Q4 2020 Digital Realty Trust Inc Earnings Call
Good afternoon, and welcome to the digital Realty fourth quarter 2000 of 'twenty earnings call.
Please note this event is being recorded.
During todays presentation, all parties will be in 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.
Due to time constraints, we will conclude promptly at the bottom of the hour.
I would now like to turn the call over to John Stewart Digital Realty's Senior Vice President of Investor Relations. John. Please go ahead.
Thank you Andrea the speakers on today's call are CEO, Bill Stein and CFO, Andy Power, Chief Investment Officer, Greg Wright, Chief Technology Officer, Chris Sharp and EVP of sales and marketing Corey Dyer are also on the call and will be available for Q&A management may make forward looking statements, including guidance and the underlying assumptions forward looking statements are based on <unk>.
Expectations that involve risks and uncertainties that could cause actual results to differ materially.
For further discussion of risks related to our business see our 10-K and subsequent filings with the SEC. This call will contain non-GAAP financial information reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website before I turn the call over to Bill I'd like to hit the tops of the waves on our fourth quarter results.
We delivered high quality quarterly bookings in terms of total volume as well as the product mix geographic split in the number of new logos landing on platform digital we extended our global platform entering Greece with the acquisition of the leading Colocation and interconnection provider in south Eastern Europe, and securing customer growth in existing markets around the world with keenly.
Land purchases of new builds.
We delivered solid financial results with core <unk> per share eight cents ahead of consensus driven by operational outperformance.
Finally, we further strengthened the balance sheet lowering our weighted average cost of debt with the redemption of high coupon debt and preferred equity while extending our weighted average duration with the issuance of attractively priced long term capital with that I'd like to turn the call over to Bill.
Thanks, John Good afternoon, and thank you all for joining us.
The fourth quarter capped off a transformational year for digital Realty.
We acquired several highly connected assets, including the Westin building in North America, and interaction of EMEA, along with the leading colocation and interconnection providers and southeastern Europe significantly expanding our platform in EMEA, while trimming noncore assets in North America.
We delivered record bookings for the full year and extraordinary performance under any set of circumstances, but particularly amidst the headwinds of a global pandemic.
Our business is increasingly global.
In 2020, we nearly doubled the number of countries, where digital Realty has a presence in EMEA accounted for more than half of our fourth quarter bookings the <unk>.
First time ever the majority of our bookings has been outside the Americas.
We more than double of our cross connect count in 2020, reflecting the growing concentration of network dense highly connected assets on platform digital.
We learned at a record number of new logos in 2020.
More than twice as many as our previous record in.
In fact, driving consistent growth in our enterprise Colocation and interconnection business.
The vibrant communities on our campus environments are attracting a growing set of new customers diversifying and solidifying our revenue streams.
Service providers and enterprises alike are strengthening their partnership with a select number of trusted global datacenter partners to help meet their growing needs around the world and digital Realty is uniquely well positioned to serve as their partner of choice.
Let's turn to our sustainable growth initiatives here on page three.
In October we formally committed to reducing direct and indirect emissions by 68%.
And indirect emissions in our value chain by area by 24% by 2030.
In line with a one five degree climate change scenario.
We set our target with the science based targets initiative, along with over 1000 organizations that are committed to reduce emissions and we also signed the UN global compact business ambition for one five degree C. Joining leading companies who have committed to ambitious carbon reduction targets.
In the early December we announced that our operations in France, we're on target to achieve a carbon neutral footprint by the end of the year and are expected to remain carbon neutral through 2030 for both the existing facilities and future expansion based on scope, one and two emissions in.
The mid December we were honored to receive NAREIT leader in the Light award for datacenter sustainability for the fourth consecutive year.
In early January we issued our fifth Greenbrier, extending our lead as the largest U S. REIT issuer of bonds committed to sustainable investments.
Our Green Bond framework is aligned with leading global best practices include.
Including the <unk> Green bond principles as well as the UN sustainable development goals and sustain the lytic as provided an independent second party opinion, including that our Green Bond program is considered robust incredible.
And transparent.
We are committed to minimizing our impact on the environment, while simultaneously meeting the needs of our customers our investors our employees and the broader society.
In terms of our social efforts.
We recently selected diversity equity and inclusion.
One of for companywide philanthropic areas of focus in addition to sustainability disaster relief and stem education.
As you may be aware NAREIT recently instituted of dividends through diversity and inclusion program, which I am honored to be co chairing along with Tom Baltimore of Park hotels, and Debbie Cafaro event to us.
Dividends true diversity, we will promote the recruitment inclusion and advancement of women minorities and other underrepresent of groups and reach and the broader commercial real estate industry.
We are also joined leaders across 85 industries and signing of the CEO pledge.
<unk> CEO action for diversity and inclusion.
An initiative that aims to rally the business community to advance the diversity and inclusion in the workplace.
And the call debate.
Trusting environment, where employees feel empowered to have discussions on these topics.
Participating in these programs and others like them is critical to our industry of future because it is the right thing to do and because we serve a broad diverse community and we believe that to help our customers prepare for the future we need industry professionals, whose insights.
And perspectives reflect the communities we serve.
We are doing our best to play a constructive proactive role.
And advancing our broader goal of delivering sustainable growth for all our stakeholders investors customers employees and the communities we serve around the world.
Let's turn now to our investment activity on page four.
