Q3 2019 Earnings Call
Good day.
Coming to the digital Realty third quarter 2019 earnings Conference call. All participants are in a listen only mode should you need assistance. Please signal a conference specialist by pressing star key followed by zero.
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I would now let's turn the conference over to Mr., Jon Stewart Senior Vice President Investor Relations. Please go ahead.
Thank you Sean the speakers on today's call, our CEO Bill Stein CFO , Andy power and interaction CEO David Ruberg.
If investment officer, Grech, right and Chief Technology Officer, Chris Sharp are also on the call and will be available for Q in a.
Management may make forward looking statements, including guidance in the underlying assumptions forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.
For further discussion of risks related to our business see our 10-K and subsequent filings with the FCC. This call will contain non-GAAP financial information reconciliations to net income are included in the supplemental package furnished to the FCC and available on our website investors are encouraged to read the joint proxy statement. It prospectus with respect to the press the proposed transaction between did.
Realty, an interaction and other relevant documents to be filed with the FCC because they will contain important information.
You may obtain a free copy these documents when available from the Fccs website at <unk> Dot Gov or from the website <unk> websites, where Investor Relations Department, So neither digital realty or interaction.
Before I turn the call over to our CEO Bill Stein I'd like to hit the top so the way it's on our third quarter results in July we announced we were reiterating re entering Paris, expanding in Frankfurt entering so and opening four new facilities in Brazil.
In September we announced we are acquiring land in Tokyo, and we also announced a 1.4 billion dollar private capital initiative with make Maple tree, bringing our year to date private private capital raising to over $2 billion, including the joint venture with Brookfield, We closed in the first quarter.
In October we raised $900 million of long term capital at all time, low coupons and reached renewable energy agreements in Northern Virginia, and Oregon, where we signed an anchor lease to break ground on land inherited through the DFT acquisition.
Earlier this morning, the Donnie group announced that we have executed a memorandum of understanding to establish a joint venture in India and last but certainly not least this afternoon. We made the very exciting announcement that we have entered into a definitive agreement to combine with interaction with that I'd like to turn the call over to bill.
Thank you John .
Good afternoon, and thank you all for joining us.
15 years ago to the day digital listed on the New York stock exchanges.
We are thrilled to be celebrating our 15 year anniversary as a public company with a definitive agreements combined with interaction in a highly strategic and complimentary transaction that will create a leading global provider.
Cloud and carrier neutral data center solutions with an enhanced presence in high growth major European Metro areas.
As you can see on page two of our presentation. We believe the best way to serve our customer needs is by offering a comprehensive set of datacenter solutions are covering the full product spectrum from small footprint Cajun cabinet environments, all the way up to Multimegawatt dedicated hyperscale facilities.
On a truly global basis from Sydney to Singapore, Desantiago to Santa Clara.
Customers form the bedrock of our strategy and in order to meet their needs around the world. We have invested and partnered with a series of leading local brands.
In the Americas, we have partnered with Brookfield to serve our customers through a 70, the leading dataset of provider in Brazil with a community of platform compute and network nodes connected via a proprietary fiber network.
Hey pack, we've teamed up with Mitsubishi Corporation is too large M.C. digital Realty in Japan, where we have recently announced a pair of land parcel purchases in Tokyo to support growing customer demand.
And of course earlier. This afternoon, we reached a definitive agreement to combined with interaction.
A leading provider of carrier and cloud neutral co location data center services in EMEA.
We believe the combination will deliver compelling benefits for customers shareholders and employees.
I'm pleased to welcome interaction CEO , David Ruberg, and I'd like to turn the call over to him to share his perspective and discuss the strategic merits of the transaction.
Thank you Bill.
I'm excited to be here today to talk about the opportunity to join forces with digital.
Please turn to slide three.
As Bill mentioned, we strongly believes that this combination is highly strategic as well as complementary.
Like everything we do.
The strategic rationale starts with our customers.
For many years.
Interaction has been creating communities of interest or datacenters at all for carriers.
Digital platform providers enterprises.
Access to high levels of connectivity and performance.
Participation and communities that can enhance the value proposition to their customers.
This approach has been very successful cross media.
And we see tremendous opportunity to replicate and extend this model cross digital's current and growing global footprint.
Interactions connectivity capabilities, our primary source of our competitive advantage.
Ali kinetic locations out a logical destinations for content providers and cloud platform providers, who are seeking to provide services to these content providers.
Not only do cloud platforms supply network nodes in these locations.
But there is a growing awareness on their part of the value of deploying compute.
Especially in close proximity to these network nodes.
Workload placement close the end user is equally critical for data intensive next generation.
Wow native applications that are focused on real time data analytics.
Artificial intelligence and the Internet of things.
The combination of interactions connectivity capabilities with Digitals Hyperscale, an enterprise expertise.
The combined company any unique position to take advantage and capitalize on the emerging global Digitization trends.
And to offer our customers, an efficient and cost effective way to address their requirements.
I'd like to spend a moment on the structure and the leadership as a combined organization.
This transaction is being structured as a stock for Soc combination.
And interaction shareholders will receive a fixed exchange ratio of zero <unk> 0.767 digital share for interaction chair.
Interaction shareholders will own approximately 20% or the combined company and digital shareholders, who owns the remaining approximately 80%.
Both boards have unanimously approved this transaction and I have a irrevocably agreed to tend to my shares.
