Feb 15, 2013
Executives
Pamela Garibaldi - Vice President, IR and Corporate Marketing Mike Foust - Chief Executive Officer Bill Stein - Chief Investment Officer and CFO
Analysts
Jamie Feldman - Bank of America Merrill Lynch Jonathan Schildkraut - Evercore Partners George Auerbach - ISI Group Emmanuel Korchman - Citigroup Jordan Sadler - KeyBanc Capital Markets David Toti - Cantor Fitzgerald Jonathan Atkin - RBC Dave Rodgers - Robert W. Baird Mitch Germain - JMP Securities Rob Stevenson - Macquarie Tayo Okusanya - Jeffries Ross Nussbaum - UBS John Stewart - Green Street Advisors Vincent Chao - Deutsche Bank
Operator
Good afternoon. My name is [Cyanuria] and I will be your conference operator today.
At this time, I would like to welcome everyone to the Digital Realty 2012 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Please note there is a limit of one question per analyst during the Q&A session.
Thank you. At this time, I would now turn the floor over to Ms.
Pamela Garibaldi. Ma’am, the floor is yours.
Pamela Garibaldi
Thank you. Good morning and good afternoon, everyone.
By now, you should have received a copy of the Digital Realty earnings press release. If you have not, you can access one in the Investor section of our website at www.digitalrealty.com or you may call 415-738-6500 to request a copy.
Before we begin, I’d like to remind everyone that the management of Digital Realty may make forward-looking statements on this call. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially.
You can identify forward-looking statements by the use of forward-looking terminology such as belief, expects, may, will, should, pro forma or similar words or phrases, and by discussions of strategy, plans, intentions, future events or trends, or discussions that do not relate solely to historical matters, including statements and expectations related to rents to be received in future periods, lease terms and rental rates, development and redevelopment plans, supply and demand, datacenter sector growth, returns, cap rates, acquisitions, leasing and investment, capital markets and finance activities, debt maturities, compliance -- covenant compliance, excuse me, the company’s growth, future, excuse me, company’s growth, financial resources and success, and the company’s future financial and other results including the company’s 2013 guidance and underlying assumptions. For a further discussion of the risks and uncertainties related to our business, see the company’s annual report on Form 10-K for the year ended December 31, 2011 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 FFO or AFFO, core FFO, earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted EBITDA, net operating income or NOI and cash NOI.
Digital Realty is providing this information as a supplement to information prepared in accordance with GAAP. Explanation of such non-GAAP items and reconciliations to net income are contained in the company’s supplemental operating and financial data package for the fourth quarter of 2012 furnished to the SEC and available on the company’s website at www.digitalrealty.com.
Now, I’d like to introduce Mike Foust, CEO; and Bill Stein, CFO and Chief Investment Officer. Following management’s remarks, we will open the call to your questions, which will be limited to one per caller and following your question the operator will be putting the line on mute in order to manage it in an orderly fashion.
If you have additional questions, please feel free to return to the queue. I will now turn the call over to Mike.
Mike Foust
Great. Thank you, Pamela, and welcome to the call everyone.
I would first like to thank everyone who participated in our Analyst Day two weeks ago. We greatly appreciate your interest and all the positive feedback we received since that event.
I’ll begin today’s call with a few comments on our sector, a brief summary on our 2012 operations, as well as our progress to-date in 2013. After my remarks, Bill will discuss our fourth quarter, as well as our first year 2012 financial results, and we will address some of the questions we’ve received since Investor Day with respect to our 2013 guidance.
Following his remarks we will open the call to your questions. Much has changed in our sector since Digital became the first datacenter REIT in 2004.
Today there are four datacenter REITs with different backgrounds, management teams, design philosophies, growth strategies and claims of competitive advantages. It is clearly an exciting sector with attractive growth prospects, but also one that requires a high level expertise around operations, innovative engineering, design and construction, finance, as well as acquisitions and investment management.
Digital Realty is well-positioned with deep professional resources in all of these areas. As we indicated in our -- at our event last month we finished 2012 with a solid performance and we are very encouraged by the level of activity going into 2013.
Types in the year include, first, an exceptional 22% growth in adjusted EBITDA over fiscal year 2011. Secondly, strong and consistent EBITDA margins of approximately 70% adjusted for transaction expenses and utility reimbursements.
Furthermore, we have record high leasing commencements of $135 million of annualized GAAP revenue and acquisitions of US$1.6 billion. In addition, we have record first quarter leases signed to date in Q1 2013 representing $31.4 million of annual GAAP rent revenues.
Let me turn first to our leasing activity, the record level of commencements in the fourth quarter of 2012 drove our strongest annual performance to date totaling $135 million in annualized GAAP rental revenue, up 36% from 2011. Since Analyst Day I’m pleased to report that we’ve signed additional leases totaling $13.4 million, bringing total lease signings for the first quarter to date to $31.4 million of annualized GAAP rental revenue.
This compares favorably to nearly $18 million of lease signings for the entire first quarter of 2012 and nearly $19 million for the first quarter of 2011. In fact, we are on track to exceed 2012’s highest quarter for lease signings of $32.2 million.