We continued to expand our global platform with the acquisition of the leading Colocation and interconnection provider in South Eastern Europe.
Groundbreakings in existing markets across EMEA and.
And strategic land purchase on the continent and in Asia Pacific.
In early November we acquired Lambda helix the.
The largest carrier neutral colocation and interconnection provider in Greece led by an accomplished management team, who will continue to manage the business.
As leading service providers continue to expand their footprint, we expect Greece and other parts of the south Eastern Europe will be major beneficiaries.
We are well positioned to capture the key cloud and connectivity deployments that will accelerate the region's digital transformation.
In Denmark, we began construction on our third data center adjacent to the two existing facilities on our Copenhagen campus and offering direct access to leading global cloud providers numerous networks Internet exchanges in a transit Atlantic subsea cable system.
We also broke ground on of new data center in Zurich.
We've seen robust demand from leading global service providers.
The expansion of our Zurich campus will provide runway for customer growth at the leading cloud and interconnection hub in Switzerland.
We also acquired a land parcel within one kilometer of our highly interconnected campus in Vienna.
And halfway around the globe in Sydney, we are under contract to acquire two parcels that will support the development of up to 250 megawatts.
The strategic land holdings, who will provide additional capacity, enabling local and global service providers to seamlessly expand adjacent to the existing deployments.
Let's turn to page five for an update on the interaction of integration.
The successful integration of interaction was our top priority for 2020.
And we made excellent progress despite the pandemic.
We've built a solid foundation for the assimilation of our businesses and we are well on our way to achieving the objectives and synergies we outlined when we first announced the transaction.
I am proud of what we've accomplished to date and excited about our prospects as we move into the implementation phase in 2021.
When we announced the transaction we stated that the combined company would have enhanced capabilities to address.
And so the public and hybrid cloud architecture requirements of our global customer base that would allow us to build upon each company's current relationships with leading global customers, while also enabling us to effectively compete in the broader target markets.
The early results are very promising.
We've enjoyed excellent success with global platform providers and early cross selling wins have surpassed expectations with numerous referrals between the sales teams.
The significant embedded growth potential was another key element of the interaction of investment thesis.
We believe the combined organization has already created significant long term value by executing on the existing development pipeline acquire.
Acquiring the freehold to the land under key positions in Frankfurt and Paris.
And securing land in key markets to support future growth.
Lets turn to demand drivers on page six.
We continue to be fortunate to be operating in a business leverages secular demand drivers.
As the leading global data center provider, we have a unique vantage point that enables us to detect secular trends as they emerge.
We recently introduced the data gravity index, which measures quantify and forecast the growing intensity of the enterprise data creation lifecycle.
And its gravitational impact on global it infrastructure.
This groundbreaking index is a byproduct of our market intelligence analysis as well as our obsessive focus on understanding customers deployments and supporting the evolving infrastructure needs.
Recent third party research continues to support the growing relevance of data gravity.
According to the market intelligence firm IDC.
80% of the worlds of data will reside within enterprises by the year 2025.
A $4 51 research global It leader survey recently found that 87% of.
It leaders will need to maintain local copies of critical data at global points of presence to meet regulatory requirements.
We continue to see these indicators as enterprises expand their private data infrastructure deployments.
And integrate data exchange with the adjacent business and service provider partners across our global platform.
Digital Realty recently received Frost and Sullivan APAC datacenter strategy Innovator Award.
<unk> platform digital for providing an innovative global platform, enabling enterprises to scale digital transformation in a consistent modular fashion and addressing the unique infrastructure requirements for integrating private data flows across multiple public platforms.
Yes.
We are honored by the strong validation of our platform and our market leading innovation to meeting the needs of our global data center customer base.
Given the resiliency of the demand drivers underpinning our business.
And the relevance of our platform in meeting these needs we.
We believe that we are well positioned to continue to deliver sustainable growth for customers shareholders and employees whatever the macro environment may hold in store.
With that I'd like to turn the call over to Andy to take you through our financial results.
Thank you Bill, let's turn to our leasing activity on page eight.
We signed total bookings of $130 million in the fourth quarter, including a $12 million contribution from interconnection.
The network and the enterprise oriented deals of one megawatt of less totaled $31 million building upon the consistent momentum throughout the year and demonstrating the growing success of platform digital as we continue to capture a greater share of enterprise demand.
The weighted average lease term was over eight years, we secured 120, new logos during the quarter with more than half of those new logos landing in the EMEA again, demonstrating the power of our global platform.
The EMEA accounted for more than half of our fourth quarter bookings.
Asia Pacific contributed over 15%.
As Bill mentioned this was the first time the majority of our bookings were outside the Americas.
In terms of specific wins during the quarter and around the world.
A rapidly growing cloud based cyber security provider selected platform digital from multiple environments in London, and Boston to facilitate modernization and embrace high performance compute technology, while maintaining an exceptional user experience.
In New York the <unk>.
Digital realty's team's deep understanding of the global retailers growth strategy enabled us to tailor a solution for the Americas markets on platform digital.
We also overcame lockdowns and the international travel restrictions to demonstrate the to a digital telecom provider, how they can leverage platform digital to meet their current and future growth requirements and existing and targeted markets at the required pace.
A rapidly growing gaming platform expanded their edge to rewire, the network and optimize data exchange with third party clouds the growth of their existing footprint with us in northern Virginia, and the new deployment in Chicago.