Bill Stein will be the CEO of the combined organization and I would be the CEO of our combined to me a businesses.
Which upon closing will be branded interaction a digital company.
I will work with bill and our teams to integrate the two businesses and over the next year. So I plan to transition from the day to day management of the EMEA business to focusing on the combined companies development of communities of interest across our global footprint and working with some of our core global accounts.
Well the rationale for this transaction is about customers.
The execution will be about employees.
The success as a combined organization will depend upon our employees and I tend to spend a lot of time working to ensure that our employees understand and contribute to our efforts to build these leading global platforms.
And I went to assure a teams the prices are transitioning from two separate entities into a combined global organization will be fair, consisting transparent recognizing the importance of preserving the rich cultural and country diversity within the combined businesses.
We also expect a combination will produce enhance career opportunities for employees as the combined companies growth acceleration.
I also note that both companies have sizable development pipelines, which represent significant embedded growth potential.
Provide considerable runway to support our customers growth.
Given our strategic land holdings, along with Digitals Hyperscale development expertise and highly efficient funding model.
Finally.
We believe our shareholders customers and other stakeholders will benefit from.
Digital's investment grade balance sheet and lower cost of capital.
In closing.
I personally very excited about the opportunity this represents for all of our stakeholders.
I'm convinced that combined digital.
And interaction well be able to build the leading global platform that can help shape and deliver what are growing university customers require.
I look forward to working closely with build new tire digital team to complete the transaction integrate the businesses and to build a world premiere datacenter provider.
With that I would like to turn it back to bill.
Thank you David.
Let's pick back up on the transaction structure here on page four.
As David indicated the transaction is structured as a stock for stock combination and interaction shareholders will receive a fixed exchange ratio of 0.7067 digital realty shares per interaction share, which represents roughly a 20% premium to the unaffected share price as of October night.
The transaction is subject to approval by both sets of shareholders and we expect to close the transaction sometime next year.
[noise] the breakup fee represents 1% of interactions market cap and the agreement is subject to a 7% overbid color with matching rights.
As David alluded to we're very talk cognizant of the value of the interaction platform and this deal is not about expense energies.
Nonetheless, we do see some opportunity for cost savings, primarily redundant public company costs and interest savings on refinancing interactions higher cost at at digital Realty is lower borrowing cost in the European debt capital markets.
We expect to achieve up to $20 million of annualized synergies.
I expect to realize roughly three quarters of our target in 2021 with the full run rate realized in 2022.
Assuming a second quarter close given the timeline for realizing synergies, we expect the transaction will be approximately 1% to 2% diluted been 2020 and a bit better than breakeven in 2021 and significantly accretive to the combined companies long term growth profile.
Let's set the stage by framing the opportunity in Europe on page five.
Well GDP levels in Europe , and North America are about the same and the population of Europe is significant larger the total outsourced data center capacity in Europe today is much smaller.
The rapid expansion of cloud and content platforms is driving significant datacenter demand across Europe .
However, within the platforms segment, there are significant differences in terms the majority of adoption across Europe .
Even the most technology centric European countries are 18 to 24 months behind the U.S., followed by a varying degree of maturity across the European car that.
This concept is visually depicted on the right hand side of the slide which describes directionally, how we see the rollout unfolding without intending to provide accurate predictions other relative size or timing of each opportunity.
The cumulative effect of this gradual rollout portrays the significant opportunity ahead of us here in Europe .
Let's turn to the Standalone interaction profile on page six.
As you May know interactions business consists of 53 high quality carrier and cloud neutral co location facilities in 13 high growth Metro's across 11 countries in Europe , and an investment in Africa.
They have over 200 megawatts of equip capacity, serving more than 2000 customers with platforms, representing approximately 40% of recurring revenue and the balance split evenly between connectivity and enterprise.
Flipping over to page seven.
You will see that our combined EMEA business will service an expanded customer base from more than 90 facilities in fit 15, metro's across 11 countries in Europe .
As you can see for the pie charts, the bottom of the slide.
Not only does the combination and create a broader network for landing and expanding customers, but our businesses are highly complementary.
Digital's position in London, and doubling dovetails nicely with interactions presence in Frankfurt, Amsterdam, and Paris and across the rest of Europe .
Pro forma business specs covers the kind of it is well balanced between the major European Metro's.
Turning now to page eight.
Interaction has successfully executed a strategy of creating and enabling valuable communities of interest in Europe .
And its internet Gateway Inmarsat serves as the digital media hub to 4.5 billion eyeballs across EMEA as a Prime example.
We see significant opportunities to extend the interactions capabilities to identify and develop high value communities of interest across the combined companies global footprint.
As shown on page nine our customer accounts are similar despite the difference and the size of our businesses, which gives you. Some appreciation for the density of the communities of interest the interaction team has successfully created.
These communities match up well with the Hyperscale compute engines digital Realty has successfully landed across our global platform.
The combination of our respective strengths should enhance our ability to solve the public and hybrid cloud architectural requirements of our global customer base.
Interactions development pipeline represents a source of significant potential embedded growth as shown on page 10.
In addition to the 53 facilities currently in service interaction also has five under construction.
These projects are significantly preleased and represent a substantial expansion of the installed base.
Including land owned or controlled interaction has the potential to double the size of its existing business.
The transaction will also create significant financial benefits as shown on page 11.