The additional signings increased our backlog to $99.5 million of annualized GAAP rent, of which $61.6 million is expected to commence in 2013, $20.4 million expected to commence in 2014 and 2015 timeframe, $17.5 million expected to commence between 2016 and 2018. We are very encouraged by our progress so early in the year.
Enterprise customers appear to be moving ahead with their new datacenter requirements as our cloud and managed services providers. Furthermore, we are seeing this activity across our portfolio including Phoenix, New Jersey, Aspen, Virginia, London and Sydney from industry verticals including financial services, social media, Internet enterprises and managed hosting cloud providers.
We continue to track approximately 1.9 million square feet of demand for new facilities. This consistent demand represents prospects in our sales funnel to which we’ve made proposals that we believe have a 30% or greater likelihood of signing.
For detailed supply and demand information on our major investment market, please see the appendix section of our Analyst Day presentation, which is posted on our website. Turning now to our 2012 lease renewal activity, during the year we signed approximately 621,000 square feet of Turn-Key Flex in Powered Based Buildings space at renewal rates that increased 9.3% on a GAAP basis and decreased slightly 3.7% on a first year GAAP basis.
This includes over 212,000 square feet of Turn-Key space and an average GAAP rental rate of $165 per square foot, up 5.2% on a GAAP basis and down 6.4% on a cash basis in the quarter. In addition, we renewed a large amount of Powered Based Buildings space over 408,000 feet, that’s up 20.3% on a GAAP basis and up 3.4% on a first year cash basis.
The combined average retention rate for datacenter space for the year was over 84%. On a square foot basis 74% of Turn-Key space or 82% of GAAP rent renewed on an average term of nearly 90 months.
We also renews 90% of expiring Powered Based Building, quietly 106% of GAAP rent and an average lease term of over 105 months. The healthy length of renewals along with the annual 2.5% to 3% contractual increases allows us to recapture any declines in cash rents after year three of the new lease term on average with continuously growing cash flow thereafter.
Last month we presented estimated mark-to-market annual GAAP rental rate increases on datacenter renewals and re-leasing of increased considerably 5% to 10% expected for 2013 to 2015. On a cash basis over that same period, we are projecting the first year cash rental renewals to decrease slightly by 3% from relatively high expiring rents.
As further evidence of the strength and resiliency of our portfolio, occupancy increased in the second quarter in a row to $94.4 million in the fourth quarter, compared to 92 -- [94.2%] in the third quarter. The increase was driven by the addition of over 165,000 square feet of space that was leased from our existing operating portfolio.
Secondly, the acquisition of two 100% occupied properties and commencement leases totaling nearly 187,000 square feet from our development program. These additions were partially offset by new available datacenter space converted from our development program and lease expirations noted above.
Turning now to our acquisitions program, we completed over $1.6 billion of strategic acquisitions in 2012 another record high for the company. Our acquisition programs remains very important component of our growth strategy and accounted for approximately 57% of our NOI growth in 2012.
Included in that figure are the Bouygues Telecom sale leaseback properties located outside of Paris, therefore we acquired in the fourth quarter for US$79 million. Bouygues Telecom is a BBB+ rated wireless telecom provider in France and the three properties are mission critical to their operations.
We expect to see more sale leaseback opportunities in 2013 reflecting part of the growing outsourcing trend. The blended going in unlevered cash cap rate for the fourth quarter acquisitions consisting of the Bouygues Telecom sale leaseback properties and the single-tenant Sydney property, this unlevered cash cap rate was slightly over 9%.
So far in 2013 we have completed two acquisitions totaling $32.5 million. The first property is an operating datacenter totaling 61,750 square feet located in Dallas, Texas area, approximately 3.5 miles from our Digital datacenter campus in Richardson.
The single tenant facility is leased on a long-term basis to a leading provider of business, information technology and communication solutions. The second property is located in Phoenix, Arizona and consists of -- actually in the Chandler market and consists of three buildings totaling approximately 227,000 square feet.
The first building, which totals above 109,000 square feet will be added to Digital Realty’s inventory of space held for development and is capable of supporting initially 7.2 megawatts of IT capacity. So our current tenant occupies the remaining two office buildings on a short-term basis offsetting the near-term carrying cost for the property.
Significant additional datacenter development is possible on this property and the site provides added future inventory to the Phoenix market where we’ve experienced significant absorption at our existing facilities, along with continued strong demand from enterprise customers in particular. We remain committed to maintaining our dominant position as the market consolidator.
We have an extensive pipeline of prospects for acquisition totaling almost $1 billion. These prospects include high quality stabilized properties, value add opportunities, ground up development sites, as well as sale leaseback transactions.
Finally, I will briefly review our development program. In addition to inventory through our acquisitions, we continue to ramp up construction to add [Flex] markets to meet current demand.
Current development activity includes nearly 460,000 square feet of Turn-Key Flex space that is 21% pre-leased, over a 153,000 square feet of custom solution space that is 100% pre-leased and approximately 760,000 square feet of Powered Base Buildings space for future inventory in key markets. Detailed information on our development activity by market can be found on page 29 of our fourth quarter supplemental package.
