Digital Realty Trust Inc (DLR) — Q1 2020 Earnings Call Transcript

Thank you, Shawn. The speakers on today's call are CEO, Bill Stein; and CFO, Andy Power. Chief Investment Officer, Greg Wright; Chief Technology Officer, Chris Sharp; and EVP of Sales and Marketing, Corey Dyer, are also on the call and will be available for Q&A. Management may make 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. With that, I'd like to turn the call over to Bill.

Thank you, John. Good afternoon and thank you all for joining us. The last 90 days have been unlike anything that we've experienced in our lifetime, and our hearts go out to all those who have been directly impacted by COVID-19, especially those who've lost loved ones. No one has been immune to this crisis, but the data center industry has been fortunate to remain open for business while huge portions of the global economy have been put on hold. As you probably know, data centers have been classified as critical infrastructure and essential businesses by government agencies around the world. Our top priority is, of course, the health and safety of our employees, customers, and partners. The entire data center industry has delivered a strong track record of operational excellence and uptime throughout this crisis. Digital Realty has maintained 100% uptime. And while we have deferred preventative maintenance and have asked customers to limit site visits to critical activities, our doors have remained open and our data centers continue to provide the trusted foundation for the digital economy. Business continuity is our core competency. We have a full-fledged pandemic playbook to ensure that we maintain service levels while prioritizing the health and safety of our employees, customers, and partners. We have received very high marks from our customers for our professional protocol and proactive communications throughout the crisis. For this, we owe a debt of gratitude to our operations team and particularly our frontline employees in critical data center roles. Despite the challenging environment, they have continued coming to work so that industries, governments, and families can continue to connect, keep in touch, and maintain commerce and information flow. We are deeply appreciative of their efforts. Let's turn to our sustainable growth initiatives here on page four. In early January, we issued €1.4 billion of green euro bonds. This was our third green bond issuance, and we are now the largest U.S. REIT green bond issuer. Our green bond framework is aligned with the ICMA green bond principles with a second-party opinion provided by Sustainalytics. In mid-January, we announced that we had achieved EPA ENERGY STAR Certification for an industry-leading 29 data centers last year. In early April, we were honored to be the first data center provider to receive an EPA ENERGY STAR Partner of the Year Award for Energy Management. Finally, in late April, we announced a wind energy agreement to supply approximately 30% of our power needs in the Dallas, Texas area with renewable energy. On the social front, we are fortunate to be in a position to give back in the midst of this crisis. We have undertaken a comprehensive philanthropic initiative consisting of corporate contributions, employee-matching gifts, and community outreach initiatives to help support organizations combating COVID-19 around the world. We are also waiving fees for expanded service exchange connectivity for the next six months to help customers in the government, medical, emergency services, and educational verticals keep critical services running. On the governance front, Jean Mandeville has joined the Board of Directors, bolstering the additions of Alexis B. Bjorlin and Dash Jamieson in January. Jean was previously Chairman of the Board at Interxion. And he has extensive experience in the technology and telecom sectors, having previously served as the CFO of Global Crossing and Singapore Technologies Telemedia as well as President of APAC for British Telecom. We are pleased to welcome Jean to the Board, and we look forward to benefiting from his leadership and expertise. On a more bittersweet note, we also have a departure to announce. Former Chairman, Dennis Singleton, has reached mandatory retirement age and will not be standing for reelection at our annual meeting. Dennis had a distinguished career prior to joining our Board, most notably as a founding partner of Spieker Properties. He has served as a Digital Realty director since our IPO in 2004 and he served as Chairman of the Board from 2012 to 2017. The company has grown nearly 50-fold since Dennis joined the Board, and he has provided sound counsel and steady leadership through the most critical junctures in the company's history, including the strategic investments that have built the business as well as leadership changes at the Board and the C-suite. He is a true gentleman and his sage counsel and collegial bearing will be sorely missed. On behalf of the entire Board of Directors, I would like to thank Dennis for his more than 15 years of service to Digital Realty, and we wish him the very best. Let's turn to page five; our first quarter investment activity showcased the breadth of our global platform and crystallized the transformation of our business. The highlight of the quarter was, of course, our combination with Interxion in a highly strategic and complementary transaction, creating a leading global provider of cloud and carrier-neutral data center solutions. We also closed the acquisition of a 49% interest in the Westin Building Exchange in Seattle. The Westin Building is one of the most densely interconnected facilities in North America and is home to leading global cloud, content, and interconnection providers with over 150 carriers and more than 10,000 cross connects. We closed on the sale of a portfolio of 10 North American data centers to Mapletree in January, generating approximately $550 million of proceeds. We also launched our colocation product offering in Osaka, building upon the success of our hyperscale business in Japan. We opened a new data center in Dublin, and the new Clonshaugh facility supports the growth of Dublin's technology sector, which is projected to boom over the next decade. We acquired a small land parcel in Frankfurt, adjacent to our existing Sossenheim campus to accelerate time to market in a supply-constrained metro. Separately, Interxion has line of sight on a sizable land parcel expected to represent a strategic extension of its existing Frankfurt campus that would support the development of up to 180 megawatts of IT capacity, providing runway to support customer growth in key European metros for years to come. We announced that we turned the power on at SIN12, a 50-megawatt new development in Singapore, partially pre-leased to a major Singaporean bank and a leading global cloud provider. Finally, in April, Interxion announced it has broken ground on Interxion Paris Digital Park, a major expansion project in Paris with up to 85 megawatts of capacity. The first of four new data centers on this site will be Interxion's 8th in Paris. And the first phase is scheduled to open in late 2021. Let's turn to integration on page six. We believe our combination with Interxion has the potential to change the global data center landscape. The combined organization is well placed to meet the growing demand from cloud and content platforms, IT service providers, and enterprises seeking colocation, hybrid cloud, and hyperscale data center solutions. These are global, long-term opportunities that we are ideally positioned to address. Integration is our top priority for 2020. The combined company offers a comprehensive global platform for our customers and gives us a runway for significant growth. We have obviously had to adapt to the current environment. The transaction closed on March 13, and we began sheltering in place the following week. Many of the initial meetings between teams that would have taken place in person have been virtual instead, and that has obviously created some challenges. But both teams have risen to