The combined company will have a global presence in 44 metro's across 20 countries on six continents with an enterprise value of approximately $50 billion nearly five times the size of the next largest competitor.
We expect the combined organization will have the most efficient cost structure and the highest EBITDA margin in the datacenter sector.
Finally, let's talk about capital structure on page 12.
The combined company will have an equity market cap of over $35 billion at a total enterprise value up more than $50 billion.
The balance sheet impact will be leveraged neutral, but one of the key benefits of the transaction is the opportunity for interaction stakeholders to benefit from digital Realty is lower borrowing costs and improved ability to fund the growth of the business as was the continued growth of the per share dividend, which we have raised each and every.
Year since our IPO in 2004.
In summary, this combination is highly strategic uncomplimentary it as prudently financed with the stock for stock structure and it is expected to be accretive to the long term growth trajectory of the combined organization.
We were excited to deliver this compelling opportunity that we believe will significantly enhance our ability to create long term value for customers shareholders and employees of both companies 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 14.
We delivered solid leasing volume with balanced performance across sectors products and geographies. We saw in total bookings of 69 million just shy of our all time second best.
Third quarter bookings included 8 million contribution from interconnection.
We saw new leases for space and power totaling 61 million.
With a weighted average lease term of a little over seven years, including a 7.4 million Colocation contribution.
We added another all time high 64, new logos during the third quarter led by global strength in our enterprise segment.
We quietly least 14 megawatts in ashburn during the third quarter and our biggest deal in this market was just six megawatts.
Although northern Virginia has been a tourist the competitive this year.
We view the current supply demand dislocation as a temporary phenomenon.
Particularly in light of Amazon selection of Crystal City for it dates Q2, and Microsoft selection for the Pentagon's 10 billion Jed I contract. We're bullish on the long term prospects for communications infrastructure in the Commonwealth as well as our position in the market given the value of our strategic land.
Holdings, our ability to support our customer needs today and to provide the longest runway for growth.
In terms of specific wins during the quarter, we partnered with they TNT to devise a solution for a global biotech firm to service their edge network and data center partner for global as deployments across multiple North America locations, London, and Frankfurt, placing the customer.
Close proximity to their end user customers, improving application performance and consolidating and reducing their network costs.
The customer selected 18, TV and digital Realty to deploy their next generation IP hubs based upon our collective global footprints proximity to their locations access to a wide array of network providers and the ability to interconnect to multiple public clouds, leveraging digital service exchange.
Fabric.
One of the nation's most comprehensive integrated academic health care delivery systems extended their commitment to our global platform this quarter.
This new expansion has a dual purpose.
It will serve to consolidate a number of their smaller datacenters and server closets from the metro digital units, including on premise facilities.
In addition, the lacked as a disaster recovery and business continuity site for the production data center with digital Realty in another location.
We provided a solution with service exchange, which helped them access Azure interestingly when platform and dark fiber network between our campuses.
Labeling them to execute a key part of their hybrid I T strategy.
We're also seeing traction in EMEA and APAC based customers joining our global platform.
One example, this quarter is a European big data analytics company looking to expand its operations to North America.
Our book a global platform capabilities, we are uniquely suited to meet their high performance computing and rapid expansion requirements.
Turning to our backlog on page 16.
The current backlog of leases signed but not yet commenced stepped down from 127 million as of June Thirtyth to 98 million at the end of the third quarter due to several large commencements in northern Virginia, Toronto and Silicon Valley.
During the third quarter, the lag between signings and Commencements was slightly below our long term historical average.
A little less than five months.
Moving on to renewal leasing activity on page 17.
We signed 152 million of renewals during the third quarter. In addition to new leases signed.
As you May recall 2019 was our all time high in terms of lease expirations.
And our four highest renewal quarters have all come within the last 12 months, including a new all time high for quarterly renewal leasing volume this quarter.
Year to date, we've retained almost 85% of expiring leases a bit better than our long term trend.
The weighted average lease term on renewal signed during the third quarter was nearly nine years, while cash rents or hurdles roll up 7.2%.
In addition to the legacy deal our long term top customer Nols, we secured earlier this year, we finally executed long awaited legacy DFT customer renewal during the third quarter.
We did better than expected or rate, but shorter on term.
As you may have seen we raised our guidance for cash re leasing spreads again from down mid single digits to slightly negative, reflecting the better than expected outcome.
Aside from a few select supply constrain reagents and metro areas, we have yet to see a broad base rental rate growth across most markets. However, we're continuing to make significant progress cycling through peak vintage renewals. The lions share of our portfolio has recently been leased at current market rents.
And we are beginning to see barriers to entry immersed in a growing number of markets around the world.
As a result, we expect to see continued gradual improvement on cash releasing spreads into 2020 and beyond.
In terms of third quarter operating performance overall portfolio occupancy slipped 40 basis points to 87.4% entirely due to reclassification of the fully leased maple tree facilities as held for sale at quarter end.
Same capital cash NOI, it was down 3.7% inline with our guidance and reflecting a 70 basis points FX headwind higher property tax accruals and the restructuring of the private colocation reseller customer earlier this year.
The U.S. dollar continue to decline relative to prior year exchange rates and FX represented roughly 75 basis point headwind to the year over year growth in our reported results from the top to bottom line as shown on page 18.
Turning to our economic risk mitigation strategies on page 19.
