Digital Realty Trust Inc (DLR) 2013 Q4 法說會逐字稿

Good day, and welcome to the Digital Realty fourth-quarter and full-year 2013 financial results conference call.

All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

In the interest of providing fair access to all participants, we do ask that you limit your questions to a single question and a single follow-up.

Please note this event is being recorded.

I would now like to turn the conference over to John Stewart, Senior Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Hello, everyone, and welcome to our fourth-quarter conference call.

The speakers on today's call will be CEO, Mike Foust, and CFO and Chief Investment Officer, Bill Stein.

Senior Vice President of Sales and Marketing, Matt Miszewski, is also here with us and will be available for Q&A.

In addition to the press release and supplemental disclosure package we put out yesterday, we've also posted a presentation to the investor section of our website to accompany Management's prepared remarks.

You're welcome to download the presentation and follow along throughout the call.

Before we begin, I would like to remind everyone that Management may make forward-looking statements on this call.

Forward-looking statements are based on current expectations, forecasts, and assumptions that involve risks and uncertainties that could cause actual results to differ materially.

Forward-looking statements include statements related to future financial and other results, including 2014 guidance and the underlying assumptions.

For a further discussion of the risks and uncertainties related to our business, see our annual report on Form 10-K for the year ended December 31, 2012, and subsequent filings with the SEC.

This call will also contain non-GAAP financial information.

Explanations of such non-GAAP items and reconciliations to net income are contained in our supplemental package furnished to the SEC, and available on our website at DigitalRealty.com.

Management's prepared remarks will be followed by a Q&A session.

Once again, questions will be limited to two per caller.

And if you have additional questions, please feel free to jump back in the queue.

And now I would like to turn the call over to Mike Foust.

Great, thank you very much John.

Welcome to the call, everyone.

As we discussed at our investor day last November, driving improved return on invested capital, especially through the lease-up of existing inventory, is the top priority across our Organization.

And I'm pleased to say that we've made very good headwind on that front during the fourth quarter.

As you can see on the first page of our presentation, we achieved record lease signings in the fourth quarter, which also propelled the full-year total for 2013 to our best year ever.

In addition, we made good progress -- we absorbed -- absorbing 12 of the 54 megawatts of finished Turn-Key inventory we had on hand at investor day last November.

We were also pleased by the higher than anticipated contribution from the midmarket and colocation sales initiatives.

We signed $7.7 million of annualized GAAP colocation revenue during the fourth quarter, which was likewise a record-high quarter for this segment.

We don't believe the strong fourth-quarter volume was an anomaly, as our midmarket sales team is ramping up with Management Sales Directors now in place.

We're encouraged by the early results and we're cautiously optimistic on the prospects for repeat performances in the quarters ahead.

As you can see from the numbers at the bottom of Page 2, base rates for our Turn-Key Flex product were lower than they had been in recent quarters.

However, this is primarily a function of market mix and was not due to rental rate erosion during the fourth quarter.

Specifically, fourth-quarter leasing activity was heavily skewed by large cloud requirements in Ashburn, Virginia and in Dallas, Richardson, Texas, where absolute rent levels are lower than our global markets in Europe and Asia-Pac and elsewhere in the US.

Most importantly, from my perspective, the rent achieved during the fourth quarter represented consistent, very attractive returns on our invested capital in these markets.

Turning now to Page 3, the firming of market rents was also apparent in our re-leasing spreads on renewal leases signed during the quarter.

Cash year-one rents on Turn-Key Flex and colo renewal leases were down only a little less than 1%.

And the overall mark to market was up over 3%, driven by another strong quarter of significantly positive cash re-leasing spreads on our Powered Base Building product.

This increase included, but not exclusive to, the renewal of several large long-term Equinix leases.

Overall, PBB lease renewals increased by 27% on a cash basis, and fully 51% on a GAAP basis, reflecting long-term growing cash flow for these leases.

In addition to signings, lease commencements were also healthy.

The fourth quarter was our third-best commencement quarter ever.

As you can see from the chart at the bottom right of Page 4, the weighted average gap between signing and commencement of these leases was only just over five months.

Moving on to Page 5. The backlog of signed leases translates to an incremental $28 million of GAAP NOI in 2014, with an additional $48 million beyond that.

We would remind you that this solid backlog of leases signed, but not yet commenced, represents contractual obligations for future rental revenue, setting the stage for healthy growth and cash flows over the intermediate term.

Clearly leasing momentum picked up in the second half of the year.

That momentum has carried forward into the first quarter, although slowed down a bit from the rapid pace in the fourth quarter.

We feel very good about the first-quarter leasing activity, particularly based on deals in the final stages of our sales process.

But as typically the case, signings do appear to be back-end loaded towards the end of the quarter.

