Q3 2020 Digital Realty Trust Inc Earnings Call
Good afternoon, and welcome to the digital Realty third quarter 2020 earnings call. Please.
Please note this event is being recorded.
During todays presentation, all parties will be an a listen only mode.
Following the presentation, we will conduct a question and answer session callers will be limited to one question plus a follow up.
Two time constraints, we will conclude probably at the hour.
I would now like to turn the call over to Jon Stewart Digital Realty's Senior Vice President of Investor Relations. John. Please go ahead.
Thank you Andrea.
The speakers on today's call, our CEO, Bill Stein and CFO, Andy Power, Chief Investment Officer, Greg Wright, Chief Technology Officer, Chris Sharp and he VP of sales and marketing Corey dire are also on the call and will be available for Q and a management may make forward looking statements, including guidance and underlying assumptions forward looking statements are based on expectations that involve risks and uncertainties.
That could cause actual results to differ materially for.
For a further discussion of risks related to our business see our 10-K and subsequent filings with the FCC. This.
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.
Before I turn the call over to Bill I'd like to hit the tops of the waves <unk> third quarter results.
We built upon the recent momentum in our business lending a record number of new logos across broad and robust bookings that were well diversified by customer type and geographic region.
We delivered solid financial results with core FFO per share of five cents ahead of consensus and we raised our outlook for revenue EBITDA and core FFO per share for the second time this year we.
We extended our global platform and drink Croatia with the acquisition of all the psyche and securing customer growth in existing markets across EMEA with key land purchases a new build lasting.
Last but not least we further strengthen the balance sheet raising over $2 billion of long term capital and retiring nearly $2 billion of high coupon debt and preferred equity 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.
And despite the pandemic our third quarter results demonstrate the strength of this framework.
Our business is increasingly global.
With nearly 60% third quarter bookings outside North America.
And we landed a record 130, new logos from around the world.
Bookings were also well diversified by customer type with enterprise Colocation and interconnection accounting for nearly half of total.
This robust and diverse business mix demonstrates the power of our global platform and further validates our strategic vision of being the only global provider dedicated to the pool customer spectrum.
Let's turn to our health and safety measures on page three.
We remain focused on keeping our employees customers and partners safe during this pandemic.
We remain fully operational across our 284 data centers and we continue to support our customers' growth right, bringing additional capacity online while expanding our global platform.
We've implemented enhanced safety protocols, such as required mass social Justice Singh engaging specially cleaning services and maintaining rotational 24 by seven staff coverage by leaning on local personnel.
As the pandemic continues we're seeing signs of permanent adjustments that are likely to be long term tailwinds for our business.
More enterprises are embracing a distributed workforce with a growing worked from home component.
Our recent Gardner survey of nearly 2000 CIO was around the world Crown that accelerating digital innovation.
And leveraging emerging technologies, our key priorities during the pandemic.
Of course, I would be remiss, if I didn't know again extend our gratitude to our employees and critical data center roles.
Who continue to come into work every day at our facilities around the world.
They make possible the service and support we provide our customers.
Thank you to the terrific onsite digital Realty team.
Let's turn to our sustainable growth initiatives here on page four.
In April we reached a weird to energy agreement to supply approximately 30% of our power needs and the Dallas, Texas area with renewable energy.
In late August we further expanded our renewable energy capacity in tech specs sourcing approximately 65 megawatts of solar power.
Once the solar project is fully operational by mid 2021, our entire Dallas portfolio will be powered by 70% renewable energy.
We completed our first wind power transaction in 2016.
And we've since gone on to contract 240 megawatts of wind and solar energy in Texas.
We remain committed to manage our environmental impact optimizing our use of energy and natural resources, serving a social purpose and delivering sustainable growth for all stakeholders.
Let's turn to our investment activity on page five.
We continue to expand our global platform.
With a small but highly strategic acquisition in south Eastern Europe.
Along with land purchases and groundbreakings in existing markets across the continent.
In early September we announced that we had acquired Altrus I T. The.
The leading carrier neutral data center provider in Croatia, expanding our connectivity footprint into the Balkans and eastern Europe.
And establish a gateway to south Eastern Europe true.
True access to one of the most interconnected data centers in the region.
This transaction was also a prime example of how seamlessly the classic interaction and classic digital Realty teams are working together.
Enjoy we're breaking ground on a new data center.
Two of our five biggest deals during the third quarter Lanterns, Oregon and.
And the expansion of our campus will provide runway for customer growth at the leading cloud interconnection hub in Switzerland.
We also recently acquired land parcels within one kilometer of our highly interconnected campuses, Indiana as well as Madrid.
These strategic land holdings will provide additional capacity, enabling local and global service providers to seamlessly expand adjacent to the existing deployments.
In early July we announced the opening of the first phase of our S. Three our data center Inmarsat.
Interactions more 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 in more say, including numerous connectivity providers digital media and cloud segments, along with local as well as global enterprises.
Finally in mid July we announced that we acquired the freehold to the land under interactions.
And our lawn straw suck campus in Frankfurt.
In addition, we are also under contract to acquire the next from insight.
Separate parcel within a kilometer of interactions existing campus that will support the development of up to 180 megawatts of bikes he capacity.
We believe that we are creating significant value by combining the leasehold and freehold positions on one of the most highly connected campuses in Europe as.
Well the adjacent expansion capacity provides runway to support customer growth and the key European Metro for years to come.
Let's turn to page six for an update on the interaction integration.
As you've heard me say before integration is our top priority for 2020.
And we continue to make solid progress despite the pandemic.
Both teams have risen to the occasion and have come together to continue to serve our customers' needs throughout this crisis.
