Nov 5, 2008
Executives
Pamela Matthews – Director, Investor Relations Michael Foust – Chief Executive Officer Bill Stein – Chief Financial Officer and Chief Investment Officer
Analysts
Michael Bilerman - Citigroup Jordan Sadler - KeyBanc Capital Markets [George Arach] - Merrill Lynch Srinivas Anantha - Oppenheimer & Co. David Rodgers - RBC Capital Markets Omotayo Okusanya - UBS William Marks - JMP Securities David Aubuchon - Robert W.
Baird & Co. Tom Lamb – Weybosset Research and Management
Operator
Good day, ladies and gentlemen. Thank you for standing by.
Welcome to the Digital Realty Trust third quarter 2008 results conference call. (Operator Instructions) I would not like to turn the conference over to Pamela Matthews, Director of Investor Relations.
Please go ahead, ma'am.
Pamela Matthews
Thank you and good morning and afternoon to everyone. By now you should have all received a copy of the Digital Realty Trust earnings press release.
If you have not, you can access on in the Investor Relations section of Digital's website at www. DigitalRealtyTrust.com or you may call 4157386500 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 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 or similar words or phrases.
You can also identify forward-looking statements by discussions of future events or trends or discussions that do not relate solely to historical matters, including statements related to future demand, leasing, capital expenditures, liquidity, and the company's expected financial results for 2008 and 2009, including projected FFO per share and unit and assumptions related thereto. For a further discussion of the risks and uncertainties related to our business, see the company's annual report on Form 10-K for the year ended December 31, 2007 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, earnings before interest, taxes, depreciation or amortization or EBITDA, same-store net operating income or NOI, and samestore cash net operating income.
Digital Realty Trust is providing this information as a supplement to information prepared in accordance with generally accepted accounting principals. Explanations of such non-GAAP items and reconciliations to net income are contained in the company's supplemental operating and financial data for the third quarter of 2008 furnished to 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 remarks we will open the call to your questions.
To manage the call in a timely manner, questions will be limited to two per caller. If you have additional questions, please feel free to return to the queue.
I'll now turn the call over to Mike.
Michael Foust
Great. Thank you, Pamela.
Welcome to the call, everyone. I'll begin with a brief overview of Digital Realty Trust, then I'll review the strong success of our portfolio operations during the quarter and conclude with a discussion of market trends and supply and demand conditions.
Following my remarks, Bill Stein will discuss in detail liquidity, dividend increase, third quarter financial performance, and our outlook for the balance of 2008 and 2009. First, a brief introduction.
Digital Realty Trust is the leading owner and manager of technology real estate. Our portfolio currently contained 74 properties containing 12.9 million rental square feet, and this excludes 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 1.6 million square feet of space held for redevelopment, a very important source of growth for the company.
DLR provides a variety of datacenter facilities solutions, including Turn-Key Datacenter, Power Base Building, and Build-To-Suit Datacenters for domestic and international corporate customers. Our properties serve a wide range of industry vertical markets, 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, especially with respect to leasing operations and finance. Demand is high for our datacenter products and we are closely managing our balance sheet to maintain comfortable levels of liquidity.
Portfolio occupancy, excluding space held for redevelopment, held steady at 95.2% at the end of the third quarter compared to 95.1% for the same period in 2007. The record volume of leases signed during the quarter is a result of our successful leasing program, which continues to capture demand for new facilities by corporate enterprise customers and enterprise IT service providers.
As previously announced, leases commenced during the quarter on approximately 351,000 square feet of space. This includes 190,000 square feet of Turn-Key Datacenter leased at an average annual GAAP rental rate of $142 per square foot.
It includes 104,000 square feet of Power Base Building leased at an average annual GAAP rental rate of $30 per square foot, and 58,000 square feet of non-technical space leased at an average annual rental rate of $23 per square foot. Year-to-date as of 9/30/08, we commenced 682,000 square feet of Datacenter at an average GAAP rental rate of $116 per square foot and 142,000 square feet of non-technical space at an average annual rental rate of $23 per square foot, which are all in line with our previously revised 2008 expectations.
Reflecting the demand we continue to see in our top markets, we signed a record amount of leases during the quarter, totaling 478,000 square feet of space signed consisting of 262,000 square feet of Turn-Key Datacenter leased at an average annual GAAP rental rate of $155 per square foot, 171,000 square feet of Power Base Building at an average rental rate of $47 per square foot, and 45,000 square feet of non-technical space leased at an average annual GAAP rental rate of $13 per square foot. These tenants represent a wide variety of industries, including major financial firms such as JPMorgan Chase, Morgan Stanley, TD Ameritrade and Goldman Sachs, large telecom and IT service providers, including BT America, T-Systems and Equinex, a large health care provider in Dallas, and finally, leading international system integrators such as IBM.
Year-to-date as of 9/30/08 we've signed leases for 766,000 square feet of Datacenter at an average annual GAAP rental rate of $112 per square foot and 94,000 square feet of non-technical space at an average annual rental rate of $19 per square foot. Despite the challenging market conditions, overall we continue to see very attractive pricing and strong demand throughout our top markets, particularly for our Turn-Key Datacenter product.
Demand for Datacenter space continues to be very healthy in our primary markets. The DLR team currently is engaged in direct discussions with over 1.9 million square feet of new Datacenter prospects.
In addition, we've identified over 5 million square feet of active requirements seeking space in these markets. We continue to see significant lack of supply necessary to meet this demand and DLR remains one of the full Datacenter providers with the financial capacity and expertise to proactively build turnkey facilities.
