilities of our running the properties cost effectively.

Tayo Okusanya – UBS

Sounds great. Thank you.

Operator

Thank you. And our next question is a follow-up from Craig Mailman from KeyBanc Capital Markets. Please go ahead.

Jordan Sadler – KeyBanc Capital Markets

Hi, guys. This is Jordan. Could you just – talking about the Turn-key leasing, what is sort of the range of size of space that you're leasing in terms of raised floor, square footage, and sort of where's the sweet spot for you guys right now?

Michael Foust

We're ranging, typically, from 5,000 feet to 40,000 to 50,000 feet. I think that sweet spot we are seeing good demand. We can really track in that 20,000 foot range.

Jordan Sadler – KeyBanc Capital Markets

Okay. And separately, and those in the sales cycles on those in the larger transactions are in that 6 to 12 month range that you uploaded early?

Michael Foust

Yes.

Jordan Sadler – KeyBanc Capital Markets

Okay. Its in the larger corporate who are taking that space.

Michael Foust

Exactly.

Jordan Sadler – KeyBanc Capital Markets

Okay. And then, could you talk about markets and where you're seeing the most significant dislocations in terms of demand outweighing supply? Just give maybe your – give it a rank currently.

Michael Foust

I mean this isn't exactly in exact rank order but we're seeing Silicon Valley and these are all kind of favorable from our perspective in terms of high demand and lack of supply right now. Chicago certainly. We're seeing it in – well, even more in Dallas now is starting to turn. But even more so, Northern Virginia, a very strong market for us. New Jersey and Northern New Jersey, and then Paris and London. So, those markets are probably the ones that have kind of the strongest supply-demand imbalance in our favor.

Bill Stein

and Jordan, when we say Chicago, we're talking about downtown Chicago, not the suburbs.

Michael Foust

Yes, Pacific Park [ph] 350 Cermak building.

Jordan Sadler – KeyBanc Capital Markets

Okay. Do you guys have anything on the suburbs?

Bill Stein

No.

Jordan Sadler – KeyBanc Capital Markets

Well, you wouldn't have any demand in the suburbs then?

Bill Stein

That's right, no.

Jordan Sadler – KeyBanc Capital Markets

I follow you Bill.

Bill Stein

But, we are just addressing downtown demand.

Jordan Sadler – KeyBanc Capital Markets

Right. And, has there been any transactions used in the investment market? Have you seen anything to point to? Have there been more or less transactions or properties for sale?

Mike Foust

Well, it's been pretty quiet. The large Lockwood Capital 365 main portfolio has not traded at this point. And really –

Jordan Sadler – KeyBanc Capital Markets

Is that going to trade?

Mike Foust

I couldn't speculate. I know they're still working on a deal.

Bill Stein

And Jordan, just access to that insignificant quantities is a challenge for any asset class. Well, I think that what's involves in any large portfolio deal. You basically – .

Jordan Sadler – KeyBanc Capital Markets

(inaudible)

Bill Stein

Pardon me?

Jordan Sadler – KeyBanc Capital Markets

I was saying that's not forcing anybody to bring portfolios to market though for sale?

Bill Stein

Well, we'd only force it if you have a debt maturity.

Jordan Sadler – KeyBanc Capital Markets

And you're not seeing much of that?

Bill Stein

No, not at this point.

Mike Foust

When these assets are stabilized, it usually flow very strong cash flow. I mean, we have seen folks – individual development opportunities where folks are buying sites or buying shell buildings that they trying to market as data centers but we – I can't think over the last quarter of any stabilized data center assets that have traded.

Jordan Sadler – KeyBanc Capital Markets

That's helpful. Thank you.

Operator

Thank you. And our next question comes from the line of Michael Bilerman from Citigroup. Please go ahead.

Michael Bilerman – Citigroup

I want to come back to some of your comments on capital and Turn-key space. You keep on talking about how you're well positioned because you have access to capital relative to others or private developers who can't do it. Have you shifted from your own, given how precious your capital is, not knowing if the debt markets or the equity markets are always going be open for you. Are you pricing your capital differently today than you were three months ago, or even six or twelve months ago before these build outs?

Bill Stein

Well, we certainly – we are pricing it differently on the acquisition front for sure. We've re-established much higher thresholds there, and on the development front, I think our returns are going up too, as rents go up. So, the answer is yes to in both product sense.

Michael Bilerman – Citigroup

Just give me a sense, I mean is it up 100 basis points, 200 basis points?

Bill Stein

On the development front, I think its a couple 100.

Michael Bilerman – Citigroup

And so you, you think your returns that you're getting are north of 15% at this point, on re-development?

Bill Stein

Typically.

Michael Bilerman – Citigroup

Okay. And then,

Mike Foust

I would say averaging in mid-teens, on average.

Bill Stein

And then on the stabilized – I think to do a stabilize we'd probably prefer to be mid-nine-ish.

Michael Bilerman – Citigroup

Okay. And then, the 415,000 square feet of – this is that are signed but not yet commenced that are going to roll in 3Q, 4Q and 1Q. How much of that is coming – is that all other than redevelopment out of the 1.9 million square feet?

Bill Stein

Yes.

Michael Bilerman – Citigroup

And has all the capital been spent on that space yet?

Bill Stein

No.

Michael Bilerman – Citigroup

And so, can you just breakout how much – what's the total capital spend to build out that space, and how much has been spent to date, as of June 30?

Bill Stein

I can give you the June 30 construction work in progress which, for redevelopment, is $364 million that will show up on our 10-Q. We've got another $11 million of construction work in progress is unrelated to redev. And then the best I can do is give you the – you know what we've spent to date and what our revised CapEx program is for the year which is roughly 600.