It's great to see this collaboration.
And he will cover our customer wins in more detail.
The boat sales engines are working well together.
And we have begun to realize some of the cross selling opportunities we envision when contemplating this transaction.
We remain on track to meet our synergy targets and underwriting budgets.
Talent retention is also running ahead of plan at over 95% with no loss of key personnel.
Along those lines.
As we announced when we first broke the news of our combination with interaction one year ago today.
Early next year, David Ruberg will be transitioning within digital Realty from his day to day responsibilities as chief Executive AMEA, and we'll be moving into a global strategic advisor role.
In this capacity David will be responsible for the development and oversight of our corporate strategy, including the company's effort to organize and execute a program to identify and develop high value communities of interest across our global platform.
David plans remain on the board of directors of our Dutch holding company.
And he will continue to play a leadership role on certain of our key global customer accounts, bringing to bear has long standing relationships and thought leadership. In addition to supporting our team on new market in product development as recently demonstrated in eastern Europe.
Upon David's transition.
Legacy digital M.D. EMEA, Jeff tap.
And legacy interaction empty.
John Peter on time will continue to oversee the company's EMEA business.
I would like to thank David for his tremendous contributions and his successful efforts to integrate our businesses.
We look forward to benefiting from his strategic insights for years to come.
Let's turn to demand drivers on page seven.
We are fortunate to be operating in a business lever just secular demand drivers.
As a leading global data center provider, we have a unique vantage point that enables us to text secular trends as they emerge.
Our customers are solving some of the most complex infrastructure connectivity and workload use cases across network peering Hyperscale low latency high performance computing big data and artificial intelligence.
Over the past several years, we've seen a growing trend of leading multinational enterprises deploying and conducting large private data infrastructure footprint across multiple global sites.
We have conducted research built a global database and device a method to measure quantify and forecast the growing intensity of the enterprise data creation lifecycle and its gravitational impact on IP infrastructure.
We recently published our findings as the data gravity index.
Report designed to assist both enterprise and service provider customers as they shift their infrastructure strategies to address challenges presented by data gravity.
Our global data center platform is uniquely positioned to help customers address these data gravity challenges.
Given the resiliency of the demand drivers underpinning our business and the relevance of our platform in meeting. These needs. We believe we are well position to continue to deliver sustainable growth for customers shareholders and employees whatever the macro environment.
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 Bill mentioned in his comments the interaction integration is coming along on schedule and we are seeing the power of the combined organization.
More than 280 data centers in 48 Metro's across 23 countries on six continents. The power of the global platform is on full display for our installed base of 4000 global customers and growing.
Let's turn to our leasing activity on page 10.
We signed a total bookings of 89 million, including a 14 million contribution from interconnection.
Which along with the 29 million of network and enterprise oriented deals of a megawatt or less accounted for a record contribution of nearly half our total bookings.
The weighted average lease term was over six years.
We landed a record 130, new logos during the third quarter, including 40 sourced by interaction again, demonstrating the power of our global platform.
Activity was well balanced across all three regions.
The Americas in EMEA, each contributing about 40% of total bookings well Asia Pacific accounted for nearly 20%.
Singapore was the star in Asia Pacific Bell, Zurich, Frankfurt, and more say were standouts in EMEA.
In the Americas, we again experienced strength in the New York Metro area, as all Chicago and Toronto.
In Northern Virginia, well, we've leased more than 90 megawatts over the previous nine months, we saw just over 2 million gap during the third quarter.
Our active development pipeline remains 100% pre leased while our in service portfolio remains nearly 94% leased.
We do expect to get back 17 megawatts of stated the our capacity in Australia at the end of this year and.
And together with the existing vacancy within our in service portfolio. This will give us a total of 40 megawatts of available inventory to meet demand and support customer growth for the next several quarters until we're able to bring additional capacity online around the middle of next year.
Although we aren't entirely out of the competitive woods just yet.
We remain very well positioned to continue to hit above our weight.
Given the strength of our global platform and Salesforce, the large and growing installed customer base seeking growth with adjacent see on a connected ashburn campuses and finally, our ability to future proof our customers grow with our strategic land holdings, the writing the longest runway to support their future growth.
In terms of specific wins during the quarter and around the world and more say, we want a significant connectivity deal with PCCW to lend the PC subsea cable at our MRF to data center.
This is a highly strategic deal as it enables our customers to directly access is 12000 kilometer high capacity table that will provide the shortest and most direct sub sea data route from North Asia to Europe.
In Hong Kong, we have started to support a fortune 500 multinational professional services firm with the implementation of a data hub deployment on platform digital.
In London.
The class of digital Realty and classic interaction teams work closely together to add canonical a leading UK based software and I teach service provider and the publisher or have you been to a leading Linux distribution.
Ooh steroid.
Cloud gaming platform expanded their platform across western Europe in the third quarter, but the deal that involved for metro's pairs more say Madrid and London.
G. for a gaming CDN expanded their use of platform digital in four locations across North America, and Europe for their growing infrastructure demands and new AI platform.
Staying with the gaming theme in the Bay area, we help the blade group a cloud based gaming company enabled data intensive gaming well.
While in Ashburn capital online selected platform digital to support their cloud deployment development platform for gaming E Commerce education and big data.
Finally in Brussels, we are helping a whole Dell has it.
A leading global grocery retailer migrate from the legacy on Prem facility to platform digital for multi cloud access and flexibility for future expansion.
Turning to our backlog on page 12.
The current backlog of leases signed but not yet commenced stands at 229 million. This.