Overall, our team is engaged with more lease prospects than ever, representing over 3 million rentable square feet of 2014 requirements.

Now let's turn to some of the demand drivers.

In addition to the success of the midmarket and colocation initiatives, large scale cloud deployments represented a significant portion of our fourth-quarter leasing activity, as well as demand in 2014 and above.

Cloud infrastructure and applications are major data center demand drivers, as represented here on Page 6 of our presentation.

And these cloud requirements accounted for over 60% of 2013 lease signings.

IBM software is a prime example, and many of you have seen that in January IBM announced plans to spend $1.2 billion to open 15 new cloud data centers worldwide.

We are working with IBM software to ensure that we remain their trusted data center partner for much of their global expansion needs.

As you can see from the top tenants table in our supplemental package, that IBM is now our second-largest tenant, representing over 5.5% of total revenues.

We believe that we have the portfolio best capable of supporting IBM's cloud platform on a global scale, much as we have with software over the past several years of their rapid growth.

Turning now to supply.

The data center brokerage practice at Avison Young recently reported that there was 20% less wholesale data center inventory available for immediate occupancy, or scheduled to be delivered by the end of the first quarter relative to this time last year.

That is certainly consistent with our experience, and you can see from the charts on Pages 7 and 8 that new supply remains relatively muted in most major markets across the US.

One change I've noted in the past 90 days is that 13 megawatts of Yahoo!

shadow sublease space in Northern Virginia, not in Digital data centers, has been confirmed as available and has been reflected as such in our charts.

We have seen several recent announcements of potential competitive starts in Northern Virginia, and we are keeping watchful eye on the supply and demand dynamic in that market.

The fact is that Ashburn is a national market.

It counted for over 25% of our total leasing volume in 2013, and due to our continued leasing success in Northern Virginia, it is a market where we continue to strategically invest our capital.

We have a significant pipeline of good customers in that market today.

I would like to turn to compensation.

Finally before I turn the call over to Bill, I would like to address a couple of changes to our programs.

First of all, we recently restructured our sales compensation program to more optimally incentivize the sales force.

Specifically, we've emphasized a handful of simple, controllable levers that will more closely align their variable compensation with our corporate objectives, particularly absorption of existing inventory, current-year cash returns, and lease term.

In addition, our Board of Directors recently approved a new long-term incentive compensation plan for Senior Management based entirely on total shareholder return, relative to the RMS index, as shown here on Page 9 of the presentation.

In recognition of the comparatively low starting point following last year's stock price performance, the hurdles have been set approximately 300 basis points higher than REIT peers with comparable relative return plans.

And the entire LTIP will be forfeited if we don't at least perform in line with the RMS over the three-year measurement period.

Similar to the philosophy behind the sales compensation program, this plan has been designed to incentivize the creation of long-term shareholder value and to more closely align Management's interest with those of shareholders.

With that said, I would now like to turn the call over to Bill to take us through our financial performance and earnings outlook.

Thank you, Mike.

Good morning and good afternoon, everyone.

Starting with the balance sheet metrics on Page 10, net debt to adjusted EBITDA was unchanged from third quarter at 5.4 times, and fixed charge coverage improved slightly to a healthy 3.3 times.

The balance on our $2 million line of credit stood at $725 million at year end, and subject to market conditions, we expect to term out most of our borrowings on the line of credit with a combination of preferred equity and/or long-term debt over the course of the year.

It is not our intent to take an outsized interest rate risk and we've entered into a swap lock to hedge a potential US bond offering midyear.

Turning now to Page 11, our Board of Directors recently approved a 6% dividend increase.

This is the 12th dividend increase since our IPO in 2004.

And as you can see on the chart, we have grown the per-share dividend at a 14% compounded annual growth rate over that time.

As we noted in yesterday's earnings release, and as outlined here on Page 12, we acquired a data center in New Jersey for $35 million, or $327 per square foot late last year.

The property is 100% triple net leased to a AA rated financial services tenant with over nine years remaining lease term.

The existing debt structure was complex and the seller was required to close by year end.

As a result, the seller chose to negotiate with the most credible buyer in the industry, and we were able to structure a transaction at a going-in yield of roughly 100 basis points over market.

The going-in cash cap rate was 9%.

But we closed the project with the expectation that we would retire the existing mortgage and would incur a $4 million prepayment penalty, which would run through the P&L, bringing the effective cap rate to 8%.

We've subsequently reached an agreement with Prudential Real Estate Investors core fund to contribute the assets to the joint venture that we formed with them last fall.

The terms would be similar to the existing structure and we expect to earn a healthy double-digit return on our 20% equity stake in the property.

The joint venture will assume, but expects to prepay the in-place debt, and will incur the prepayment penalty.

