Q2 2020 Digital Realty Trust Inc Earnings Call
[music].
Good afternoon, and welcome to the digital Realty second quarter 2020 earnings call.
Please note this event is being recorded.
During today's presentation, all parties will be and they listen only mode.
Following the presentation, we will conduct a question and answer session.
Callers will be limited to one question, let's say follow up.
Due to time constraints, we will conclude probably at the hour.
I would now like to turn the call over to John Stewart Digital Realty Senior Vice President Investor Relations. John. Please go ahead.
Thank you Andrea.
The speakers on today's call or CEO, Bill Stein and CFO Andy power.
Chief Investment Officer, Great Chief Technology Officer, Chris Sharp and even if sales and marketing Corey dire also on the call and will be available for human <unk> management may make forward looking statements, including guidance in underlying assumptions.
Looking statements are based on expectations involve risks and uncertainties that could cause actual results to differ materially for further discussion of risks are related to our business CR 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.
Let me turn the call over to Bill I'd like to hit the types of the waste on our second quarter results.
We delivered record bookings more than 50% higher than our previous all time high.
We beat consensus by seven cents, driven by operational outperformance and the beat flipped through to upward revisions to guidance for revenue EBITDA and core FFO per share.
Third we extended our sustainability leadership with the publication of our second annual Yes, you report.
Fisher recognition as the first data center energy star partner the or.
Last but not least we further strengthened the balance sheet with the issuance of $645 million, a common equity and 500 million euros of 10 and a half your bonds at one in a quarter percent with that I'd like to turn the call over to Bill.
Thanks, John Good afternoon, and thank you all for joining us.
Our formula for long term value creation is a global conducted sustainable framework.
Even though we haven't been physically sitting together for the past several months, we've made significant progress strengthening each of these pillars.
As John just mentioned, our second quarter bookings were more than 50% better than our previous all time high.
But we're also more than double our previous trailing four quarter average [laughter].
We've now seen improvement for six consecutive quarters, So, we've clearly seen acceleration and leasing velocity.
We are admittedly a bigger organization today and the bar should be higher following our combination with interaction and as well so 70.
But our second quarter results would have been a record for Standalone digital realty as well.
A world of remote everything has accelerated digital transformation initiatives and data center demand has benefited.
But I believe these results also reflect the past several years ago hard work, putting together a highly attractive diversified global platform.
The ability and cable leadership within our broader organization.
And with solid execution.
In particular, I would like to congratulate core retire and his entire sales team and their exceptional performance.
We do expect the second quarter, maybe the high watermark for the full year.
We don't necessarily expect to maintain this lost the every quarter.
But 2020 is clearly shaping up to be a banner year.
And we continue to capitalize on the acceleration of digital transformation strategies to build business resilience, which should continue to drive strong demand going forward.
Our confidence in the forward outlook is reflected in the upward revisions to guidance for revenue EBITDA and core FFO per share.
Let's turn to the current environment on page three.
The Cobot 19 global pandemic has changed all our lives.
Our Hearts go out to the global communities, we serve especially those that have been most impacted.
We stand in solidarity with them.
Focus remains unchanged, keeping our employees customers and partners safe.
We are fortunate to have been is well prepared as we possibly could have been for this pandemic.
Our 280 data centers and 45 <unk> metropolitan areas across 21 countries on six continents remain fully operational.
We are grateful to be in a position, where we can help industries communities and families around the globe continuing to conduct business.
And stay in contact with each other during these uncertain times.
We also want to again extend our gratitude to our employees in critical data center roles will continue to come into work every day at or data centers around the world.
They make possible to service and support that we provide our customers.
Stepping back.
Our approach to managing and leading through the Cobiz 19 pandemic has guided by our yes. She strategy depicted on page four.
We strive to lead the global data center industry and sustainable environmental performance.
We are committed to minimizing our impact on the environment, while simultaneously meeting the needs of our customers are investors our employees and the broader society.
We take this work seriously because it matters to our customers and because we think it's the right thing to do.
Environmental stewardship incorporated into almost every aspect of our business.
Sustainability as a top priority for us your route the industry governmental organizations and the press are all taking note.
In early April we were honored to be the first data center provider to receive an EPA energy Star partner The year Award for Energy management.
In late April we announced a wind energy agreement to supply approximately 30%.
Power needs in the Dallas, Texas area with renewable energy.
In early June.
Her actually announced that it reduces cooling system energy consumption by 20% during the first year of an ongoing project would echo sense.
Dataset or optimization specialist.
In mid June we recognized as a green lease leader by the U.S. Department of Energys better buildings Elias.
We also published our second annual Yes, you reported in mid June providing transparency, what our E. S. T performance for 2019 as well as a comprehensive overview of our clean energy commitment resource conservation community engagement philanthropic amendments diversity and inclusion efforts.
And other sustainable business practices.
In terms of our social efforts.
Since April we've committed more than $1 billion to partnering with charitable organizations globally combating the kobin 19 pandemic.
Well as efforts to played ratio in justice.
We've also begun a doubling down on our employee matching gift program raising an additional $100000 on top of our corporate efforts.
We're doing our best to play a constructive proactive role and advancing our broader goal of delivering sustainable growth for all of our stakeholders investors customers employees and the communities that we serve around the world.
Let's turn to our investment activity on page five.
We continue to expand our global platform with a groundbreaking announcements and multiple metro's across a pack the Americas and EMEA.
In early July we announced that we would be building our second data center in Hong Kong, allowing us to cater to diverse multi site workloads.
Facilities is expected to be build out and ready for global and regional customers by mid 2021.
In mid June we vote broke ground on the first carrier neutral facility in Korea, with the saying Gan digital media city and northwest so.