The step down from the 251 million last quarter reflects record commensurate to nearly 100 million during the third quarter offset by the 75 million of to bind space and power leases signed.
The lag between signings and Commencements was a bit longer than our long term historical average at roughly six and a half months.
Moving on to renewal leasing activity on page 13.
We signed a 160 million of renewals during the third quarter. In addition to new leases signed.
The weighted average lease term on renewals signed during the third quarter was a little less than two years, reflecting a mix of activity skewed heavily towards the deployments smaller than one megawatt.
Cash rents on renewals were essentially flat down.
Down just 20 basis points across all categories in cash rents on renewals above and below one megawatt were both essentially unchanged an encouraging sign for pricing.
We retained 78% of expiring leases essentially in line with our long term trend, but drive down a bit by network customer, who churned out of powered shell capacity at our downtown Los Angeles interconnection hub.
Similar to our strategy, we've successfully executed recapture of shelf space in Chicago.
We expect to redevelop the scarce inventory within a highly desirable interconnection hub into significantly higher yielding toll occasion capacity.
In terms of third quarter operating performance.
Overall portfolio occupancy improved 20 basis points, driven by fully leased development projects placed in service.
Generally in Chicago and Hillsboro.
Same capital occupancy was unchanged from the second quarter and same capital cash NOI growth was in line with expectations at negative 1.9%.
As a reminder, interaction and the Western building are not included in the 2020 same store pool, but 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 softened over the summer before setting at those lower levels, providing a bit of an FX tailwind in the third quarter relative to prior average over.
Overall FX represented roughly 100 basis point tailwind to the year over year growth in our reported results from the top to the bottom line.
As a reminder, 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 are fortunate to be primarily serving customers whose businesses are thriving in the current environment with limited exposure to sectors most negatively impacted.
Rent collections remain in line with our historical average and request for rent relief have largely subsided.
In addition to managing credit risk and foreign currency exposure we.
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 roughly a 50 basis point impact on full year EPS AFFO per share.
Our near term funding and refinancing risk is very well managed and our capital plan is fully funded.
In terms of earnings growth.
Core FFO per share was down 8% year over year, but five cents ahead of consensus driven by a beat on the topline as well as lower property taxes, and a lower share count due to late September Sip settlement of the 1 billion dollar forward equity offering.
Offset by higher than expected corporate taxes due to the higher statutory rates in the UK.
As you may have seen from the press release, we are raising guidance for revenue.
EBITDA and core FFO per share again this quarter.
During the third quarter outperformance.
We now expect to be at or above the high end of our original ranges for all three measures.
In terms of the quarterly run rate as you can see from the bridge chart on page 15.
We expect to be flat to down a nickel in the fourth quarter.
Early due to the higher weighted average share count as the additional shares from the forward equity offering will be outstanding for the entire fourth quarter compared to just six days in the third quarter.
As you update your earnings models and begin to roll forward to next year. Please keep in mind, our 2021 results well until a couple of partial period complications.
For starters, we'll of course report a full year contribution from interaction next year compared to just three quarters. This year, which we expect will help drive double digit revenue growth.
On the other hand, the sooner we return to a more normalized operating environment next year the tougher comps.
As current period results are benefiting from the deferral of some overhead <unk> and opex as well as maintenance Capex.
Finally, the additional shares from settlement of the forward equity offering in midyear ATM issuance will be outstanding for the full year in 2021 compared to a partial period in 2020.
As a result, although we expect to roll up formal guidance early next year. We are currently targeting mid single digit growth in both earnings and cash flow per share.
Last but certainly not least let's turn to the balance sheet on page 16 as expected the third quarter activity on the ATM and settlement of the forward equity offering brought leverage back down in line with our target range net debt to adjusted EBITDA step down to 5.6 times.
Well fixed charge coverage remains healthy at 4.4 times.
We also capitalized on favorable conditions in the debt capital markets and executed since several proactive liability management trades during the third quarter.
In mid September we raised 750 million of long 11 year Green Euro bonds at 1% and 300 million of two year floating rate notes at an initial coupon of zero percent, achieving all time low coupons for digital Realty.
We also retired 1.2 billion a bonds due in 2022 and 2023 at a blended coupon of 4.1% as well as 500 million of preferred equity at a blended coupon of 6.1%.
We had 970 million of cash on the balance sheet at September Thirtyth.
Although one of the preferred redemptions and one of the bond redemption straddled quarter end at approximately 650 million of that cash was used to fund those redemptions in mid October.
This successful execution against our financial strategy reflects 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 peers enables us to prudently fund our growth.
As you can see from the chart on page 16 leave.
We've extended our weighted average debt maturity out to six and a half years and ratcheted, our weighted average coupon down to 2.5%.
It's a little over 70% of our debt is non us dollar denominated acting as a natural FX hedge for investment outside the U.S.
Over 90% of our debt is fixed rate to guard against a rising rate environment.
And 98% of our debt is unsecured provide the greatest flexibility for capital recycling.
Finally, as you can see from the left side of page 16, we.
We have a clear runway with virtually no near term debt maturities.
No bar too tall in the out years.
Our balance sheet is poised to weather a storm, but also position to fuel growth opportunities for our customers around the globe consistent with our long term financial strategy.
This concludes our prepared remarks, and now we will be pleased to take your questions.
Andrew would you please begin the Q and a session.
We will now open up the line for questions.
As a reminder.
Well be limited to one question and one follow up.
Good question you May Press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Michael Rollins of Citi. Please go ahead.
Good afternoon, and thanks for that I have to ask question just curious you.
If you could talk a little bit more about pro forma revenue growth in a couple of contacts first due to look at the third quarter, what would be the year over year.