A significant factor for our success is the depth and experience of our technical sales, design and construction and operations teams, who make DLR the preferred infrastructure solution provider for many large corporations and system integrators. Turning to our redevelopment program, we currently are under way on construction projects in high demand markets in the U.S.
and Europe that will approximately 294,000 gross rentable square feet of additional Datacenter space to operating portfolio, including the HSBC BuildToSuit in suburban London. Approximately 531,000 rentable square feet of redevelopment plus 26,000 rentable square feet that previously was not classified as redev space were delivered as turnkey space in the first three quarters of the year.
Overall, we plan to deliver approximately 50 megawatts of IT load in 2008. In addition, we were able to capture previously unutilized space of 120,000 square feet from Qwest in our 350 East Cermak facility in Chicago in exchange for a substantial payment to DLR.
We are redeploying this space as Turn-Key Datacenter to meet the demands from our tenants, including securities and commodity trading customers at the property. No other space is available at the building.
We expect to achieve significant added value at this flagship facility in what is likely our highest demand market. Overall, our leasing and product delivery programs remain on track to contribute strong results in 2008 and into 2009.
We are carefully monitoring both the demand for Datacenter space as well as capital availability in the credit markets as we continue to meet our customers' requirements for mission-critical IT infrastructure. The DLR team will continue to manage liquidity closely and will maintain prudent levels of cash.
We believe that our business model, unmatched organizational depth and breadth, strong balance sheet and proven ability to access capital will continue to drive above-market long-term FFO growth for DLR. I would now like to turn the call over to our CFO, Bill Stein, who will discuss our third quarter 2008 results, capital program, our increased 2008 FFO guidance, and new guidance for 2009.
Bill?
Bill Stein
Thanks, Mike. Good morning and good afternoon, everybody.
I will begin with a discussion of our liquidity position and our dividend announcement, and then review our third quarter 2008 financial results, our revised guidance for 2008, and our outlook for 2009. Following my remarks we will open the call to your questions.
Liquidity has become a critical concern for all businesses, including REITs, and maintaining a strong balance sheet with the financial flexibility to continue to fund our acquisition, redevelopment and development activities is a priority for us. Our ability to access capital from multiple sources is a critical component of our success.
In anticipation of what has developed into a significant economic downturn and global liquidity crisis, since the end of the second quarter of 2008 we have sourced and closed over $492 million of debt and equity capital, plus $142 million remaining on an uncommitted, unsecured private [shell] facility with Prudential. As a result, we have sufficient liquidity solely through borrowings on our revolving credit facility to meet all of our planned capital expenditures and maturities through 2009 and most of our debt maturities in 2010.
Our third quarter financings included a common stock offering in July which generated $211.6 million in net proceeds, the addition of a new $25 million commitment from Deutsche Bank increasing aggregate commitments under the revolving credit facility to $675 million, the initial draw of $25 million from the Prudential facility at an interest rate of 7% with a three-year maturity, a second draw of $33 million which we'll fund today at an interest rate of 9.32% with a five-year maturity. We also completed the following secured debt financings on three properties, generating proceeds of almost $198 million: We reported on our last call we closed an $80 million secured financing in July on our 3 Corporate Place facility located in Piscataway, New Jersey.
This loan has a three-year maturity with two one-year extensions and an interest rate of 6.72%. On September 11, 2008 we closed a $44 million secured financing for the joint venture at 1500 Space Park in Santa Clara, California.
Our pro rata share of the total proceeds was $22 million. The loan has a five-year maturity and an interest rate of 6.15%, with principal amortization on a 15-year schedule.
On September 2, 2008 we executed documents for a secured construction and permanent debt financing for a Datacenter facility located north of London in Welwyn Garden City. Practical completion of the project is expected later this month, and estimated proceeds on the permanent loan will be up to 53.7 million pounds, limited by a 75% loan-to-value ratio.
The permanent loan will have a five-year term, no amortization, and an all-in swapped interest rate currently in the range of 5.5% to 5.75%. Approximately 28.7 million pounds has been funded to date on the construction loan.
The proceeds from these transactions were utilized to repay borrowings under our revolving credit facility and other general corporate purposes. Our total debt at quarter end was $1.3 billion and our ratio of debt to total market cap was 22.6% based on the September 30 stock price of $47.25.
Based on yesterday's closing stock price of $34.05, our ratio of debt to total market value capitalization would be 27.7%. Our cash fixed charge coverage ratio was 2.5 times and our cash debt service coverage was 4 times.
As of September 30 our weighted average cost of debt, including interest rate swaps, was 5.76% and the weighted average maturity was 5.2 years, including debt extension options. A description of how we calculate these ratios can be found in our supplemental operating and financial data report furnished to the SEC and available on our website.
For additional information on our revolving credit facility, we have now added a new schedule to the third quarter supplemental package entitled Revolving Credit Facility Commitments, which lists the 17 participating banks and their corresponding commitments. Turning now to our revolver, we currently have approximately $106 million outstanding on the credit facility.
We are holding $60 million of that in short-term investments which represents our estimate of funding requirements over the next 30 days. Including the $33 million Pru facility that we'll fund today, we will have $662 million of immediate liquidity through short-term investments and funds that can be drawn on our revolving credit facility.
If this capacity were fully utilized, our pro forma debt to total market cap would be approximately 36.7% based on yesterday's closing stock price of $34.05. Looking ahead, based on our current plans we expect our capital requirements for the balance of 2008 and 2009 to total between $500 and $550 million, including $425 to $475 million of CapEx and $79 million of ongoing principal amortization and debt maturities in 2009.
This assumes that we exercise the one-year extension option on 350 East Cermak in June 2009. If we fund all cash needs through the end of 2009 entirely on our revolver, we would have approximately $70 to $90 million of liquidity at the end of 2009.
By the end of 2008 we expect to have sufficient eligible assets in our borrowing base to be able to fully utilize the revolver and the remainder of the Pru shell facility. In 2010, including the $95 million loan at 350 East Cermak, we will have a total of $108.7 million of debt and principal amortization.