The contribution is expected to close by the end of the first quarter.

Given the current costs and availability to capital, we remain sharply focused on disciplined capital allocation.

At the same time, this transaction is an example of how we will also continue to take advantage of opportunities that arise and are aligned with our core competencies to create value for shareholders with a judicious deployment of capital.

Turning now to earnings.

Our fourth-quarter FFO per share came in $0.10 higher than the third quarter, and the final 2013 outlook we provided on the last earnings call.

As shown on Page 13, the primary sources of upside include $0.04 per share due to lower financing cost from the delayed execution of both the preferred equity offering and a Sterling bond issuance that we previously expected to close in the fourth quarter of 2013, along with higher than expected capitalized interest.

It is important to note here that we are expecting a significant reduction in capitalized interest for 2014, as we slow down our development spending, and that is one of the reasons why the beat in the fourth quarter does not automatically fall through to higher guidance for 2014.

In addition, there's $0.02 of upside relative to our prior forecast due to lower bonus accruals.

And this is evenly split between corporate G&A and property level compensation.

In other words, half was above the NOI line.

Third, $0.01 was due to other revenue and fee income, which included a few small items such as a bit of development fee income and a small gain on the sale of a land parcel.

Four, we had $0.01 of tailwind from favorable foreign currency exchange rates during the fourth quarter.

And last, but not least, we picked up $0.01 of savings at the property operating expense line, primarily from reduction in discretionary spending.

Our NOI margin excluding utility reimbursements was 74.2% in the fourth quarter, and we expect a similar margin in the first quarter of 2014, as well as for the full year.

We are maintaining 2014 guidance that we provided in early January for core FFO per share of $4.75 to $4.90.

On the heels of the beat in the fourth quarter, the year over FFO per share growth rate admittedly looks light, but I would remind you that that is largely a function of what we believe to be prudent balance sheet management, along with the dilution from the joint venture with Prudential Real Estate Investors that we closed in the third quarter late last year.

I'm sorry, late in the third quarter last year.

I would also like to point out that the greatest variable for guidance is financing, the timing and the cost of financings that we planned for the year.

Finally, as part of our ongoing commitment to excellence and financial reporting, I am pleased to report that we have recently engaged former AMB Chief Information Officer, Wayne Pryor, to upgrade and integrate our existing IT systems and to design leading future-state data center business intelligence platform.

We expect to have more to report on these initiatives as they progress over the next several years.

Similarly, we have made several enhancements to our quarterly supplemental package in direct response to feedback from the investment community on our disclosure practices.

Most notably, we provided a detailed components of net asset value calculation on Page 12 of the sup.

We added a second table to our same-store analysis on Page 16, showing a same capital calculation, which is our attempt to provide you a better measure of the true organic growth since our traditional same-store disclosure included properties under redevelopment.

We've also provided the IT load by market across the portfolio for the first time on Page 24.

We have added a development lifecycle schedule on Pages 30 through 32, with market level detail on our development pipeline and finished inventory.

We have added a comprehensive schedule on Page 33 of our current and historical capital expenditures, reconciling our supplemental CapEx disclosure to the footnotes in the 10-K, as well as the statement of cash flows.

And last, but not least, we have provided summary balance sheets and income statements for our unconsolidated joint ventures, which allow you to arrive at our pro-rata share of unconsolidated JV debt, as well as NOI.

We aim to continue to improve the transparency of our financial disclosures over time, and we welcome additional input from analysts and investors in that process.

This concludes today's prepared remarks.

I would now like to turn the call back to the operator and we will be pleased to take your questions.

Operator?

(Operator Instructions)

Our first question will come from Emmanuel Korchman of Citi.

Please go ahead.

Good morning, guys.

Thanks for taking the questions.

Just, Bill, if we think about your 2014 guidance, I appreciate your points on higher capitalized interest and conservative financing.

But maybe you can help us bridge the gap sort of between your investor day presentation and the slide deck today, specifically if we look at Slide 54 of the presentation -- of the larger presentation, Slide 5 today, it looks like your contractual NOI is much higher going into the year versus where you thought it would be.

So I'm surprised that that hasn't flown through the guidance.

And similarly, Slide 53, which was the backlog, looks like it's increasing significantly as well.

If we look at Slide 4 today, and again, that didn't seem to sort of flow into the topline.

Maybe you can help us sort of bridge that.

NOI, we expect that Q1 NOI will be slightly higher than the run rate at the end of Q4.

But the reason it hasn't flown through the bottom of FFO is because there's probably around $0.15 of financing costs, $0.15 per share.

Those are already in guidance.

So why should that change?

What we know is your contractual NOI for '14 is up $71 million from investor day.

That's $0.05.