We managed currency risk by issuing locally denominated debt to act as a natural hedge the 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 a 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 to 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 up 2.4% year over year or 3.3% it on a constant currency basis.
As you can see from the bridge chart on page 20, we do expect the quarterly run rate to dip back down in the fourth quarter, primarily due to the Maple tree joint venture transaction, which we expect to close in early November .
As a result, we're revising our 2019 core AFFO per share guidance by five cents to reflect the dilution from the joint venture transaction as well as the two opportunistic long term capital raises in October that were not previously contemplated in our guidance.
As it begins to roll your models for to the fourth quarter and be onto next year. There are several puts and takes to keep in mind.
We expect to close the Maple tree joint venture transaction in early November and the Maple tree portfolio sale in early January Consequently, we expect a partial period of dilution in the fourth quarter and a full year in 2020.
The interest income on incentive bridge loan and the UK income tax benefit Q1 19 were both onetime benefits in the current here and are not expected to occur in 2020.
We've extended the duration of the Ford equity settlement, which does provide a current year benefit to per share earnings.
And cash flow, but do expect to eventually settle the forward equity offering early next year, which will likewise represent a drag to yearoveryear growth in per share earnings and cash flow in 2020.
Inversely Naco would we are not currently anticipating any changes in accounting policy in 2020. Unlike the impact on a reported result results from the change in lease accounting in 2019 and revenue recognition in 2018.
Last but certainly not least let's turn to the balance sheet on page 21.
Net debt to EBITDA stood at 6.1 times as of the ended the third quarter, while fixed charge coverage remained healthy at 4.3 times.
Pro forma for the Maple tree transaction and settlement for of the forward equity offering net debt to EBITDA remained in line with our targeted range approximately five times a fixed charge coverage is just under four and a half times.
Terms of capital raising activity.
In mid September we announced a 1.4 billion portfolio sale and joint venture transaction with Maple tree elite in Singapore in real estate investment from.
These transactions represent an important step towards a our goal of self funding our growth and diversifying our sources of equity capital and setting the stage for accelerating growth as the proceeds are redeployed into accretive investment opportunities.
We expect to close the joint venture in early November and the portfolio sale in early January .
Likewise in mid September we extended the duration of our forward equity offering by 12 months to most efficiently matched the timing of our sources and uses given the 1.4 billion of pending proceeds from the Maple tree transactions.
In early October we raised 340 million 5 million a perpetual preferred equity at 5.2%, an all time low preferred equity coupon for digital Realty. The very next day, we opportunistically tapped the euro bond market raising approximately 550 million of eight and a half your paper and one.
And then it likewise, an all time low coupon.
This successful execution against our financing strategy is a reflection of the strength of our global platform, which provides access to the full menu a public as well as private capital sets us apart from our Peters enables us to prudently fund our growth.
As you can see from the chart on page 22.
Our weighted average debt maturity is over six years, and we will hold our weighted average coupon down another 10 basis points this quarter to 3.2%.
Half of our debt is non U.S. dollar denominated acting as a natural FX hedge for investments outside the U.S. over 80% of our debt is fixed rate to guard against a rising rate environment and 99% of our debt is unsecured provided the greatest flexibility for capital recycling.
Finally, as you can see from the left side of page 22, 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 the 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'll be pleased to take your questions. Sean would you. Please begin the Q and a session.
Thank you.
We'll now begin the question and answer session.
To ask a question you May Please press Star then one on your telephone keypad.
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First question will come from Jordan Sadler with Keybanc capital markets. Please go ahead.
Thank you good afternoon, and congratulations on the transaction.
My first question is.
Regarding the.
Initial dilution in the ultimate accretion surrounding the transaction.
The assumption for 2020 .
That initial dilution factoring in the transaction on a leverage neutral basis simpler as is.
And then maybe you can speak to beyond the immediate term dilution ultimately, how we should sort of quantify what you think the.
Accretion will look like on a growth.
Growth perspective to the overall platform.
Hey, Thanks, Jordan this is Andy.
So.
We Oh, maybe go to your question on the balance sheet first this is a 100% stock for stock transaction. So.
And when you look in the capital structure slide in our Investor deck, you can see its leverage neutral, including the friction from any transaction costs. So on a pro forma for our Maple tree and equity forward. We're right at five times net debt to EBITDA target ratio and still have the proceeds from those capital to kind of fund.
Combined companies growth, which really excited about.
2020 is obviously a little bit tough to handicap here, we're kind of sitting at the very end of 19.
We both have to go good shareholder approval for this transaction and also get any regulatory approval.
So depending on when you where you handicap on closing anywhere called the end of one cute into twoq or so you have a fraction of the year. We also really do not assume any synergies flow through the combined business in 2020.
That's a tad bit conservative.
So happy or ours or last or just what over half your combined no synergies.
That's kind of how we got to that roughly 1% to 2% dilution per share in 2020, but in 2021. When you look at the combined company Oh, we describe this is a a bit better than break even so we didn't try but as creative obviously, a combination of the relative valuation from.
The exchangeable shares.
We do have a pickup from refinancing their non investment grade debt with our investor bid a euro bonds.
Picking a couple hundred basis points of savings there.
And then we do see some of the synergy starting to flow through.