Likewise in Chicago, a global exchange, operator leveraged platform digital to extend their access into our highly interconnected community.
In Singapore, two leading global financial services firms expanded with digital Realty due to our platform offering and long history of operational excellence.
The software developer selected platform digital to expand their proprietary cloud offering into the region.
Turning to our backlog on page 10.
The current backlog of leases signed but not yet commenced reached an all time high of $269 million the <unk>.
<unk> up from $229 million last quarter reflect $78 million of commencement during the fourth quarter.
All set by roughly $118 million of combined space and power of leases signed.
The lag between signings and Commencements was a bit longer than our long term historical average at eight five months.
Moving on to renewal leasing activity on page 11.
We signed $156 million of renewals during the fourth quarter. In addition to new leases signed.
The weighted average term loan renewals signed during the fourth quarter was a little over three years, reflecting a roughly even split in the mix between deals above and below one megawatt.
Cash re leasing spreads on renewals were plus 1%.
And cash rents were positive one renewals above and below one megawatt and encouraging sign for pricing.
We retained 79% of expiring leases in line with our long term historical average.
In terms of fourth quarter operating performance overall portfolio occupancy improved 40 basis points.
Driven primarily by leases commencing on recent deliveries in ashburn and the sales of vacant building in Amsterdam.
Same capital occupancy was down 40 basis points from the third quarter due to no move outs, partially offset by positive absorption in Silicon Valley and Chicago.
Same capital cash NOI growth has continued to improve since bottoming in 2019 and picked up slightly the negative one 6% in the fourth quarter.
For the full year same capital cash NOI growth was negative one 9% or a little over 100 basis points better than initially expected.
As a reminder, the Westin building interaction Lambda helix and <unk> are not yet included in the same store pool, but we expect each of these acquisitions will be accretive to our organic growth going forward.
Turning to our economic risk mitigation strategies on page 12.
The U S dollar softened in the second half of the year, providing a bit of an FX tailwind in the fourth quarter relative to the prior year average overall.
Overall FX represented roughly a 50 basis point tailwind to the year over year growth in our reported results.
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.
With limited exposure to the sectors most negatively impacted.
Rent collections remained in line with our historical average and requests for rent relief have largely subsided.
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 roughly a 50 basis point impact on our full year <unk> 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 the <unk>.
Fourth quarter core <unk> per share was down <unk>, 6% year over year, but eight cents ahead of consensus driven primarily by operational outperformance.
For the full year core <unk> per share came in 'twenty, two or nearly 4% ahead of our initial guidance.
As previewed on our third quarter call, we expect to deliver double digit revenue growth driven by a full year contribution from interaction and the record Colocation and interconnection and overall bookings in 2020.
We expect the EBITDA margin will remain in line with the fourth quarter throughout 2021.
As Bill mentioned, we remain on track to achieve the synergies we underwrote on the interaction transaction, although the rationale for the deal has always been accelerating revenue growth rather than realizing expense synergies.
We've already made great strides on our financing plans for the year with the highly successful $1 billion Green Euro bond offering in early January and five eights. In addition to solid progress on the capital recycling front.
As always we expect to remain nimble for the rest of the year and we may look to capitalize on favorable market conditions to lock in long term fixed rate financing at attractive coupons across the currencies that support our assets to proactively manage the future liabilities.
In terms of <unk> per share guidance are the forecast is largely unchanged from the preliminary outlook. We previewed on the third quarter call all of the year over year bar has been raised in the interim given the outperformance in the fourth quarter at the midpoint, our 2021 guidance represents growth of approximately.
<unk>, 4%, which includes near term dilution from capital recycling.
In terms of the quarterly run rate, we expect the split between the first half of the year in the second half of the year to be approximately 49 to <unk> 51.
In other words as you can see from the Bridge chart on page 13, we expect the dip down by about a nickel in the first quarter than the ramp ups fairly steadily over the rest of the year.
In terms of the quarterly dividend distribution policy is ultimately a board level decision given the continued growth in our cash flows and taxable income we would expect to see continued growth in the per share dividend just as we have each and every year since our IPO in 2004.
Last but certainly not least let's turn to the balance sheet on page 14.
During the fourth quarter, we continued to execute on our financial strategy of <unk>.
<unk> the menu of available capital options, while minimizing the related cost and extending the duration of our liabilities to match our long lived assets.
Fixed charge coverage reached five one times, reflecting the results of our proactive liability management.
Net debt to adjusted EBITDA was slightly elevated at six one times as of year end, but is expected to come back down in line with our long term range over the course of the year through a combination of proceeds from asset sales and growth in cash flows as leases commence from the record leasing activity in 2020.
In mid October, we redeemed 300 million pounds of our 475% Sterling bonds due in 2023.
We also redeemed $250 million of high coupon series D preferred a five and seven eights.
In early January we raised $1 billion of tenant of half year of Green Euro bonds at an all time low coupon for digital realty of 0.625%.
We also retired $350 million of 275% bonds due in 2023 and repaid all three of $5 to $30 million outstanding of the term loan due in 2023.
The successful execution against our financial strategy reflects the strength of our global platform, which provides the access to the full menu of public as well as private capital sets us apart from our peers and enables us to prudently fund our growth.
As you can see from the chart on page 14, we've extended our weighted average debt maturity out nearly seven years, while ratcheting, our weighted average coupon down to two 3%.
