Digital Realty Trust Inc (DLR) — Q4 2018 Earnings Call Transcript

Thank you, Andrea. The speakers on today's call will be CEO Bill Stein and CFO Andy Power. The call may contain forward-looking statements including guidance and the underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business see our 10-K and subsequent filings with the SEC. This call will contain non-GAAP financial information. Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website. Before I turn the call over to our CEO, Bill Stein, I'd like to hit the tops of the waves on our full year 2018 results. First, we delivered record bookings over one-third better than the previous all-time high. Next, we closed on the acquisition of Ascenty, expanding our global platform into Latin America and we further extended our sustainability leadership with continued expansion of our renewable energy capacity. Third, we delivered 8% core FFO per share growth and we delivered double-digit growth in AFFO per share for the third time in the past four years. Last but not least, we further strengthened the balance sheet by recasting our line of credit and locking in long-term fixed rate debt at attractive coupons. With that I'd like to turn the call over to Bill.

Thank you, John. Good afternoon and thank you all for joining us. Our formula for long-term value creation is a global connected sustainable framework. We advanced each of these three pillars during the fourth quarter. We extended our global footprint with our entry into Latin America. In December, we closed the acquisition of Ascenty, the leading data center platform in the rapidly growing Brazilian market shown here on page three of our presentation. Ascenty owns a high-quality portfolio of purpose-built world-class data centers as well as a proprietary fiber network and is run by a best-in-class management team. Over 90% of the revenue is generated from investment-grade or equivalent customers and over 75% of contractual cash rent is denominated in U.S. dollars. This transaction represents a highly strategic extension of our global platform, offers a compelling growth opportunity, and will be accretive to our long-term growth. Our top priority is deepening connections with our customers. We are also focused on strengthening connections across our organization. We made several important investments in our human capital during the fourth quarter, most notably including the appointment of Greg Wright as Chief Investment Officer and Corey Dyer as Executive Vice President of Global Sales and Marketing. Greg joins us following a long and distinguished career in investment banking, and he served as lead advisor on several transformational transactions for Digital Realty. Corey brings over 25 years of relevant industry experience, including colocation and interconnection sales leadership experience successfully targeting the enterprise customer segment. With these key additions in place, we have filled out the team and are fully primed to leverage our competitive advantages and power our customers’ digital ambitions around the world. We also took several significant steps towards further extending our sustainability leadership over the past few months, highlighted here on page four. In November, we received NAREIT’s Data Center Leader in the Light Award for the second consecutive year. We are the first and so far the only data center REIT to receive NAREIT’s Leader in the Light Award for sustainable real estate practices. In December, we announced that we earned the U.S. EPA’s Energy Star certification for superior energy performance in 24 data centers in 2018. We also entered into an agreement with Salt River Project to source solar energy to power a portion of the load for our Arizona data center portfolio. In January, we issued the first-ever data center Green Euro bond. And finally, just a couple of weeks ago, we announced a long-term renewable power purchase agreement to secure 80 megawatts of solar power on behalf of Facebook to support their renewable energy goals. We are committed to managing our environmental impact and optimizing our use of energy and natural resources because we believe it's the right thing to do and because it matters to our customers. Most of our top customers have 100% renewable energy targets, and our ability to meet their needs for renewable and highly efficient data center solutions sets us apart from our competitors. Let's turn to market fundamentals on page five. Moving from East to West with the sun, data center demand remains robust across the Asia Pacific region, driven by local as well as global hyperscale users. In Japan, we recently announced a multi-megawatt multi-year agreement with a leading global cloud service provider to anchor the latest facility on our Osaka Connected campus, scheduled for delivery in the middle of this year. As you can see from the occupancy schedule in our supplemental, we've also had significant activity in Singapore, where we are quickly running out of capacity and recently announced the acquisition of a land parcel on a long-term ground lease to accommodate the build-out of our next facility at Liang Drive on the east side of Singapore, scheduled for delivery in the latter half of next year. The supply situation across the region remains largely in check. And given the robust demand backdrop, we expect to continue to invest to support our customers’ growth in existing core markets as well as potentially in select new markets. In Europe, supply-demand dynamics are fairly balanced. Despite the noise around Brexit, we continue to see healthy demand, notably including a sizable global cloud network node deployment in our Crawley campus in London during the fourth quarter. At Sovereign House in the Docklands, we are nearing capacity, and we recently gave the go-ahead to break ground on a Cloud House, an adjacent multi-megawatt facility that will offer customers a unique ability to land a new colocation deployment directly adjacent to the city's network dense interconnection hub. Incidentally, we acquired the freehold interest in Sovereign House during the fourth quarter and we now own this iconic London Docklands asset outright. Across the UK as well as the continent, pricing is competitive and customers remain focused on flexibility and expansion options along with differentiated connectivity solutions and a track record of operational excellence. Market vacancy remains in check across the major European markets, while competitors are bringing new supply to market; it is being met by healthy demand, particularly from existing customers either expanding their current footprint or looking for new partnerships for their next phase of growth. In the Americas, competition is similarly intense across the primary data center metros, including Northern Virginia, which is by far the largest and most active metro in the world. Despite the number of competitors and shovels in the ground, we are well positioned to outperform the competition given our ability to address the full spectrum of our customers' data center needs around the world, our deep installed customer base in Ashburn with a strong preference to expand next to their existing deployments. The longest runway for customers’ campus growth aligns with our agile delivery capabilities allowing for limited speculative risk. And last but certainly not least, the strength of our investment-grade balance sheet. At the end of the day, we believe customers view our global platform, our operational and financial resiliency, and our comprehensive space, power, and interconnection offerings as key differentiators in the selection of their data center provider. Let's turn to the macro environment on page six. We are late in the cycle, and comps are getting tougher across corporate America. Tough comps and moderating growth are a far cry from a global recession, however, as evidenced by continued robust job growth in the U.S. as well as the very respectable growth in cloud revenues during the fourth quarter. Hyperscale requirements are big and getting bigger, so new business could be lumpy from quarter to quarter. But we continue to see very healthy demand from our customers. The trends underlying this demand are long-term and secular in nature. People don't stop using personal or professional social media just because it's late in the cycle. In fact, corporate IT outsourcing and cloud adoption are significant drivers of our business. The cloud is gaining traction because it enables corporate enterprise end-users to achieve efficiencies and contain costs. During a slowdown, cost containment and achieving efficiencies become paramount. Constantly given the resiliency of our industry, our business, and our balance sheet, we believe we are very well positioned to continue to deliver sustainable growth for our customers, shareholders, and employees, whatever the macro environment may hold in store. With that, I'd like to turn the call over to Andy to take you through our financial results.