In 2021 to just get a little bit over break even and then we see pretty solid accretion from 20 to 2022 on their on out and I guess to reiterate what do you said, a we all see accretion to the accretion to the growth profile. The combined company as you can see weve, a very complimentary long term.
Under construction and land holdings in the European market continue to feel that growth.
Is there a way to quantify.
That.
Yeah growth profile accretion you should significantly accretive to the combined companies growth profile I believe in the prepared remarks, I am just had 100 basis points better growth in in the three to five year period.
200 basis points.
I think I think on a per share basis, we've kind of flip into 22 and beyond I think the reverse the dilution estimate we estimated in 2020, so called 1% to 2% to accretive to our fill rate per share.
Our next question will come from Jonathan Atkin with RBC. Please go ahead.
Yeah, I had a couple of questions about the deal and then a follow up about just kind of market trends, but.
As you look at regulatory approval in Europe .
Sorry, just one gentium took a couple of quarters longer than initially anticipated and then Equinix Telecity of course ended up requiring divestitures on interested in kind of your expectations around timeline and your thoughts about.
What some of the aspects to consider would be around country level and you approval on the deal and then just as a footnote maybe to Jordan's question I just wanted to be sure but did the 20 million of synergy that you identified is that entirely opex or not I just missed that.
And then I guess, just the second question would be around market review.
Which metro's.
And you talked about this in the script a little bit, but just interested in which metro is currently in North America, Europe and Asia Pac are showing the most kinda hyperscale demand. Thank you.
Hey, Jonathan its Greg right, Let me take the first question with respect to anti Trust.
Look I think in working with a both lawyers on each side of the transaction, we take a look at a the geographic overlap and alike. I think we feel we feel good about our outcome on any antitrust issues.
In terms of time, it's always hard to say timing, but I think a factoring in that that's why Andy gave you a range from end to first quarter to end the second quarter.
That would be the long pole and the Titan if you will for any timing differences. So I would say that's factored into the guidance that Andy just gave a but again when we look at it again, both sets of lawyers and other professionals on the antitrust front.
We feel good.
Hey, John just to add on to that for second then I'll try to round out. Your other questions. This is this is Andy obviously I think what you got to here is a tremendous.
Value problems as for our customers when we're bringing together a European portfolio that was very strong in the United Kingdom London.
And the interaction team have been done fantastic job on mainland Europe . So complimentary in terms of product and footprint. So I think that also helps our cards I wouldn't go into regulatory process on the expense synergies I, just I would characterize them expense synergies not opex overheads specific.
Type of expense synergies.
There's obviously some public redundant public company costs here, including our board of directors that it's kind of easy or low hanging fruit ought to go up first I do think they're also going to be revenue synergies here that we don't really have factored into our numbers.
Where our combined customer base.
Our now going to be able to.
We're able to be the trusted global partner for this combined customer base.
Around around the globe across six continents in 20 countries. So I do think that's another a key element of this transaction.
And then up last but not least.
Think you were just asking about overall kind of how the quarter when a in terms of.
Markets demand I'll try to go real quickly on that.
On the digital side, starting with a Europe , a we had the I guess, the topping off or like the <unk>. The last kilowatts indoor Frank first 27 megawatt campus over the top cloud service provider.
We had a smaller when within enterprise customer into the London market I think those are the highlights there are over in Asia Pacific We had another top CSP land in Osaka campus with a fairly large signing a down South America.
In Brazil, we had a continued growth from a top five CSP.
And North America.
Had a little bit of the same as earlier in the or in a little bit of different we had continued success in Toronto with two different top csps.
Strengthened financial services sector in our northern New Jersey in Europe Metro area.
Growth from existing customer on a Dallas campus and Northern Virginia Ashburn in fact actually do come back obviously had some great wins, there some of which we highlighted in the in the script.
Two international wins, one coming out of Asia Pacific one coming out of Europe that landed in Nova and then also a a large legacy digital customer ticking down several megawatts as well.
So obviously those are kind of tops the waves in terms of demand for the quarter on our side.
Thank you.
If I could just follow up briefly the leverage neutral need the all stock deal and the applications for leverage sounds like it gives you some dry powder for further expansion you announced Korea earlier this year and in India in the last 24 hours, but.
What it how do we think about your expansion pipeline in some of these Asian markets versus elsewhere and for David perhaps.
What what led you from the interaction side to kind of favor the all stock structure versus maybe a mix of cash and stock.
Hey, John at this bill.
In terms of the Asian market expansion, you mentioned, India in particular, India at this point is a exploratory.
It's a six month ammo you.
Exclusive to each other but we have made no commitments in terms of capital so its a.
It's really tough to bracket the amount of capital that's going to be required for that venture.
Other than that I would expect that our capital program will continue as it has been at a billion dollar plus a year and we have a you know but through the.
All equity nature of this.
Ends action as well as a additional asset sales that are coming to play.
I would expect that.
We are self funded to easily through next year on a development.
And John .
John Stewards waiving fees I think we've given you four or five questions. We'd have to get you back in acute to round out that last question.
Well lets us, let's let David that answer that question on all equity.
Hi, Jonathan your upping [laughter].
If you don't mind I think there the real question I like to address is why did we do this and why did we do this now.
The form of the transaction is less important.
The real answer is the infrastructure requirements of our customers are evolving.
And as they've evolved they've created a greater opportunity for us to do business with them.
And we thought that.
As this is involved in these two companies have evolved.