A little over half our debt is euro denominated, reflecting the growth of our global platform post interaction and acting as a natural FX hedge for our investments outside the U S.
90% of our debt is fixed rate to guard against a rising rate environment and 98% of our debt is unsecured providing the greatest flexibility for capital recycling.
Finally, as you can see from the left side of the page 14, we have a clear runway with nominal 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'd be pleased to take your questions.
The Andrea would you please begin the Q&A session.
We will now open up the call for questions.
A reminder, participants will be limited to one question and one follow up too.
To ask a 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 two.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from John <unk>.
Skins of RBC. Please go ahead.
Thank you.
So the first question regard as regard regarding leasing and you talked about who will go capture but I wondered of your largest kind of multi megawatt deals any kind of highlights by geography or type of company.
And then.
The second question kind of gets too.
M&A and divestitures the end.
New market entry and kind of any kind of the highlights to call out in terms of your appetite for any of those types of projects.
Heading into 2021.
Yeah.
Hey, Thanks, John I can probably kick it off on the question on the multi megawatt side and then I'll.
I'll hand, it over to Greg to speak to M&A.
So.
Very pleased with the results overall in terms of <unk>.
The diversity of the platform really shine through in both categories.
Not only the less of the megawatt in the interconnection, but also on the scale of Hyperscale plus.
If you do a quick kind of run through the regions.
EMEA.
The first time more than 50% of the signings.
It was very diverse there were six different markets across EMEA that did a north of a megawatt deal each so as London Paris Marseille.
And two others because of the escape in my mind.
And then over in the Americas, we had.
Both in Ashburn and also in Hillsboro.
And the cast of characters for all of these are a combination of the the major csp's.
SaaS providers.
And the call it the B to C hyperscale as well.
And then last but not least.
I'm pleased with the results in both Brazil.
And we signed our second customer in the Santiago, Chile, and the Hyperscale arena on the other top CSP.
And then last but not least how the project with a top three CSP down in Sydney, So really diverse contribution from numerous major metros.
Now I'll turn it over to Greg the pick up on the M&A piece.
Actually just continuing on that as you look at the pipeline into 2021, whether you. Andy of course, you would want to comment but is there any kind of change in procurement activity or just the dialogue with your customers that gives you a particular confidence around repeating some of the recent momentum.
I'll talk about Macquarie.
Hey, Jonathan this is Cory I appreciate it just broadly on the tail on all of it just tell you that were happy with the momentum of the success. We had in 2020, we see that continuing.
I think Andy mentioned to you the regional variances that we've had meaning first time that EMEA is our largest.
<unk> per sales and for bookings there. So that was really good and positive. So we feel good about it and then regarding the industries that I think you might asked about those that of work that are taking advantage of the current work from home are.
We're doing more and more quickly.
So we're happy about that and how we're supporting them and then also we're seeing strength from those industries of our strong prior to the the pandemic cloud digital media et cetera.
And then those that are being kind of suffering a little bit from it we're seeing them maintain their it services and they still got to continue to have our support to go after their mission critical needs. So we're happy about it and as we mentioned earlier the year on year record growth from new logos Standalone really good success from digital and.
Interaction as we combine the two groups so real happy with the funnel.
Okay.
And I'll now hand, it back to you over to Gregg sorry.
Yes.
I would take it okay. Thanks Corey.
Hey, John Hope you well, let me I guess in the order. Let's go M&A. First then we can talk about the divestitures, which are somewhat related.
Look I think with respect to M&A as we've said before look we remain focused on integrating interaction.
Doing a few of tuck in acquisitions that we would call them.
Like Altice in Croatia, and Lam the helix in Greece.
Look we think the M&A.
<unk> is likely to be more episodic net annual I think we've always said that.
And look as we look at the M&A environment right now, we would say, it's probably gotten more competitive over the past year as additional capital has come into the space.
But we also think this could serve to benefit us as we seek to dispose of assets and our capital recycling program.
I think look with respect of our divestitures of capital recycling.
Terry for asset sales remains consistent with our prior commentary, we're seeking the sell noncore assets and select non core markets.
To date with all of these criteria and dispose of the various PDP assets and other quality standalone assets that really just theyre not part of our connected community.
Excuse me connected campus strategy.
We're about 1 billion of the half through the multiyear guidance, we gave which was the sell a few billion dollars of assets over a few years.
The good news for US is we don't need to sell these assets. So we have the ability of the strategic.
The only off of these assets when it's likely that we're going to receive fair market value for the assets and.
And we do expect of these asset sales.
That will recycle that capital and will provide some of the capital needed for our development program this year and going forward.
Again, that's really the state of play again tuck in acquisitions are going to be more focus deals that are strategic.
But as both Croatia in Greece, where they're highly connected assets in the regions.
The assets combined with the management teams, providing strong launching pad for further activity in the region and Thats really the way we that's the way we look at it and we will continue to try to find similar.
Similar deals like these two to the extent we can.
Mhm.
The next question comes from Michael Funk of Bank of America. Please go ahead.
Yes. Thank you all the questions to add a few if I could.
First I noticed the GAAP on the GAAP base rent per square foot.
Down across the regions quarter over quarter can you comment on that.
Hey, Michael.
I think theres a few two items to note in there in particular.
I think you're mostly talking about the later than the megawatt because I thought we had pretty strong pricing power on the lesson of megawatt category more enterprise network.