As stated in our 2013 guidance, we plan to invest somewhere between $850 million and $950 million in new construction this year, the largest amount in our history. We believe that our scale and improving development program combined with our disciplined investment management approach and our superior balance sheet allow us to better manage market risk by diversifying our capital deployment across geographies and product types, while achieving unmatched returns on invested capital.
We have a great deal to be optimistic about in 2013. In addition to our outstanding team of dedicate real estate financial and technical professionals, we’ve added significant new talent in key positions within the organization.
Because of our global platform, financial resources and dominant position in industry that has tremendous growth prospects we are fortunate -- we are in a very fortunate position to continue to track and retain professionals that we consider among the best in the business. We believe that our commitment to excellence and innovation, delivering superior datacenter solutions to our customers will continue to drive solid earnings growth for our shareholders.
I’d now like to turn the call over to Bill.
Bill Stein
Thank you, Mike. Good morning and good afternoon, everyone.
I will keep my remarks brief and focus primarily on fourth quarter and full year 2012 results and elaborate on 2013 guidance. As Mike indicated in his comments, 2012 was another year of exceptional performance for Digital.
As a result on Tuesday our Board approved a quarterly common stock dividend increase of 6.8% or $0.05 a share to $0.78 per share. This is our 11th dividend increase in a little over eight years since our 2004 IPO and reflects the quality of our earnings and optimism for continued growth.
Since our first full quarter of operations in 2005, we have grown our dividend by a compounded annual growth rate of over 15%. In 2012, we raised over $2.4 billion of new capital.
Our balance sheet strength combined with our excellent lender and investor relationships continued to provide access to multiple capital sources globally to fund the growth of our company. For example, last month we were the first U.S.
REIT to access the sterling bond market with a 400 million sterling 12-year unsecured note offering at a coupon of 4.25%. Proceeds from this offering were used to repay borrowings under the global revolving credit facility drawn to fund the Sentrum acquisition and to further hedge our FX exposure to foreign markets.
This transaction is consistent with our strategy of minimizing our financial risk by lengthening our maturities at attractive rates. Currently, we have $1.5 billion of immediate liquidity, including $48.5 million in short-term investments plus funds that can be drawn on our credit facility.
If this capacity we’re fully utilized we would remain in compliance with covenants contained in the credit facility, term loan, prudential shelf facility and other unsecured debt. In 2013, we have $228 million remaining principal amortization and debt maturities with a weighted average cost of 6%.
We plan to retire initially with the revolver and eventually replace with additional long-term unsecured debt and/or preferred stock. For the full year 2012, we sold approximately 957,000 shares of common stock through our at-the-Market equity distribution program for net proceeds totaling $62.7 million at an average price of $66.19 per share and currently have approximately $54 million of availability remaining on the ATM program.
Let me now turn to our fourth quarter and full year 2012 results. All per share results are on a diluted share and unit basis.
As stated in today’s earnings release, the fourth quarter FFO per share was $1.16. Adjusting for items that do not represent ongoing expenses or revenue streams, fourth quarter 2012 core FFO was $4.1 million higher than reported FFO or a $1.19 per share.
This reflects a 15.5% increase from the fourth quarter 2011 core FFO of a $1.03 per share. The non-core expenses of transaction expenses are largely due to our recent acquisitions in Paris and Sydney.
These expenses were partially offset by a change in fair value of contingent consideration related to the Sentrum portfolio that was recorded as a reduction to rental property operating expenses, accounts payable and other liabilities. A fair value assessment on the three-year Sentrum earnout obligation is required for each reporting period.
Changes in fair value are considered non-core adjustments. For the full year 2012, FFO per share was $4.44, up over 9% from 2011 FFO per share of $4.06.
When adjusting for non-core items, 2012 core FFO per share was $4.46, up 9% from 2011 core FFO per share of $4.09. Adjusted funds from operations or AFFO for the fourth quarter of 2012, was $115.8 million, up from $115.6 million in the previous quarter.
The diluted AFFO payout ratio for the fourth quarter of 2012 was 82.6%, unchanged from last quarter. Adjusted EBITDA, at quarter-end of $204 million grew by 25% from $163.6 million in the fourth quarter of 2011 and by 2% from $205.5 million last quarter, excluding transaction cost, adjusted EBITDA grew by 27.5% and 4.1% respectively.
Our net debt-to-adjusted EBITDA ratio was 5.2 times at quarter-end, up from five times last quarter, which is mostly due to higher transaction cost in the period, as well as a higher drawn balance on our global revolving credit facility at year end. The ratio is within our new guideline of maintaining debt to adjusted EBITDA ratio of 5.5 times up from five times.
This increase in debt capacity is in line with our BBB, Baa2 investment grade ratings and was discussed with the rating agencies at our recent annual meetings. The higher balance decreased our weighted average cost of debt to 4.25% at quarter-end from 4.35% last quarter.
Our GAAP fixed charge ratio was 3.8 times compared to the previous quarter of 3.7 times. For the full year adjusted EBITDA was $758.7 million in 2012, up 22% year-over-year from $622.9 million in 2011.