Constant currency growth by region. You know what are you looking at Europe, U.S. Asia, just to get a sense of where each of these businesses are growing and if you owned all of these assets a year ago terms of what you acquired what you've divested.
And then secondly, as you look at the guidance or the indications are the aspirations. You. Just described for 2021 can you further on pack with double digit revenue growth what would be the organic part of that versus the benefit of the acquisition and maybe walk through a little bit more detail on that.
Pluses and minuses that are affecting the core FFO per share. Thanks.
Hey, Thanks, Michael So this is Andy let me maybe try to take that in reverse.
Reverse order and I'll see if I can get all the details by region. So the I think the second question part of your question was speaking to what next year's growth looks like.
And we showed a little bit of a preview, although obviously our official guidance won't come out till early next year.
Really there's there's no on <unk> on it we were speaking to the bottom line or core FFO per share growth. So.
Theres, no apples and oranges.
Benefits because the cost of our interaction acquisition is kind of baked in the share count and obviously the debt. So it's not like.
There's inorganic growth.
Supplementing those numbers if.
If you kind of deconstruct it from the top line I mean, I think you can look at our our signings volume.
Probably the last two quarters and the best trend given that those are two quarters, where we reported digital plus interaction together for 100% of the quarters in terms of PML contribution and signings.
One quarter. This quarter is obviously, a strong 89 million.
Prior quarter was a record 140 for the two of them kind of average out to.
Low one hundreds 115 or so.
Coincidentally, our revenue in the in the quarter is now rated a billion dollar so that makes the math easy for what kind of.
Revenue growth would be kind of going forward called in the low teens, you obviously have to net art art any churn but.
But I still think you arrive at a high single digits.
Revenue number at the top line for the aggregate business.
And that obviously nets down to that mid single digits core AFFO per share growth.
Growth model I.
I think that headwind or two to obviously think about is we're.
We're having.
There's less spend this year from an obvious things less kidney.
Delaying in maintenance of Opex right, we're going to kind of just critical staffing.
And assuming we are all fortunate to.
Being a better place versus this virus next year.
I would assume a lot of those the cost is not all of them in some capacity to return.
Breaking that going back to your first part of the question and looking at.
The revenue contributions as I do.
No I don't I apologize I don't have a segment by segment.
Our personnel.
Personnel and <unk>.
Front of me, but I think I can get to the crux of your answers, we just look at our development.
Schedule, which is just under 200 megawatts of capacity.
Under construction, 56% Preleased.
Those returns.
<unk> it creeped up a little bit in our favor this quarter relative to last quarter and you can see a relative to our existing mix of business a disproportionate share of our new capacity coming online is outside the U.S. relative to our installed base.
And what's not on that schedule given its an unconsolidated joint venture is Latin America.
I think that would further amplify not.
Not math based on the activity, we're doing incenting. So.
Obviously, our growth relative to the installed base is much larger.
In EMEA in Latin America, and Asia Pacific given the amount of new capacity that we've signed we're bringing online in those markets relative to those bases.
Relative and makes sense, obviously, the north American market is by far the most mature and it is our largest portion of the pie.
Thanks Danny.
Thank you.
Our next question comes from John Atkin of RBC. Please go ahead.
Thanks wanted to ask a kind of a big picture question about energy and sustainability in that a question about that about lease expirations. So.
I wondered if you could maybe dive down a little bit into future initiatives around sustainability in any kind of future milestones that you're working towards.
And then the.
The supplemental it looks like the lease expirations next year.
Increase and a lot of that is in kind of the sub one megawatt range. Although it does tend to during the bump up in explorations in annual rent across all categories and I Wonder as we think about 2021, how do we kind of you know free.
Frame that from from the standpoint of of lease roll downs or increases in rent or churn or whatnot. Thank you.
Bill I don't know if you want to take the first part and I can take this was the second part on expirations.
Yep Yep sure Hey, Thanks, Jonathan Okay Heritage, it'll were committed to going well above and beyond minimum renewable standards.
We think that that consistent renewable sourcing efforts allow us to decouple the growth of our portfolio from the growth in our carbon footprint.
Our approach prioritizes cost competitive.
Net new renewable energy sources within the same grid regions, where our data centers are located.
We work with electric utilities to support them and bringing new renewables on the grid.
At our customers strongly prefer local net new renewals and our approach reflects that.
We do not use unbundled commodity renewable energy credits either code already Ses to meet our long term objectives.
[noise], We prize what's called Additionality at our approach that's a concept where more renewables are brought online because of our actions.
And also when we when we sign onto a project early on in its development cycle.
It's important to recognize it as an investment grade counterparty. This enables that project to both be financed and built.
Andy you want to handle that.
No question.
Yes, Thanks, Bill So I'm John John Obviously, we're still in 2021 budget season, but I don't I do look at kind of what's ahead in 2021 in terms of expirations.
As being very favorable in terms of volume mix mark to market relative to our history, which I've shared for some time and some are investor calls you you've obviously hosted.
If you if you kind of good or expiration table in our Sop I look at them really to two discrete discrete buckets. The first one being.
Call it that zero to one megawatt category.
I would say about 17% of our expirations.
In 2021, which is concentrated in our most highly connected highest pricing power sticky, albeit shorter term colocation contract bucket.
Pro forma for our combination about half of that.
Contracts coming due and not as if from legacy interaction in the western portfolio.
So we do expect to continue to see very strong pricing power there and the other half is really from our legacy north.
North American coal portfolio.
Overall, the markets or call it major Metro the London, New York City's Frank redemptions parishes in terms of the top markets.