We've seen significant pent up customer demand for carrier neutral offering in South Korea.
We expect to be open for business in the fourth quarter of 2021.
In early June we announced that essentially our Latin American platform and joint venture with Brookfield infrastructure was entering Mexico with two diverse locations anchored by long term U.S. dollar denominated multi megawatt agreements to support the growth of a leading global cloud provider.
In April interaction broke ground on interaction Paris digital part a market expansion project in Paris with up to 85 megawatts of capacity.
The first before new data centers on this site will be interactions eighth in Paris, and the first phase is scheduled to open in late 2021.
In early July interaction announced the opening of the first phase of M. R. S. Three its third data center and bar say.
Interactions bar say campus is one of the world's leading digital hubs for Intercontinental data traffic with over 150 network service providers.
The new facility will offer customers expanded access to the vibrant community inmarsat, including numerous connectivity providers digital media and cloud segments long with local as well as global enterprises.
Last but not least.
In mid July we announced that we had acquired the freehold to the land under our and our largest raso campus in Frankfurt.
In addition, we're also under contract to acquire the net Cameron site.
Separate parcel within a kilometer of our existing campus that will support the development of up to 180 megawatts of IP capacity.
We believe that we're creating significant value by combining the leasehold and freehold positions are one of the most highly connected campuses in Europe.
While the adjacent expansion capacity provides runway to support customer growth and a key European metro for years to come.
We also made two significant announcements advancing our collaboration with Nvidia.
In early May we announced the platform digital data hub, featuring Nvidia DGX, a 100 P.L.D. infrastructure.
Hey, joint engineered solution that brings the world's first five head of flops AI computer system to the enterprise to tackle high performance computing challenges.
Most recently in late July.
We announced a joint development of an AI platform as a service offering on platform digital combining core scientific plexus AI work flow Orchestrator with the end video data hub solution to address enterprise data Lake performance constraints.
These announcements validate our strategy of building a portfolio of engineered partner solutions to help enterprises accelerate digital transformation and removed data gravity barriers.
Let's turn to interaction on page six.
Integration is our top priority for 2020.
And despite having to do the hard work of integration virtually during the pandemic.
Both teams have risen to the occasion.
Andy will cover our customer wins in more detail, but we are already seeing the benefits of the significant cross selling opportunities.
We said last quarter that we believe our combination with interaction has the potential to change the global dataset or landscape.
And in the interim we've received meaningful third party validation of our view.
In mid July cloud seen gave us the top billing in EMEA on their H 120, 20 data center ecosystem leaderboard.
Which ranks data center operators based on the composition of their facilities service providers network fabrics and cloud on ramps.
The combined organization is well placed to meet the growing demand from cloud and content platforms I T service writers and enterprise is seeking co location hybrid cloud and Hyperscale data Center solutions.
These are global long term opportunities that we are ideally positioned to address.
We've made steady progress on our corporate integration efforts and by putting customers first we've been able to seamlessly come together as one company.
There will be more work to do over the next several quarters, but we are pleased with our progress to date.
Let's turn to the macro environment.
As we're all aware the pandemic has pump the brakes on the global economy.
As you've heard me say many times before data center demand is not directly correlated to job growth.
We're fortunate to be operating in a business lever to secular demand drivers, both growing faster than global GDP growth and somewhat insulated from economic volatility.
The current environment is accelerating enterprises digital transformation strategies and data gravity is shaping the way enterprises will deploy host and connect their infrastructure globally.
According to I'd see by 2025 enterprises will need to manage the integration of 175 Zetta bites of data between their private infrastructure in public clouds.
For 51 research conducted a global I T leader survey, finding 87% of I T leaders need to maintain local copies of critical data a global points of presence to meet regulatory requirements.
We see indicators of enterprises solving data gravity globally across our platform in the volume of new logos as well as expansion bookings within our enterprise vertical.
Digital Realty was recently named a global leader in gigabit arms market radar for edge look co location ranking our strategy as the only outperformer in the platform strategy sub segment, a strong validation of our vision.
The roadmap for platform digital is positioned to capture the enterprise opportunity.
Given the resiliency of demand drivers underpinning our business and the relevance of our portfolio to meeting. These needs. We believe we're well positioned to continue to deliver sustainable growth for customers stakeholders 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 nine.
As you may have seen from our supplemental reporting package. We have included interactions portfolio statistics in the supplemental this quarter.
The highlights here on page nine of the deck give you a sense for the power of the combined platform.
We also implemented the changes towards disclosure package Weve telegraph for the past several quarters.
As we've said we season winds blurring between product types, and we believe the traditional distinctions had become less meaningful.
The changes we've made attempt to more closely align our disclosure with our customers buying behavior and the way we manage the business.
We hope this disclosure enhancements are helpful.
We aim to continuously improve the utility and transparency of our financial disclosures and as always we welcome additional input from analysts and investors.
Let's turn to our leasing activity on page 10.
We signed total bookings of 144 million, including an 18 million contribution from interaction.
The second quarter also included a 12 million contribution from interconnection.
And along with the 22 million of network and enterprise oriented deals of a megawatt or less accounted for nearly 25% enough total bookings.
The weighted average lease term was nearly 11 years.
We landed a total of 124, new logos during the second quarter, including 38 sourced by interaction.
Again, demonstrating the power of our global platform.
In terms of regions demand was particularly robust northern Virginia, The New York Metro area, The Pacific Northwest and Mexico City in the Americas, as well as Frankfurt, Paris, London, and more say in EMEA.
We at least 48 megawatts nationally during the second quarter, bringing our trailing four quarter total to north of 100 megawatts.
This activity is driven lease up of active development as well as existing inventory.