Workloads landing of those sites.
On the on the greater than the megawatt.
It's a little bit of apples and oranges Burns Inc.
Comparing each market quarter over quarter.
The better off going back to the second quarter in terms of more of it.
Apples to apples comparison volume and then.
In the fourth quarter, we had.
On a particular deal structure.
<unk> made that skewed that stat lower in terms of reported results.
I recall, a year or two ago.
In the Ashburn market, we did a almost build to suit type project, where we built a rather lower 36 megawatt shell for a customer that was.
Paying us for that shell on the long term lease and then we dropdown built out the suite six megawatt or so increments over time. So as those does take downs of those suites happened you are only getting a fraction of the entire economic cost for that customer.
Flow through our leasing stats, because we're already already recognize the signing of that already realized in.
The return on the shell.
And that phenomenon happened actually in North America, and also in Asia Pacific This particular market.
Physically I mean, it's great tool.
<unk> of our tool kit that I would say not all competitors can really Uh huh.
Have really giving the customer the runway that the desire and the timing flexibility.
And digital with its scale and breadth of portfolio and as well as our land banks are able to kind of structure of those type of transactions debt.
I think there is a strategic advantage for those type of customers.
And then Andy on the <unk> growth growth for Etsy provided.
Maybe helps you guys could quantify the impact from the potential of sales. The 600 million two of $1 billion can you quantify that for us.
And so we reiterated.
Really the same quantity of capital of slightly for this year as last year.
We feel good.
Nearer term on the lower end of that range, it's a contributor to the call it <unk> to <unk> bridge.
Bridging of the of the quarterly rhythm of <unk>.
Just kind of rough math, if we kind of just hit the low end of that range $600 million use the same type of cap rate, we were using for the last outright sale, we did call it.
Mid to low six cap.
You called about 40 million of NOI on our share count could be as high as 2% now that's assuming you sold the entirety of those asset the first day of the year and you didn't have any redeployment of proceeds so when.
When you kind of use the appropriate calendar of <unk> based on our expectations and also redeploy those proceeds either paying down debt near term or in lieu of really equity.
I would kind of ballpark it in the 5200 ish type of basis point headwind.
So our year over year growth that is.
The next question comes from Matt nickname of Deutsche Bank. Please go ahead.
Hey, guys. Thank you for taking the question.
Maybe just the <unk>.
One that the follow up to the prior question and then one other operational one maybe the follow up.
If I think about the $6.
The 45 implied core at that full at the midpoint, that's essentially taking the <unk> well the $1 61 and annualized Inc.
So Andy of maybe I want to better understand the capital recycling, that's assumed but has not happened yet so I just wanted to clarify.
Then secondly, more related to Hyperscale in the U S. If you could if somebody just give an update on the price gain competitive backdrop youre seeing within hyperscale and whether deals are good.
Getting any more or less competitive than they've been in the past. Thanks.
Sure. So two elements first on your base.
We did have we definitely had some outperformance in the fourth quarter that we highlighted in the prepared remarks, some of that was call. It operational related just commencing revenue faster, but some of it was out of our control and FX was a tailwind as you saw the U S dollar kind of plummet and then retrench.
Beginning in the 2021.
So that's the makes a little bit of an apples and orange comparison between <unk> and the the run rate for 2021 day.
The answer to your question on the dispositions, we have other than the small one off asset for the $6 million, we have not executed on any of the next leg of capital recycling, yet we framed as a in a low range of 600 million of high range of a $1 billion.
And we expect the low end of that range to be execute upon in the pretty near term future here, hence when you sell the quantity of assets.
Even at a 665 cap rate you of immediate loss of net income.
Just to remind.
You Madden and the broader audience.
The dilution or near term.
We think a is offset by longer term accretion, we're selling non core slower growing parts of our portfolio.
And using that capital of often in lieu of equity to fund our growth and to.
And to that dilution is baked within the approximately 4% year over year growth. So were arriving at the year over year of growth comparison.
Of a outperformance of the last at the back half of this year and absorbing that dilution. So it's not incremental to the guidance that we've already laid out.
Got it and all of the Hyperscale.
Oh, Thank you for reminding me the first.
Question.
My question was about Hydroscope pricing and the like.
<unk>.
Yes, the pricing and competitive nature of because we've heard maybe some anecdotes thing.
It was maybe on the margin Inc.
Beginning to get a little bit better.
I'm just curious to get your take in terms of of what you've seen.
Yeah, I think the.
A couple of data points that I would say point to or.
Continued confidence in the opportunity set and really differentiated offering that I think allows us to outside of our competitors, especially any floods were new.
Our competitors.
The one you've seen now a string of quarters in a row, where we have a global platform offering for the Hyperscale <unk>.
And to address their pinpoints future proof their growth deliver operational excellence across now 49, metros six continents 24 countries. So.
The the trend has been our friend in terms of the success. There I think if you look to our development pipeline that stepped up about 13% quarter over quarter, now 220 megawatts or so under development still about 55% pre leased.
You got to imagine there's a lot of hyperscale business and that I think the returns of.
<unk> been pretty steady in that category, if not stepped up in certain regions.
I'm, not saying or blushing off debt. Some of this business is competitive I think our most competitive market is certainly the U S.
And that market I think our value proposition.
It's allowed us to even in a challenged market like Ashburn, do particularly well with all of our customers, but hyperscale is in particular.