the challenge. During that first week, we had to implement policies, procedures, and customer communications for operating in the midst of a global pandemic. As I mentioned earlier, I'm deeply grateful for the way both teams have come together to continue to serve our customers' needs throughout this crisis. Based on our work prior to closing and within just the past few weeks, we've made progress on our corporate integration efforts, including finalizing our integration governance and combined EMEA leadership structure, which we will be rolling out in the coming weeks. There will be more to come over the next several quarters, but we are pleased with our progress to date. Let's turn to the macro environment on page seven. As we are all aware, the global economy has ground to a halt. As you've heard me say many times before, data center demand is not directly correlated to job growth, and we are fortunate to be operating in a business levered to secular demand drivers, both growing faster than global GDP growth and somewhat insulated from economic volatility. To put a finer point on the secular demand drivers underpinning our business, I'd like to draw your attention to page eight. McKinsey recently conducted a global survey of 3,600 B2B decision-makers on their business outlook and priorities. The surveyed executives stated they value digital interactions with customers as two to three times more important than traditional interactions, reflecting continued need for digital infrastructure and capacity demand for data centers. According to the market intelligence firm Intricately, on average, enterprises utilize 27 cloud products, deployed and consumed across eight points of presence globally. We are seeing indicators of this demand globally across our platform in the volume of new logos led by our enterprise vertical as these firms shift their strategy to enable digital interactions for their customers. Digital Realty was recently named a worldwide leader in the IDC MarketScape Colocation and Interconnection Services Provider Assessment report, noting PlatformDIGITAL provides a global-scale platform to enable digital transformation in a consistent, modular fashion. We are honored by the strong validation of our platform and our unique positioning to capture the global data center demand opportunity. Given the resiliency of demand drivers underpinning our business and the relevance of our portfolio to meet these needs, we believe we are well-positioned to continue to deliver sustainable growth for 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 pick up here on page 10. As you may have seen from our supplemental reporting package, given the compressed time frame post-closing and the complexity of reconciling different reporting practices with both teams working remotely, we've included the partial period contribution from Interxion in our financial statements, but we have not included Interxion's portfolio statistics in the supplemental until next quarter. We've also tabled most of the changes to our disclosure package we discussed last quarter. We continue to see the lines blurring between product types, and we believe the distinction is becoming less meaningful. As a result, we still expect to evolve our disclosure in the coming quarters to more closely align with our customers' buying behavior and the way we manage the business. We also expect to fully reflect the Interxion portfolio statistics within our disclosure next quarter as well. Nonetheless, we provided a few pro forma data points in summary form here on page 10 to help frame the power of the combined business. I would like to point out that we slightly tweaked our definition of adjusted EBITDA this quarter to include our pro rata share of unconsolidated joint venture taxes and interest expense. We use net debt to adjusted EBITDA as our primary leverage governor, and we calculate leverage on a look-through basis. In other words, we include our pro rata share of unconsolidated JV debt in the numerator. And we believe that including our pro rata share of unconsolidated JV EBITDA in the denominator is the intellectually honest approach. Our pro rata share of joint venture interest expense and taxes has historically been negligible, but it's becoming more meaningful as we expand our strategic private capital initiative through ventures like Ascenty in Latin America and MC Digital Realty in Japan. Let's turn to our leasing activity on page 11. We delivered solid leasing volume with balanced performance across sectors, products, and geographies. We signed total bookings of $75 million, our second-highest quarter on record. This does not include any contribution from Interxion, which separately signed another $10 million during the first quarter. Interxion's first quarter bookings were entirely colocation and connectivity business, with no single deal larger than 180 kilowatts. Standalone Digital Realty's first quarter bookings included a $9 million contribution from interconnection. We signed new leases for space and power totaling $66 million, with a weighted average lease term of nearly seven years, including a $7.5 million colocation contribution. Standalone Digital Realty added 54 new logos during the first quarter on a consolidated basis. In addition, Ascenty landed 20 new logos and Interxion added another 45 for a grand total of 119, underscoring the power of our global platform. In terms of regions, standalone Digital Realty's results showed particular strength in the Americas as well as APAC, notably in Northern Virginia here in the U.S., as well as Singapore in APAC. We leased 25 megawatts in Ashburn during the first quarter, bringing our total over the past three quarters to 57 megawatts. This activity has driven lease-up of active development as well as existing inventory, and we generated nearly 300 basis points of positive net absorption within our Northern Virginia in-service portfolio during the first quarter, from 90% occupied at year-end to 93% as of March 31. We have not yet begun to see meaningful improvement in Northern Virginia market rents, but the available inventory is being rapidly absorbed, and the pendulum appears to be swinging back towards tighter availability and healthy competitive tension. In terms of specific wins during the quarter and around the world, we've landed a leading global video streaming platform for their launch across much of Europe, which was a resounding success. Interxion, a Digital Realty company, supports this on-demand, ad-free streaming service by providing their data center infrastructure across five locations in Europe. With the growing demands for OTT video services, this is a sector that relies on highly connected data centers to deliver a superior customer experience, and we are honored to have partnered with its leading provider to help them bring their world-class content to European consumers. We helped a leading European digital service provider stand up a bare-metal cloud offering adjacent to cloud on-ramps in São Paulo to support a major cloud provider's hybrid services in South America on our Ascenty platform. A global financial services firm using NVIDIA GPUs in their high-density compute cabinets chose Digital Realty because we met their high-performance computing requirements, including proximity to their legacy compute environment to ensure ultra-low latency and security. PlatformDIGITAL has been gaining significant momentum since its launch late last year, and customer-spanning industries, geographies, and business objectives are making the migration. SEMrush, a SaaS provider offering online visibility and marketing analytics software subscriptions, had a requirement for a data hub with proximity to multiple leading global cloud providers and a global expansion under an aggressive timeline. We were able to solve their needs with a new deployment in Ashburn, including connectivity via our service exchange. Similarly, BIGO, a Singapore-based technology company specializing in AI-enabled video platforms, needed a critical infrastructure provider to help them expand into EMEA. BIGO