The Cermak property is expected to have approximately $40 million of NOI in 2009. Based on this level of NOI, some time over the next 18 months we expect to be able to refinance this loan with a new mortgage at Cermak.
We could also issue notes through the uncommitted Prudential shell facility or raise secured debt at one of our other unencumbered assets. Moving now to our dividend, yesterday we announced an increase of 6.5% or $0.02 to $0.33 per quarter for our common stock dividend.
We currently estimate that the 2009 payout will represent approximately 103% of our 2009 taxable income based on the midpoint of our second quarter results guidance. We expect future dividend increases will be based on increases in the company's taxable income and the need to meet our redistribution requirements.
Now I'd like to turn to our third quarter results. FFO of $0.69 per diluted share and unit includes approximately $0.06 per share of additional FFO from certain significant nonrecurring items consisting primarily of $7.9 million representing a partial lease termination fee of $9.4 million from Qwest at our 350 East Cermak property net of $1.5 million of non-cash expenses.
This was offset by $1.6 million of non-cash expenses recognized related to the acceleration of the 2005 outperformance plan and $576,000 in straight-line rent adjustments related to two leases. After adjusting for nonrecurring items, FFO would have been $0.63 per diluted share and unit for the third quarter of 2008, a 6.8% increase over the second quarter of 2008 and a 23.5% increase over the same period in 2007.
Adjusted funds from operations or AFFO for the third quarter of 2008 was $44 million or $0.55 per diluted share and unit. This compares to second quarter 2008 AFFO of $30.4 million or $0.41 per diluted share and unit.
The AFFO payment ratio for the third quarter of 2008 was 56.4%, down from the second quarter AFFO payout ratio of 75.6%. EBITDA adjusted for preferred dividends and minority interest was $80.7 million in the third quarter of 2008, up 18.5% from $68.1 million in the second quarter and up 41.3% from $57.1 million for the third quarter of 2007.
Net income for the third quarter was $18.2 million, up 31.9% from $13.8 million in the second quarter and up 256.9% from $5.1 million for the same period in 2007. Net income available to common shareholders in the third quarter was $8.1 million or $0.11 per diluted share, up $3.7 million or $0.05 per diluted share in the previous quarter, a net loss available to common stockholders of $0.2 million or zero per diluted share for the same period in 2007.
Same-store NOI was $70.2 million in the third quarter of 2008, up 1.5% from $69.1 million in the second quarter of 2008 and up 15.2% from $60.9 million in the third quarter of 2007. same-store NOI adjusted for straight-line rents and FAS 141 adjustments, which we refer to as same-store cash NOI, was $64.9 million in the third quarter, up 6.4% from $61 million in the second quarter of 2008 and up 24.6% from $52.1 million in the third quarter of 2007.
These increases were primarily the result of new leasing in our properties commencing during the 12month period ended September 30, 2008. I would now briefly review specific items in the statement of operations to provide additional detail on the results for the quarter.
For the third quarter, rent revenues increased to $102.4 million, up 4.5% from $98 million in the previous quarter. The increase was primarily due to the commencement of leases signed in previous quarters.
G&A increased during the quarter to $11.3 million, up from $9.8 in the previous quarter, primarily due to the acceleration of the outperformance plan. G&A would have been flat quarter of 2005 if we had not accelerated the outperformance plan.
Turning now to our balance sheet, during the third quarter we capitalized 22% or $4.4 million of interest related to construction projects, which compares to 24% or $4.5 million in the second quarter of 2008. The decrease was due to additional construction projects coming online during the quarter.
In addition, excluding the OPP acceleration, we capitalized approximately 26% or $2.8 million in compensation expenses compared to 27% or $2.9 million in the second quarter of 2008. I would now like to discuss our revised guidance for 2008.
With better visibility towards our full year results, we are raising FFO guidance to a range of $2.58 to $2.60 per diluted share and unit. This increase is due to stronger than expected leasing results for the second half of the year as well as the significant nonrecurring items previously discussed.
Adjusting for the nonrecurring items mentioned that impacted Q3, plus an additional $4 million from the Qwest lease termination fee net of non-cash expenses that will be recognized in Q4 or $0.05 per diluted share and unit, FFO for the full year 2008 to be in the range of $2.47 to $2.49. This represents projected FFO growth of 20.5% to 21.5% over full year 2007 FFO of $2.05 per diluted share and unit.
Moving on to our initial 2009 guidance, FFO per diluted share and unit for the year ending December 31, 2009 is projected to be between $2.75 and $2.90. This guidance represents projected FFO growth of 5.8% to 12.4% over the 2008 revised FFO range of $2.58 to $2.60 per diluted share and unit.
Excluding the implementation of APB 14-1, which increases our GAAP interest expense by $4 million, FFO per diluted share and unit and net income per share for 2009 would both be higher by approximately $0.04 per share. Adjusting for both the nonrecurring items positively impacting 2008 results and the adoption of the new rules negatively impacting 2009 projections, FFO growth from 2008 to 2009 would be between 12% to 19%.
For the balance of 2008 and 2009, all capital expenditures are assumed to be funded through the company's revolving credit facility. As of today, the balance of the revolving credit facility of $106 million and the company has $93 million in cash and short-term investments.
The 2009 guidance is based on the following additional assumptions: Commencement of leases for approximately 500,00 square feet to 570,000 square feet of Turn-Key Datacenter and Power Base Building space at average annualized gross rents of $125 per square foot; the commencement of leases for 150,000 square feet to 265,000 square feet of basic commercial space at an average annualized gross rent of $21 per square foot; total capital expenditures in 2009 of $275 to $325 million; total G&A of $47 million, which includes $500,000 of acquisition-related costs previously capitalized which now must be expensed under new accounting rules commencing January 1, 2009; an additional non-cash interest expense of approximately $4 million due to the adoption of SEP ABP 14-1. In conclusion, with modest financing between now and the end of 2010, we have sufficient liquidity without issuing new equity to meet our current growth expectations.