Combination is far greater position to take advantage of these opportunities than we were individually.
We believe in them they believe in us.
The form of the transactions the compensation secondary.
Our next question will come from Erik Rasmussen with Stifel. Please go ahead.
Yeah, Thanks, and congrats on another deal announcement, it's obviously a on the M&A front <unk> kinda checks you know the boxes that you've talked about his strategic uncomplimentary accretive to what we'll see the long term.
Growth on an F., a AFFO basis in its you mentioned prudently financed but.
Where do you see sort of the pitfalls of you getting to some of the metrics you've outlined I know you talked about it previously you know the 1% to 2% dilutive and then slightly break even and then.
We'll call it low single or a reverse of that dilution you know where some of the pitfalls and where do you see some of the opportunities for that even be stronger than you expected.
Thanks, Eric So I think obviously the greatest potential risk is obviously this is all about the customers and the people in the employees that are making this come together for the customers. So Ah that's why I think we're going to make sure. We go through this and <unk>.
And fashion.
Bringing together two great teams.
In support of these customers and really execution on building out a capacity for our customers.
And be in their trusted partner.
And especially in Europe , but also on a global basis. So that's certainly something that we're keeping the eye on the ball, there's other things I'd say or secondary in our mind, whether its achievement on the expense synergies, which I would say are relatively modest.
In numbers, and obviously execution and ability to tap the fancy markets to lock in the financing synergies.
But I really think it's it's a continuation.
At the top line and focus on the customers in order to deliver that EBITDA in 2021, which is going to win spin for for the near term financial success.
Okay, maybe just as my follow up you you'd you'd mentioned northern Virginia coming back with a couple of a nice deals there, but maybe if you could just talk about the pricing dynamic in that market and then hyperscale deals in general that were signed in the quarter.
Sure So in northern Virginia really the the success there was selling selling our platform and our value proposition to our customers.
Which was about a global organization supporting these customers across numerous countries and continents, the full product spectrum.
And looking to land in Northern Virginia, which is obviously very competitive but on what we think is the best campus, where many of these customers have installed footprint and when a growth adjacent C.
And many of these customers value the longest runway for growth in that market that we provide a so I think those key elements a were really what allowed us to two when the day from some of those key signings.
During the quarter.
And not have to just compete on rate among some of our private competitors may have had to go obviously the rates are down there on a year over year basis, but I I would say I was quite pleased with the volume and the rate activity.
It was a big piece of our North America's signings that you can see flowing through our TTF alignment our term total signings that raises down a little bit quarter over quarter, but not astronomically. So I think we are really adding value to our customers are appreciating that value and that's where the pickup.
US and it's not all just about a bought basement bottom rate discussion.
Our next question will come from coal do you see stone with Cowen and company. Please go ahead.
Hi, This is Michael on for Colby two questions. If I may 1st for I guess this goes to two David.
Did interaction run a full process for green to a deal.
Along those lines is there a formal go shop period and secondly.
How much leasing came from assembly and what was the Americas pricing per kw, excluding a something for the quarter. Thank you.
Hey, Michael This is Andy I'll take the easy 170 was very small contribution this quarter they've done a great job the last three consecutive quarters outperforming or underwriting, but this quarter I think it was like a million and a half a gap ourselves so very small contribution.
And that's not to say I'm still optimistic that we just Oh, we're meeting with essentially team and Chris and there, but having pretty good pipeline for the fourth quarter, but Oh, what actually <unk>. We reported in our signs was a very I was relatively small portion of our Americas signings number.
With that I'll hand, it back over to David.
Contrary to what was in the press, we did not run a process.
What we have basically done is.
For the last couple of years.
We've been approached by a lot of people.
We were focused on what we thought it would take to be successful.
We were focused on what we thought.
Hey, good partner would look like.
Bill and I've been talking about this for quite some time.
And it was just the appropriate thing to do.
And that's how we got here.
In terms of what happens from now.
You can expect it there as the standard.
Terms and conditions.
But this deal to me.
Makes a lot of sense.
And again, that's why we've had this conversation for quite some time.
So.
We'll see what happens.
But.
I'm focused on making this the best opportunity that we can.
We spend enough time getting to know each other.
I think we know what we're doing.
Our next question will come from Frank Loosen with Raymond James. Please go ahead.
Hi, This is Rob one for Frank actually post the deal what do you believe will be or approximate percentage of revenue from northern Virginia.
Hey, Rob this is a Andy that's a very good question I know.
We have.
I'm it seemed like a handicap it is a slide decks that shows a pro forma slide 11, so the pro forma geographic concentration.
That doesn't have the shows pause with doesn't have number for the pause our just over 60% or from the Americans.
About 30 little over 30% or 33, I believe percent from EMEA and about 6% from off a pack.
If you look at our.
One of the pages in our sub northern Virginia is still our top market.
And but I would kind of handicapping into 10% to 15% of the total pro forma combined company.
Perfect. Thank you.
Our next question will come from Jon Petersen with Jefferies. Please go ahead.
Oh. Thank you. So maybe one question on the quarter and then one question on the deal. So are the same capital I know I noticed was down 2.6% or sorry, 2.70 cost basis year over year, 2.5% sequentially. It looks like occupancy dropped 100 basis points, maybe if you could just give us some more color on on what's going on there.
Thanks, John So.