landed on legacy Digital Realty's Frankfurt campus. Interxion's capabilities across the region further solidify the selection of their ideal partner. We were also able to support the 5G aspirations of a global Fortune 100 service provider by meeting their financial growth and power density requirements. We are continuing to build on our global momentum in the second quarter, and we look forward to helping customers achieve their goals during these uncertain times. Turning to our backlog on page 13. Standalone Digital Realty's curve backlog of leases signed but not yet commenced stepped up from $116 million at year-end to $122 million at the end of the first quarter. The lag between signings and commencements was a bit better than our long-term historical average at four and a half months. Moving on to renewal leasing activity on page 14, which again excludes Interxion, we signed $92 million of renewals during the first quarter in addition to new leases signed. Activity was heavily skewed to our colocation business, and the weighted average lease term on renewals signed during the first quarter was a little over three years. While the positive mark-to-market on colocation renewals largely offset turnkey and PBB roll downs for an average cash re-leasing spread across the product types of negative 1.5%. As you may have seen, our guidance calls for cash re-leasing spreads to be down low single digits. Please keep in mind that our 2020 guidance does include Interxion, whereas we have not reflected Interxion results in our first quarter leasing statistics. Aside from a few select supply-constrained regions and metro areas, we have yet to see broad-based rental rate growth across most markets. However, we are continuing to make significant progress cycling through peak vintage renewals; the lion's share of our portfolio has recently been leased at current market rents, and we are beginning to see barriers to entry emerge in a growing number of markets around the world. As a result, we expect to see continued gradual improvement on cash re-leasing spreads in 2020 and beyond. In terms of first quarter operating performance, overall portfolio occupancy improved 40 basis points to 87.2%, largely due to positive absorption in Northern Virginia and Dallas. Same capital cash NOI was down 3.7% due to downtime related to record expirations in 2019 and reflecting a 40 basis point FX headwind. Our full-year guidance implies improvement going forward. And barring any unforeseen shocks, we are cautiously optimistic that we put the low watermark for the cycle behind us. As a reminder, Interxion and the Westin Building are not included in the 2020 same-store pool, but we expect both acquisitions will be accretive to our organic growth going forward. Turning to economic risk mitigation strategies on page 15. The U.S. dollar continued to decline relative to prior year exchange rates, and FX represented roughly a 50 basis point headwind to the year-over-year growth in our reported results, from the top to the bottom line. 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 terms of vertical concentration, as you can see from the pie chart on the upper right, we have limited exposure to the businesses that have been most directly impacted by the COVID-19 pandemic. Our April rent collections are in line with our historical average and the sum total of customers who have reached out to request rent relief represent approximately 2% of total revenue. In addition to managing credit risk and 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 of matching the duration of our long-lived assets with long-term fixed-rate debt, a 100 basis point move in LIBOR would have less than a 50 basis point impact on full year FFO per share. Our near-term funding and refinancing risk is very well managed, and our capital plan is fully funded. In terms of earnings growth, core FFO per share was down 11.6% year-over-year. As you may recall, there were several one-time items in 1Q 2019 affecting the year-over-year comparison, including a $0.065 U.K. tax benefit, another $0.065 of interest income on the Brookfield bridge loan, and a full quarter contribution from consolidating Ascenty prior to closing the joint venture with Brookfield on the last day of the year-ago quarter, whereas we had nearly a full quarter of dilution from the Mapletree asset sales in 1Q 2020. Excluding these non-comparable items, the year-over-year growth would have been up 1.2%. Core FFO per share missed consensus by $0.03 but was $0.03 ahead of our internal forecast, driven by strong leasing performance and operating expense savings. By our estimation, the first quarter miss relative to consensus was entirely due to the share count. Its actual results were 5% to 6% ahead of consensus on the top line and EBITDA. And most street models did not reflect the 54 million additional shares outstanding for 18 days upon closing of the Interxion combination in mid-March. As you may have seen from the press release, we opportunistically issued a little over $650 million of equity on our ATM in late March and early April. In addition, we now expect to draw down our forward equity offering sooner rather than later this year. Our 2020 guidance includes just over $0.25, or 4% headwind comprised of three items; the opportunistic equity issuance and accelerated drawdown of our equity forward; FX and COVID-19 impact, including modest drag from development delivery delays in select markets; and finally, the earlier-than-expected closing of our combination with Interxion, along with additional investments in the Interxion business to fund future growth. As you can see from the bridge chart on page 16, we expect the quarterly run rate to dip down by $0.06 in the second and third quarters before rebounding in the fourth quarter and beyond. Our recent investment activity, including Ascenty in Latin America and Interxion in EMEA, along with our capital recycling initiative and balance sheet management, have lowered the per share bar in 2020. But we believe each of these initiatives will create long-term value and set us up for accelerating growth and a greater share of global customer wallet going forward, while still providing for a well-covered dividend, which the Board raised for the 15th consecutive year in February. Last, but certainly not least, let's turn to the balance sheet on page 17. Fixed charge coverage remains healthy at 3.8 times, while net debt to adjusted EBITDA stood at 6.6 times as of the end of the first quarter, primarily due to showing 100% of Interxion's debt on our balance sheet as of March 31, whereas it contributed just 18 days of EBITDA in the first quarter. Pro forma for a full quarter contribution from Interxion and the Westin Building, the equity issuance activity on the ATM after quarter end and settlement of the $1.1 billion forward equity offering, net debt to adjusted EBITDA remains in line with our targeted range at just over five times, while fixed charge coverage is just under five times. As a result of our proactive balance sheet management, we have ample liquidity to fund our capital spending with nearly $250 million of cash on the balance sheet as of March 31, another $1.7 billion of equity coming in post-quarter end, and $2 billion of availability on our global revolving credit facilities. The successful execution against our financing strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers, and enables us to prudently fund our growth. As you can see from the chart on page 18, our weighted average debt maturity is over six years, and our weighted average coupon is 3%. 60% of our debt is non-U.S. dollar-denominated, acting as a natural FX hedge for our investments outside the U.S. Over 90% of our debt is fixed rate to guard against a rising rate environment, and 98% of our debt is unsecured, providing the greatest flexibility for capital recycling. Finally, as you can see from the left side of page 18, we have a clear runway with virtually no near-term debt maturities 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. Shawn, would you please begin the Q&A session.