Coming due in that bucket.
If you do look at what I think maybe.
Maybe was that the emphasis of your question was kind of looking at the greater than a megawatt bucket.
That's that category is little bit less than 8% as you can see on the sub.
And it has stepped down about 300 basis points from I think the peak was the third quarter of 18.
About a lot over just over 11%.
Other than ashburn in that category of of expirations lower north of megawatt no market other than ashburn is greater than 1%, so it's pretty diverse.
And then when you can I know its a little bit a tough comparison because we.
Broaden our definition or change our definition slightly when we changed our disclosures a couple of quarters ago, but.
You look at the rates per kilowatts to we look at the rates on Spartan contracts haven't come down call. It 15, or so dollars per kilowatt. It out in that time period from that prior peak so setting this up for more favorable.
Comparison.
And then last but not least.
As I highlighted in the prepared remarks, the really the most most concentrated expiration is just under 70 megawatts. Fortunately it is in the ashburn market, obviously, our largest market.
And probably couldn't have come at a better time, given how well our team's done in leasing that market now.
90 megawatts over the last nine months.
Really kudos to the broader global organization on that.
So I know I'm certainly we have customers right now that are anxiously awaiting for that adjacent hall in their buildings and one of our connected campus to become available so.
I think we'll be able to weather away through that after that concentration. The next largest called chunk would be less than four and a half megawatts from any single customer and half of that expirations in Santa Clara, which is a really tight market for us.
So hopefully that provides a little bit more color and a little bit more about the car convictions. What we see ahead in the expirations.
That's very helpful. Thank you.
Our next question comes from Jordan Sadler of Keybanc capital markets. Please go ahead.
Good afternoon.
So wanted to start with.
Sort of capital new.
Would be hard not to notice the move in the stock year to go and extraordinarily low cost of debt, which you guys have avail yourselves.
Digital has historically.
Been pretty active on the M&A and investment so maybe you could.
Tell us what you're seeing in the market today and the opportunity set for inorganic growth and.
Maybe I'll hand, it off to Ted to Greg to speak to Cold Brew.
Broader M&A landscape.
Thank you Greg.
Sorry can you hear me now sorry about that Jordan.
Okay, sorry about that look I think the current market, we're seeing today, which I don't think we'll surprise you're seeing demand for the data center assets is really strong.
This was previously really a niche asset class, but I would say is going mainstream or has gone mainstream.
We're seeing more core like capital come into the sector.
Given the strong supply demand fundamentals and how.
Well the sectors performed during the pandemic and both of those things I think combined with the credit readiness of the customer base all of those underlying elements strive for more core like capital.
So look we think you're going to continue to see a focus on data center as an asset class.
You know this this capital is capital that was previously invested in areas like offices or strip malls and they started to migrate towards our space I would say the environment is increasingly strong right.
Right now.
So I mean again I think we'll continue to see strong demand for the sector for quite some time Jordan on the M&A front.
I think we've seen we've seen some of these private portfolios trade.
They continue to trade at our.
At decent levels. For example, I mean, you saw the asset that we sold last quarter in the Netherlands, we sold that as it was a non core asset and we saw that we sold it for roughly a 6.7 cap rate. So look I think when you look at the overall.
Overall environment right now I would say there is a lot of interest and a lot of demand, which should bode well for the sector.
And just maybe as a follow up along the same lines in terms of let's say the next dollar of investment.
Where would you be focused from an M&A front is that increased market share in a mature market like North America or is it adding new markets.
Look I think there's I think there's I think when you look at our global strategy I think it's different for each market Jordan I think look clearly in Asia right now the way.
We have been growing as organic growth in our existing markets through land acquisition and development.
Near term and our existing land bank right I mean, we've rolled out.
Products across seven of the APAC markets you know.
For example, we created the first network neutral datacenter in South Korea, we.
We built out a campus of 100, plus mags and Tokyo I think it was five or 10, Megs and Ahsahka, we power data on a 50 megawatt building in Singapore, which is our third asset. There I think you also saw us announce our second site in Hong Kong. So clearly when we look at we look at Asia right now it's a harder.
Market to grow and right because it's much more fragmented.
But we like it I think in terms of Europe, and EMEA I think you've got to look at first thing is to look at is really our under construction pipeline.
Which we had at legacy digital as well as the legacy interaction, but you look at markets like Frankfurt, Amsterdam, Zurich Mar say, Stockholm, we have assets in each of those markets are under construction that are really being driven by customer demand as well as you know in those in that same Europe EMEA markets organic growth again in existing markets through their land.
Acquisition or development of our existing land pipeline things places like Madrid, Frankfurt Deanna in Paris.
Clearly in that market too as you saw in this press release, we'll have select dispositions and capital recycling.
You know and and you'll see some redevelopment right on our on our head our campus that Bill mentioned one of the beauties of that transaction as we get a we're going to have redevelopment opportunity for several buildings that we didn't previously owned.
I think when you keep going back going across the globe you look at South America, Andy mentioned again, it's really been organic growth for land acquisitions and development in South America again like all markets, that's really a customer driven approach. So you talked about incremental dollars.
Lot of times, where we go it's dictated on where our customers want to be right and I was there no. Two places that are better examples of that in both Chile, and Mexico, Obviously, Brazil was the same.
And then when you and come back to the you asked which is a more developed market you know again, you'll see a development in select markets, but I think you will see continue to see acquisition of a highly connected assets you know with what we would call established communities and interest in building such as the Weston.
Again, there just like in Europe, you'll see select capital recycling. So I think you when you talk about incremental dollar assess just a quick snapshot of how we're thinking about things across the globe.