This concludes our formal remarks. We would now be happy to take any questions that you might have.
Operator
(Operator Instructions) Your first question comes from Michael Bilerman - Citigroup.
Michael Bilerman - Citigroup
Mike, I have a question on the guidance for 2009 with regards to leases commencing. Based on sort of the volume of demand that you mentioned you were tracking in your prepared remarks and the sheer volume of leasing that you've done over the last several months, I'm wondering why the amount commencing next year, assuming a lot of the leasing you're doing now won't commence until then, I'm wondering why that number wouldn't be bigger considering you've commenced probably about 40% more this year than what you're projecting to start next year?
Michael Foust
It's really our amount of leasing activity and commencements is driven largely by capital availability and our desire to maintain a sufficient capital liquidity cushion. So we're taking a conservative view.
If the capital markets loosen up a little bit next year, as we're hopeful they will, then we'll be able to beat those numbers. So really it's not a reflection of demand; it's a reflection of capital availability that we're seeing today in the marketplace.
Michael Bilerman - Citigroup
So are you holding back on pursuing some of this new demand because of capital constraints?
Michael Foust
Yes. Yes, I mean, there's business that undoubtedly we would like to do, but we won't be able to address in terms of capital available.
Michael Bilerman - Citigroup
And one other question on the lease termination fees. Can you provide a little more background on the tenants, the reason for terminating and what the sort of run rate adjustment would be to your third quarter NOI if we were to back out the income that won't be coming in anymore.
Michael Foust
So this is related to Qwest, as I mentioned in my remarks, and at 350 Cermak in Chicago, it's maybe our most highest demand building, highest demand market, and we're out of space there. So we have the opportunity to have Qwest pay us a significant fee to give back space to us that they were not utilizing, and so we can take that square footage and turn around the build out Turn-Key Datacenter space to satisfy the demand we have in the building.
So it's a great value added opportunity to us. We'll substantially increase NOI coming from that floor and provide a lot of value add.
Essentially the payment overrides and consisted of approximately two years of gross rent, giving us a real good cushion in terms of re-leasing capability timeframes. I don't have the numbers at my fingertips in terms of what the run rate is without that space.
I will say we're planning on definitely replacing that and more in terms of new rents that are being captured in 2009.
Bill Stein
The average annual rent on the space that was given up was a little over $5 million - $5.3 million.
Operator
Your next question comes from Jordan Sadler - KeyBanc Capital Markets.
Jordan Sadler - KeyBanc Capital Markets
Just coming back to your comment, Mike, on the space you're tracking, you broke it up a little bit differently this quarter than in the last couple of quarters. And I think this time you said that you're in discussions for 1.9 million square feet of new prospects, with over 5 million square feet that you're tracking in the markets.
And I think last quarter you talked about 4 million square feet that you were engaging, and I'm trying to bridge the two comments. Is the 5 million analogous to the 4 million you were tracking and the 1.9 is the more serious stuff, or what?
Michael Foust
Exactly. So the 5 million relates to that 4 million plus, and the 1.9 is more serious LOIs, you know, beyond just hey, we know you have space, why don't you talk to us.
So more serious discussions in the 1.9.
Jordan Sadler - KeyBanc Capital Markets
And so what are you doing to your return requirements given sort of the capital constraints on new deals. How have you ratcheted them up?
Michael Foust
Yes, we've definitely been nudging up those unlevered returns we're looking at so, you know, I'd say today on projects, where we're building new turnkey space, we're definitely targeting solidly in mid-teen on levered returns for new projects whereas previously we might have been a little more broader ranged, dipping down into the 12% range, 12% to 15%. And now, you know, deals we're working on kind of range anywhere from 14% to 16%, 17%, and sometimes somewhat more.
This is on specific projects that we're building and leasing on a spec basis.
Jordan Sadler - KeyBanc Capital Markets
Bill, just curious if you could give us the backlog in terms of space that's teed up but not yet commenced?
Bill Stein
Sure. So on the signed but not commenced there's about $6.4 million of revenue that should come in in the fourth quarter, another $18.2 million that'll come in in the first quarter, and then a little over $700,000 in the third quarter of 2009.
Michael Foust
That's for the year 2009.
Bill Stein
Right, third quarter 2009.
Jordan Sadler - KeyBanc Capital Markets
Each one of those reflects the contribution to their respective year, right? So it explains the $4 million in 4Q is the additional revenue we'll see.
Bill Stein
Additional revenue to be recognized in 2008.
Operator
Your next question comes from [George Arach] - Merrill Lynch.
George Arach - Merrill Lynch
Following up on Jordan's question, it sounds like the demand in the market has actually increased over the last three months, but wondering if the demand growth is real net demand growth or does it now include tenants who had planned to build out their own space but now can no longer fund this on their own balance sheets?
Michael Foust
I think it's a little of both. We're seeing many more applications now, you know, across the board, across all the industry verticals that we address.
We're seeing more outsourcing, and that's driving business from the system integrators and the IT service providers who are tenants of ours. And there are several larger companies who have previously been looking at do-it-yourself projects.
These tend to be the larger-scale, longer-timeframe planning projects who are now engaging with us on potentially building out projects for them. And that's been actually typical kind of throughout our experience the last several years.
Previously there really weren't many viable alternatives to building it yourself and still giving the operational flexibility and control that the DLR model provides. So it's probably a trend that we've seen all along that we're seeing continuing.
George Arach - Merrill Lynch
What percentage of the 5 million square feet of demand that you mentioned is new net demands in those markets as opposed to tenants relocating from older facilities or consolidating their operations?