As disclosed in our Analyst Day presentation, at the midpoint of our 2013 guidance, we forecast 17% growth in 2013 adjusted EBITDA of $891 million versus 2012 adjusted EBITDA of $759 million, up slightly from the midpoint estimate of $757 million disclosed at that event. Based on the information, we provided on page 74 of our annual state presentation entitled ‘return on strategic capital investment,’ we expect incremental revenue in 2013 to be 47% of stabilized revenue, which implies commencements are mostly back-end weighted in the year, slightly back-end weighted, excuse me, modestly.
Turning to the income statement, net operating income increased to $219.6 million in the fourth quarter of 2012, up $7.8 million or 3.7% from $211.8 million last quarter. This increase was primarily attributable to growth provided by incremental revenue from new leasing and acquisitions which was partially offset by unreimbursed landlord costs related to Hurricane Sandy and an increase in property taxes and $1.6 million special reserve relating to one tenant which affected rental revenue.
Tenant reimbursements decreased by $3.8 million to $75.1 million in the fourth quarter from $78.9 million in the previous quarter, primarily due to seasonal fluctuations in utility expenses. Property taxes increased by $1.7 million to $19.7 million in the fourth quarter from $18 million in the third quarter due to supplemental taxes resulting primarily from reassessments of completed developments in Singapore and one U.S.
property. NOI margins including utility reimbursements decreased 120 basis points in the fourth quarter versus third quarter due to the previously discussed increase in property taxes as well as unreimbursed Sandy-related landlord costs.
NOI margins including utility reimbursements increased slightly in the (inaudible) quarter versus third quarter due to lower utility reimbursements in the period as previously mentioned. We prefer to look at NOI margin and EBITDA margin excluding utility reimbursements because of the seasonal fluctuation that occurs in a given calendar year in utility expenses.
Likewise, fourth quarter same-store NOI was relatively unchanged at $181 million compared to $181.4 million in the previous quarter. Same-store cash NOI, which we define as same-store NOI adjusted for straight line rents and adjusted for non-cash purchase accounting adjustments was $163.3 million in the (inaudible), also relatively unchanged from $161.7 million in the third quarter.
This nominal decrease quarter-over-quarter was largely due to Sandy and the tax assessments we mentioned. It is important to know that combined with the late rating of lease commencements in the quarter i.e.
December, approximately 73% of fourth quarter commencements occurred at new properties and are not included in the same store pool. G&A decreased (inaudible) to $13.4 million in the fourth quarter compared to $14.4 million in the previous quarter, primarily due to year end accrual adjustments.
Transaction expenses increased to $5.3 million in the fourth quarter compared to $504,000 last quarter due to costs incurred in connection with the recent international acquisitions activity previously mentioned. Interest expense decreased to $40.4 million in the fourth quarter compared to $41 million last quarter.
Although gross interest increased in the quarter due to additional borrowings, we capitalized $3.4 million of more interest in the fourth quarter than in the previous quarter primarily due to the inclusion of additional qualified activity in our unconsolidated joint ventures and pre-purchases of heavy equipment as well as higher construction in our portfolio. Going forward, we expect capitalized interest to normalize around $5 million per quarter.
Finally, we are confirming our 2013 FFO guidance of $4.65 to $4.80 per share and our 2013 core FFO guidance range of $4.70 to $4.85 per share that we announced at our January 31, Analyst Day with the assumptions that were set fourth in the press release. In response to (inaudible) that we’ve received regarding our 2013 guidance assumptions, we would like to provide some additional color on the expected ROI or return on investment, up 10% to 12% on a $986 million of datacenter capital that we expect to deliver in 2013.
And that range compares to our stated targeted returns of 11% to 14%. There are two important factors that (inaudible) expected return of 10% to 12%.
First, the low-end of the 10% to 12% ROI range reflects the potential lag associated with the timing of lease commencements. By comparison, the 11% to 14% range is based on stabilized cash NOI.
For signings in 2011 and 2012, we achieved unlevered cash returns of 12.3% and 12.2% respectively. We expect to deliver returns on a stabilized cash basis in line with historical performance.
Second, based on the three-year earnout agreement associated with the Sentrum acquisition, there is a cap 9% return on leases signed at the Woking property that we estimate will lower 2013 lease of returns by 50 basis points. As it is customary, we will revisit our guidance assumptions each quarter and revise them as necessary.
This concludes our formal remarks and (inaudible) now open the call to your questions. Operator?
Operator
(Operator instruction) And your question will come from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead with your question.
Jamie Feldman - Bank of America Merrill Lynch
Great. Thanks.
I was hoping you could talk a little bit more about lease pricing and the leasing spreads you are seeing across the different property types. And if you can -- if you think the guidance you gave, how does it break out across the different types of properties?
Mike Foust
Well, we kind of tend to look across the Turn-Key Flex and the powered base buildings. And the powered base building renewals tend to -- and I think as we mentioned as, we talk about renewal activities those generally are up probably around 10% on a GAAP basis and 3% or 4% on a cash basis.