Our next question is from Matt.
Deutsche Bank. Please go ahead.
Hey, guys. Thanks for taking the question. So my question, though not hyperscale. So one of your peers.
This morning was talking about getting more aggressive lowering the yield there targeting for hyperscale deals down to the 8% to 10% range. So I'm wondering if you can talk a little bit about the pricing and competitive backdrop, you are seeing in the Hyperscale arena.
In what you know whether things are getting more competitive relative to what they've been like in the past.
And then just a quick follow up on enterprise you talked about record new logo growth deal velocity.
At a time when a lot of your peers are actually talking about more growth coming.
From the embedded base. So I'm just wondering what's enabling you to win new share where the where are these new customers coming from thanks.
Thanks, Matt, maybe I'll start off and Hyperscale and I'll toss it to Korea to speak to.
Well, what I really thought was a really fantastic quarter went when it came to enterprise in particular.
Yeah, I mean, I think the Hyperscale arena, it's something that leaves excel at.
For several quarters on and here and I.
I think I got a hunch the competitor that you're referring to and.
I think I know, it's a new leadership resumed but I would say that's they've been a pretty fierce competitor for some time and aggressive I wouldn't I'm not seeing a change in the posture.
From our day to day activities.
I think it goes back to all digital our platform has been able to win more than its fair share but.
I come to the <unk> table with many ways to support these global Hyperscalers.
Whether it is being across.
Numerous countries and markets.
Were they want us to grow whether it's entering new markets as Greg mentioned side by side with them, where there is no.
On a truly established player to deliver strong capabilities.
Whether it is owning the adjacent landholdings that really allows us to future proof their growth.
And and other things like making.
Making sure we're delivering the health and safety standards they require.
And making sure were operating these facilities to.
But the level that they require as if it was their own building and they have high expectations I think digital strives to exceed across the board and I think you see that paying dividends in our results.
This last quarter as I mentioned, a second ago, our returns on our development, which are obviously weighted very much to our success within the Hyperscale Arena actually went up across a couple of markets.
And I think our success in the Ashburn market over the last few quarters, which is a hotly contested market.
And we have been able to have before 100% preleased and rather full.
Speaks to our success within that category for sure.
So I think that's kind of cops lets it I don't think there's been a real dynamic shift in the competitive landscape I would even say because the customers continue to mature and want to thinned down their buying groups.
With more global partners.
Trusted infrastructure partners like the digital but maybe you can pick it up and really speak to what you're what we've been doing on the enterprise front.
Yeah. Thanks, Matt for the question, Andy or transition, it's Jamie on the enterprise Orion's Matt.
Matt I think you ask a little bit about where the new logos are coming from and just where the enterprise wins are coming from and I'd tell Ya.
Randy Andy referenced earlier, a record number of new logos and then we're just excited about the quality of the new logos and what the growth in the future that they can drive this just think through it on the notable wins, we talked about where global markets company that was one of the world's largest financial derivatives exchanges with signed up and commenced during the quarter. We also had a mobile marketing platform that fuels.
Many of the popular mobile games studio and marketing technology, and a major participant in the investment industry. So we just had a really broad base of wins in the enterprise lately.
As you take you think through we also kind of to keep track of service exchange ports. So that went up for it and then interesting this quarter more than 50% of our new bookings this quarter as Andy mentioned, we're from deals less than one megawatt which is generally a sign that the enterprise and you are coming to you and then if you think longer term at about where we are.
Selling.
Theres a lot of studies out there that show 80, 85% of the enterprise, they're thinking about going hybrid cloud strategy and so as you think about that are migrating to hybrid clouds implies that they're going to put some of it in the public cloud, but a majority of it in their kind of co location facilities like us.
So we don't see that we see that as a as another advantage and something is going to continue to drive more more enterprise growth for us and then there's there's probably a little bit of poetic a bit but I didn't kind of the transition to a distributed architecture for the for the enterprises, which again, we're really well positioned to take advantage of so above them.
Beyond that.
We're doing a lot with our go to market that were changing that we did in the last couple of years. That's had huge success for us and then the channel that we that we built here in the last couple of years has been amazing for US too, we're getting now more than a 20% or business out of the channel. So I feel like we're really just kind of hitting on all cylinders. When it comes to the enterprise right now and until really.
Really happy.
Happy with what we're doing and we're progressing the business hope that helps Matt.
That's great. Thanks, guys.
Our next question comes from Jon Petersen of Jefferies. Please go ahead.
Oh, great. Thanks, So on Europe, I'm wondering if you could break out the how much of that leasing was a legacy interaction.
Versus legacy digital subs.
So we can get an idea of like apples to apples versus prior years, if that's possible I know it gets more difficult every quarter, we get away from that merger.
And then also.
I didn't go back and look at all your supplemental if I think this is only the second time that wholesale leasing in Europe was greater than North America. Just curious how long you think this trend of kind of strong wholesale slash hyper scaled and demand in Europe will will last and when we start to see if we start to see a shift back to to America in the coming quarters.
Hey, Thanks, John So.
To answer both those questions the the lion's share of the activity.
Landed within legacy interaction sites within EMEA.
We did have a very strong contribution from the legacy digital Colo sites, but.
But overall GAAP wise.
It was the right call up less than 10% of the EMEA contribution.
So.
Asked and which can should be expected obviously the legacy footprints are weighted.
They're like Superpremium was a fair bit larger than our legacy footprint.
Yeah.
And then when you your question North America versus EMEA I mean.
Going I think it was kind of goes back to the first question Michael Rollins It asked about we're.