Thank you, Bill. Let's begin with our leasing activity here on page eight. During the fourth quarter, we signed total bookings of $44 million, including a $7 million contribution from interconnection. We signed new leases for space and power totaling $37 million, with a weighted average lease term of nearly 10 years, including a $10 million colocation contribution. These results do not include an additional $18 million of previously disclosed bookings by Ascenty during the fourth quarter. Ascenty did not sign any deals during the last 10 days of the year after closing, but this volume of activity, particularly relative to the size of the base, should give you a good idea of why we are so excited about the growth potential for this platform. Our largest single deal during the fourth quarter was just 6 megawatts, and nearly 40% of our activity was outside of the U.S. Our domestic fourth quarter bookings were likewise diverse, with major contributors from the Bay Area, Houston, Dallas, and Chicago markets. For the full year, we delivered total bookings of $268 million, an all-time high and up 35% from the previous record of $199 million in the prior year. Colocation and interconnection bookings were flat year-over-year at $63 million, but third and fourth-quarter results were both above the recent average. We continue to see traction with accounts expanding with us globally, including a leading regional cloud provider, who expanded their footprint with us most recently in Singapore in the fourth quarter. We've helped this customer expand globally in the U.S., Europe, and in Asia Pacific within the last 12 months. Another example is a global leading SaaS provider that we helped to expand into Japan through our Mitsubishi Corporation Digital Realty joint venture. Digital Realty is assisting this strategic partner in expanding their cloud presence in the region. They are in multiple sites across our global platform, and this is their third deployment with us across APAC. One final example I want to cite illustrates our ability to help hyperscale customers power their digital ambitions. One of the world's largest SaaS companies required a custom-built data center. We signed the deal in Q1, and they commenced using the data center in Q4. Simply put, we were able to build and launch the first data hall for the customer within nine months. We're also pleased with our traction in the Enterprise segment. We are landing business from small, medium, and large customers, who are positioned to grow with us. We added a total of more than 150 logos in 2018, more than half of which were enterprise customers, and we signed a total of 868 contracts in 2018. Aarki ranked the 19th fastest-growing company in North America and number four in the Bay Area on the 2018 Technology Fast 500, helps companies grow and re-engage their mobile users. Aarki is standardizing their global data center footprint with Digital Realty to ensure they have the scalable solutions around the world to meet their fast-paced timelines and support end-user demand. Most recent colocation expansions were made across Ashburn and Amsterdam. Dialpad, who designs and develops cloud-based platforms for enterprise communications, is hosting their AI-powered Cloud Phone System in Digital Realty Dallas and New York locations. We help build redundancy within the platform for our customers' end users. Dispatch Track, the number one last-mile logistics platform that is currently being used by about 40% of all furniture and appliance deliveries that occur in the Continental United States, has a unique requirement of owning its computer infrastructure with specialized hardware for its proprietary algorithms. After quite a bit of research, Dispatch Track chose Digital Realty as a partner on this journey. Digital Realty’s world-class infrastructure, commitment to standards in terms of certifications and processes, and presence across a wide geographical location will help Dispatch Track scale their solution and service their current and future customers better. Dispatch Track is looking forward to consolidating and scaling all of their existing hosted infrastructure at Digital Realty. We continue to see very healthy networks sector business. This quarter, a notable win was OutScale, a strategic partner of Dassault Systèmes, at the forefront of cloud computing. OutScale’s primary focus is providing infrastructure services, hosted solutions, and on-premise private cloud as well as related cloud-based services like mapper as a service, rendering solutions, compute, storage, and networking to many of the world's most respected companies. This new and much larger private cage environment for a longtime customer will enable OutScale to grow and remain focused on their core competencies of providing secure, scalable, and compliant infrastructure as a service solutions to over 800 of the world's top corporate customers throughout North America, Europe, and Asia. We continue to see traction with our service exchange platform. Netgain, which helps highly regulated industries such as healthcare, financial, and legal services manage their IT infrastructure, needed to shorten connection provision times and minimize latency between Netgain facilities. We provide a centralized colocation facility for their hybrid cloud architecture to connect to local customers. They were able to connect to major telecom providers to maintain 10-millisecond or less latency between facilities, leveraging service exchange for fast, secure access to Azure