Foust Stein VITAL STATISTICS:Digital Realty Trust HEADQUARTERS ADDRESS: 560 Mission St., Ste. 2900 San Francisco, CA 94105 PHONE: (415) 738-6500 WEB SITE: www.digitalrealtytrust.com TICKER: NYSE: DLR KEY EXECUTIVES: Richard A. Magnuson, chairman; Michael F. Foust, CEO; A. William Stein, CFO and CIO 52-WEEK HIGH: $42.86 52-WEEK LOW: $27.60

By Allison Landa

Technology has treated Michael Foust well. The CEO and director of Digital Realty Trust (NYSE: DLR) has built his company on the bits of data that make the electronic world go around.

"Your work or personal e-mail requires archiving digital files," Foust says. "Your e-mail sits on a server in a datacenter somewhere. Even if you have e-mail through Google or Yahoo!, all these applications require backup for data."

That's where Digital Realty Trust shines. The REIT owns, acquires, develops and manages real estate related to technology and datacenters, with a portfolio comprising more than 60 properties and 11.8 million rentable square feet in more than 25 markets in North America and Western Europe as of August 2007.

Digital Realty began its life as a private equity partnership with the California Public Employees' Retirement Systems (CalPERS). "In 2001, we invested in datacenters that were primarily utilized by telecommunication networks and IT service providers, which was a very contrarian approach at that time," Foust says. "However, we always felt these were very strategic and very valuable properties, and they were very good long-term investments. We took advantage of the technology downturn in the earlier part of the decade and continued to build our portfolio on the real estate side of these tech properties."

Flash forward to November 2004, when Digital Realty became a publicly traded REIT. "We felt there was a much broader opportunity to continue to expand our ownership and management of these datacenter facilities," Foust says. "That's when we made the decision to take our portfolio public."

Zeroing in on Technology

Today, Foust says the fact that Digital Realty was the first to begin working with these facilities has paid off in a profound way. "We've had a first-mover advantage," he says. "The ownership of these mission-critical datacenters and telecommunications network properties was fragmented. The majority of our investments have been from individual acquisitions, so it's been a lot of hard work accumulating these centers in the marketplace. Having an early focus on this niche pushed us forward."

Digital Realty Trust Build-to-Suit Datacenter

John Stewart, an analyst with Credit Suisse, says that, in terms of its historical performance, the REIT has significantly exceeded expectations since the IPO. "The tech industry and the datacenter sector were in a recovery mode at the time Digital Reality went public," he says. "There was a lot of concern. However, they just timed it incredibly well."

Digital Realty Senior Vice President of Sales and Technical Services Chris Crosby credits the company's success to honing in on digital centers. "The niche thing has been very powerful," Crosby says. "A lot of companies struggle with the interaction between IT and the real estate facilities group. We help bridge that gap. We really have carved out a new area."

The continuing expansion of technology has created a growing demand for datacenter services, which has broadened opportunities for Digital Realty. The company currently offers datacenter solutions, including turn-key centers, build-to-suit centers, critical facilities management and datacenter acquisitions and financing.

"All major corporations and even small corporations have significant requirements for datacenters, such as internet enterprises like eBay and IT service providers like Savvis and major financial institutions like JP Morgan Chase," Foust says. "Companies across the board have growing requirements for these facilities, and we're hitting the market at the right time to market existing facilities and build new ones."

Stewart says that currently Digital Realty has the sweet spot in the datacenter niche. "Since the IPO, the market for datacenter space has tightened significantly past the point of equilibrium where landlords have pricing power," Stewart says. However, he cautions, there could come a time in the future when supply and demand come back into equilibrium.

Expansion Initiatives

Digital Realty Trust Corporate Datacenter in Silicon Valley

Historically, the company was active in acquiring new properties. "A large number of our properties were vacant, and we could continue to build within an operating building," Foust says. "That's a big part of the company's value-added strategy."

However, that business model is getting a bit of a makeover. "Now we're moving toward an internal growth model, leasing and building our redevelopment inventory," Foust says. "We started this plan in 2007 and will continue into 2008."

That activity will be particularly intense in Dublin and London, two markets where Digital Realty sees great potential, as well as a driving need. "In London, it's driven in large part by financial-services companies, banks, brokerages and insurance companies," Foust says. "Dublin has a broad range of financial services as well as IT service providers and internet companies."

Paris and Amsterdam are the two other Western European markets that hold significant interest for Digital Realty. Outside of Europe, the company's main U.S. strongholds are Chicago, Dallas, New York, Phoenix, San Francisco and Washington, D.C.

More Power

Digital Realty Trust Internet Gateway & Corporate Datacenter, Chicago

Be it for acquisition or development, Digital Realty looks for properties with access to megawatts of power, as well as access to a number of broadband data networks and fiber-optic network providers.

"Power is the most important to us, because it is difficult to find buildings appropriate for datacenter use with power ability in very high density. Broadband networks are just as important for us," Foust says. "We keep a close eye on what the utility network looks like in terms of capacity to a particular building or business park. It can vary widely."

Crosby says that serves as an example of what puts Digital Realty ahead of its competition. "We offer a client the expertise to help design and fit out the datacenter space," Crosby says. "We provide solutions."

Looking Toward the Future

According to Stewart, the bottom line is that Digital Realty is really driven by a different set of fundamentals, and they're at a good place in the data center cycle.

Both now and in the future, Crosby says the company plans to continue focusing on providing a broad slate of technological solutions. "Our goal is to continue to increase our market presence," he says. "We've found a tremendous amount of demand, and our goal is to establish ourselves further as the brand for folks who outsource their datacenter facilities. There's a lot of work to do, but I think with our execution strategies, our track record and our excellent client base, we should be able to get there."