Thanks for taking the question. This is Bora Lee on for Jon. I guess first of all, given the widespread pause in place in Singapore for new permitting and a moratorium on permitting in place in Amsterdam, are there any other markets where this is happening? And do you have any update on when these restrictions might be lifted?

Thanks for the question. This is Andy speaking. The Digital team is currently in different locations due to social distancing, so Bill asked me to manage the questions. I can start with the first one and let the team add their insights. Singapore was one of the first countries to recover but is now back in lockdown, which is affecting our delivery times there. In Amsterdam, the situation is different and not really related to COVID; it's more about government restrictions in certain areas. We've done a great job preparing in Amsterdam, planning for our multiple campuses with Interxion and securing land outside the restricted areas. I'm not aware of similar restrictions impacting other locations in our portfolio. There are markets where we're approaching supply constraints, and the situation in Amsterdam favors established players like Digital, limiting new entrants. We're also experiencing COVID-related impacts intertwined with government actions. In Toronto, where we have a campus under construction, the government paused work for a time before reopening, which also happened in Hillsboro, Oregon, where a pre-leased campus is being constructed. The reduction in government restrictions has led to some absenteeism, causing delays in labor. However, these are just a few specific markets where we've seen potential disruptions to our deliveries that may affect 2020, as we outlined in the script. Overall, it's not a widespread issue across our portfolio at Digital.