Michael Foust
That is hard to say. I think the net new is probably a very high percentage of that, keeping in mind that we are seeing a lot of consolidation.
We have been over the last three years, you know, financial services, energy companies, larger Fortune 1000s, and so this isn't a new trend. Where they need new Datacenter facilities to accommodate the new applications, especially the new server-based applications and trading applications that are more energy demanding.
That's a trend that we continue to see and it definitely works in our favor because people need more new facilities.
George Arach - Merrill Lynch
And finally, Bill, what was the construction in progress balance at the end of 3Q?
Bill Stein
Okay, let me give it to you a couple of different ways. First, when you look at the Turn-Key product, we had 293,757 square feet of Turn-Key product under construction at the end of the third quarter.
The work in progress total relating to that was $135 million, and that's broken up into $72 million for the actual construction work in progress and $63 million that's allocable to acquisition costs, so land and building. And then we have another 451,000, 452,000 square feet of Power Base Building.
There's $146 million of work in progress allocable to that. $109 million of that are actually the acquisition cost, land and building, and $36 to $37 million of that is the construction part of it, construction work in progress.
Was that clear enough for you? There's a fair bit of data there, but we'll have better - that'll be laid out in the Q as well, which is going to be filed on Thursday.
Operator
Your next question comes from Srinivas Anantha - Oppenheimer & Co.
Srinivas Anantha - Oppenheimer & Co.
Mike, I know you talked about this Qwest, the existing revenue run rate is around $5.3 million that's coming. At what price do you guys expect to replace that and what do you think the annual run rate for that is going to be once it's fully leased out?
Michael Foust
We typically don't give out specific rental rates at specific buildings, but I can tell you that Chicago is our highest priced market in terms of the rates that we're able to achieve there, typically because of the connectivity in the building, the power and kind of the universe of trading platforms in that market. So we see oftentimes 20% to 30% higher rates than we achieve in our other markets.
Bill Stein
The other thing, Srinivas, as I mentioned in my remarks, our budgets assume approximately $40 million of NOI in 2009 [inaudible] property growth which is higher than the NOI today.
Srinivas Anantha - Oppenheimer & Co.
And Mike, do you have any other instances of similar customers who have taken space in some of your key markets but not utilizing fully where you can take it back, especially with some of the leases still coming due later this year and next year?
Michael Foust
You know, we don't have very much rollover in the portfolio in terms of leases maturing this year or next year. There are a couple of instances in our Internet gateway buildings where we are talking to customers who might want to give back space that, you know, frankly, like in the Qwest position, they never really utilized the space, but the power is available and that's obviously very valuable when it's in one of our buildings with a lot of power availability and with the data center infrastructure already in place.
So I think we're going to have some value added opportunities like that, maybe not on the same scale as the Qwest space. We have not factored those into our 2009 projections, but our folks will be pretty aggressive to be able to take advantage of those opportunities where we can redeploy space.
So there are a couple of instances, I think, on smaller spaces we'll be able to do in 2009 and we have not factored those into the guidance.
Srinivas Anantha - Oppenheimer & Co.
I know you guys haven't said anything about your prior guidance of commencement of leases from 2008. I'm assuming there's no change to it.
But, anyway, your commercial space is already well ahead of what you have guided to, so anything that we should keep note of for 4Q '08?
Michael Foust
I think we're going to come in overall easily within that range that Bill had mentioned for our FFO guidance.
Bill Stein
Right now we're focusing the analyst commentary on the FFO per share numbers since there's so little time left in the quarter.
Operator
Your next question comes from David Rodgers - RBC Capital Markets.
David Rodgers - RBC Capital Markets
I was wondering on your comments regarding your own capital availability and how that may be limiting 2009 faster expansion. Could you prioritize as you sit here today between existing developments or existing redevelopments, new redevelopments and acquisitions kind of what your preference is or what you're seeing in the market relative to each of those opportunities today?
Michael Foust
Sure. I mean, our focus going forward right now is on deploying our existing portfolio of redevelopment inventory that 1.6 million feet that is in the portfolio today.
And so we will be opportunistic in terms of new acquisitions, but we're definitely prioritizing looking very closely at return on investment, return on cost, in order to prioritize building out our current inventory redevelopment space versus new acquisitions versus new development. So we're really not looking at any new out-of-the-ground developments at this point for 2009 and really focusing capital on the current redevelopment inventory that we own.
David Rodgers - RBC Capital Markets
Given that final comment, do you anticipate slowing down any existing redevelopments due to the same capital issues or are the existing redevelopments still on track and how much space during 2009 will become available? Will it be the entire amount?
Michael Foust
Not the entire 1.6 million. I believe in our guidance we're talking about in the range of 500,000 to 570,000 feet of Datacenter space coming online, so that will reflect pretty closely what we're that is what we'll be projecting to bring online in 2009.
David Rodgers - RBC Capital Markets
Is that fairly ratably throughout the year do you think?
Michael Foust
Probably more heavily weighted in the first half of the year, you know, probably 60% to 75% in the first half of the year.
David Rodgers - RBC Capital Markets
Bill, you drew down on the Pru facility, you said, or I guess you will today the cost on that, obviously higher than your remaining sources of debt. Can you just explain why you elected to pull down on that?
I'm sure there's a reason, but I was just curious as to the rationale for that.
Bill Stein
Probably a liquidity issue. The Pru facility, I want to emphasize for everyone on the call, is an uncommitted facility and we basically wanted to test the facility in a small amount to make sure that it was available as we entered into our planning process for 2009.
And we were gratified that it was available. While looking back historically, the 9.3% coupon is certainly higher than if we had issued maybe even 6 months ago.