cloud services and provide a high-availability environment for customer application hosting. Total alliance and channel partners related bookings continue to contribute to our business. Our channel partners sourced nearly 20% of new logos in 2018 and over 25% of new logos during the fourth quarter. Through our channel partner, we landed a Korean IT-based marketing and advertising company with a mission to support bringing Korean lifestyle fashion and entertainment imports in our LA data center to support its digital advertising and cloud business. They chose Digital Realty because they needed the right location with maximum uptime to support their mission-critical infrastructure, flexibility to support their private and hybrid cloud environments, and access to data center and cloud connectivity and certification compliance. Our continued partnership and capabilities with IBM around their Direct Link products resulted in more than a 200% year-over-year increase in our total deployments in 2017, and we are working on several opportunities for 2019. Significant 2018 deployments with IBM included adding new IBM blockchain and IBM Hyper Protect deployments allowing IBM customers to deploy their infrastructure and leverage secure, direct low latency access to IBM cloud and these advanced services all within a highly connected ecosystem supported by globally by Digital Realty. Turning to our backlog on page nine. The current backlog of leases signed but not yet commenced stepped down from the all-time high at the end of the third quarter to $97 million as of year-end, due to an all-time high level of commencements during the fourth quarter. The weighted average lag between fourth quarter signings and commencements was a little over three months, speaking to the diversity of our fourth-quarter signings activity. Moving on to renewal leasing activity on page 10, we signed $138 million of renewals during the fourth quarter in addition to new leases signed. The weighted average lease term on renewals was five years, and cash rents rolled down 2.6%. For the full year, cash rents rolled up 0.3%, a bit better than our slightly negative guidance. Cash re-leasing spreads were negative for turnkey as well as colo renewals in the fourth quarter. The colo roll-down was entirely due to two top customers who started out in a colo environment early in their life cycle and have grown so significantly that they are both now hyperscale users. Our unique product offering with the ability to accommodate single rack colocation and interconnection footprints since all the way up to multi-megawatt hyperscale requirements enables us to continue to support the full spectrum of data center solutions for both of these strategic customers. The turnkey roll-down was largely due to the expiration in Houston, where a customer renewed their existing footprint on a long-term lease while simultaneously expanding and taking close to another megawatt of additional capacity likewise on a long-term lease. This transaction is a prime example of what we mean when we talk about our holistic long-term approach to customer relationship management. As you're probably aware, we expect cash re-leasing spreads will be negative in the high-single digits in 2019, primarily due to the size of above-market expirations within the legacy DFT portfolio; this roll-down was fully baked into our underwriting at the time of the acquisition. As we work our way past these pending renewals, we do expect to reach an inflection point and return to positive re-leasing spreads, driven by modest market rent growth and steady progress. We have made cycling through peak vintage lease expirations. In terms of our fourth quarter operating performance, our overall portfolio occupancy slipped 50 basis points to 89% due to a single non-data center customer who moved out of an entire Class B office building they were using as a call center on a campus earmarked for future redevelopment in Dallas. Needless to say, the square footage impact on reported occupancy is far more pronounced than the economic impact given the low rent for a call center redevelopment candidate in Dallas. Property operating expenses picked up sequentially, primarily due to the timing of some repairs and maintenance projects we had expected to close out earlier in the year, along with the growth of our portfolio with more than 50 megawatts of capacity placed in service during the fourth quarter. Turning to our economic risk mitigation strategies on page 11, the U.S. dollar strengthened somewhat over the past 90 days, and FX represented roughly a 50 basis points headwind to the year-over-year growth in our fourth-quarter results. We manage currency risk by issuing locally denominated debt to act as a natural hedge, so only our net assets within a given region are exposed to currency risk from an economic perspective. In addition to managing foreign currency exposure, we also mitigate interest rate risk by proactively terming out short-term variable rate debt with longer-term fixed rate financing. Given our strategy to match the duration of our long-lived assets with long-term fixed rate debt, a 100 basis point move in LIBOR would have a 1% impact on our full year FFO per share. Our near-term funding and refinancing risk is very well managed. In terms of earnings growth, core FFO per share was up approximately 8% year-over-year for the fourth quarter and the full year. We were a couple of pennies above consensus for the fourth quarter and we came at the top end of