Okay. And for my follow-up question, a few days ago, you announced the launch of the Digital Realty Data Hub featuring NVIDIA for the rapid deployment of AI and machine learning workloads. Could you provide further color on this announcement? Are there similar ones yet to come? And what are some illustrative customer use cases that DLR is seeing or expects to see?

Thanks, Andy. So, we're absolutely delighted to partner with NVIDIA to extend machine and deep learning to the data center to accelerate artificial intelligence. Digital is an early-stage partner with NVIDIA. Together, we've pre-certified 24 locations around the world. Our Data Hub solution featuring NVIDIA DGX PODs provides buyers with a validated reference architecture and solution starter kit for rapid AI deployments on PlatformDIGITAL around the world. The combination of NVIDIA DGX and PlatformDIGITAL enables a secure and performance-driven data center architecture for enterprises at any scale. We do have a pipeline of similar ones. In addition to NVIDIA, we've released solution offers with Cisco, IBM, and Vapor IO. This is part of the PlatformDIGITAL roadmap that we published last November when we launched the platform. We're seeing multiple customer use cases across many industries. We've captured multiple customer wins across financial services, transportation and logistics, and IT service industries. All of these customers are looking to unbound data processing and exchange limitations to enable intelligent insights for their business. Initial use cases include complex trade analytics and risk, AI-based cybersecurity, and route optimization for connected vehicles.

Great. Thank you very much.

Thank you and good afternoon. I hope everyone is doing well. For my first question, I would like to know what you've observed regarding demand, the pipeline, and the funnel in relation to COVID. Specifically, I'm curious about the situation in the first quarter when there wasn't much activity due to the virus, although it may have had an earlier impact globally. I'm particularly interested in what occurred in March, the end of March, and into April, as well as the momentum you've experienced during that time. It would be helpful if you could break this down across your customer base. Thank you.

Hey, thanks, Jordan. I hope you and your family are healthy and safe as well. I'm going to toss it over to Corey to talk about pipeline in response to your question there.

Thank you, Jordan, for your kind words about the global impact of COVID. I’ll address this in two parts: first, I’ll discuss our pipeline, then I’ll share insights on the impact of COVID. Overall, I want to emphasize that demand has been strong. It picked up during the launch of PlatformDIGITAL in Q4, and Q1 has maintained that momentum. Customers and partners have responded positively. We recently received the NVIDIA sign-off, which underscores the unique value of our platform. Bill mentioned that IDC MarketScape recognized us as a leader in the data center sector, and we saw significant growth in new enterprise logos. In fact, 75% of those new logos were from enterprise clients. Looking ahead to Q2, our pipeline remains robust, continuing the momentum established with PlatformDIGITAL. The late-stage pipeline is up over 50% quarter-on-quarter and 100% year-on-year. Our new logo pipeline shows similar strength. We do have a solid pipeline for our enterprise segment as well. While we have some enterprises facing challenges, we've offset this with new opportunities, including CSPs, content networks, and interconnection growth. It's expected that the industry experiences some impact from COVID, but overall, we still enjoy strong demand and a solid pipeline moving forward. I hope this provides clarity.