In today's environment it's actually not that bad at all. At the time that we issued or the time that we priced it, which was October 22 - even though we're drawing it down today, we priced it October 22 - the spread over the five-year Treasury was 674 basis points.
And, of course, we don't carry a debt rating and just to give you some indicative spreads on that same day for debt of comparable maturities, where Vornado had a piece of debt maturing in 2011 and trading at 725 basis points over, Simon was at 675 over, and [Kempco] was at 725 over. Boston Properties was at 675 over.
So basically the spread was at least as good if not better than obviously companies that are bigger, been around longer, and have debt ratings. And as a new issue, this actually should have traded at a higher spread in any event.
Operator
Your next question comes from Omotayo Okusanya - UBS.
Omotayo Okusanya - UBS
Just to go back to the Pru uncommitted facility, if you needed to draw down on it going forward, each time you draw on it that's considered a new issue and then you need to come up with new pricing on that particular drawdown - is that the way the facility works?
Bill Stein
Absolutely. Its market based pricing at the time.
Omotayo Okusanya - UBS
And then how do I go about thinking of your taxable earnings versus FFO in '09? Is there a way you can give us a sense of what the big difference is between the two numbers, at least from that end, so we have a better sense of how to model dividend?
Bill Stein
That would be very difficult.
Omotayo Okusanya - UBS
I know like one or two major line items that are just helpful in regards to the difference. Does that recur every quarter?
Bill Stein
Well, I mean, it's basically depreciation. It's a very complex model, I will tell you that.
Omotayo Okusanya - UBS
Going back to the Qwest lease termination, net-net how much space are they giving up between this quarter and next quarter?
Michael Foust
It's about 120,000 gross square feet. Essentially what we find desirable it's over - it's got 1.8 megawatts of IT load that we'll redeploy as Turn-Key - I'm sorry, 8.1 megawatts of IT load that we'll be able to redeploy as Turn-Key Datacenter space.
And just to be clear, I mean, that's not all of Qwest's space in the building. They still have a very substantial operation in that building.
It was just excess space that they, frankly, over the years never utilized. And so now that we're full we can take advantage of that.
Omotayo Okusanya - UBS
And they were paying $5.3 million on that 120,000 gross square feet?
Michael Foust
Correct.
Operator
Your next question comes from William Marks - JMP Securities.
William Marks - JMP Securities
On sectors of the economy, are there any areas where you're seeing a real slowdown in demand?
Michael Foust
Not really. It's interesting.
Financial services continues to be a strong demand area - and that's very broadly, everything from commodities, security trading platforms to major Wall Street firms. We're seeing continued demand from the Internet sector, companies that are operating, companies like the Yahoo!s and Amazons and Facebooks of the world still need space.
And the system integrators and IT outsourcing companies are seeing a lot of demand, and I think, if you look at a lot of the analysis that's coming out of kind of the co-location, hosting, managed services sectors who are a lot of our customers, their businesses are doing quite well and they continue to see expansion for 2009.
Operator
Your next question comes from David Aubuchon - Robert W. Baird & Co.
David Aubuchon - Robert W. Baird & Co.
How much redevelopment opportunity do you specifically see that is left at the Cermak property past the Qwest space?
Michael Foust
We're pretty much full at that point.
David Aubuchon - Robert W. Baird & Co.
And when you think about that asset and that redevelopment opportunity relative to your capital financing plans going forward, obviously the mortgage is due in 2010. Can you just provide your thoughts about where you may see financing at that asset over the next two years?
Michael Foust
The mortgage is quite small relative to the size of the building and the size of the income. So, in truth, we could refinance today that amount if we wanted to.
It's just such a low loan-to-value that we'd rather hold off.
Bill Stein
We were in the market this year looking for $200 million of debt against the asset and because of the nature of the market, you can't get a bank to underwrite that. You basically are forced to do what's called club deals.
They bring in several banks in the $40 to $50 million size. And frankly, it's a little bit like herding cats; everybody has their hot points.
We had $150 million that we could have done, but we just felt that the building would be grossly underlevered at that point. And we clearly have room.
I mean, we have almost two years to wait for this market to open up. I mean, if you were to cap $40 million and actually the NOI would probably be higher than that in 2010, but if you cap $40 million at 8.5%, you're at $470 million of asset value.
David Aubuchon - Robert W. Baird & Co.
And your current target on the Qwest redevelopment space, to have that space stabilized, would be 2010?
Michael Foust
Probably, yes, first quarter 2010.
Bill Stein
Yes.
David Aubuchon - Robert W. Baird & Co.
And then just one last question relative to an earlier question about just demand and whether or not it's falling off, are you seeing anything differentiating the international side of your business right now?
Michael Foust
I'd say no. Now, with that said, we've been very focused on London, Paris, Amsterdam, and we're seeing good demand in all those markets.
I would say in London there was probably a little bit of a slowdown in interest from financial services, but growing interest from kind of corporate, major corporates and system integrators easily taking place. And now we've got financial services coming back and showing interest again.
A lot of interest from network providers, content delivery, corporates, system integrators, folks like IBM. We recently did a lease with them in Paris for their corporate customers.
It seems more broadly based in terms of different industry verticals than maybe it was even a year ago.
Operator
Your next question comes from Jordan Sadler - KeyBanc Capital Markets.
Jordan Sadler - KeyBanc Capital Markets
The lease termination fee, I just want to clarify - I don't know if I missed this - I think in your release you say there's another $4 million coming in the fourth quarter. Is that also from Qwest?
Bill Stein
Also from Qwest. It's an accounting recognition issue.
It's being recognized over three months, but the fee has been received, the cash was received last week or the week before.
Jordan Sadler - KeyBanc Capital Markets
So you've received a total of $14 million or so?
Bill Stein
$14 million was the gross fee.