our original guidance range for the full year. We also delivered double-digit AFFO per share growth for the third time in the past four years. As you may have seen from the press release, we are reiterating the 2019 guidance we rolled out a few weeks ago. Almost all the drivers are unchanged except for debt financing. As you may know, just two days after we gave our initial 2019 guidance, the debt capital markets opened up, and we were able to successfully tap the euro bond market for the first evergreen data center euro bond, raising approximately $1 billion of seven-year paper at a 2.5% coupon. Our 2019 refinancing and capital spending needs have been put to bed, but we expect to remain nimble for the rest of the year. We may look to capitalize on favorable market conditions to lock in long-term fixed rate financing and attractive coupons across the currencies that support our assets to proactively manage future liabilities. Please keep in mind that our 2019 guidance includes a $0.20 impact from the adoption of the new lease accounting standard. We don't typically give explicit AFFO per share guidance, but given the hit to the bottom line from the change in accounting policy, it's worth noting that we expect to deliver mid-single digit growth in AFFO per share. Please also keep in mind this mid-single digit growth includes the 2% dilution from Ascenty and also absorbs a 100 to 200 basis points FX headwind. Excluding FX and accounting changes, we expect to deliver per share growth in line with our long-term sweet spot in the mid to high-single digits. In terms of the quarterly distribution, the first half of 2019 should represent roughly 49% of the full year results, while the second half should contribute roughly 51%. In terms of the quarterly dividend, that payout policy is ultimately a board-level decision. Given the actual cash flow growth in 2018, along with the projected growth in 2019, we would expect to see continued growth in the per share dividend, just as we have each and every year since our IPO in 2004. Last but certainly not least, let's turn to the balance sheet on page 13. It's been another busy few months for the Digital Realty capital markets team characterized by consistent execution against financing strategy on maximizing the menu of available capital options while minimizing the related costs. First and foremost, in late September, we executed a forward equity offering to fund the Ascenty acquisition and development CapEx needs. We expect to receive approximately $1.1 billion of net proceeds when we settle the forward sale agreements. In early October, we issued approximately $520 million of 12-year sterling bonds at a 3.75% coupon. In late October, we recast our $3.3 billion global senior unsecured credit facilities, tightening pricing for the line of credit by 10 basis points, extending the maturity date another three years to 2024 and up-sizing availability by $350 million. We also completed a roughly $300 million five-year revolving credit facility denominated in Japanese yen to fund our joint venture with Mitsubishi Corporation. Shortly before year-end, we closed on the Ascenty acquisition. The transaction was initially funded with $600 million of proceeds from a non-recourse five-year secured term loan, $300 million of Digital Realty OP units, and $1 billion of unsecured corporate borrowings. As you may recall, we expect to ultimately own Ascenty in a joint venture with Brookfield Infrastructure, which we expect to close sometime in the first quarter. As you can see from the charts on page 13, leverage is artificially inflated at year-end since 100% of Ascenty debt is reflected on the balance sheet, whereas our fourth-quarter results include just a 10-day contribution from Ascenty. Pro forma for a full-period contribution from Ascenty, the joint venture with Brookfield, and the forward equity offering, leverage remains in line with our long-term target of approximately five times, while fixed charge coverage remains healthy at north of four times. The success of these collective financing activities over the past several months is a reflection of our best-in-class global platform, which provides access to the full menu of public, as well as private capital, and sets us apart from our peers, enabling us to prudently fund our growth. As I mentioned a moment ago, we've already addressed our 2019 refinancing and capital spending needs, but we will continue to monitor the global debt capital markets, consistent with our strategy of proactively managing the right side of our balance sheet with an eye towards longer-duration financings across the currencies that support our assets. As you can see from the pro forma maturity schedule on page 15, the recent financings have extended our weighted average debt maturity to six years, and lowered our weighted average coupon to 3.6%. Nearly half of our debt is non-U.S. dollar denominated, acting as a natural FX hedge for our investments outside the U.S.; roughly 90% of our debt is fixed rate to guard against a rising rate environment, and over 95% of our debt is unsecured, providing the greatest flexibility for capital recycling. Finally, as you can see from the left side of page 15, we have a clear runway with less than $1 billion of maturities in any year until 2023 and no bar too tall in the out years. Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy. This concludes our prepared remarks, and now we will be pleased to take your questions. Andrea, would you please begin the Q&A session?