We're certainly seeing outsized growth relative to our installed base in these now our non us markets, although I do at the same time.
You have to put into context, we're coming off a quarter in North America, where we absorbed a tremendous amount of capacity in North America, including Ashburn, So I'm not I'm not sure I'd read I clean direction that.
EMEA overall is going to be larger.
Especially in the plus megawatt category.
For some extended duration.
But were step definitely pleased.
With the success of our combined EMEA platform.
And I didn't go for what I'm seeing on we're not done for the year in that category, yet as well I know another way, we're differentiating ourselves with some of these hyperscalers.
It's kind of continue to support them in more and more EMEA markets.
Not just the traditional flat markets.
So, leaving the flaps has been a great place where weve had success.
In EMEA as well.
Okay, Great. That's helpful. Thank you.
Our next question comes from Sami Badri <unk> of Credit Suisse. Please go ahead.
Hi, Thank you for the question.
I just wanted to touch up a little bit on slide number 13 regarding the releasing spreads and that's.
Yes. This clearly shows a material improvement versus the last couple of quarters and I just wanted to.
Round out to see if this is essentially.
You know you're clear runway out of all the releasing spreads at least the majority of the vintages that you guys are trying to process through the last couple of quarters from prior acquisitions, it's safe to say now that this is kind of the new range and this now plus plus one plus or minus 1% range on releasing spreads for rental changed on a cash basis.
Hey, Thanks Sami so.
And then congratulations it a a here or in order in there some of the <unk> rankings. So good work good work there I'm glad to see that not recognized.
But to answer your question.
Obviously.
That those data points are reporting in our favor a bit in terms of our cash mark to markets.
You saw that in the quarter are basically flat to low.
20 basis point negative in the less than megawatt category, but basically flat across both and flat overall and.
What we put up in terms of renewals in the third quarter. We also.
Improved our characterization of our mark to markets in our guidance.
From a beginning of the year, we were down low single digits in terms of expectations for a cash mark to markets and now weve.
In the words of John Stuart are slightly negative.
So moving in the right direction for sure there I would I would put an asterisk Chicago just to be more transparent you can see in the document here.
The weightings. This particular quarter were overall much more in the call that most highly connected.
At work oriented megawatt or less type category, so that obviously blends in our fever those.
Those are locations, both legacy digital and legacy interaction with some are strongest pricing power and the overall sample set in the greater the megawatt category was certainly on the smaller side. So.
I don't think so we're ready to put the quote victory flag up behind us.
On this topic.
But I do I am taking some conviction that.
We're moving in a better direction here, which is the product in some regards of not only the market fundamentals, but also the re characterization or complexion of our portfolio that is much more diversified across.
Both us and non us markets.
More connected and highly connected and network oriented destinations.
So I do think those things in addition to the market fundamentals are helping us on the on the cash mark to markets.
Got it thank you and thanks for the note just one other follow up regarding channel that came up earlier I think if someone.
Someone set at 20% of bookings are coming from the channel and I just wanted to check on one additional details. There has this percentage of contribution from the channel gone up with interaction or was it always essentially in the 20% range every quarter and you know with interaction under the Hood does that mean that this mix could potentially increase.
Overtime.
Core you want to you want to pick on the pick up on that night or fill in with some do those as well.
Yes, Sam Thanks, Thanks for the question.
Well, what I would tell you is that our percentage of our sales from a legacy.
Digital perspective has continued to grow well over 20%.
With the interaction that might moderated a little bit, but I think it gives to your point a huge opportunity for us as we build out the channel globally and we continue to take the same learnings we've had across North America throughout the throughout the globe. So I think there is a huge opportunity for us.
I think that was your question sorry, I didn't answer it.
Got it thank you.
[laughter].
Our next question comes from Brendan Lynch of Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking the question I have seen a number of press releases recently, where you're referencing your data gravity index I'm wondering how does this change your communication with clients is it needed them or is it something that they already understand and does that lead to any different type of deploying.
And then the client otherwise would have.
Hey, what Chris why don't you share a little bit about what we're doing around data gravity and what that means to our customers and obviously Corey please chime in.
As well.
No absolutely thanks, Brian for the question no. It's a it's a very unique formula that's been evolving over 10 years and.
What it really does it have you identified key challenges facing enterprises today around the power requirements and the growth of data. So that we can design solution to alleviate it and so I think it's something that is unique to a digital has unique assets to really solve for this kind an ever evolving problem, that's being generated around the math of.
Lots of data being created and so whats unique in the fact that digital can allow customers to be in proximity to these data ocean that already exists within digital realty until they have you know the efficiencies of proximity to those data oceans and then we also provide you know most recently, we just did a a press release with path AI work.
They can now be placed in a space, where they can do analytics against that and so the artificial intelligence trend that's happening in the industry is another underpinning element of what the data gravity index represents it how customers can get in proximity to existing data and then also do analytics through AI with our unique asset.
Klaskin product portfolio and so you know it's a it's a bit of a educational basis that we really just want customers to be aware of the buyers dynamic and helps them solve for the burgeoning underpinning of data and the amount of data that's being grown and I think you know there's some great statistic out there where enterprises are.
Going to be creating more and more of their own data in a very distributed manner and so that's where you see us being able to solve for not only in our traditional types of offerings for these data gravity problems than the bridging sets of data, but also some of the emerging edge workloads, as well and being able to tie all that together.
And our comprehensive set of product offerings and interconnection capabilities, that's really what's underpinning that data gravity kind of formula and just educating our customers about I don't know core if you had anything else you wanted to touch upon.
No Chris you did a great job on the on framing up what the what it is what I would also add to that maybe is it.
