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SAN FRANCISCO-Digital Realty Trust is living in a different world than most of the rest of the commercial real estate industry. The locally based datacenter REIT’s 11-million-square-foot operating portfolio is 95% leased, demand appears high and new average rents are three-times higher than expiring rents.

Hence its strong four quarter earnings report this week, which included a 43.4% jump in FFO to $68.9 million ($0.76 per share). After backing out one-time items, including a lease termination fee and property tax adjustments, FFO was $0.69 per share, a few pennies below analysts’ average estimate, according to reports. For the year, FFO was $230.3 million ($2.62 per share), up 27.8% from 2007, and adjusted FFO was $2.48 per share, a 21.0% jump from 2007.

“Despite the deepening economic downturn, DLR is seeing solid pricing and demand in almost all regions and sectors,” JMP Securities Analyst Will Marks said in a client note on Friday. “This is difficult for many to fathom, particularly in light of what happened to the datacenter market during the last downturn and the severity of this global recession in comparison to the last one.”

The difference between now and then is that during the 1990s start-up companies with little to no revenue but plenty of venture capital rented lots of datacenter space. Once the dotcoms started folding, datacenters emptied out and were sold at bargain prices. “Today, datacenters are used by a wide variety of companies, from startups to well-established giants, and are now a necessity for businesses in every sector,” Marks writes in his client note.

Looking ahead, despite a constrained supply of data centers and sufficient liquidity to develop and meet debt maturities over the next two years, Digital Realty is holding back on pursuing this demand in order to maintain a strong balance sheet with a liquidity cushion, Marks reports. While it may not speculate it certainly will be willing to develop freely on a build-to-suit basis with strong tenants, and Marks thinks the demand will be there.

“We believe that many corporations are likely to look for ways to cut costs in 2009 and one way to cut costs is to outsource datacenter operations,” he write. “This trend should benefit DLR.”

All told, new leases, renewals and expansions (319,976 square feet) during the quarter far outstripped expirations, terminations and reductions (188,810 square feet) and the delta between new rents and expiring rents was huge. Rents commencing in the fourth quarter averaged $98.62 per square foot, 232% higher than its average expiring rent, $20.68 per square foot.

Also significant is that more than half of the space for which leases commenced during the quarter was the company’s most expensive space, Turn-Key Datacenter space, which leased at an average annual GAAP rental rate of $154.00 per square foot. The remainder included approximately 119,000 square feet of Powered Base Building space leased at an average annual GAAP rental rate of $49.00 per square foot, and approximately 38,000 square feet of non-technical space leased at an average annual GAAP rental rate of $15.00 per square foot.

Compared to the full-year, commencing lease rates in the fourth quarter rose for its Turnkey and Powered Base space and declined for its non-technical space. Of the 1.1 million square feet of new and renewal leases that commenced during 2008, nearly 700,000 square feet was Turn-Key Datacenter space leased at an average annual GAAP rental rate of $142.00 per square foot, 8% below the fourth quarter average. For the 270,000 square feet of Powered Base Building space leases that commenced in 2008 the average lease rate was $42 per square foot or 14% below the fourth quarter average. The average lease rate on non-technical leases commencing during the year was $22, 33% higher than the fourth quarter.

Leases signed during the fourth quarter and commencing sometime in the future totaled 276,000 square feet. Just under half of it was the company’s Turn-Key Datacenter space and just over half of it was the company’s non-technical space. The average lease rate on the Turn-Key Datacenter space was $180 per square foot, approximately 17% higher than the average Turn-Key Datacenter lease commencing during the quarter and approximately 27% higher than the average Turn-Key Datacenter lease that commenced in 2008. The lease rate for signed non-technical leases during the fourth quarter was $17, up 12% compared to non-technical leases commencing during the quarter but down 23% compared to the full-year average for commencing non-technical leases.

Leases signed during the full year totaled 1.1 million square feet, half of it Turn-Key Datacenter space and the remainder split between Powered Base and non-technical space. The contract value of the signed leases in 2008 is $1.1 billion, 50% higher than 2007. The average lease rate on the signed leases for the year was $153 per square foot per year for the Turn-Key Datacenter space, $56 for the Powered Base space and $18 for the non-technical space.

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