Digital Realty Trust, Earnings Call NUGGETS: Enterprise Leasing, Technical Tenant Terminations

On Wednesday, Digital Realty Trust, Inc. (NYSE:DLR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Enterprise Leasing

George Auerbach – ISI Group: I just wanted to touch on the slowdown in enterprise leasing. I guess, at sort of what point of spring did you start to see trends pull back and maybe how is this experience different than past cycles, in dealing with large tenants?

Michael F. Foust – CEO: I don’t think we’ve seen anyone pull back on requirements. In fact, we’re seeing the actual amount of enterprise requirements especially in major markets like New York and London actually growing. There are large requirements in many cases and so we see the potential funnel of potential requirements actually as larger now than they were previously. So, but it is a longer time frame when you’re working with larger enterprises and that’s certainly offset by the leasing we’re doing with smaller requirements than maybe big companies and with the managed services and cloud providers who are often times, move more quickly than some of the larger enterprises.

George Auerbach – ISI Group: Just two follow-ups. First, I guess, maybe the question should have been – at what point did you see the sales cycle start to lengthen out, maybe it’s not a demand issue, it’s more on the timing from discussions to signings. At what point did tenants start to become more hesitant to sign leases? And also, it sounds like the mix of tenant is changing a bit more corporate than managed services. Are there any tenants within the corporate side that you see are being a bit more skittish or cautious at this time?

Michael F. Foust – CEO: No. On the contrary, we’re seeing more potential demand from the large enterprise users. Especially, looking to create more efficiencies and lower their operating costs, often times looking to get the data centers out of high-rise office building or suburban office locations into proper mission critical facilities that have the power backup, mechanical system backup and resiliency that they require, and also to allow them to be able to expand as they need to expand. So, I’d say it’s more, and this is kind of real – I’m kind of putting my finger in the air here as to timeframe, so maybe where we saw 6 to 9 month timeframes, those timeframes can be 6 to 12 months, working with customers, and that’s a guess, but we are seeing larger potential requirements that we are almost uniquely positioned to acquire because we have the professional team with the engineering staff, the design staff, construction, technical operations facility staff. So, we’re well positioned to serve these large customers.

George Auerbach – ISI Group: And I guess just last, Bill, on the straight-light rent, it went from $15 million in change to $19 million in change this quarter. Is that a better run rate to use going forward or was that impacted by the other Solyndra lease termination?

A. William Stein – CFO and CIO: That wouldn’t have been affected by the cylinder lease termination. I think there might have been one or two deals in the quarter that had some free rent that affected free rent in the quarter.

George Auerbach – ISI Group: So we should expect it to sort of burn down towards $15 million again?

A. William Stein – CFO and CIO: I think that $15 million is a better rate.

Technical Tenant Terminations

James Feldman – Bank of America: Focusing on the terminations for a minute, I know you had mentioned Solyndra. Can you first talk about the plans for that space? I think you said non-technical. But then I guess bigger picture, what are you seeing in terms of your actual technical tenants, taking lease terminations and moving out, and kind of where are they going if anywhere and in what market?

Michael F. Foust – CEO: Sure. Regarding Solyndra, that’s a two building property, very highly improved clean room manufacturing. So, they are pretty highly improved facilities. We think that this is an attractive facility to either sell to a user or lease to someone in Silicon Valley who can utilize this kind of space. So, we think this is a pretty valuable space and we can be positioned to lease it out at competitive rates for the improvements. In terms of other, we have very, very few terminations. I mean, I think we had one or two this quarter of data centre tenants and knows that we initiated those in order to put in longer term tenants, one was a – we had a tenant in the Dallas who wasn’t fully utilizing their space and we had space no space in Dallas and we had had another brand-new customer who wanted lease space with us in Dallas 10-year basis, we were able to trade out two years remaining for a 10-year lease at significantly higher overall rents, so I’ll give credit to our asset management team for being really creative and being able to take advantage of – and work to negotiate really interesting deals that allow us to add to overall value of the portfolio pretty significantly in that case, so it’s not very typical that we would do that, but where we can add significant value to the asset, we will be creative about doing those kinds of transactions.

James Feldman – Bank of America: I guess what I’m trying to figure out is are you seeing instances there in certain markets where tenants are just trying to or competitors are trying to poach tenants with a much more attractive options?

Michael F. Foust – CEO: No, that’s rarely the case. It’s very expensive and awkward in those cases where customers to move their switching costs, in other words are high and it’s very disruptive to operations and also tenants have had a very good operating history with us and that five nines of uptime represents a very high level of resiliency and security in the operation. So, we continue to have a very high level of renewals.

A. William Stein – CFO and CIO: Jamie, just to be clear to the facility in the East Bay in Fremont that we leased to Solyndra is not a data center. It was not a data center. It was owned by GI Partners prior to the IPO, so it’s a legacy property and I think at this point it’s most likely to be disposed of.