Same same capital pool or really it's about a there's the company's obviously largest expiration year, we've done quite a good job knowing a lot of the contracts pushing amount for staggered various terms.
There are a and even though our retention was little bit above historical averages we've taken back a fair bit of space that hit that pool.
So we do have some downtime.
For releasing a and I would say significant chunk of our new signings.
In this quarter and last quarter, a was a little bit more into move new space, that's gonna be delivering so a little bit of interim cashflow hit I do think a there. It's did it is a temporary phenomenon. Some of this capacity I think Dublin is a good example is we're taking back and we're going into convert Tcf suite.
Into a co location that connection.
Product offering.
So we think that does provide longer term upside. Although you do have the near term cash flow hit.
Oh, so and I think there are lot other good things about the quarter, which didn't get a lot of lot of questions. So far on Oh. In addition to this quarter being I think what our thing a third highest almost just just SNF and ours, our second highest from last year.
I was pretty multi geographic multi product a interconnection was up there in terms of a number two or three I think in terms of signings in the last handful of years had a record 64 new logos.
I believe the new logos, we signed the first three quarters. This year are more than the new logos, we signed in the prior two years or so pretty happy about that.
But we are having some are taking back some non routine capacity and we're certainly woking focusing our sales force on selling into that move in ready space toward a day moving tomorrow type capacity.
That does certainly help us in certain markets.
Okay. Thanks, and then I'm just curious the interaction business will that be a good read income that will require a dividend payout and if not how does that change your thought on growing the dividend going forward.
Based on our assessment other than maybe a relatively short time period at the initial close depending on.
The tender of their shares.
Where we would have to hold that the that the business in our Trs temporarily would the would we would qualify this as good read encompass and everything we've seen to date.
So I don't see this is a a drag on our trs capacity or incremental corporate tax friction.
And so I I would based on what we see this looks very similar in terms of read ability to our core business.
Our next question will come from Michael Bilerman with Citi. Please go ahead.
Yeah I'm. The first question just strategically you know you guys had been extraordinarily active that building out a the global platform.
And different from your original M&A deals early on the last few have been dilutive in the near term part driven by development part different by de leveraging an asset sales.
But eventually be accretive.
But it just feels as though whether it was a sent the the Macquarie deals this interaction deal.
Are you sort of push the growth to eventually coming what gives investors confidence that you won't do another deal next year that then impacts 2021 growth and we're just on the sort of flat cycle until you eventually get to a more positive growth.
Outlook.
Thanks, Michael So I think the.
The three transactions up to buys and one cell I think other nuances of of near term or temporary dilution of fall by what we see as accretion obviously, a 70 was a pretty strategic entry brought up acquiring the leading platform in Brazil, which was subsequent expanded into Santiago Chile.
Which was a very large inflight construction.
Project, essentially so very little near term earnings and also we suffered dilution and how we mitigated the risk but that transaction.
The sale of the assets when you sell a billion in change of assets at a low six cap and you lose that income right away you certainly aren't going to have dilutions your per share for a though and this transaction has its do you need nuances.
With a closing sometime in 2020 timing of synergy realization is unlike where there's dilution.
I think we're still focused on driving the growth in our FFO ample cash flow per share.
And what's it's what pays our dividends up but at the same time I think we're looking that especially with the transaction the Keystone strategic piece in our global platform.
And this is part of the reason why you prepare for transactions like this and it's why we've kept the balance sheet and such good shape why we run the AFFO payout ratio. So conservatively its been close to 70% or south so very well covered so the this mild dilution is temporary.
And I don't think a repeat story.
And I think we're positioning the company for growth from all three of these initiatives quite honestly.
And we do ask our investors to bear with us and the noise in the earnings.
The ensuing a handful of quarters, but we think we're setting ourselves up for a a stronger platform a with accelerating growth.
Right well, let me also and add to that.
As David indicated he and I've been talking for many years now.
And the same is true for Chris toward though we've been talking we talked for many years before we.
We closed on that transaction. So these are opportunities that we've been tracking it had been interested in for a long time, there's nothing like that on our horizon. Today I can say that unequivocally that we are are not talking with anyone else and.
That's not to say that we won't do another acquisition, but right now are played a school.
And then just something specific I relate to the deal than it's been a long time since I've been an investment banker can you just a walk through you said it was a 7%.
Color in terms of a bid protection and you have matched matching right up to that 7% and then it sounded like there was a 1% on equity breakup fee to any other bid or that would come in so call. It a buck a share print traction share.
Does that 7% overbid with matching rights work.
The little different Michael its Greg, it's it's it's a 1% a breakup fee.
And then it's what's called a 7% overbid collar so what it means as someone who comes in.
If if if they weren't a top the deal they would have to pay 1% in order to top the deal they have to be 7% above our bid.
So that's how that works.
Our next question will come from Sammy bought <unk> with credit Suisse. Please go ahead.
Hi, Thank you.
My main question has to do a slide number 17, and some of the rental rate changes that you've seen you reported 7.2% cash now.
In the end the industry across some of the private data center operators, there has been probably pricing weakness and essentially cost per kilowatt reduction down. However, you guys have clearly executed and reported a pretty I would describe it as strong result that 7.2 above right positive can you just give us more color on how you are dry.
I think those results what are your customers doing are they deploy into multiple locations that'd be very helpful color for the industry numbers.
Yeah.