We generated another 70 basis points, a positive net absorption within our northern Virginia in service portfolio during the second quarter up from 90% occupied at year end to 93.8% as of June 30.
And our northern Virginia active development pipeline is now 100% pre leased.
Despite its somewhat crowded playing field in this market.
We believe we certainly hit above our weight due to the strength of our global platform and Salesforce, the large and growing installed customer base seeking growth with adjacent see on a connected campuses.
And finally, our ability to future proof our customers growth with our strategic land holdings, providing the longest one way to support their future growth.
What we have not yet be gone to see meaningful improvement in northern Virginia market rents the available inventory has been rapidly absorbed.
And the pendulum is starting to swing back towards tighter availability and healthy competitive tension.
In terms of specific wins during the quarter and around the world.
The New York Metro area was a stand out not only the top destination for network and enterprise oriented deployments during the second quarter.
But also with the groundbreaking over newest connected campus in Northern New Jersey, where we will be developing a highly strategic purpose built new infrastructure solution to help a leading data <unk> analytics provider optimize did exchange for their employees customers and partners.
In Phoenix is leading Pac 12 University is leveraging our network dense interconnection hub to optimize their hybrid I teach controls.
As we announced in May the Shadow Server Foundation, a nonprofit security organization working to make the Internet's a pure for everyone is streamlining its data center network with digital Realty in the Bay area.
Our pairs to persuaded I could tell you French global IP service provider to migrate its infrastructure onto our platform.
By offering flexible commercials and demonstrating their value as a trusted partner.
In London, we added to lead and local fiber and managed service provider to our care community, which will attract other enterprises, particularly in digital media, who use the lead for their services.
In the Netherlands digit Tayne, they fast growing software company targeting the online gaming community chose our Stifel Reich campus in Amsterdam as its worldwide hub due to low latency connections to the rest of Europe and beyond.
A leading U.S. semiconductor manufacturing company deployed across multiple Metro's December stream, the diverse product solutions available on platform digital.
Leveraging fit for purpose interconnection and infrastructure capabilities across three unique sites on a dollar auto Dallas connected campus as well as to Amsterdam business Park.
Finally, hash power, a leading global content delivery company headquartered in Portugal harness the power for a combination was interaction to reward their network in Madrid and San Francisco.
Turning to our backlog on page 12.
The current backlog of leases signed but not yet commence stands at a record high 251 million.
The step up from 122 million last quarter reflects the 44 million backlog inherited from interaction as well as the 132 million of combined space and power leases signed offset by 47 million of combined Commencements.
The lag between signings and Commencements was a bit longer than our historical average and a little less than seven months.
Moving on to renewal leasing activity on page 13, we signed 169 million of renewals during the second quarter. In addition to new leases signed.
We retained 80% of expiring leases above our long term trend.
The weighted average lease term on renewals signed during the second quarter was those a little less than six years, while cash rents on renewals roll down 2.8% inline with expectations.
Aside from a few select supply constrained regions in metro areas, we've yet to see broad based 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 tightening fundamentals and barriers to entry emerging 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 second quarter operating performance overall portfolio occupancy was down 150 basis points to 85.7% entirely due to consolidation of the embedded upside within the interaction portfolio in a reported statistics for the first time.
Same capital occupancy ticked up 20 basis points for the second quarter and same capital cash NOI growth was better than expected negative, 1.2%, including a 60 basis points FX headwind.
As we indicated last quarter barring any unforeseen shocks, we're cautiously optimistic that we've put the same store low watermark for the cycle behind us.
As a reminder, interaction and the west in building are not included in the 2020 same store pool.
Well, we expect both acquisitions will be accretive to organic growth going forward.
Turning to our economic risk mitigation strategies on page 14.
The U.S. dollar began to weaken in late May but remained elevated relative to prior year average exchange rates for the full quarter and FX represented roughly 80 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 most directly impacted by the covert 19 pandemic.
Rent collections rates remain in line with it our historical average and the sum total of customers who have reached out to request rent relief represent approximately 3% 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 a roughly 30 basis points impact on full year after FFO per share.
Our near term funding in refinancing risk is very well managed and our capital plan is fully funded.
In terms of earnings growth core AFFO per share was down 6% year over year, but seven cents ahead of consensus as well as our internal forecast driven by a beat on the topline as well as operating expense savings, primarily due to lower property level spending in the Kobin 19 environment.
[music].
A portion of the Opex savings is likely timing related and represents more of a deferral rather than an permanent savings, but the operational performance is obviously encouraging.
In terms of the quarterly run rate as you can see it from the bridge chart on page 15, we still expect to dip back down by five to 10 cents in the third quarter before rebounding in the fourth quarter and beyond.
In early July we announced that we intend to redeem 800 million of senior notes due in 2022.
We expect to fund the redemption buy sell that settling the 1 billion forward equity offering in the third quarter.
And the higher share count along with do you expect to catch up and deferred Opex are primarily responsible for the step back down in the third quarter.
As you may have seen from the press release, we're raising the low end of the range for revenue EBITDA and core AFFO per share guidance, reflecting the second quarter outperformance as well as the strength of our bookings and backlog.
We don't typically provide explicit hey, AFFO per share guidance, but given the magnitude of the B. We wanted to offer some additional context as you may have seen from the earnings release, we're maintaining our full year guidance for non cash rent adjustments of 20 to 30 million as well as a recurring capex guidance of two.
220 to 230 million, although we are admittedly trending towards the low end of the range.
The implication here is that we do expect straight line rental revenue will continue to moderate over the course of the are narrowing the delta between cash and GAAP enhancing the quality of earnings, but we still expect to spend the nearly the same recurrent capex budget for the full year, despite the lower spend year to date.