That's helpful. I have a question for you, Andy, regarding the guidance. It's somewhat disappointing compared to the expectations. I understand you've had to incorporate various factors related to Interxion and COVID, and I appreciate the $0.25 headwinds you've mentioned. However, even when considering the $1.53 you reported in the first quarter and annualizing the $0.25 headwinds, it suggests very limited growth from new business, especially since we're already into the year. It just appears a bit low. Additionally, I want to comment on the re-leasing spreads. The Digital portfolio is significantly larger than Interxion's. We’ve talked before about being strategic during challenging times, yet it seems like fundamentals have improved with increased demand and decreased supply capability. What am I missing?

Thank you, Jordan. Let me address this. The first quarter exceeded our internal expectations at $1.53, while you mentioned $1.57, which is close to what we’re discussing. It was a complex quarter for our partners in the research community. We tracked about 23 analysts covering us, and only around seven could account for all the moving parts, including interactions that impacted the numbers. The consensus calculation, taking into account share count and interactions, was closer to 630. Since the beginning of the year, we've highlighted changes amounting to a little over $0.25 in impact across three main areas, with the first two being significant contributors. The first component was our balance sheet management during uncertain times, particularly due to broader disruptions in capital markets. We opportunistically raised $650 million through our ATM and aim to bring down our equity sooner, which accounts for about $0.08 of the $0.25, and this was a strategic decision to leverage investment opportunities for future growth. The second significant factor is related to foreign exchange and COVID impacts, contributing around $0.13 in total, roughly split between the two. COVID led us to adopt a more conservative approach regarding bad debt estimates and resulted in restrictions that affected our ability to deploy labor in certain markets. For instance, Singapore was initially out of lockdown but then faced restrictions again, causing delays in our 50-megawatt shell and pre-leasing activities. Such episodic disruptions in select markets will temporarily impact our revenue for 2020, but these are not long-term issues and reflect the ongoing fluid nature of the COVID situation. Lastly, there’s a small portion related to Interxion. At the beginning of the year, we didn't anticipate the complexities of navigating multiple European government jurisdictions and shareholder votes, which led to completing the transaction in mid-March. We initially projected a 1% to 2% dilution from that deal, but due to the earlier-than-expected timeline, we’re finding investment opportunities in our combined EMEA business, contributing about $0.01 this year. With that said, we are consistently focused on growing our earnings as quickly as possible while managing our balance sheet carefully, whether through capital recycling or selectively further equitizing to fund future growth opportunities without compromising our dividend coverage. Now, regarding re-leasing spreads, it's worth noting that in four of the last five years, we have had positive re-leasing spreads. This year, however, we expect a slight decline. Historically, we tend to overestimate negative impacts and often perform better than our guidance, as seen last year. Occasionally, we encounter a customer renewing with above-market lease terms, which positively contributes to our commercial negotiations across various products and regions. Therefore, we're not in a situation where all our contracts are below market. The trend is improving, and we look forward to moving into positive territory regarding this metric and to enhancing our overall organic growth.

Hi, good afternoon. Since this might be one of the last quarters that you're reporting metrics for the heritage DLR business, back when you filed the S-4 for the transaction with Interxion, it was inferred from there that organic growth for the just heritage Digital business would be about 5%. Can you frame what that growth rate looks like that's embedded in the guidance for 2020 in terms of the expectation for heritage Digital revenue growth?

I believe that if you examine the results so far, Interxion only had a contribution of about two weeks. The first quarter results are mainly from Digital. To clarify, we had to adapt to a work-from-home environment immediately after closing Interxion. When looking at our statistics without Interxion included, you can see the fundamental performance of our legacy Digital business. Regarding guidance contribution, I wasn't on the fourth quarter call, but Matt Mercier covered it well, providing some guide rails for legacy Digital, outlining our standalone top line expectations and adjustments related to our asset disposals and capital recycling. We anticipate organic revenue growth in the mid-single digits for 2020, which I still believe to be accurate. We also mentioned having industry-leading EBITDA margins, which I stand by as well. This is true even when considering the Interxion merger, which has a lower EBITDA margin business. The commentary made in February regarding our organic growth projections should reflect in the guidance. The organic growth of the Digital business significantly contributed to our strong performance from our own perspective in the first quarter, which was primarily a Digital-focused quarter.

Thank you. Regarding the Q1 results of $823 million, could you break down the organic DLR and Interxion's contribution? I would like to understand those numbers better. Also, I thought there was going to be a consolidation of the Westin Exchange. Could you provide some comments on that in relation to the quarter?