Generally, when I think on the Turn-Key Flex, our experience has been those increase on a GAAP basis a little over 5% and last quarter they were down 6%. But I think we are generally seeing that they’d be down on a first-year cash basis on average more like 3% going forward on the Turn-Key Flex.
So overall we are looking at projecting somewhere in kind of the high single-digits to 10% on a GAAP basis going forward and on that first year and on the first year of cash, about 3% overall.
Operator
Your next question will come from Schildkraut with Evercore Partners. Please go ahead with your question.
Jonathan Schildkraut - Evercore Partners
Great. Thanks for taking the questions.
Just kind of following-up on some stuff that came to us this morning. I had a question about the capitalized lease commissions.
Just wondering the terms of the timing, do you pay those out when the leases are commenced or at the time that you sign leases? Thanks.
Bill Stein
Half on signing and half on commencement.
Jonathan Schildkraut - Evercore Partners
Thanks, Bill.
Operator
Your next question will come from George Auerbach with ISI Group. Please go ahead with your question.
George Auerbach - ISI Group
Great. Thanks.
Mike, could you give us some color on the leasing pipeline? I know you’ve had some success here in the first quarter, but maybe help us understand what the pipeline looks like going forward?
And of the $31 million of leases that were signed so far in the first quarter, how much of that would you say was business that you may have thought was going to close in the fourth quarter kind of drifted into the first quarter? And how much of it -- do you think it sort of represents maybe an acceleration of kind of ongoing demand?
Mike Foust
Sure. I think probably, I don’t know $5 million or $6 million of revenue was items that drifted.
I think from fourth quarter to first quarter and the remainder, things that were closing in the kind of the natural course of business. So, overall, we are very encouraged by the amount of leasing activity and it includes enterprises, financial services, our cloud and managed service providers, even some of the large social networking and Internet commerce companies.
So we are seeing a really good general [growth] in demand. And I think the trend for outsourcing of enterprises is definitely driving that continued trend upward and signings this quarter.
Operator
Your next question will come from Emmanuel Korchman with Citigroup. Please go ahead with your question.
Emmanuel Korchman - Citigroup
Just going back to the TIs and leasing commissions for a second. They looked particularly high, especially in the renewal portfolio.
I was wondering, what would make them jump up so much over on your recent run rate?
Mike Foust
Emmanuel, there was one deal in particular that involved a tenant in a high-rise building. It was an anchor tenant and it involved not only a renewal but a relocation.
They were in two different locations in the building. So one was an eight floor location and one was a second floor location.
So the second floor suite was located adjacent to the eight floor, and there was also expansion associated with that. And just because of the nature of the building, it was very expensive to relocate them.
And I guess, additionally, this is a tenant that we would hope to do additional business with on a global basis support. It’s a strategic customer for us.
Operator
Your next question will come from Jordan Sadler with KeyBanc Capital Markets. Please go ahead with your question.
Jordan Sadler - KeyBanc Capital Markets
Thanks. Good morning, out there.
Just wanted to circle back, Bill, to -- you gave some color that was helpful on the G&A change sequentially and the capitalized interest. But if you could flesh those out a little bit more for us?
It sounded like G&A was down because of reversal of accruals, just the source of that. And then on the cap interest, I think you said -- it seemed like a very big spike to me and up $3 million to $4 million given that your average borrowing cost has come down.
It seems like a lot of money would have to -- a lot of additional investment would be capital. If you could walk us through the mechanics of those two, that would be helpful?
Bill Stein
Sure. So in the case of the G&A, that was predominantly a reversal in the bonus accrual for the year because we didn’t make the high end of its internal targets and that’s what accounted for that.
In the case of the capitalized interest, there is a catch-up associated with this and there’s new methodology as well. But as a result there was a $3.5 million catch-up, as I said it would normalize at around $5 million going forward.
Operator
Your next question will come from David Toti with Cantor Fitzgerald. Please go ahead with your question.
David Toti - Cantor Fitzgerald
Hi. Thanks.
Just a question around your development costs. It appears that some of the estimates went up in the quarter on a sequential basis.
Just give us a little bit of detail as to what’s driving this and if you are expecting any yield impacts or was that all sort of pass-through costs at this point?
Mike Foust
Well, our development costs are going up actually as a result of more projects. So on a unit basis actually, Jim Smith, and our team have really driven down unit costs on per KW per square foot.
So the increase in the amount of construction we are doing and our guidance is a direct result of taking advantage of more opportunities that we are seeing in the market around the U.S., around the globe. So it’s (inaudible), so we are building more.
Operator
Your next question will come from Jonathan Atkin with RBC. Please go ahead with your question.
Jonathan Atkin - RBC
Yeah. I was interested in the revenues that you classified as retail, and what types of returns you are seeing on those deals versus the rest of the business.
Is this retail kind of captive business that you are winning from your existing wholesale customers or given that there is a broader set of competitors like Telex and Equinix competing for the business, is it kind of a different dynamic? If you could maybe flush that out a bit that would be helpful.
Mike Foust
Those are our small footprint customers where we are just designating. And maybe big companies with a small footprint requirement and it might be an existing customer that has a smaller requirement in a particular geographic market and that’s where (inaudible) program really comes into play, to be able to serve that broad range of customers.