Sure Sammy this is Andy again, so I would want to say we are we certainly had a our fair share of negative cash mark to markets and you can look at that in the last quarter as a Prime example, a this quarter we were able to have the uplift for for a handful of contract.
Thanks.
Most notably one of the large legacy DFT customers renewed at a shorter duration that shorter duration that typically here comes with a higher rate. So that was certainly a contributor as well as some other contracts we renewed during the quarter that kinda was able to drive a positive cash mark to market spread.
It's really all goes back to the vintage of the agreement the market in terms and supply demand fundamentals within that specific market and also the product segment.
So while we are certainly quite pleased with the outcome the third quarter I'm not under the assumption that we're going to repeat plus 7% every quarter for the next four or five I will certainly have or ups and downs, but.
But net net I do think or we are moving through our largest expiration year. We've had several record renewal Oh <unk> quarters in a row numerous a multi universe top customer multiyear multi product Nols a staggering out those expirations you can see as whittled down.
What's come due 19 and beyond.
And I do think this ties back to comment you made is that we're really about selling the platform. The multiproduct Marta geo offering to our customers really trying to be a trusted partner and solution provider to them. So they have one responsible party are around the globe to system with whether it's the renewal in one market expense.
And another network nodes.
You name it Ah that's really how we're trying to drive the business and I do think that does pay a little bit of dividends to our success or overall.
Great. Thank you.
Our next question will come from Richard Choe with JP Morgan. Please go ahead.
Hi, I wanted to revisit kind of the longer term outlook. The deal provides in terms of the amount of development under construction, how we should think about that group and then also the future capacity because it seems like this is more of a longer term strategic deal and not necessarily.
Something that's going to impact things right away and that probably drove more of the transaction.
Hey, Richard This is Andy I can speak to the numbers here, there's a slide the death I think what paid a.
Nice picture of the growth profile I think this slide 10, what's quite unique about this transaction. In addition to the broader global strategic nature of it. It really is kinda to interlocking puzzle pieces in terms of inventory.
And portfolio footprint as I'd mentioned, we basically topped off our growth in.
In the Frankfurt market and interaction team has done a great job, bringing inventory on a in the near future so filling in gaps there.
And in London, that's a market, where we've been having a pretty.
Nice in future proved a runway for growth with our cloud house, a digital Docklands campus as well as our quality and woken campuses and that was more of a newer market. Similarly in in France. We just we entered pairs and the interaction team as a dominant share in multiple markets.
In France, So let's call. It 18 months out I think we've got a very complimentary inventory position, which we like that includes over 80 megawatts under construction from interaction that are north of 40% Preleased, we're being 40 megawatts the table to about 40% Preleased Ah So I think.
That kind of dovetails for the near term picture or a and then longer term.
The interaction team a really dot has done a fantastic job.
Building out a long term one way of growth a worthy either own a lease or options on several years worth of inventory.
Strategic markets, including some of the budding growth markets.
Outside of the Frankfurt, London, Amsterdam, Paris market, Oh would that have traditionally known for such a stronghold for so I think it's a combination of near and longer term growth.
And we'll that those kind of up I guess options Hope you bridge the gap or when you start integrating the sales forces are and how should we think about the sole source integration going forward.
Yeah, I think this inventory set up a is a fantastic thing for our customers and when our customers have lots of opportunity to move into our footprint of the combined company basis that uses a good thing for our sales force at the same time.
I.
We are we're just on the heels of announcing we've got obviously, you've got to work independently until our shareholders approve this transaction and we close.
And and once we close we're going to work to work together as well to combine.
And with that I think David wants to chime in.
I just wanted to add what's what's fascinating about this combination is.
When you look at the top.
15, or 20 platform players in the world.
We actually overlap substantially.
But we approached them from two different orientations, one from the large size and one from the small size.
So when you look at this even the sales forces are highly complementary in terms of the way they approach and when you look at the combined.
With a number of the top three or four customers. When you put these two companies together.
And you look at the relevance that we have as a combined entity for some of these behemoths.
It's really impressive.
So it's not it's not going to be is difficult to bring them together because they bring complementary knowledge one more on the.
Compute side, one more on the connectivity side.
So.
I think it works.
This will conclude today's question and answer session I would now like to turn the conference back over to Mr. Bill Stein for any closing remarks.
Thank you Sean.
I'd like to wrap up our call today by recapping, the strategic merits of our combination with interaction.
As outlined here on the last page of our presentation.
The combined company will extend interactions successful strategy of creating and enabling valuable communities of interest in Europe .
By extending it across the combined companies global footprint.
Our businesses are highly complementary.
The combination creates a leading pan European data center provider offering consistent high quality services with low latency access to approximately 70% of the GDP in Europe .
Interactions co location capabilities combined with our Hyperscale expertise will significantly enhance the combined companies ability to address and solve our companies public and hybrid cloud architecture requirements on a global scale.
Interaction has five projects under construction, which are over 40% preleased.
And represent a 40% expansion of the asset base and a source of significant potential embedded growth and long term value creation.
Last but not lease.
The transaction is expected to generate significant financial benefit.
It's expected to be accretive to the long term growth rate at the combined organization.
Well established a global platform that we believe will significantly enhance our ability to create long term value for both the customers shareholders and employees.
Both companies.
Thank you all for joining us we hope to see many of you at marketplace live at Spring Studios in New York next week.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.