The bottom line, though on the F. AFFO per share outlook is similar to core FFO per share the second quarter be does flow through the full year forecasts, but similar to the opex running through the PML a portion of the recurring Capex savings is likely timing related and represents more of a deferral rather than permanent savings and when.
I expect the quarterly run rate to dip back down in the second half.
Last but certainly certainly not least let's turn to the balance sheet on page 16.
Fixed charge coverage remains healthy at 4.6 times, well net debt to adjusted EBITDA stood at 5.7 times as of the end of the second quarter.
Pro forma for the settlement of the 1 billion forward equity offering net debt to adjusted EBITDA remains in line with our targeted range just over five times all fixed charge coverage is just under five times as a result of a proactive balance sheet management prior to the redemption of our bonds doing 2022, we have.
Over 4 billion of liquidity to fund our capital spending including over 500 million of cash on the balance sheet as of June Thirtyth.
Another 1 billion of equity coming in upon settlement of the forward equity offering.
And two and a half billion of availability on a 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 on 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, our weighted average debt maturities over six years and our weighted average coupon is 3%.
A little over 60% of our debt is non U.S. dollar denominated acting as a natural FX hedge far investments outside the U.S.
Over 95% of our debt is fixed rate to guard against a rising rate environment and 90% of her dad is unsecured provides the greatest flexibility for capital recycling.
Finally.
As you can see from left sided page 17, 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 were pleased to take your questions.
Andrew would you please begin the culinary session.
We will now begin the question and answer session.
As a reminder, participants will be limited to one question and one follow up.
To ask a question you May press Star then one on your telephone keypad.
If you're using his speakerphone, please pick up your hands that before pressing the key.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble a roster.
And our first question comes from John Atkins of RBC capital markets.
Please go ahead.
Yes. Good afternoon. My first question is on kind of leasing I wondered given the strong performance. If there's any kind of credence to the notion that this is sort of a pull forward and kind of your views on on that topic and what we might kind of take it out in terms of timing first half versus second half.
On demand and related to that you you did indicate bill a little bit about pricing, but I I wonder how are you within kind of the midpoint low point high points up your targeted yield range on the larger deals you signed in northern Virginia, and and other markets and then I got a follow up.
Hey, Thanks, Jon This is Andy maybe I'll start this one off and then handed over to Corey to talk about a two Q and also kind of more forward looking at the back half the year.
I can tell you Oh, we're always trying to pull forward deals as fast as possible at the end of every month and every quarter. So I don't think there's nothing particularly unusual about this quarter's results, which were certainly quite pleased with.
I would I'd characterize it a broadly back to something build kind of mentioned the prepared remarks I'll briefly we worked pretty hard for several years now putting together a highly attractive highly connected diverse and truly global portfolio and platform.
And that along with consistent stable and productive brought organizational talent and leadership and just solid execution is really kind of what contributed to a numerous wins across the board, whether the vault leasing signings volume, a and well as well as mix, but like Corey Uh huh.
Me too a little bit more what he saw in the quarter I know, we can come back and talk about returns on the larger deals.
Yeah, Thanks, Andy and yes, I would say that it really was not a pull forward on cobot I would tell you that that we really had a great quite a bit in building. Its Andy you mentioned that five or six consecutive quarters of growth a lot of work that the team's been doing to build our platform position at the correct way and really build trust, but with.
All of our customer side, but I wouldn't view this into the pull forward, even though we pulled deals forward. All the time. This is really the fruits of our labor playing out for us, but do you think about the segments that that we actually had a ton of success with so really good success across the Hyperscalers again, they value our global platform the geography all of the work that.
We've done for them with our trusted and in our ops team that continues to provide support for them.
And then religious the heritage of success and relationship that we've got going with them.
An enterprise an in network perspective investing the team our sales team our go to market our global capabilities and then we improved our messaging enough positioning around the value. When we launched platform digital back in November I think you're starting to see the fruits of that customers media analysts, maybe just a broad base.
People that picked up on that.
And then we'd had a lot more success with our reps quarter over quarter. So a lot more contribution from the reps and then finally I would just say that isn't looking ahead, we think that we're going to really focus on the makeup of our quarter.
How do we continue to grow new logos enterprise wins, our communities of interest.
Interconnection co location and then finally I think you're also going to see at some of the messaging. We we brought out has been like picked up and some of the trends that we're driving are starting to drive the industry and how they're thinking about thinking in the industry around the importance of us centers of data and around the importance of data grabbing which requires some architect to reconsider.
Since and we expect to see more and more the industry falling I'll eat in these areas as well.
Most of it Andy but go ahead, if there's something else.
John anything else do would have yeah.
Yeah, I don't know yeah. That's good and then maybe the follow up on interaction and maybe maybe the to have you again on the kind of on the integration side, whether its pistons are right. He integration, Andy if theres any kind of future milestones to call out and then for Corey.
You have worked for global organizations in the past and picking up you know very valuable kind of European operation anything you see going forward in ways that you can maybe optimize what obvious example is cross connect pricing, which is I've seen some nice lift over the last couple of years something on the part of what are your major peers.
Maybe bill can start up on the integration front, yeah, John happy to take the.
Take part of that no hand off to Andy first was as you know we we closed the transaction on March 12, So just about the into the last quarter.
And I've said it on on several occasions, but the integration of interaction as is our top priority for 2020.
And I would tell you that we are absolutely pleased with the progress made to date.
Particularly given the impediments created by the pandemic.
And I think we've done a good job.
Identifying synergies expense synergies and what we're seeing a potential revenue synergies as well, which is what we hope but didn't underwriting.
As I mentioned last quarter, I I'm I'm very very happy with with the collaboration that's occurred within the two firms David Ruberg, when I speak a several times a week or I've had the utmost respect for for what he brings to the data center business.