And.
I think if you then look where the pipeline is going and where the growth for our business going.
We're seeing more and more opportunities to generate higher returns.
From both our colocation or connection offering, but also serving those hyperscale or in places, where we have a really differentiated value proposition.
Certainly tighter markets like the Santa Clara in the U S, but international markets like Frankfurt, Marseille, Brazil, and Singapore as well so listen.
Not saying that Hyperscale became its an easy business overnight, but feel very good about what we're delivering to those customers.
The next question comes from Jordan Sadler of Keybanc capital markets. Please go ahead.
Thank you and good afternoon.
And could you just elaborate on the.
The downtime on the agency a little bit.
Sort of baked into the sequential net.
The decline youre pointing to on page 13.
Hum.
I'm not sure if that is it.
Factored into the one 3% churn you saw in the fourth quarter or.
Is that sort of hitting elsewhere.
Yeah, I would say that the fourth quarter actually.
And then I'll get to the first part of the question Jordan the fourth quarter actually was pretty pleased with the customer retention.
And pricing dynamic.
In both categories.
In terms of pricing of both carriers in terms of retention of potential called in the in the eighties.
And positive Mark to markets.
For both above and the blessed the megawatt.
The impact that.
We see hit in 2021, but certainly the first quarter of 2021.
It really goes back to.
What I mentioned in my.
Our call a quarter ago.
We ended the year with our largest amount of non retained capacity in any given market.
Just under 17 megawatts coming back to us.
It literally came back to us the first of the year of the customer had.
Both physical and economic occupancy of the suite.
Will the year changed.
It's across multiple suites across numerous campuses in ashburn.
We're going to refurbish the capacity and getting it back out to the market of that 17 megawatts.
I can tell you we've already released two of new customer haven't commenced yet, but they are selling for.
Two three megawatts.
We're likely to take another two three megawatt suite and convert that the prototypes co location given the success of our offering in the market.
And then we've got a pretty strong pipeline for those other opportunities of vacancy and it's it is a bit serendipitous in our favor that we've had such success in ashburn. Despite the broader market challenges is that we're being able to focus all of our efforts in lieu of re leasing that capacity because of our newest building doesn't come online until roughly the first a J.
Hi.
Certainly taking a temporal hit to 2021 in the first quarter.
And what's the.
The biggest chunk of.
Of the 17 Meg you mentioned two three has already been re leased that contiguous but the biggest contiguous chunk and then.
Just back to the five <unk> is that the bulk of that coming from.
This departure.
And then what and how will this one maybe you could talk about <unk> and <unk> 2021 churn guidance overall.
Okay.
So let me try to unpack a few of them there. So the the biggest hole is the two three megawatts so but there's numerous contiguous holes. So if we wanted to if a customer wanted to have numerous contiguous holes with certain customers value that I think we can string.
Six or so of those together.
I'm sorry, the caveat.
I'm looking at the wrong scheduled here, we can we can strength I think three of those together of contiguous data hauls, but each pod is roughly a two three part of.
That is the largest driver.
To the <unk> in terms of the quarter over quarter step down.
Jordan can you just remind me of the second part or the third part of your question. There just just just churn.
So what what do you think if churn was one point.
Three in the <unk> what would it be in <unk> and then just maybe full year expectation, while we're at it.
The the.
So that's in the greater than a megawatt capacity churn our lesson of megawatt capacity churn looks like it's going to be basically.
In line.
And.
I don't have the implied first quarter churn I think the the 80 steps down to on a full year basis the call it like 69% for the full portfolio.
The greater than the megawatt territory.
But you could you can use 70 megawatts of the proxy you can see our quantities of explorations I just don't.
I don't have all the ingredients to give you the exact math on the first quarter measurement right here.
The next question comes from Jon Peterson of Jefferies. Please go ahead.
Great. Thanks, just a couple from me so the <unk>.
Current capex and the fourth quarter looked a little elevated I'm wondering if there's just anything that we should be thinking about there and how it will trend in the next year on a quarterly basis.
Yes.
Not just for recurring Capex, but I would say some of the opex as well.
Youre seeing some of the Covid fluctuations if you look at the I think it's scheduled 28 recurring capex stepped down to 30 as low as $34 million in the first quarter of 2000 $38 million in the in the second quarter 'twenty the back up to $53 83. So we did have a little bit of of catch up period.
In terms of call of timing as you can see John our guidance for recurring Capex for all of 2020 is roughly the same numbers as prior year. So 220, I believe of $230 million. So.
So we had a little bit of fourth quarter catch up.
In there just the.
Major items, we had a.
We had some refreshed capital on some second generation space debt.
I think we are converting the colocation.
When a PB or of Tcf customer had exited so that.
That kind of hit that.
The first generation so it hits through the recurring Capex.
I think that's the product of.
The maturation of our portfolio and re customer in to new types of customers different shapes of forms.
But I Wouldnt you can't just annualize out of this next year you got look toward the guidance table for more appropriate view for the full year 2021.
Okay, Alright, and then kind of on the asked about market rents I mean do you guys have a sense, maybe if we just think about your greater than one megawatt tenant do you have a sense of where the mark to market is on in place rents versus market rents and then I know you talked about your your leasing spreads being relatively flat this year.
But I mean.
The market dynamics that youre seeing what are your expectations for rent growth.