Thank you and good afternoon. I would like to ask if you could provide more details on the expectations for the pipeline and clarify what we should anticipate for 2019. I understand that 2018 was a record year, but we ended it on a somewhat disappointing note. A few weeks ago, you expressed a bit of optimism at a recent conference, so I am curious about how we should approach leasing volumes for 2019.

Thank you, Jordan. This is Andy. I’ll address that since you’re referring to my recent conference. We ended 2018 with impressive overall signings of $44 million, marking a record year with a 35% increase year-over-year, totaling $268 million. We achieved significant successes across regions, including Europe, Asia Pacific, and North America, as well as specific markets and product lines. As we enter 2019, we share a similar optimism regarding the overall demand landscape. Bill, Corey, Chris, and I, along with the team, have been engaging with customers during the early weeks of the year, and we have received a lot of positive feedback about their demand outlook and how our capabilities align with their needs as a trusted partner worldwide.

Okay. And so relative to 2018 you think 2018 was not necessarily an anomaly, sort of what it sounds like.

I would say, listen, we sat this time in the beginning of 2018, I certainly didn’t have the expectation that we're going to do a 35% increase year-over-year and put record $268 million. But as we look at exiting 2018 and look at what's out in front of us in 2019 in terms of where we're seeing opportunities and we’re overall honestly quite bringing on new inventory capacity such as the Osaka, Japan, Sydney, Australia, our Frankfurt, Hampshire, and the London campuses, numerous colo footprints and then some of the usual names you've heard about North America be it Ashburn or otherwise, I think we feel like we're pretty well positioned heading into this year.

Thanks. So kind of a related question just about overall hyperscale demand and how it benefits the data center sector. And you talked about having inventory in a lot of the key markets, but I'm wondering from a competitive standpoint how do you think about the mix of business that goes to unlisted players versus listed data center operators such as yourself. And then, maybe drill down on kind of sales given the hiring of Corey into the organization. Any kind of thoughts on channel strategy or any changes whatsoever contemplated in kind of your go to market approach. Thanks.

Hey, thanks, John. I guess, what I would say at least what I have observed is that the private guys win the business when at least Digital doesn’t have inventory in the market. So it’s a question of availability. And I do think that we are the preferred partner to most of the hyperscale players.

I would like to address your second question, Jon. In addition to the insights we are gathering from our customers regarding the demand landscape, we are also hearing about a potential shift towards vendor consolidation. Customers are looking to engage with fewer global organizations that can efficiently scale and cater to their needs across various markets and product lines, which aligns well with our capabilities. Regarding changes in our go-to-market strategy, Corey and Greg joined us at the beginning of January. We had already advanced our sales kick-off, which was a great success, and our team is actively pursuing goals for 2019. I'm confident that Corey will focus on identifying improvement areas, given his extensive experience in colocation and interconnection, as well as his ability to engage the enterprise customer base, which is a priority for us to enhance.

Thanks. And then quickly on, there was an interconnect announcement related to Ashburn in Chicago that you put out a couple of weeks ago. And wanted to maybe get your thoughts on that overall prospects for cross-connect growth as well as your SDN partnership with Megaport? Thanks.

No, absolutely. Thanks for the question John as always. So a couple elements to it. Yeah, the most recent announcement we just made inside of the Ashburn and Chicago markets are around expanding our internet exchange. And so, that was a lot of customer-driven demand in those two markets. And because of the fact that we have a comprehensive interconnection portfolio comprised of both the internet exchange and the service exchange, which meets a lot of our larger customer demands. I would tell you the reasoning and why we went into Chicago in particular is the ownership of 350 East Cermak and how that building is becoming a bellwether of the broader workloads and interconnection requirements, and then associated Ashburn, that is the epicenter of where a lot of these clouds are building out. And so getting access to all of the networks via the IX was kind of the backdrop of why we were pushed into those markets. And just further solidifying the broader architectures that not only the hyperscalers are bringing to us, but also the enterprise. And so secondly to the partnership with Megaport, which is the underlying fabric on our service exchange. I mean, it's been a great partnership where it's really generated a lot of new revenue for us; we're having a different value-based dialogue with a brand new ecosystem of enterprise customers coming in to consume cloud. And so it's an underpinning of our strategy going forward. And we've had a huge uptick in not only the dialogue, but also utilization of the platform. And so we're very happy with the outcome of that. And again, just to echo the sentiment of Andy and having Corey join the team, we're just getting focus on leveraging that even further in our dialogue so that we can represent the comprehensive portfolio that we have in these markets and all the interconnection capability that we have is really a unique differentiator for us.