And I do believe that providing essential services during a global health crisis as it has had a unifying effect on the on both teams and the alternate over to you.
Just a little bit more and then a mixture we've got to the heart last pretty a question about cross connects obviously work continue to progress it despite the technology or not being able to doing a person had some key milestones in the last several months of organizational announcements.
Out and certainly tie backs to our global organization now working on some specific workstreams, such as our technology and how we.
Bring together I T systems business processes.
And in a different kind of just the people front. So a lot of great wins, there in terms of customer referrals, a cross selling a multi site a bid bidding and great progress I think the a piece you mentioned on the cross connect John obviously.
The commercial model for cross Nexus has been different in Europe overall interaction of last several years moved to a model, where oh, there's better commercialization of the cross connect opportunity.
That being said I look at the combined global portfolio and call. It roughly half of our cross connects sitting in EMEA, yet are probably only to closer to 20% of our interconnection revenue originates from that part of the World I was I think speaks to opportunity to.
Really make sure our customers are getting value from our services overall and there's an equitable equitable our commercial relationship for that value, we deliver correale handed over to you to.
Wrap up John's points of everything else that.
No I think you guys covered it well across across the board and left or something John that Jonathan that you'd like.
Our next question comes to Jordan Sandler of Keybanc capital markets. Please go ahead.
Thanks, and good afternoon. So first I just want could you.
Speak to pricing a little bit.
Yes. It seems you know this volume pretty significant I noticed sequentially domestically or at least the Americas pricing.
So much stable, maybe even better despite the increased volume.
But.
In Europe, it looks like a pricing came down quite a bit I mean, maybe not at a perfect comp, but I'm curious what the green success achieved in the quarter.
Thanks, and then maybe more aggressive pricing and maybe in that context can you talk about what you're feeling in terms.
Thinking in terms of returns and underwriting.
Sure Jordan so.
By and large I would say, we did not see much of a change in the pricing dynamic during the second quarter and.
And I think whats evident of that is you can look at our returns under development table, a which I think barely moved in North America.
I think it little it's a little bit tough quarter to quarter comparisons overall region by region, because the mix within the region can certainly sway that outcome, but when we started up internally and go much market by market deal size by deal size, we did not see a degradation in pricing.
I think further evidence of that dynamic a that you may have seen in ashburn, a we are essentially a adding another 70 bips of net absorption after close to 300.
Prior prior quarter.
And our our development pipeline is 100% pre leased for north of 50 megawatts in Ashburn. So when you have a dynamic when you're literally selling the last kilowatt or megawatt or project underway, you're certainly not trading price and you're certainly not doing in the quarter a that had this trajectory. This.
A bus of overall volume.
In Europe, I think a religious the mix the prior quarter Oh, we reported sightings was just a legacy digital.
It didn't have a lot of larger scale deals this quarter or we have the contribution of interaction.
Which had a two to good components. It had a consistent a more enterprise or network oriented smaller deals call. It 10 plus million or that a and then it had some cloud compute nodes.
In a few markets, which are obviously multiple megawatt deals a that if you compare EEMEA quarter over quarter. A you would you see a mix shift that would change the pricing.
So net net still sees a pretty good stability in the pricing.
For what we sell into Q.
Okay, and then I'm.
Speaking with pricing.
The re leasing spread.
Yeah I think in your in your prepared remarks, you mentioned that you could see some gradual improvements in cash leasing spreads in second half between 20 and that seems to be tightening.
But no change the guidance and along the same line.
You had a lot of success.
Well on the leasing front this quarter.
And I I would think that that might translate into increased capital spend your development spend and that also had to remain the same any sort of commentary on those.
Pieces.
Sure. So a few things the meal tape is in reverse order.
The capital spend just to remind everyone. We put out our guidance a with the first quarter calls that number really wasn't stay all the way back to the beginning of the or the end of last year, so or I'd say, our progress was somewhat anticipated and quite frankly, it's a bit so the range that numbers in the hundreds of million dollars type of.
Range, so it's relatively bigger dollars.
With regard to releasing a I would say in the broader sense as a reminder, four of the past five prior years, we've had positive cash re leasing spreads. This year, we guided to slightly negative ER and we exit we saw that in the for in the second quarter.
I would say the preponderance of the actual releasing was into positive territory, but there was always an exception or to the two exceptions here I would add good customer and commercial reason one we did a multi site multiple G.O. network node from one of our large global account platform customers are very strategic.
To be part of our community type customer added advantageous rate given the attracted to that customer that you see kind of muting I would typically is a call. It two plus percent increase on those zero to one megawatt type deployments and then on the little bit larger I think just over a megawatt Oh, we had an energy.
Hi, guys customer, who did a simultaneous new siding with us in Europe. A in addition to a renewal with us in our southeast region. So when you parse those stats, obviously see the negative on one piece, but that may have contributed to positive elsewhere.
We still think it's a strategic advantage to come to the table with that relationship and and those incremental arrows in our quiver, but those are some things that contributed to it.
And I don't think we didn't change the guidance on that quite frankly, because it's it's probably one of the toughest to protect because it depends when the customer wants to in the renewal of its contract which can be early or can be very much down to the wire. So it's a your handicapping not only the outcome or when it went purity actually happens.
Our next question comes from.
Nick Damn of Deutsche Bank. Please go ahead.
Hey, guys. Thank you for taking the questions or just one and one follow up first on enterprise or if you could share any sort of up based on your discussions with enterprise. It how demand is trending and I got the ability.
Platform digital to sustain this type of new logo growth I think it's been about 120, plus new local new logos the last two quarters.
