Higher Leasing Rates for Digital Data Centers

Digital Realty Trust (DLR) reported some of its strongest leasing rates yet in its second quarter earnings this morning.

Are leasing rates for "plug and play" data center space trending higher? The largest landlord of data center properties, Digital Realty Trust (DLR), reported some of its strongest leasing rates yet in its second quarter earnings this morning. Citing that performance, Digital Realty said it is increasing its guidance on funds from operations (FFO) for 2008 by 5 cents to a range of $2.40 to $2.50. FFO is a key performance gauge for real estate investment trusts.

Digital Realty commenced leases on 86,200 square feet of Turn-Key Datacenter space in the quarter at an average annual rate of approximately $185 per square foot. The company also signed new leases for 106,700 square feet of Turn-Key space at an average rate of $173 per square foot. A lease commences when the tenant occupies the facility, which often lags the lease signing by a few months.

Those rates are substantially higher than the average rates seen in recent quarters. In the first quarter, new leases averaged $100 per square foot, while commenced leases tracked at $119 a square foot. These rates often vary from quarter to quarter based on regional differences in leasing rates. Strong leasing activity in a high-demand market like London, for example, can lead to higher average leasing rates.

Even so, the strong rates appear to reflect healthy demand for Digital's Turn-Key program, which offers finished data center space to enterprise customers. In recent quarters, Digital Realty executives reported that demand for finished data center has been surged as companies have sought to preserve capital. In the Turn-Key program, Digital Realty incurs the cost of building the raised-floor environment, which it then leases at a higher rate.

The company also updated investors on a flurry of financing maneuvers to raise capital for additional investments:

  • On July 17 the company closed an $80 million secured financing on 3 Corporate Place in Piscataway, New Jersey. The loan has a three-year maturity with two one-year extensions at an interest-only rate of 6.72 percent a year.
  • On July 21 Digital Realty completed a public offering of 5.75 million shares of common stock, generating approximately $211.6 million in net proceeds, which the company will use to temporarily repay borrowings under its revolving credit facility, and to fund property acquisitions.
  • On July 24, the company closed on a $200 million uncommitted, unsecured Prudential Shelf Facility. The three-year, multi-currency facility provides for periodic draws, as approved by Prudential. Digital Realty made an initial draw of $25 million with an interest-only rate of 7 percent and a three-year maturity.
  • On July 25 the company increased the total commitments under its revolving credit facility from $650 million to $675 million with a new $25 million commitment from Deutsche Bank.

"We have continued to obtain capital from a variety of sources to maintain our liquidity and strong balance sheet in the face of extremely volatile capital markets and challenging economic conditions," said A. William Stein, Chief Financial Officer and Chief Investment Officer of Digital Realty Trust.

Digital Realty Trust owns 74 properties spanning 12.9 million square feet of space.