Thank you very much. Good evening. You mentioned the opportunity to enter new markets. You've been expanding significantly in some existing markets, especially in Asia recently. Can you share your thoughts on this for 2019? Will you pursue new land development organically, or do you believe mergers and acquisitions will be the way to enter these markets? Also, do you have any updates on your initial experience with Ascenty and any insights you’ve gained since their integration? Thanks.

Thanks, Simon. So I think as you know, we don't target slices of the geographic pie by region. We look to allocate capital where we see the best risk-adjusted returns. We're always looking at potential markets and we want to be prepared if there are good opportunities, but our criteria just remind you is that we're customer-led into major new markets and we're looking for appropriate risk-adjusted returns in these new markets. I'll turn it over to Andy to handle the Ascenty question.

Simon, could you just repeat the Ascenty question to make sure I didn’t miss it?

Yes, you talked about the bookings when you came on board, but just you’ve had it for six or seven weeks just how is the integration going and any more color that you've had on the opportunity since you've taken control.

Great, thank you, Simon. So we closed I think the last week before the holidays, the 21st of December. We've had our first board meeting with the team, Brookfield has cleared its regulatory approvals, and we're working towards finalizing their closing, which should happen in the next month or so. We've been out in front of customers on a joint basis and have had some really terrific feedback from existing customers of legacy Digital Realty, legacy Ascenty, and crossover; we've really gotten going on the rules of engagement for the Digital Realty 100 plus sales reps in terms of feeding demand into that region, and we're also doing some late work on the supply chain design, constructional operational capabilities to really try to bring that benefit to the Ascenty platform. Albeit it's been a fast and furious couple weeks under our ownership to date, but so far so good and seeing some positive signs, but obviously have a lot more to report on this topic in another 90 days or so.

Great, thank you.

Great, thank you. In your comments, prepared remarks you mentioned the renewal spreads, how they're going to be down in the high-single digits. This you should be the trough and I think you said you expect them to go back to positive in 2020 and beyond. Just tied up the pricing. Is it your sense that pricing is going to start to trough? I mean pricing, if you look at it on a like-for-like basis seems like it's been coming down for the last few years. I'm just trying to get a sense of where you think we are because as I did notice, for example, in your returns, you're now getting to 9% to 12%, whereas you've historically guided to 10% to 12%. And then secondly, as it relates to bookings or leasing for 2019, I appreciate you don't want to give us a hard commitment on what that number could look like. But when you think about it from a geographical dispersion perspective, is it fair to assume that we should see a notable percentage coming from international in 2019 than in 2018? Thank you.

Thanks, Colby. Let me break down the various aspects of your question. First, regarding renewal spreads, we've ended the year slightly cash positive on a full-year basis, exceeding our GAAP results. We noted some anomalies in the fourth quarter, and I'm happy to discuss those further. Overall, we were cash positive for the year, even more significant than GAAP positive. We had previously indicated in our 2019 guidance that we were facing a cash negative mark-to-market, mainly attributed to a large legacy customer from our DFT acquisition. The situation surrounding that customer remains unchanged since our acquisition, so the same factors apply, and we expect this to resolve in 2019. Additionally, we're anticipating a significant renewal in our Power Base Building segment likely to be finalized in the first quarter of 2019. We are actively managing larger customer renewals, including pushing out maturities for several years. Looking at our top customers with multiple renewals, many of their leases are of a different vintage. One customer typically only signs five-year leases, limiting their exposure to long-term market fluctuations. Thus, we see a shift in sensitivity for expirations this year. Regarding your pricing question, our scale pricing generally appears flat to slightly increasing across different markets. In North America, we've seen less concentration on larger deals, particularly in Ashburn, with increased success in cities like San Francisco, Dallas, Houston, and Chicago. When comparing similar-sized deals in those markets, the rates are relatively stable or slightly increasing. As I mentioned earlier this year regarding Ashburn, our third-quarter rates compared to the previous year were within about 100 basis points. This indicates a stabilizing trend in rates. While competitors may offer lower prices to secure business, we believe our global multi-product platform and expanding customer base provide significant advantages, especially in competitive markets like Ashburn, along with our agile approach to supply chain and counterparty risks. Finally, concerning development returns and bookings, our development projects are focusing on larger deals, typically involving 20 to 25 megawatts with 10 to 15-year lease terms and AAA-rated credit counterparties, which are bringing North American returns closer to the nines. Internationally, we are seeing a significant portion of our new growth, reflected in regions like Singapore, Osaka, and across Europe. While the returns are slightly lower internationally, they benefit from lower interest rates in those markets. For example, we recently issued seven-year euro bonds at a 2.5% coupon. I believe I’ve addressed all your points.