And so we are really focused on expanding those opportunities, (inaudible) our customer base broadly. So that’s and we are pretty -- we are very bullish actually on being able to increase that opportunity.
So we can capture the broad range. Our returns are probably somewhat higher than on our larger footprint leases.
If you look at unlevered return on costs, we are clearly on a higher returns. So we like that business all around.
Operator
Your next question will come from Dave Rodgers with Robert W. Baird.
Please go ahead with your question.
Dave Rodgers - Robert W. Baird
Hey, good morning. And maybe a follow-up to John’s, on the colo business.
The occupancy at 365 Main sell in the quarter, should there be any particular read through on what you might want to do with that space internally? And then along the colo line, do you have any earmarked money in either acquisitions or development CapEx this year kind of geared towards that retail colo business?
Mike Foust
Yeah. So at 365 Main that was just -- we just built out more space in that building.
So, we’re taking advantage of the opportunity to add values. So our folks are really clever and creative and we’ve been able to capture space.
Add our UPS power and be able to expand there and certainly we’re deploying a significant amount of capital either directly to building out that colo business if you will. I don’t have it at my fingertips, but significant portion of our $850 million to $950 million projected CapEx for this year is devoted toward adding value at our assets with the colo program.
Operator
Your next question comes from Mitch Germain with JMP Securities. Please go ahead with the question.
Mitch Germain - JMP Securities
Good morning, guys. Just interested, Mike or Bill, in terms of allocating capital outside of the U.S.
Seems like you kind of fall in Europe, is the goal is sort of beef up your Asia Pac exposures at this point?
Mike Foust
We’re looking -- we’re definitely looking at opportunities both in Europe as well as Asia Pac. And we’re at a point now in Europe where we’re pursuing a couple of opportunities on the continent to add to our portfolio.
So while the capital spending actually, I think is probably going to go up a little bit as a percentage in Europe. Right now, we are projecting about 9% of our CapEx spend to be in Europe and the CapEx spend in Asia Pac was probably mostly due to the timing going down from 21% of the total bucket to 16%.
But the bucket has grown also. So you are probably looking at almost the same amount in terms of dollar investment.
Bill Stein
Yeah. Asia is (inaudible) on an absolute dollar basis and Europe was up I think by about a third in absolute dollars.
Operator
Next question will come from Rob Stevenson with Macquarie. Please go ahead with your question.
Rob Stevenson - Macquarie
Hello, guys. Just a sort of follow-up on that.
Can you contrast the U.S., Europe and Asia and your sort of core markets for us both in terms of the ability to drive cash rents where you see the best pricing power and where it’s sort of lagging at this point? And then, what you are seeing in terms of acquisition cap rates in those three regions for core income producing assets?
Mike Foust
Well, in terms of income producing assets, we are projecting I believe in our guidance 7% to 8% roughly.
Bill Stein
7.25% to 7.75%.
Mike Foust
And we were able to achieve somewhat over 9% in the fourth quarter with a combination of Sydney deal and a Paris deal. So we think that our guidance numbers are conservative.
But there’s going to be a range there and clearly it’s averaging somewhere between that 7.25% and 7.75%. It’s hard to make a sweeping statement about regions like that because every market in the U.S.
has different characteristics and as well as in Asia-Pac as well as in Europe. A lot has to depend with (inaudible) are.
I think it’s safe to say that generally for investment properties across the board, cap rates have declined over the last couple of years. For datacenter buildings, we are not seeing a rapid decline for the properties we are looking up.
And also there is properties that trade at 6% to 6.5% that we just don’t bid on it. There is a property - a couple of things that we’ve taken a look at in Europe that have been potentially 5.5% to 6%.
So we are looking for those opportunities where we can either create value or be in a position to underwrite tenants in buildings and releasing risk that other core investors are going to have a difficult time doing. In terms of lease rates, we are generally seeing lease rates have stabilized in most markets in the U.S.
and they’ve been flat, pretty flat year-over-year, that we did have an uptick in the fourth quarter of 2012 that was encouraging. And broadly, every market is a little different in Europe and Asia-Pac.
Europe is pretty steady at rates that have declined. I would say London is pretty steady.
Paris doesn’t have a lot of activity right now. Amsterdam will continue to be a healthy market.
And we are still seeing a good activity in London. So, I think flat rates would probably be the norm.
In Asia Pac, lease rates are very healthy, demand is healthy generally and we see really good pricing power in the Asia Pac markets.
Bill Stein
And, Rob, one thing I would like to add to that is that in Europe on the acquisition side, there are situations where the seller of the asset is seeking liquidity and there is limited liquidity in Europe today. So in those situations, we can really achieve a pretty attractive risk adjusted return.
Operator
Your next question will come from Tayo Okusanya with Jeffries. Please go ahead with your question.
Tayo Okusanya - Jeffries
Yeah. Good afternoon.
So just a quick question in regards to deferred rents. Just when I look at the growth on that line item relative to how much rent has been growing, it seems like deferred rent has been growing a little bit faster over the past few quarters.