Over this year and over the next few years every army to a point, where we can start to see.
Rent start to grow again.
Yes.
I think there's a couple.
Relevant data points to look at that there's obviously the activity of what youre seeing coming through our renewal activity both in the fourth quarter as the trajectory throughout the year and we had consistent progress to the point, where we had positive plus megawatt one megawatt cash renewal spreads in <unk>.
Some of the stronger markets were renewed and shining through in the air Santa Clara was the stand out in that renewal.
We have not our guidance includes a slightly negative.
Outlook for the cash mark to markets, but.
I know we use the language there instead of exact numbers I think our languages.
Less.
Less conservative than it was last year, So I think we're moving into better territory.
If you look at just the lease expiration schedule in 2021.
I think we're getting into a better place both in volume mix and mark to market relative to recent history.
You've called out, particularly the greater the megawatt category, which is call it seven and a half as a percent of our expirations down from a high of call. It over 10% at one point, it's pretty diverse with no market other than ashburn being even greater than 1% and the mix geographically.
Youre seeing a sizable part component from not only Santa Clara Titers U S market, but also our international markets in the coming contracts and then last but not least just looking at the new signings because the more of a forward indicator of what the come.
The by and large in the greater the megawatt.
Category.
We saw pretty good firmness in the price.
And I would say strength in the Americas were.
Call It New York Chicago.
One of the whole schedule than my bad.
In the greater than the megawatts, you had pretty much stability in both northern Virginia, and Portland again, it goes back to that structure I mentioned previously where the customer is taken down sales at pre committed rates at their discretion, so really not room for negotiation there and the desire from the grow with adjacency and then EMEA, we saw strength in the greater the Meg.
Megawatt plus category from Zurich, and Marseille, where particular standup markets and the last one at least Singapore.
That market has been of star and I think you're going to see that continue into 2021 and that is certainly a market, where we're doing the size of amount of megawatt plus activity as well.
The next question comes from Michael Rollins of Citi. Please go ahead.
Thanks, and good afternoon curious on two things if I could the first is if we turn to page 26 of the supplemental.
You provide the development yields by region that you're expecting.
And just curious for your take on the movement over the last few quarters.
Where it seems like North America has moved up a little bit EMEA is down a little bit.
Asia Pac near the level on this page.
Where do you see that going over the next couple of years based on the activity and the demand in the pipeline and just separately I was curious to go back to one of the comments I think bill made it at the beginning of the call.
Describing that some of the larger customers are choosing a select number of global data Center partners. Im curious just on that theme are you seeing a greater percentage of your large customers embrace multiple providers or are you seeing more of a winner take all evolution.
Where one data center provider could take the disproportionate share of business from some of these customers.
I'm Gonna give build the honors.
The answer the second part of the question first and then I'll come back and do the the numbers questions on the development cycle on page 26.
Thanks for the question.
We're definitely seeing a shrinking of the of the number of participants in the business.
I think that that's <unk>.
The place to to our strength, but I think that the COVID-19 in particular has.
As demonstrated the importance of having a very credible counterparty on the <unk>.
Other end of these.
These partnerships and we've received excellent feedback from our partners, particularly among the hyper scalar is a bit about our.
Our procedures around.
The.
And not just the COVID-19, but.
Some of the other social unrest that has occurred in the last several quarters.
Yes.
And then Michael one of your second question I mean, I think there's a few observations and some of this is repeat of the development pipeline.
One when you're missing the from here because it's a unconsolidated.
Self managed joint ventures of centers not on the schedule, but we've seen tremendous activity.
In Latin America.
Including a continued growth in Brazil not.
Not only of our first but the second customer into Santiago, Chile and price.
The spirit of the same in terms of our second customers landing in the Mexico City.
On the schedule of the volume of stepped up about 13% of 200 and.
21, five megawatts the.
The pre leasing has remained roughly intact at 55%.
You go market by market.
I think you're accurate in seeing this trend of.
A larger and larger share of our new capacity of capital going outside the United States.
The Americas region is a little muted because we delivered capacity there was a 100% pre leased and ashburn and the the shell.
We'll show up with megawatts on the schedule.
I think of the quarter or so just hasn't popped in here, but I still think of the thesis is constant.
And Youre seeing also.
Year over year improvement on the on the yields in the Americas.
And I think another relevant data point is the non U S markets are also becoming more diverse in EMEA.
As I rattle off of the very beginning of the call rather than the eloquently.
Across six different EMEA markets with north of one megawatt signings you can see in the schedule from Amsterdam dessert numerous markets with capacity coming online.
And I think the same phenomenon, it's gonna happen hours continue to happen in the APAC region as well.
Yeah.
Thanks.
The next question comes from Sami Badri of Credit Suisse. Please go ahead.
Hi. Thank you. The first question is on interconnection you reported the interconnection of the backlog, but can you just give us some color in terms of how that backlog is mapping to the respective regions. That's the first one and then the second one is.
Named Bill and the anyone can really address this is digital adopted.
Adopted maybe of different philosophy on speculative construction versus when the building with the pre leases in hand hasn't has kind of the playbook changed a little bit just given the very rapid and high volume of leasing that tends to come from pretty big cycles that we've seen has the strategy kind of changed a little.
And.
We'll leave it at that.
Yeah.
Bill do you want to again, we'll try to do the same format you take the second question first on the strategy and then I can go back to the interconnect connection detailed.