Yes, thanks. So maybe just want to focus again on Northern Virginia. There is a lot of capital coming into the major markets especially Northern Virginia, which is shaping a lot of the development. But what are your thoughts on the private companies making these major investments for planned data center space? And how that impacts the overall industry and general fears of potential oversupply?

Thanks, Erik. We've commented on this before. While there is a tremendous amount of supply obviously in Northern Virginia, there's an equal amount of demand, so absorption has been very strong. As I said earlier, and Andy mentioned this too, if the hyperscale players have to choose between a private provider with whom they've done little to no business and Digital with whom they've done a substantial amount of business and they are also keen to bring their product to market as quickly as possible at least it’s been our experience that they would prefer to do business with the provider that offers the shortest cycle for providing a product. So that has to do with both contract and reliable construction deliveries and knowing that the building is going to operate as expected.

Great. And just maybe my follow up, kind of efficiencies in the past you talked about efficiencies in the various ways to control, bill cost to manage returns. But how much of those efficiencies can you still pull from? And are we coming towards the end where you may start to see some headwind because you don't have those same levers to pull? Thank you.

So I think our team has done an excellent job of bringing out the cost from data center design. But I think you note correctly that we're approaching a level where it's going to be difficult to take out more costs without impacting residual value. I think we're fortunate that we've established our VMI, or vendor-managed inventory, and program in place with most of our major suppliers. And what that means is we have three-year contracts in place that lock in pricing for critical equipment like generators, switch gear, and UPS modules. And so, we haven't been affected by rising steel prices because of those programs. It's also I think important for you to keep in mind that we're still the only data center REIT with investment-grade ratings from all the major rating agencies, and that gives us a competitive advantage in a rising rate environment. And finally, we've been able to derisk labor inflation by keeping our contractors on site. So to sum up, we have the benefits of buying in bulk across a global sales funnel.

Hi. Two questions, if I could. First, I noticed that you took out the goal for asset monetization relative to prior guidance tables, and I was wondering if you could size the potential for asset monetization and optimization of the portfolio and what kind of market is out there for the assets that would be up for consideration? And then just switching gears as you look at the hyperscale deployment that you've accommodated over the last couple of years, is there a way to quantify any magnetic effect those deployments are having to also get to additional enterprise bookings in a similar or nearby campus that either wanted to be close to the cloud or employ a hybrid cloud architecture? Thanks.

Hey. Thanks, Michael. I'll tackle the first question, then I'll pass it over to Chris on the second one. So asset monetization is still very much part of our DNA here; it's in our heritage. And I think you could see that by the fact that even on the portfolio optimization and capital recycling track for some time, I think we've sold about $800 plus million of assets outright in the last handful of years. I'm pretty sure that's more than any other data center provider out there. And also we are big fans of having our fishing pool in all the different pools of capital, both public and private. And that includes outright or joint venture ownership. And we've deployed joint venture ownership across multiple formats. So I would say we look through our portfolio and try to find areas where we want to focus and defocus, and also opportunities to further optimize our capital structure through the use of private capital. I think you could expect us to continue to focus our investment in the major markets where we see additional runway for growth- the Ashburns and Santa Clara types of markets or Dallas and Chicago's in North America, the Frankfurt's, London's, Dublin's, Amsterdam's in Europe, and Osaka, Tokyo, Singapore, and Sydney in Australia and Asia. I think we'll see less of a focus on some of those other markets in terms of where we put further dollars or continue to invest. And with I'd say now over 200 data centers almost entirely unencumbered, the majority of which own fee simple, I think we've got a credible amount of flexibility to optimize our portfolio effectively track various forms of capital and to recycle capital when we find it appropriate. Chris, do you want to hit the hyperscale and overall ecosystem question?