Sure. Thanks, Erik. To clarify, you’re asking for a breakdown of the $823 million in revenue for the quarter regarding the contributions from each of the major transactions, correct? Certainly. Of the $823 million, and I'm kind of bridging you between the quarter's changes, I'd say, Interxion was probably like a $40 million almost $47 million contribution, and the rest was really the ins and outs of Digital. I think we put a cap rate and a return on the Westin purchase at about a 5.8% return, so that you can kind of back into flipping that from an unconsolidated joint venture to a consolidated joint venture investment. Erik, we're also more than happy to follow up post the call or work through any of the granularity. We understand when you joint venture and recycle $1.4 billion of capital in the last 90-plus days, buy out a partner on a $700 million asset, and close an $8.5 billion strategic combination in Europe, it's not a simple quarter from anyone’s modeling perspective.

No, definitely. I appreciate that. And I will do that. And then maybe just my follow-up on Northern Virginia; it seems to be recovering and we're hearing of improved demand. How are you seeing this market and your opportunities? And can you comment on other markets where you're seeing an improvement versus what you thought just 90 days ago? And that's maybe just not here in the U.S., but obviously, now with Interxion, you have a lot more visibility into that European base as well.

Sure. I'll begin with an overview of the market and then ask Corey to share his insights from the customer perspective. Northern Virginia had an exceptionally strong quarter, becoming our top market in terms of overall signings. The colocation and connectivity sectors performed well, with attractive pricing for our colocation suites on that campus. We successfully backfilled many recently vacated suites, which represents high leasing activity since the suites are already built. Additionally, we completed our largest transaction of the quarter, which came from outside the region and was significant in the hyperscale area. Overall, it was a strong performance, but I would note that the market is not fully back to normal. Our success can be attributed to a few factors: our comprehensive platform offering, a large and growing customer base looking to expand, and in Northern Virginia, we have substantial growth potential regarding capacity build-out. While more commoditized providers in Northern Virginia are cutting rates, the competitive landscape for our customers seeking specific suites within our Ashburn campuses has led to better economics. Looking at the rest of North America, Toronto stands out as a bright spot, as it is rapidly depleting capacity, and we're about to launch a new colocation suite there. The New York City metro area, including New Jersey, is also rebounding, particularly in colocation connectivity and enterprise demand in financial services. Santa Clara remains tight. Outside North America, the Asia-Pacific region had a strong quarter, with positive early indicators from our Osaka colocation interconnection launch. Our SIN12 building has secured deals with a major enterprise and a leading Asia-Pacific bank, along with a major cloud service provider. In Latin America, São Paulo saw success by fulfilling demand from a European customer in our Ascenty platform. In Europe, we highlighted our strength in selling to Asian customers from our legacy Digital colocation facility in Frankfurt. The London Cloud House has made a solid start, and while we didn't explicitly mention it in our results, Interxion achieved healthy signings totaling $10 million, across a diversified book of business with no major signing above 180 kilowatts. It was also a successful quarter for Interxion. Corey, do you have anything to add?

You gave him pretty much a rock star world tour of what we've got going on, so I was trying to think of what to add. I guess I would say, Andy, is the only thing to add is that we're really happy with what we've seen in Ashburn, if that's the base question here. We've had deals each of the last couple of quarters that have helped us. We're continuing to see demand in that area that we're going to continue to source and take care of. It puts us in a position to think about expanding and growing more there. As you said, if you looked across our regions, each of our regions was really successful this year or in this last quarter, as well as AP just going gangbusters for us. So, I think you did a great job summarizing it. We're happy with how PlatformDIGITAL has been received by customers. We're seeing a lot more multi-metro deals come through and a big pickup on the enterprise wins with new logos. So, I appreciate it, Andy.

Hi. I just wanted to ask about the base business. And given that there are so many puts and takes on the financial side, just to focus on what's going on with the underlying business. It seems like $70 million in signings has been pretty steady over the past four quarters. Is that the new normal? And is it fair to say, even though Northern Virginia contributed, it doesn't seem like you had an out-of-trend win there? Later on, that could boost the overall signings number from $70 million to a much bigger number.

Thank you, Richard. We've shown a consistent improvement over the past several quarters, with each quarter slightly better in terms of volume and composition across multiple aspects. We're currently just under 75, not including anything from Interxion, and the contributions have been quite diverse. As we noted, APAC was a significant contributor, and Northern Virginia also played a solid role, but it didn’t dominate the performance. If we look deeper at Corey's and Bill's earlier comments, we had a robust number of new logos. Overall, we've reached 120 new logos. While I typically avoid annualizing these figures, with a customer base of 4,000, this amounts to nearly 12% growth in new logo generation from our combined platform. I'm very satisfied with several other key performance indicators, and you may have heard a bit about Corey's outlook for the pipeline as we move into Q2.