Jordan Sadler - KeyBanc Capital Markets
$14 million is the gross. And that's all related to the same space at Cermak with Qwest?
Bill Stein
Right.
Jordan Sadler - KeyBanc Capital Markets
Now you would categorize this as an opportunistic lease termination, I would imagine. Are there prospects for this specific space and how much would you have to spend to bring this space online to re-let it?
Michael Foust
Yes, we definitely have prospect, Jordan. There are several folks in the building now that we're talking to who really want to expand and the Turn-Key product works really well for them here and for pretty critical operations.
So we'll probably be deploying somewhere around $60 million or so in total to build out the entire space. If we build out the entire space as Turn-Key, probably in that range.
Jordan Sadler - KeyBanc Capital Markets
And why sort of a 15 to 18 month lead time on the turnaround? I mean, you guys have built buildings in 6 to 9 months.
I'm just kind of curious.
Bill Stein
It's our usual conservatism. We're very, very positive about this space.
It's in a great building, best market, high demand, so we're being conservative.
Jordan Sadler - KeyBanc Capital Markets
And the lease term is effective as of what date? When does it come out?
Bill Stein
November 1.
Bill Stein
Jordan, you know, we're going to be building on six pods in the building eventually, but we're only doing four of the six right now under this capital program. So that's why we speak about full stabilization in 2010.
It assumes that the other two are built.
Jordan Sadler - KeyBanc Capital Markets
Bill, what did you assume in your guidance on next year's lease roll? I think 5.3% of rent is rolling.
What's the bump and/or retention factor?
Bill Stein
You know, I don't have that in front of me, but I think we assumed flat.
Jordan Sadler - KeyBanc Capital Markets
Flat?
Bill Stein
Flat. Conservative.
Flat.
Jordan Sadler - KeyBanc Capital Markets
Can you just maybe give us a little bit of color on who is rolling or what type of space is rolling? It looks like 200 and, I don't know, 481,000 feet at $40 rents?
Bill Stein
I don't have that.
Michael Foust
A substantial chunk of that is some office space, I believe office space in Boston and some office space in Philadelphia, that's rolling over. So those rents won't go up much.
And I think we're being conservative, you know, and seeing the parts that are Datacenter probably going up about 20%. And so it kind of all blends out to a fairly - I think we actually have about a 10% roll up in that space is what we're projecting, I believe, in our pro forma.
But a lot of it reflects the fact that a considerable portion is non-technical space.
Jordan Sadler - KeyBanc Capital Markets
So just to follow up, it sounds overall the guidance reflects your conservative nature, not to mention the environment and the ability to access capital. Could we maybe talk a little bit about what you guys are doing on the capital front to try and source new capital today?
I recognize it's very difficult in terms of big denominations and the long-term debt markets are shot, but what are you doing nonetheless?
Bill Stein
Well, we're meeting with prospective lenders, both in North America and in Europe, with the expectation that we'll get hopefully some injection of liquidity in the first half of 2009. We have smaller properties that I think are going to be more easily financed initially than Cermak.
The big mortgages are the tough ones to close at this point because of the illiquidity in the system, but I think, you know, there are still some banks in the U.S. that are open for business where you can get a $35 to $40 million loan, and that would be appropriate for some of our buildings.
And we have a large unencumbered asset base that would support that.
Jordan Sadler - KeyBanc Capital Markets
So these are one-off type mortgages you're talking about with these lenders?
Bill Stein
Correct. And we continue to have discussions with potential joint venture partners as well.
Obviously, that initiative has been affected by the illiquidity in the markets, too, but we have found some interest there which we're pursuing.
Jordan Sadler - KeyBanc Capital Markets
One other thing, just on HSBC. Is that starting earlier than you expected?
I think in the release you referenced November, and I remember you guys talking about like March of '09 or 1Q '09. Is it starting in November now?
Bill Stein
I think we have it in at December 1.
Michael Foust
Now, it might be a couple months earlier than we had projected before based on construction completions.
Jordan Sadler - KeyBanc Capital Markets
So it's going to put you well above the commencements, the high end of the commencement number of 2008 that you were expecting, 900 or whatever that number was.
Bill Stein
It would.
Michael Foust
Yes.
Operator
Your next question comes from Michael Bilerman - Citigroup.
Michael Bilerman - Citigroup
Yes, Bill, I just wanted to come back. You said something in your opening comment about having [inaudible] eligible assets in your borrowing base to be able to fully utilize a revolver under the remainder of the Pru facility.
What time period were you referencing in order to do that?
Bill Stein
That would be at the end of this year.
Michael Bilerman - Citigroup
And how much more needs to be put in and then sort of how do you get there, to be able to tap this facility?
Bill Stein
It's pretty insignificant. I mean, basically what we do, our borrowing base consists of two groups of assets - the leased or stabilized assets and buildings that are under construction.
Now that's only in the U.S. It's not in Europe.
Only domestic assets are eligible for the borrowing base. And we've done so much leasing in the last few months that we're basically going to be converting assets that had been in the borrowing base at their cost, you know, their construction cost, and putting them in as leased assets.
And our leased assets, if you think about the math on it, Michael, let's assume that we have a going in yield of - let's make it 16% to make it easy - and our cap rate that we use for calculating the value of the borrowing base is around 8.25% - we'll make it 8% just to make the math easy. You know, if you spend $100 million and you've signed a lease at 16%, it goes in at $200 million rather than $100 million, so you've created value within the borrowing base.
And then we have a 70% advance rate against that borrowing base asset.
Michael Bilerman - Citigroup
So how much, I mean, what's the - take me from why you're not getting it today and what sort of rolls into the fourth quarter to be able to -
Bill Stein
Well, you know, I think we maybe even could meet it today. It's really paperwork, so we just need to do the paperwork to submit it to the borrower to convert assets to borrowing base.