Yes, thanks Andy. Appreciate the question, Michael. So there's a couple of elements to that. So it is somewhat hard to quantify. But still a lot of the industry research and papers out there indicate the fact that 80 plus percent of enterprises are looking to achieve that hybrid multi-cloud. So one of the things we've often looked at, and we constantly track, is not only the amount of uptake on the service exchange, which allows private connectivity to all of the major cloud providers on a very open platform, which we’ve referenced in the past, and at a couple of conferences, where you have access to 109 cloud on-ramps associated with that platform, which is very demonstrably allowing customers to efficiently achieve the hybrid connectivity or access to these hyperscale services. And then I'd say the other key indicator that we've been watching a lot is the proximity, right? And so allowing enterprises to deploy chasing points in Ashburn where you could be immersed in the largest cloud epicenter in the world is a major differentiator, which is why you see a lot of the construction and the build in the amount of infrastructure pipeline that we have in that market. Because it's just a key indicator of the amount of uptick that we have associated with that. I don't have any specific metrics on how to quantify the attach rate to that at this point in time, but that's something that we constantly track and are really putting in a very tight model to our sales team to ensure that they're having that dialogue with the enterprise customers that they know which clouds they're betting their business on. And how easily and efficiently consume them either via the service exchange, which is private connectivity, or which is unique to our connected campus. The proximity of being deployed right next door to it, which Andy referenced in the script earlier with IBM, is a very unique model where customers can be right next door to the actual cloud services they're consuming. So we see a lot of that uptick coming to the market, and we see no ending sight for a lot of that hybrid multicloud architectures.

Hi. Thank you for taking my question. Can you discuss the power availability situation in Northern Virginia and whether it's affecting market growth there? Additionally, last year, most of the leasing activity in North America was concentrated in Northern Virginia. How does the sales pipeline for other markets in the U.S. compare this year to the same time last year?

Thanks, Robert. I'll jump on the first question and I think Andy will pick up the second piece. But, as far as power availability in Northern Virginia, one of the things that we often really start to look at is how we master plan the multiple campuses that we've built out there. And one of the key elements of that master plan is working with the local power providers and early on establishing a demand profile associated with not only what we have today but where we're headed. And a part of that is investing and ensuring that we get the proper substations built inside of the market, which is very unique to Digital. From our long heritage in building out these campuses to ensure that we don't run out of any power. So not only with the campuses that we have populated today, but the future expansion campuses we're already in deep dialogue with a lot of local utility providers to ensure that we have proper access and redundant access in these core markets even outside of Northern Virginia. So we see nothing impacting our ability to meet our customer demand with the master plan facilities that we have today and also the future expansion that we have in that market. And I'll hand it over to Andy for the second part.

Thanks, Rob. Looking back at the fourth quarter of 2018 in North America, it wasn't primarily focused on Ashburn; rather, it was more varied. We saw over a megawatt in the San Francisco area, along with signings in Houston and Dallas, and also in Chicago. Reflecting on previous quarters, I remember significant signings in Chicago and at the Dallas campus. While a 25-megawatt deal in any quarter certainly adds to our numbers, it was not exclusively centered on Ashburn or Northern Virginia. For 2019, I expect to see steady demand for the robust market in Ashburn, Virginia, but our discussions at Digital are expanding to other regions, including our new delivery campus in Toronto and some talks in Santa Clara. Additionally, we’ve noticed increasing activity at our Richardson campus in Dallas. Another market that has quietly picked up is the New York City metro or Northern New Jersey, where we’re seeing rising demand tied to financial services in several locations. It appears that in 2019, we're seeing demand spread across more areas in our North America portfolio compared to previous years. I also think I overlooked one of Colby’s earlier questions about the outlook for 2019 in terms of international versus non-international. We have the Ascenty portfolio, which is set to contribute significantly to our record signings in 2018, influencing our performance in 2019. When we compare apples to apples, looking at our campuses in Frankfurt, Amsterdam, and London, we’re observing enterprise customer demand in Dublin, and we also announced new deliveries in Sydney, Australia, and Osaka, Japan. In the past couple of years, around 75% to 80% of our signings were in North America, with the remainder outside the U.S. or North America. Moving forward, we expect to see a more global distribution. This was a key focus as we began the year, emphasizing our strengths in the global multi-product platform.

Thank you, Andrea. I'd like to wrap up our call today by recapping our 2018 highlights, as outlined here on the last page of our presentation. We advanced our top priority of deepening connections with our customers, delivering record bookings of $268 million, a 35% increase from the previous all-time high the prior year. We further expanded our global platform with our entry into Latin America. And we further extended our sustainability leadership with the addition of 90 megawatts of renewable energy capacity. We delivered 8% growth in FFO per share at the top end of our original guidance, and we delivered double-digit growth in AFFO per share, setting the stage for continued growth in our dividend. Last but not least, we further strengthened our balance sheet, raising $1.1 billion of common equity to fund our future growth, refinancing our $3.3 billion credit facilities, and issuing over $1 billion of long-term investment grade corporate bonds at very attractive coupons. As I do every quarter, I'd like to conclude today by saying thank you to the entire Digital Realty team whose hard work and dedication is directly responsible for this consistent execution. Thank you all for joining us, and we look forward to seeing many of you in Florida in March.