Then secondly follow up maybe for Andy I think you've got about $3.07 a share in core AFFO.
First half of the year I think the midpoint about so five and so I'm. Just wondering can you talk about the puts and takes around incremental headwinds embedded any outlook and I guess more specifically or the coal get 19 deferred opex, that's driving about half of backdrop you expect in Threeq you. Thanks.
In Korea, maybe you could hit the first question I'll turn it back over to Andy.
Yeah sure I'll take the first question on enterprise demand and what we're seeing in and really what's driving it and I would tell you that it. Thanks for the question, there's really been no single barrel bullet to it we've had a great team supporting customers selling a platform and really building out a platform for us and so I would tell you. It's a a confluence of all these things coming together.
We also had a great message that I mentioned earlier with platform digital and how that's being taken up by the industry and by customers or enhance go to market approach is helping so it's a lot of things we did.
We're also encouraged by our Rep tenure, I've got better relationships, we've got customers I'm, having better relationships with our customers our employees at longer we increased number of reps, making quota. We've got a ton more sites that are happening multi site deal multinational deals average deal sizes up so from a from a demand perspective.
I'm on enterprises really believed that work we've been doing for the last five years and longer as well to improve messaging and go to market.
Puts us in a position where weren't were sustained for it and then you add on to that the interaction or adjustment for us and what we've got from an interconnection and the networking capability and platform. It really puts us in a really.
Really well positioned spot to go and help enterprises as they navigate hybrid I T N. The I'd navigate through Cogan and really feel like the breadth of customers the breadth of our geography.
There's going be some customers in the enterprise World right now there maybe slowdown I I've heard that other places I think because it how many were helping and the solutions, we're bringing to them to help and take advantage of hybrid I T or or managed through coded has really helped us a kind of you a little bit insulated from that.
I hope that helps Andy if you've got something else that.
No I think you nailed down but going into second question Mountain <unk> welcome back it's great to have you back a cover in digital.
The question on the three outside of in Ah Why can't you just times that by by two I don't know if your colluding with our C. O. Because he asked me that same question as well I did have to her I did have to remind him a two things one of which you highlighted a one where we are we have been doing some strategic capital management matching or.
Sources and uses and we are redeeming some notes, but all along to fund or capital spend we were planning to draw down on that 1.1 billion equity forward. So those shares off from the equity forward or not and our share count for the first half the or they're going to come into the second half the year as we close on that in the third.
Quarter.
The other piece.
Oh, good 19, maybe I'll take a quick second to really Oh God given another tremendous thank you to our operations team globally.
Just going above and beyond we obviously with this crisis stayed fully operational but we did scale down our staffing to make sure. We put the safety of our customers employees and partners a first and foremost so we delayed any type of a maintenance spend.
Repairs and maintenance that could be delayed.
And that span a we don't think is gonna be delayed forever, we're working with a safe manner, a two to continue to maintain the equipment.
And we expect some that spend there was thought to be planned and happening in the first half the year onto to resume in the second half the year.
Got it thanks, Sandy and if that could be back.
Our next question comes from Sammy Badri of Credit Suisse. Please go ahead.
Hi, Thank you very much for that question.
My question is memory to do with a that releasing spreads on page 13 of your slide deck and I know you touched on elements of this already over the call, but I was just looking at the releasing spreads for at least.
Hi between zero, and one megawatts and I started to releasing spreads a little bit negative and given the dynamics, we're seeing that such a big surge in demand coming specifically from enterprise isn't really the whole spectrum.
Within the data center ecosystem as far as customers.
I guess, the perception or that would be a little bit more positive than it would be negative in the reason why it's negative in the country because it may be a very large customer that distributed into multiple locations and an aggregate. They got a discount for releasing or maybe you could just given the puts and takes for customers in that specific size bandwagon.
Yeah.
Sure. Thank Sami. The you are correct me if you look historically that category would be closer to two plus percent positive and if you look through whats goes happening in there that there's numerous renewals happening in there and on a very granular.
Basis, the pondering, so those renewals or in the positive territory.
And you hit the nail and the head with there was a specific customer that renewed a cross three or four sites globally.
With network deployments, so small deployment that add up to a larger sizable point deployment.
And that customer is not only incredibly important to our our platform based on its size and scale, but also the value. It it brings to the other community participants and customers I hear a digital so we want to make sure that we found the most fair potential.
Outcome for that renewal to secure their future here with digital.
It was a little bit on the longer side for that size employment terms of renewal what is always a the rates a little bit longer a lower rates are longer but really more of a strategic renewal within that category.
That brought that into the slightly negative category.
Slightly negative cash mark to market.
Great. Thank thank you bring that color on my other question has to do what the interconnection commentary that you can't earlier with EMEA, representing about 50% of the portfolios cross connects but only making up about 20% revenues I was hoping you could give us maybe like a timeframe or a trajectory some kind of like time lapse.
When you think you'd be able to get that 20% of revenue mix, maybe even closer to the 50%.
And you're just talking 50% of cross connects in Europe, because we can understand like that that pace in the cadence transition, you're having with your customers and in there.
You know Sammy I'm going to hand, this over to Chris.
To give you a little bit more color on the history in the trajectory of what we're doing I'm not going to enforce I won't sign up for a raising of the cross connect prices timeline on this call I don't think David Ruberg would be to pleases me, if I did that but I can tell you, we're all about bringing value to our global customers now the total four.
Thousand customers and making sure that we are commercially oh treated and fair and equitable wait for that value.
But Chris maybe chime in a little bit about on cross that pricing and trajectory.
Absolutely happy to do it anything you are not thanks for the questions Jamie So.