Sure.
I would say that.
The strategy today as we.
We don't really go into.
Any of these new markets.
Without a pre lease in hand without an anchor.
So.
That's what we've done in Chile, that's what we've done in Mexico.
Now we did buy existing business is obviously in Croatia, Greece, So that's different.
But in general I think we're looking for one of our good customers.
Probably more than one to tell us they really want us to go into that market and then in those slide eight.
An anchor lease with us.
As far as the existing markets are concerned.
Sure.
The desert almost always expansions with existing customers.
And.
And that business to be quite Kansas as fast and furious.
In some instances I would say the challenge is just keeping up with the.
The end in existing markets with the.
Particularly the Hyperscale.
And then Sami on your question on interconnection.
So quite pleased with the interconnection signing contribution.
Yes, it step down quarter over quarter, but it was up 4% from the prior quarter and <unk> was quite of a outsized winter in terms of interconnection signings.
The cast of characters or <unk>.
Similar in terms of the.
The type of verticals industry wise that we experienced in the past regionally.
Some of the stores I would say the EMEA region.
It was definitely a standout.
This category.
Not just in the fourth quarter, but on the full year basis.
I believe Theyre interconnection revenue was call it up into the double digit type growth trajectory.
I also I know you.
The quite asked this question I also really look at these things is part and parcel of what the less in the megawatt signings.
They also often go hand in hand.
Terms of where most of the interconnection.
Interconnection rich type customers day, one and certainly post lending with digital.
I would say.
We put up.
Third quarter or fourth quarter of ROE of consecutive growth in that category of a really strong <unk>.
We put a record of you up in call of the interconnection and less of the megawatt co location.
<unk> category.
Those were also led by EMEA, but APAC played a great role, we've once now our colocation offering and Osaka Singapore.
In Hong Kong, and our first carrier neutral offering in Seoul, South Korea.
Right around the corner so great great early days in that category as well regionally.
So we're definitely expanding the breadth of the product offering across more more and more markets and pleased with the success, we're seeing in both the interconnection and the cash.
Enterprise and network oriented lesson of the megawatt category.
Got it thank you Bill and Andy and actually just one quick follow up and this is pertaining mainly to <unk>.
Europe and since you guys have now kind of integrated interaction and you've looked at some of the pricing in each of the respective markets do you expect the cadence or at least the.
The stabilization of pricing work.
Maybe that's the wrong way to phrase it the right way to phrase it is marking it up slightly right to reflect pricing that looks more comparable to U S markets do you guys see.
The the rate at which you guys are increasing is that starting to moderate or is pricing relatively flat and consistent and not really changing our walnut much in Europe I, just want to understand kind of like what's going on from a local type of pricing perspective.
Think of them, mainly referring to the zero to one megawatt type leases specifically.
Thanks, Jamie.
The very elegant way of.
You're asking are we going to increase cross net prices in Europe, I think but.
I'm going to I'm going to pass this over to Chris and the second but I think we're very focused on delivering as much value to our customers in terms of increased performance increase.
The increase security increased efficiency.
And do that in a global platform offering here of platform digital so.
It's not a episodic one market has to match and other market, we're very attuned to the customer needs and also us supply demand nature in each market, but maybe Chris do you want to talk a little bit about our product roadmap and.
How pricing relates to that.
Absolutely appreciate it and I appreciate it the Sammy definitely we look at driving value to our customers through our global interconnected platform, which.
Bill stated in his prepared remarks that double our cross connect count in 2020 is pretty impressive and particularly to EMEA, we were constantly watching.
<unk>, how our communities of interest have really grown their with network dense highly connected assets as a part of platform digital but we absolutely align our cross connect pricing based on the market dynamics within EMEA.
And we will continually evolve our platform to ensure that you know pricing is aligned with the value that we see these communities of interest continually getting out of the platform, but one of the things that we're very happy about is we continually see the attach rates within each of these markets continually increasing and it's core to our platform going forward.
We remove complexity from the customers. So they can get access to that value and the more simplistic fashion. So you'll see that play out over the over the coming year on exactly how we achieved that but it's it's something that we're constantly watching and making sure that the customers are are getting the true value of that they need in the very simplistic fashion.
Yeah.
That concludes the question and answer portion of today's call I'd like to turn the call back over to CEO Bill Stein for his closing remarks Bill. Please go ahead.
Thank you Andrea.
I'd like to wrap up our code of date.
By recapping, our highlights for the fourth quarter as outlined here on the last page of our presentation.
First we further strengthen our connections with our customers.
Meeting more of their needs beyond the U S and reaching a much broader set of enterprise customers with our enhanced colocation and interconnection product offerings.
We delivered extremely solid current period of financial results delivering full year <unk> per share that was nearly 4% above our initial guidance.
We extended our global platform, providing customers with the gateway into south Eastern Europe and runway for growth around the world, which the strategic land purchases and new development starts.
And last but not least.
We further strengthened our balance sheet, extending our average duration well further ratcheting down our average cost of debt by locking in attractive pricing on long term capital and retiring high coupon debt and preferred equity.
I'd like to conclude today's call by saying, Thank you to the entire digital Realty family.
But particularly our frontline team members in critical data Center facility rules, who have kept the digital world turning in the meat in the midst of this global pandemic.
I hope all of the stay safe and healthy and we hope to see many of you in person again later this year.
<unk>.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.