Is it really helps us.
Have a point of view and Anna and some perspective for customers as they think through the changing architecture that they're going to need to go through cobot engine fell into a much more distributed world and so you're going to have to start thinking about how you handle data not just interconnection right and the data that is going to matter.
So all of US, it's what really drives all of our businesses. So if you've got you've got some customers that are curious about it I've got a whole bunch of people and team members here that are more than happy to go get engaged with yet to talk about how you can make take advantage of it.
Great. Thanks for the color.
Thanks.
Our next question comes from Colby Synovial of Cowen. Please go ahead.
Great. Thank you for taking my question one it does lend it he can get an update on the European assets out that you guys have talked about on the timing and size.
Hi perspective, I've seen some reports that might that might be moving forward and then secondly, I. Appreciate the color you gave on 2021 quite a bit though per share.
Growth of mid single digits I was writing is give us a little more color in terms of what is assumed in there as it relates to that equity needs leverage capex those types of things that obviously had a pretty big impact as well. Thank you.
Craig why don't you start with the.
Where are we on dispositions our philosophy, there and then I'll pick up in.
On the second question.
Yeah, Hey, Colby how are you.
Good good Greg.
Well look I'm not I'm not sure we've ever talked about a specific we had we sold our one asset here in in Europe here as we mentioned in the quarter.
In the Netherlands, we thought was attractive cap rate for the asset, but look I think when we thinking when you think about our philosophy or approach when it comes.
The portfolio optimization, I mean look we we've talked and we remain focused on capital recycling and portfolio optimization.
As I mentioned earlier, we think its a strong market right now.
Sell assets.
Once we sell those assets out of what you know for US again, there's still good assets, there's not just core digital.
Our ability then turnaround and recycle those proceeds and deploy capital and other assets that.
That further aligned with our strategy.
Again, we want to do smart deals that maximize shareholder value and that's that's where we're focused.
So look I think look over time, you know the guidance. We gave I guess, it's been it was an official guidance, but when we talk to the market I guess, it's been close to two years ago. We said a few billion over a few years.
We're about halfway through that now.
And look we have been pleased with the results so far but again the good news is.
We do that we don't have to do this we only do this and we think we're going to get fair pricing and it makes strategic sense for us.
Luckily Andean John and the team have the balance sheet in good shape. So that were never forced to have to do asset sales, but we do them again when it when it's a fair price and make strategic sense to digital.
And can I ask one quick follow up to that which is your own valuation has gone up since the last asset value did.
With Maple wasn't Maple check and I'm, just wondering if that factors into.
Your your decision, making when you think about that the accretion dilution aspect.
To these potential south and the cap rates you can get.
It does.
10% I mean, we look at we look and see where were trading a lot of times for these assets will run marketed processes. So we get it we get a true market check.
Yeah, It definitely definitely factors into our thinking where our stocks trading and what are what.
What our redeployment strategy will be yes, you can you can you best leave it factors into our thought and approach.
And Colby just real quick on your second question, obviously, we're not we're not pulling forward on call with our guidance for next year called 180 days or whatever it is.
But I think I think the point of.
That probably most relevant to the heart of your question was.
<unk> funding sources and thoughts right touched on a little bit, but I think I would kind of capsulated in the following snapshot obviously were.
To stand today.
And our target leverage levels.
And that's with a substantial backlog of non income producing assets.
They're going to be coming online and producing EBITDA here shortly.
To kind of grow EBITDA without much capital requirements to finish those projects.
To as.
You saw we've we've got about little north about three little over $300 million of cash sitting on the balance sheet, which is just the net of.
The capital raise relative to the debt or preferred redeemed.
So there's kind of cash sitting there not earning anything as we speak but obviously will go towards our funding sources for the next 12 plus months.
We all we have redeemed about 500 million of perpetual preferred.
In the last two months. So we do have perpetual preferred capacity and those coupons weve been quoted in or close to 4%.
Greg touched on.
Potential dispositions.
In a call it a if we get to the high end of our guidance that's call. It another $500 million of size. So also those are unlevered also contributing equity sources and then longer term.
I think we're going back to that question you just had raised of always continuing to expand our capital partners with sources of private capital, where we can put in fully value maximized fully leased long term.
Assets and retain management control.
And we have also not been shy of.
Prudently using the the ATM on the margins here. So I think we've got a lot of arrows in our quiver here in terms of capital sources to fund some pretty attractive opportunities we see.
So I'm going to front <unk> mirror here. Thanks Colby.
This concludes our question and answer session I would like to turn the conference back over to CEO Bill Stein for his closing remarks.
Please go ahead.
[noise], Thank Andrea I'd.
I'd like to wrap our call today by recapping, our highlights for the third quarter as outlined here.
The last page of our presentation.
First we further strengthened our connections with our customers.
Landing a record number of new logos in the quarter with a book of new business remarkably well balanced across customer type and geographic region.
We also delivered solid current period financial results, beating consensus and raising guidance for the second time this year.
We further extended our global platform provides.
Providing customers a gateway into south Eastern Europe.
And our runway for growth across the continent with strategic land acquisitions and new development starts.
Last but not least we further strengthened our balance sheet with exceptional execution.
Two and a half a billion dollars of long term capital raises and we used the proceeds to retire 2 billion of high coupon debt and preferred equity.
I'd like to conclude today by saying thank you.
To the entire digital Realty family.
And particularly our frontline team members in critical data Center facility Rose <unk> co.
Kept the digital world turning in the midst of a global pandemic.
I hope all of you stay safe and healthy and we hope to see many of you in person again soon.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.