You're absolutely correct and I'll echo the sentiment throughout the call is that you know we're very happy with the addition of interaction into our broader portfolio and I think what that represents to our customer base. As these are major EPL centers of value for kind of current and future customers and so really what's represented within that is the.
She is of interest and the amount of interconnection that's been generated over the years that exists and that continues to grow when I think one of the things that it's very important to us and and it's a shared vision within the interaction team as well is that that'd be a very balanced approach, where we want to ensure that we don't siple, our customers' ability to grow.
And continue to derive unique value out of this overall platform digital and so I do think that you'll see a lot of our other existing customer base coming into Europe. So that platform effect will start to build that up so I think over a period of time, you'll definitely see that grow, but where we're really conscientious of taking a balanced approach and having a very.
Open platform. So that we can allow customers to grow and continue to expand and I think I think a critical element of a lot of this is not only the interconnection I would note, but the multi market and the unique advantage of our fit for purpose product, where you can do both smaller colo and larger scale deployments to the value of all of that coming.
Together as the a unique position that platform digital equips our customers what.
Our next question comes from Erik Rasmussen of Stifel. Please go ahead.
Yes, thanks for taking the questions I just wanted to get.
Some high level thoughts that you know, we obviously had a very strong first half the year, we saw a data before the quarter.
Results started to come out.
Sure for yourself and peers are that the northern Virginia was in some of the U.S. markets had a pretty good you absorption numbers. So far we're now seeing it with you guys as well, but what are your thoughts about or you know what sort of could be creeping in and that's you know digestion in you know maybe us having sort of a repeat.
Orbitz of what we saw a 2018.
And maybe what's different this time around based on what you see today.
Yeah.
Thanks, Eric So maybe I'll start off and head into Corey to kind of little more for looking here. So I think a few things to your question I think we had a really strong quarter in ashburn, but I think we also had a really strong quarter in North America as well.
Just a quick highlights New York City Metro area, a top a enterprise network oriented smaller footprint appointments.
Connectivity as was a very strategic of a build to suit project on our Jersey connected campus.
Out in.
The Pacific Northwest continued support of a hyperscaler on a highly strategic project and Hillsboro market continued Oh, great wins in Chicago, both on the connectivity side within the financial services vertical as well as a different hyperscaler growing on one or.
<unk> campuses in Chicago area. So I think that theme speaks to a little bit about your question.
If you do rewind the clock back for a second with the the the digestion of the last go around I think our business did quite well, which I think goes back to serving our customers across six continents 20, plus countries 44, plus metropolitan areas.
Oh, and having that globally diverse 4000, plus customer base has allowed us to not be wed to a specific market or the the ups and downs. The one specific customer and I thought last I would say I don't I don't think each of these customers on the exact same pacing, they're all different places in the race or different points.
Each of their build out of their infrastructure, which allows us to kind of help them when one customers, maybe taking a pause or working to grow in different markets, but <unk>. Please share your thoughts as well.
Yeah, I'll add to it Andy from a stemming from an enterprise demand perspective, and I feel like you touched on a good bit of it.
Think about the power of our comprehensive global platform and wherever across 4000 global customers 20 countries 33 markets 44 metres and anything through the new ideas and solutions, we're bringing to our customers at the same time with this combined interaction and digital.
Merger that we've done here it puts us in a really good place to be able to address customers that need and want to continue buying those services and it really moderates us from any kind of an exposure on on a on an individual or an industry or a geo that's a little bit different. So we're pretty excited about where we are I also feel like we've got.
At the by kind of funnel and demand going so we're going to be fine with growing to the cloud on and continuing to to drive the demand that we're seeing and making investments in the data centers right.
And so I think that you know it might be possible to some people see some new logo stifle mantra, maybe a little slow down there because you're trying to get into new sites that you're not familiar with but I like I said I think we've got enough customers. We've got enough breadth of our our platform and our geography that I think were insulated from at a good bit and then when I just look at our pipeline.
Going forward it definitely supports the numbers that but and he's put forward to everybody. So I think rental place hope that helps it since 2018, we've added the essentially platform or Latin America, we've expanded materially in Europe with the acquisition of interaction we've added new markets in Asia specific.
Finally, a new development sites in Tokyo, and so and I would expect that in the second half of the year, you're going to see a additional contributions out a lot am.
EMEA and Asia Pac.
Yeah really good point thanks, Phil.
Right. That's helpful. And then maybe just my follow up.
You know you'd mentioned in I think are.
In the press release, a there was some marginal construction delays.
You know what sort of impacts is that had owned the business and maybe could you comment, though which regions that might stand out for that and how we go to resolve those thank you.
Sure Erica so.
Also another a big thank you and kudos to our global construction team a working day nights and weekends for sure. We're in really Crazy times, we Ah why can't say were eight we able to make up time, we've had from some delays from specific.
Since like a Toronto, where hillsboro from from pulling labor off sites I can say globally, where we are in a really great spot going forward in terms of getting our teams back to work.
And and delivering on our delivery times.
One is the one oh it was exception I'd say, we're not exceptional potential spot there were keeping an eye on it we're not at full staffing the Singapore or given the they'll the the labor situation that country.
We are not at 100% capacity, but we are continuing to make progress that being said so I think we're in a much better place today than we were our when we reported on that topic a few months ago.
Our next question comes from Eric Calypto of Wells Fargo. Please go ahead.
Hey, Thanks for squeezing me in so I.
I know a bill you kind of said that any meaningful M&A likely kinda off the table for their main into the year, but I just wanted to confirm kind of you know the plan is obviously integrating interaction and kind of no near term plans for any additional acquisitions and you know to that degree if the any opportunities that arise are there any kinda geographically.
You know wouldn't get into <unk>.
Yeah, Eric No Oh, reiterate and reaffirm that interaction remains our highest priority the integration of interaction.