But we most certainly have it at the end of the quarter due to the expected leasing this quarter.
Michael Bilerman - Citigroup
And that gives you up to the full capacity of both of those lines?
Bill Stein
It does. And we also have to count the convertible debenture against that as well because that's another unsecured issuance.
Michael Bilerman - Citigroup
And then going on to Cermak, what's the NOI today after giving due affect to the Qwest going out, that $5 million?
Michael Foust
You know, I would have to look. I think the run rate NOI without that would probably be in the I'm guessing $33, $34 million.
But that's not a totally precise number.
Michael Bilerman - Citigroup
And so you think about getting to that $40 million of getting a 10% return on the $60 million?
Michael Foust
It'll be much higher than that.
Michael Bilerman - Citigroup
I'm just trying to figure out - you threw out a number of a $40 million NOI number.
Michael Foust
Yes, and that's not a run rate NOI. That'd be the NOI that we would achieve next year, so it wouldn't reflect the full year of lease up.
Michael Bilerman - Citigroup
So the $40 million is not even a stabilized number. The $40 million is just an '09 number?
Bill Stein
It's an '09 number because we're building out the space in '09 and we'll be signing leases in the back half of '09. So yes, that's right.
It's definitely a partial year.
Michael Foust
And we also have some leases on the fourth floor that are commencing in the second half of '08 that we don't have the full impact of until next year.
Michael Bilerman - Citigroup
So when you were talking about going out and getting that $200 million that obviously was with the previous NOI. What sort of loan-to-value was that part of it - was it like 50%?
Bill Stein
It was around 50%, exactly. I mean, even that wasn't a robust LTV compared to what you could have gotten a year ago.
Michael Foust
Yes, so we're really confident. We don't see, at minimum, refinancing the current loan balance as a particular hurdle for us.
As I mentioned, if we wanted to we could refi that today. But it would just be such a low loan-to-value that it just doesn't make sense.
We don't see a liquidity issue on that refinancing at all.
Michael Bilerman - Citigroup
And just going back to Jordan's question on the expirations, those [482,000] expiring. What you list as technology office total is only 670,000 out of your 11.2 million square feet, so I'm just trying to figure out, I mean, how much of that 42 is really just technology office space in that it shouldn't be that high of a percentage given you only have 670,000 square feet of it.
Michael Foust
We've got a large part, I believe, in Boston we've got a lease maturing there that's probably about 380,000 feet or so.
Bill Stein
2,010.
Michael Foust
Oh, that's 2,010?
Bill Stein
Yes.
Michael Foust
I would need to look at that and look at it line item by line item and get back to you.
Michael Bilerman - Citigroup
Yes, I mean, it says there's 127 leases, so I wouldn't think that there would have been that one large lease in there, but maybe we can go over it afterwards.
Bill Stein
That's looking like [inaudible] space at 127 leases.
Michael Bilerman - Citigroup
Yes, that's what I was just trying to understand, the lease distribution, to be sure we understand what's going on.
Operator
(Operator Instructions) Your next question comes from Tom Lamb – Weybosset Research and Management.
Tom Lamb – Weybosset Research and Management
Just a question about the capital structure. Did I understand you correctly that the new line of credit cost 9.3%?
Bill Stein
Well, there's not a new line of credit. The line of credit was put in place in August of 2007.
Tom Lamb - Weybosset Research and Management
Oh, I'm sorry. That's more than a year ago.
Bill Stein
And that's priced today at LIBOR plus 110.
Tom Lamb - Weybosset Research and Management
And that's the term of the line, LIBOR plus 110?
Bill Stein
It's [grid] pricing, so as leverage increases, the spread increases. But currently it's at LIBOR plus 110.
Tom Lamb - Weybosset Research and Management
What I'm trying to understand are opportunities for refinancing assuming that the credit markets come in and improve somewhat, both on that line and then we have some preferred issues outstanding that carry pretty high coupon. Can you tell us what the opportunities are to refinance it?
Bill Stein
Well, we wouldn't. I mean, when we put secured debt on properties, we use the proceeds to pay down the revolver.
That's just how we conduct business here. The revolver's basically our source of growth capital until the term debt markets reopen as well as the equity markets.
Tom Lamb - Weybosset Research and Management
And at that time you'll replace the revolver. Is that what you're saying?
Bill Stein
Well, it's a revolving credit facility, so you pay it down and you borrow against it. That's the basic nature of it.
And it's essentially a five-year facility, so we put it in place in August of 2007. The initial term is three years, and then it has two one-year extensions.
Operator
Your next question comes from Jordan Sadler - KeyBanc Capital Markets.
Jordan Sadler - KeyBanc Capital Markets
Did you guys punt on Telex?
Bill Stein
Yes.
Michael Foust
Just so people know that Bill and I realized that we had an option to exercise warrants for a small percentage of ownership in Telex, which is one of our tenants, and we declined to go ahead with that.
Bill Stein
It just didn't seem like a prudent use of capital at this time in this environment.
Operator
And thank you, sir. At this time there are no further questions.
I'd like to turn it back to management for any closing remarks.
Michael Foust
We're very pleased with the progress that our entire team has and the accomplishments that our team has made this year, and we're very positive going into 2009. And I appreciate everybody's taking the time.
It was a long call today and a lot of good questions as well. So we appreciate everybody's focus on DLR.
Thank you very much.
Bill Stein
Thank you.
Operator
Thank you gentlemen. Ladies and gentlemen, this concludes the Digital Realty Trust third quarter 2008 results conference call.
If you'd like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-405-2236 and enter access code 11120276. Once again, those numbers are 303-590-3000 or 1-800-405-2235 and enter passcode 11120276.
Thank you for your participation. You may now disconnect.
Have a pleasant day.