And as a follow-up, the interaction of $10 million signings; is that kind of the normal level? Or was that kind of them having a very good quarter? And how should we think about that going forward?

I'm not aware of David ever providing a signings pipeline or a signings number, so I won’t be the first to discuss that in public. Some transactions likely didn’t close during the quarter. Europe faced the COVID crisis earlier than the United States. However, I was quite pleased to see nearly $10 million in signings with consistent performance across various markets and strong connectivity.

Thank you for taking my questions. The first one, just you guys have talked about in the past a goal of getting to maybe 5%, 7% core FFO per share. When you think about 2021 and getting past some of the things that you've talked about that are impacting you specifically in 2020, is that still a fair approximation for where you would aspire to see growth going, particularly with the leasing numbers that have been so strong? And then secondly, well, I appreciate you don't guide to AFFO, I was hoping you could give us a little bit of color on some of the metrics that go into it, such as straight-line and market rent amortization. I mean some of us do focus a little bit more on that metric as well.

Thank you, Colby. I believe our growth goals for the business remain steady. However, I want to express a bit of caution as we navigate this new environment, which could create temporary challenges or lead to longer-term growth through overall digital transformation that may further boost our business. I still see mid to high single-digit growth in our recurring cash flows or FFO, AFFO per share as the target we aim to achieve. Regarding adjustments to FFO and AFFO, straight-line rents are mainly a GAAP issue where we account for rental escalations. The impact can be positive or negative depending on the stage of the customers' contracts and whether they are increasing their use of our space. With 4,000 customers and the diversity of our business, many factors influence that figure. If you have other questions, please feel free to ask, as I may not have fully addressed what you want to understand regarding the impact.

Sure. Well, just given the interaction and how that's a slightly different business than what you guys had, what your business predominantly is, I was just wondering if there's any color you can give. But maybe more simply, would you expect AFFO to be notably below, above, similar to your core FFO? Maybe that's an easier way of asking it. And then, I guess, since if you're not able to answer that question, just curious, in terms of COVID-19, if you're seeing, as a result of that, some of the larger hyperscalers are shifting more to an outsourced model opposed to a self-build model, given perhaps their own desires to reduce their own CapEx expense in this environment?

I believe the better answer to your first question lies in the combination of our well-connected colocation facility, the Westin Building, and our partnership with Interxion. Our business mix is increasingly shifting towards a more detailed customer base, particularly network-oriented clients. We are targeting enterprise customers within hybrid multi-cloud environments. This customer mix will significantly reduce the reliance on long-term steady contracts, which I believe will ultimately lessen the gap between our FFO and AFFO per share over time compared to our legacy business from a few years ago. As for your second question, I’ll pass this on to Corey or Chris to discuss the customer behaviors or buying trends of the hyperscalers.

Yes, I can help out with this one, Andy. I think on the hyperscalers, Colby, they have requirements all across the globe. So we're well positioned to help out where they need to look at it. They generally handle that demand with a combination of their self-build and then outsourcing to groups like us. Many of the hyperscaler requirements also involve compute nodes combined with connectivity. I think we're really well positioned just to take care of them from a full spectrum of data center solutions, both highly connected and wholesale. While you might hear that some of them want to insource for whatever different reasons or build their own, we haven't seen that come through in the pipeline yet, and we haven't seen that come through in any kind of change in our customer conversations and our engagements with them, is what I'd tell you, Colby. Thanks.

Thanks, Shawn. I'd like to wrap up our call today by recapping our highlights for the first quarter as outlined here on the last page of our presentation. First, we enhanced the value of our platform, successfully closing our highly strategic combination with Interxion as well as the acquisition of the Westin Building in Seattle and the Mapletree portfolio sale. Second, we also underscored our commitment to delivering sustainable growth for all stakeholders with community outreach initiatives, a renewable wind energy contract, and new additions to our Board. Third, we maintain steadfast support for our customers, prioritizing health and safety while maintaining service levels. Last but not least, we further strengthened our balance sheet with the opportunistic issuance of $650 million of equity capital. I'd like to conclude today's call by saying thank you to the entire Digital Realty family, but particularly our frontline team members in critical data center facility roles, who have kept the digital world turning in the midst of this global pandemic. I hope you all stay safe and healthy, and we hope to see many of you in person again soon. Thank you.