You know, we certainly are acquiring.
Land parcels around the world for development and there may be you know very very small tuck in acquisitions.
That's really for the purposes of a new market expansion.
And or maybe product enhancement or growing markets, Greg you might want to add to that.
No look I think youve covered as Phil said and.
We I understand that integrations, our top priority and we really have become more risk averse in this environment, but as Bill said, you know where procuring land, where our customers need to be and where the facilities that really inherent to our platform digital community of interest strategy and as Bill said, well you know we're selectively monitoring opportunities.
In the market, where if an asset as strategic it'll be smaller we can create value and get the right return, we'd probably do it.
You know I think a lot of people are speculating in terms of acquisitions in this environment, where we are with respect to distressed opportunities and quite frankly, we haven't seen any distressed opportunities in this market yet, but we're actively monitoring things a longer term.
We may see some distressed opportunities for smaller more thinly capitalized companies that may have debt coming due.
But a couple of things look we originally thought that its assets outside of the day, there's been a center space got hit harder.
In data centers and became relatively less expenses that we'd say private capital migrate towards there's opportunities and decrease competition for data centers. However, what we are starting to say is that.
You know their private investment community have come to appreciate really the strong underlying secular trends in our space as well as the credit worthiness of our customers and the growth potential in the sector and they're becoming more educated and looking to invest so like as Bill said you know we have we you know we're going to continue with that strategy and that's.
What we're focused right now.
Great. Thanks.
Our next our final question comes from Colby sinus all of Cowen. Please go ahead.
Great. Thanks for tuning in on two questions if I might make I just to stick with you I was wondering if you can give us an update on potential asset South Ah that's something that has been put more on the back burner, because it could be Nike and if you're still moving forward and there's still possible you can see something maybe this year.
And then secondly, with the U.S. government.
Threatening to close down.
I think Chinese social media applications and web sites.
I believe that they've been a big purchase their data center services over the last few quarters.
I'm just curious how you guys get comfortable underwriting and risk taking on a customer like that in light of all the geopolitical uncertainty that could be impacting them. Thank you.
Greg do you want to hit the first one and I could hit the second yeah sure Hey, Colby. How are you. Thank you look I think with respect to asset sales I think it's I think it's a fair to say that the level of chatter in activity has picked up quite a bit.
But what the exact impact will be on pricing for larger deals, it's still hard to say.
You know it's important to again note everything we were saying about investors, how they're viewing the sector in terms of the secular trends the creditworthiness and the growth potential, which clearly you know I think you're starting to see the data center space migrate to more of a Ah.
Core asset class that investors, particularly for this pandemic are starting to appreciate.
As you know, we just sold the asset in the middle of pandemic in Europe with probably when we got the pricing we expected.
You know we continue to believe that our multiyear guidance about few billion dollars over the few years noncore assets are non core markets.
You know we still we still think that's the right guidance, we've already done about a billion for that.
It's important to note that were fully funded and you know will continue to recycle capital Opportunistically when it makes sense and the price is right, but it's always in a good it's always good to be in a position where you have no sense of urgency if you can't get fair value.
I think you're probably also noted we gave guidance.
600 million to a billion dollars.
It earlier in here and with the Maple tree transaction itself, we've already achieved bottom into that range.
Again, so why we're not expecting.
No we weren't expecting cobot 19, but we are comfortable and confident in where we are with respect to our capital recycling activity. So but look yeah. It's going to continue to change daily and we'll continue to monitor what we feel like when a good position.
And then Colby on his second one.
Obviously and doesn't have to be specific to a headline in the news. We obviously look at various risks a and that's part of our job in our business Devaluating risk and return.
When it comes to Asia Pacific in General I mean, I think well we go back to is one where global company a across 20 plus countries six continents and numerous markets.
And we have a global customer base 4000 plus customers.
And rapidly expanding that 124 outages this quarter I think the diversity of our offering the diversity of our revenue streams or give us a lot of comfort.
In evaluating risk if you look at our top customer list, our top 20 customers totaled just under 48%.
Of our annualized recurring revenue.
And if you go down that list.
Got to go past number 19 defined a non U.S. company, just given the size and scale of some of the top cloud service providers and Hyperscalers, our that we're doing business with or the number of locations. All we're doing business with some of the network providers.
So you kind of got to like the 1% or less territory. When you might run into a customer. So that's a along with his ways of saying, we we we want to welcome all the right customers into our fold and I think we do the right things and Valuating the right risk, but I think that diversity is what.
Insulate sensor protects us to any type of exactness shocks.
Great. Thank you and congrats on the S family.
Thank you.
This concludes the question and answers to us portion of today's call.
I'd now like to turn the call back over to CEO Bill Stein for his closing remarks. Please go ahead.
Thank you Andrea.
I'd like to wrap up our call today by recapping, our highlights for the second quarter as outlined here on the last page of our presentation.
First we further strengthened our connections with our customers prioritizing health and safety, while maintaining service levels and reaching record highs in our bookings and backlog.
Two we delivered solid current period financial results, beating consensus, beating our internal forecasts and raising guidance.
Third we also underscored our commitment to delivering sustainable growth for all stakeholders with the publication of our second annual yes. She reports and our official recognition as the first data Center energy Star partner for the year.
And last but not least we further strengthened our balance sheet with excellent execution on the raising a $1.2 billion of long term capital.
I'd like to conclude today by saying thank you.
The entire digital Realty family and particularly our frontline team members in critical data Center facility Rose good kept the digital world turning in the midst of a global pandemic.
I hope all of you stay safe and healthy we hope to see many of you in person again soon thank you.
The conference has now concluded. Thank you for joining today's presentation and you may now disk disconnect.