Michael Bilerman – Citigroup

How much of that relates to this 400 – I mean, you've already delivered some space, and your working on space that's going to deliver in 2009-2010. So I'm just trying to get a perspective of a bottom line impact of this 415,000 square feet of space coming online.

Bill Stein

When you say bottom-line impact, you mean the –

Michael Bilerman – Citigroup

The FFO. Right. So you talk about revenues what I'd like to get to is an NOI less interest as that serves the flow back on to the income statement.

Bill Stein

I think that, as Mike said, if you do a mid-teen unlevered return on the capital invested. Granted it's trending more towards Turn-Key so the dollar is per square foot, on average you're going to be higher. In terms of the blend, no, I think you'd have to work with a range there.

Michael Bilerman – Citigroup

And the 360 foreign CIT, that's on a whole 1.9 million square foot pipeline right?

Bill Stein

Correct.

Michael Bilerman – Citigroup

And does that include land basis?

Bill Stein

Yes. But not all that's currently sort of under construction, you may have it in the redevelopment pool but it may not be an active –

Michael Bilerman – Citigroup

Why?

Bill Stein

Because there's a portion of that redevelopment, I think it's about 35%-40% that are in income producing buildings so, it's space that we've shown. We bought the building and we may not be currently building.

Michael Bilerman – Citigroup

What's the volume of redevelopment space that you – that is delivered but not yet renting.

Bill Stein

Very little. I don't have a number at my fingertips. But it's going to be a very small number.

Michael Bilerman – Citigroup

And is that included in your run rate NOI? In other words, is that adjust for a couple of thousand square feet you might have you delivered over the last couple of weeks that might not be paying rent yet?

Bill Stein

I don't think that would be in the run rate NOI because I think that's of June 30.

Michael Foust

June 30 is the cut off.

Michael Bilerman – Citigroup

But presume you have 415,000 square feet in space, that's near term deliveries. Some of that has to be fully built out waiting, I mean, that we are – you've spent the capital but you haven't – the rents haven't commenced? Right, so, there is that –

Bill Stein

That's a backlog.

Michael Foust

That's the backlog but I mean the backlog is basically a situation where leases commence as soon, for most part, as soon as the product is finalized and commissioned.

Michael Bilerman – Citigroup

You're not sitting on any vacant fully built out Turn-Key space as of June 30th where you are – where you sort to have rolled the interest expense from that capital spent on to the balance sheet.

Bill Stein

Very little. It might be well under 100,000. It might be 50,000 feet. I'm speculating.

Michael Foust

I mean, I think, there's – we have some that was vacant at June 30 where we signed the lease yesterday or expected to sign this week, later in the week and that will basically take up all of it.

Michael Bilerman – Citigroup

Okay. And none of the vacancy that's on the core portfolio has been leased or pending lease commence? The 500 basis points of vacancy you have in the core –

Bill Stein

I'm not aware of anything there that's out for lease. What's out for lease is really redevelopment.

Michael Bilerman – Citigroup

Okay. Thank you.

Bill Stein

Thank you.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Craig Mailman from KeyBanc Capital Markets. Please go ahead.

Craig Mailman – KeyBanc Capital Markets

Last one, sorry. The mix on the commencements is or used to be I think 50-50, and with this update, it's now closer to Turn-Key versus shelf?

Mike Foust

Right. So the commencement in the second-quarter of Datacenter space, all but 300 feet were –

Craig Mailman – KeyBanc Capital Markets

I just mean the guidance of 900,000 for the full year.

Mike Foust

On the blend?

Craig Mailman – KeyBanc Capital Markets

Yes. I mean you get 900,000 square feet of commencing, I guess I could back into how much – or in the different buckets year to date. And then you guys could give me the amounts on the stuff that's commenting in the back half but maybe it's just be easier to back of the envelop. What do you think the mix is for Turn-Key versus shelf for the full year?

Bill Stein

Eyeballing it, on a square footage basis, it's a little more than 50-50. Basically –

Craig Mailman – KeyBanc Capital Markets

60-40?

Bill Stein

Yes. 60 – 40, but we drive so much more revenue through the turnkey product that from a revenue standpoint, it's much higher.

Craig Mailman – KeyBanc Capital Markets

Now, that makes sense. It just gives me a better idea of what you're spending CapEx per foot.

Bill Stein

Right.

Craig Mailman – KeyBanc Capital Markets

Thank you.

Operator

Thank you. And our next question comes from the line of Phillip Gutfleish from Elm Ridge Capital Management.

Phillip Gutfleish – Elm Ridge Capital Management

Yeah. Just a quick question. If I look at these supplements, it looks like you have a contract with – a lease with JP Morgan that expires in three months and in the last one, it was about 100 and some odd months, and I'm wondering, is there a typo in this supplement or has there some – had something changed. Also, because if I do it on a per square foot basis, it's about $250 per square foot on that contract.

Bill Stein

What page are you?

Phillip Gutfleish – Elm Ridge Capital Management

20.

Operator

Thank you. And gentlemen, I'm sure that we have no further questions at this time. Please continue with any closing remarks that you might have.

Mike Foust

Wait, we will still need to answer the gentleman's question.

Bill Stein

I'm not sure what was in the last supplement but this would be space most likely at 1118 in New York and it's a short term lease that is at a high rank per square foot, and will likely renew.

Mike Foust

Yeah, it's turn-key space. It's a data center, operating data center space.

Bill Stein

Hello?

Operator

It seems that Phillip's line has disconnected.

Bill Stein

Okay.

Operator

And gentlemen, I'm sure that we have no further questions in the queue. Please continue.

Mike Foust

Okay, well we appreciate everyone's time and focus on DLR and look forward to following-up with everyone as we go through time here and appreciate taken the time to join us today. Thank you very much.

Bill Stein

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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