I was wondering whether you could address that.
Bill Stein
We bought a pretty large portfolio in July, which was the Sentrum Portfolio, and that would account for a significant component of that. It was US$1.1 billion, Tayo.
Operator
Your next question will come from Ross Nussbaum with UBS. Please go ahead with your question.
Ross Nussbaum - UBS
Hi guys. Mike, a couple of your tenants focused over in the ISP in cloud arena had a rough week in the stock market mainly Rackspace, CenturyLink, and Level 3.
I’m just curious as you look at the way the market responded to what those companies had to say, I don’t know if you had a chance to look at what they said to the market. But what was your read on how their businesses are doing and what you think that foretells in terms of the space that they are going to be demanding going forward from companies like they did?
Mike Foust
That’s a really good question and actually we’re seeing both of those companies in particular continue to see good demand and very good growth. It seems like the market did not like CenturyLink’s decision to use cash flow and to shift that cash flow from dividends to stock repurchase.
I think that in my opinion had a very, very big effect on their stock rather than our operating results. If you look at CenturyLink’s enterprise market both network and enterprise market data hosting which are our tenants, that would be your -- generally your Savvis and your historic Qwest.
Operating revenues in their hosting business was up almost 13% year-over-year on the quarter. Colocation revenues were up almost 10%.
They are seeing quite a bit of increase in their geographic expansion including and expanding further into Germany and they have got adding to their portfolio of cloud services. So it’s a very attractive growing business which is why CenturyLink brought them on onboard.
The enterprise network market, those revenues were up almost 6% quarter-over-quarter to $671 million. Their other revenue is up 4.5% year-over-year.
So that business is showing good growth too. Those are the businesses that would -- that do occupy and continue to take more space in our facilities.
If you look at CenturyLink overall, they have operating cash flow of U.S. $7.7 billion and in the quarter it was up -- it was $1.9 billion, which was an increase year-over-year before and net income was up.
So their business overall and cash flow from operations and those sorts of health metrics look good and as I said that the enterprise hosting and enterprise network are doing quite well. Rackspace, it appears the market didn’t like that.
They only grew 57% quarter-over-quarter instead of 65% quarter-over-quarter revenues. So their revenues and new business is still growing tremendously well.
And they need more space in many markets. So I think a natural adjustment and sometimes when stocks get a little frothy on valuations, but their business is extremely healthy and growing.
Operator
Next question will come from John Stewart with Green Street Advisors. Please go ahead with your question.
John Stewart - Green Street Advisors
On the TI, on the Turn-Key Flex renewals, first of all, can you tell us which market that was. Secondly, is it fair to assume, call it a 65% NOI margin so, a $100 rent.
And then lastly can you tell us what the book value per square foot was before you capitalized the additional $130 a square foot in leasing costs?
Mike Foust
John, your question was cut off. We didn’t hear all of it.
John Stewart - Green Street Advisors
I asked which market the Turn-Key renewal space was in. Is it fair to assume a $100 net rent and what was the existing book value per square-foot before you capitalized on a $130 of additional leasing cost?
Bill Stein
We don’t have the book value for you in Chicago. We don’t have the other information for you right now.
We can talk about that offline.
Operator
Your next question will come from Vincent Chao with Deutsche Bank. Please go ahead with your question.
Vincent Chao - Deutsche Bank
….specifically, it sounded like you are seeing some pretty good demand there and recently bought another portfolio of office buildings to get the inventory. Can you just talk about what verticals are really -- you’re seeing strength there and what the sweet spot is for deal sizes?
Mike Foust
I’m sorry, Vincent, the first part of your question didn’t come through.
Vincent Chao - Deutsche Bank
I was just wondering about Phoenix. It sounded like you had some positive comments there, and recently added some more inventory.
Just trying to get a sense of what the demand looks like, where the strength is coming from in terms of industry verticals. Also, what is the sweet spot in terms of size of deployment that you’re seeing demand for there?
Mike Foust
Phoenix is very active. We’ve seen a wide range of large requirements, multiple megawatts, as well as growing smaller footprint requirements.
And it’s a combination of enterprise, web-based commerce, retail, hosting, managed services. So a pretty good mix of customers in Phoenix.
Phoenix has always been historically a very tech market, broad based datacenter market for enterprises and financial services companies. And we already have a big stable financial services companies in Phoenix and particularly in Chandler.
Operator
Your next question is a follow-up from (inaudible) Bank of America Merrill Lynch.
Jamie Feldman - Bank of America Merrill Lynch
I was just hoping to get a little bit more color on your conversations with the largest corporate enterprise users. I mean it seems like last year they have been -- they were in the pipeline, they are still in the pipeline.
What changed for those guys after the first of the year. What do they need to see to really get more active here and just kind of how are they thinking about their needs going forward that if we do start to get a better economy here and more visibility on earnings that you will really start to see a pick up or maybe that’s the wrong way to think about it?
Mike Foust
Well, I think in 2012, there is a lot of (inaudible) going on about outsourcing. And a lot of internal strategic planning around capital allocation in a lot of the big -- and in many, many big enterprises and especially in financial services.
So I think our indications are that a lot of these plans have been formulated and they are ready to be implemented. And we see almost across the board, the plans include outsourcing of new space and consolidation of space.
And outsourcing that is more of a leasing model as opposed to build-and-own yourself model. And we think that’s going to add significant new business in 2013 and 2014.
So we are really encouraged by that. And I think financial services are going to lead the way in that.
Other verticals are already looking down hard at healthcare. I think it will be another vertical that we will see more business coming out of.
Certainly, the cloud services, computing, managed services. They are already focused on outsourcing and I think that’s a very positive trend for us all around.
Operator
Your next question is also a follow-up from George Auerbach with ISI Group. Please go ahead with your follow-up question at this time.
George Auerbach - ISI Group
Bill, thanks for the additional color on the development yields. I guess, I just -- I understood what they mean.
So that the 10% to 12% is sort of the year one cash return, the 11% to 14% is the stabilized return. Then I guess just how should we think about the timeframe in your view to hit the 10% to 14%.
Is that sort of six to eight quarter lease up?
Bill Stein
Okay. So the 10% to 12% would be taking all of the commencements over the course of the year and basically establishing a run rate on 12/31, divided by investment capital deployed.
And the 10% assumes that some of the investment capital doesn’t lease. So that’s the reason for the delta between 10% to 12%.
You can see the 12% is pretty close to what we achieved in 2011 and 2012 but in fact adjusting for the 50 basis point reduction due to the Sentrum earn out, the 9% -- you could argue that we are expecting to do better this year than we did in prior years. The 11% to 14% is where we expect yields to fall.
So some yields will be at 11%, some yields will be at 14% and some actually could be higher than 14% and in fact have been higher than 14% in prior years, particularly in Asia. So, the 11% to 14% is really a range of outcomes and it just so happens that our results as adjusting for the Sentrum earnout, the 12.5% is really an essence right in the middle of the 11% and 14%.
Operator
Your next question is also follow-up from Jordan Sadler with KeyBanc Capital Markets. Please go ahead with your follow-up at this time.
Jordan Sadler - KeyBanc Capital Markets
I just want to circle back. There was some commentaries surrounding colocation and this was a discussion topic and point the colocation strategy at the Investor Day that I think it hit on.
But you identified the firm’s current markets as a broad swath including the major metros like New York and Boston, Northern Virginia, Chicago, et cetera. I know colocation had -- you picked up this business through (inaudible) and you’ve grown it in markets where some of your major tenants who are in the colo business haven’t wanted to necessarily expand into such as Dallas for instance or certain buildings in Dallas if you will.
How are you thinking about the business today. I mean, are you willing to put your own colocation business to the extent -- with an existing customer in buildings with existing tenants and essentially going head to head?
Mike Foust
Well, our colo offering does not include managed services. So, if they overlap, I think we see very little overlap because most of our folks -- colocation in our vernacular is just a small footprint.
We’ll provide the remote hands, the rack and stack, the cabling, these are normal typical datacenter services that we do for the large customers as well as small customers. Actually we do more of that type of -- the large footprint customers than the small ones in reality and actuality.
So, we don’t see a big differentiation around our product type. We don’t see a lot of overlap but we’re going to go ahead and continue to work hard to fill our buildings and serve our customers who have a wide range of footprint requirements.
But I think in actuality, there is not much overlap between our customers that are providing a broader set of managed services and interconnect network services offerings.
Operator
And we do have time for one final question for today and that will be coming from Jonathan Atkin with RBC. Please go ahead with your follow-up at this time.
Jonathan Atkin - RBC
The robust (inaudible) leasing year-to-date (inaudible), just wondering, if you can comment is that reflective of all three regions in terms of broader market trends or primarily U.S. centric?
Mike Foust
Well, we certainly have more markets in the U.S. So the U.S.
is always going to drive more volume, but we’ve also had success with significant lease requirements in London for a build-to-suit, in Singapore a smaller TK Flex requirement or an international bank. New York Metro was one of our larger Wall Street customers, some office space in Philadelphia.
So it’s a pretty wide range of requirements. I think that’s reflective of the amount of activity, leasing activity we’re seeing across the board whether it’s Singapore or Sydney or in Phoenix or Northern Virginia or Chicago.
So it’s Dallas -- I mean certainly all these markets, New Jersey, we are seeing good activity. So it’s pretty broad based, which is great for us because we have stock customers -- customers who want to be in multiple markets with us.
And we will be able to take advantage of that throughout the year as well.
Operator
And we have reached the end of the allotted time for questions and answers for today. I would now like to turn the call over back to the management for any closing remarks at this time.
Mike Foust
Thank you. And thank you everyone for spending the time with us today on the call.
As you can tell, we are very positive about the opportunities for our business and for our customers’ business as well. The secular demand drivers that we reviewed on Investor Day continue to be in play and are only pointing towards greater demand as we had.
We’re probably in better position to capture that demand than anybody else in the market. So thanks everyone and we will be speaking with you again soon.
Operator
Ladies and gentlemen, this concludes today’s conference call. We thank you for your participation.
You may now disconnect.