And the NOI was higher in the fourth quarter than you thought, so the run rate is more aggressive.

The financing, if anything, got delayed.

And if anything, it's at better pricing, because rates have fallen.

So how is guidance not moving up?

We're just taking your numbers.

Well, this is Mike.

On one hand, the financings are occurring later than we had anticipated and we're also being conservative in our outlook since it is early in the year.

But that should be accretive, right, if it's happening later, more accretive to guidance?

Your NOI is at least $0.05 higher today than where you thought it was at investor day.

So is the $4.75 to $4.90 just not a good range to use anymore?

Or is there some negative offset that's happened that you're not telling us about?

No, no.

The -- I mean, spec leasing was higher on investor day than it is today obviously, because we leased up a lot of space in the fourth quarter.

All right.

Thanks, guys.

That's gone down.

Our next question will come from Ross Nussbaum of UBS.

Please go ahead.

Hi, guys.

Thanks for taking the question.

Can you talk a little bit about the same-store occupancy rate?

I guess I'm trying to put the 60 bip sequential decline and the 210 bip year-over-year decline in 2013 into perspective, given what was a record gross leasing year.

So what should we be thinking about for same-store occupancy in 2014?

And then as part of that, can you talk about the tenant retention ratio, particularly for Turn-Key, which I think was 79% last year, and just talk a little bit about where you expect that to be.

Sure.

What's interesting to note, that while we had a slight tick-down in occupancy overall, if you look at the amount of space that's leased in the portfolio, it continues to go up every quarter.

So we have occupied square footage of 19.8 million overall this fourth quarter, compared with the previous quarter of 19.56 million.

So we're bringing on more space.

And as that's inventory, so that inventory goes into your denominator and then as that space gets leased up, we'll increase our percentage occupancy.

So the good news is we continue to have net positive leasing and we've never had more occupied space than today.

And so we expect that we'll start catching up and continue to absorb that existing inventory we mentioned earlier and that will raise that occupancy.

Russ, let me give you detail though on the 60 bips and the 210.

So if you look quarter over quarter, of the 60 bips -- 100 bips of decline is due to delivering vacant inventory into our pool.

There was plus 60 bips of increase in same-store for new leasing.

Then there was a 30 bip decline due to terminations in the quarter.

If you look at Q4 2013 versus Q4 2012, the 210 basis points, we have an office building out in the East Bay, which -- that's the Ardenwood property.

We've had it basically since our IPO.

We had a couple tenants leave in that period last year, so we had 110 basis point decline in occupancy in 2013 because of that.

Again, we had vacant inventories delivered that generated a 40 bip decline.

And then terminations delivered a 50 bip decline year over year.

30 bips of that was data center.

20 bips was office or non-tech.

Just on the retention ratio, do you expect it to be roughly similar in 2014 as you saw in '13?

Yes, over 90% in 2014 is what we expect right now.

Thank you.

Our next question will come from Jordan Sadler of KeyBanc Capital Markets.

Please go ahead.

Thank you.

Good morning.

Wanted to just drill down a little bit on the middle market sales effort and what you're seeing vis-a-vis the sales funnel early in the year on that effort.

It sounds like things are still good, but maybe you can add some color around the number of new sales people that have been onramped since the investor day and just what you're seeing momentum-wise.

Yes, this is -- thanks, Jordan for the question.

This is Matt Miszewski.

Happy to give you an update.

We have added since the Q3 call all three of the midmarket Vice Presidents and their staff.

And so we have additions of 15 sales assets in all of the relevant markets from a midmarket perspective.

So we feel as though we are very close to fully staffed in the midmarket space for 2014.

Again, we've got a three-year target in terms of hiring ramp, so there will be some additional work to be done in 2015 and 2016, but we are very close to fully staffed on the midmarket side from a staffing perspective.

In terms of total pipeline, I think that I'm comfortable with a number of the dynamics in the midmarket space coming off of a very strong $7 million plus midmarket performance in Q4.

I'm pretty satisfied with the positioning of the pipeline coming into the last month of Q1 to be able to hit our goals from a midmarket perspective.

And I'm also very satisfied right now with where the rates are looking for both the midmarket space as well as large enterprise space, not just for this quarter, but for the balance of fiscal year '14.

What's interesting about a lot of our customers in the midmarket space is they are not necessarily taking one or two cabinets.

They are taking 2,000, 3,000, 4,000 square feet at a crack.

So it's, we're ramping up very well because there are some really interesting requirements out there that that this team is able to address, in addition to our traditional large cloud and large enterprise and network customers.

So we're very pleased on how far the, our prospect funnel is built overall.

We've gone from 2 million square feet of real prospects to over 3 million rentable square feet as we stand today.

Okay.

And then a separate question, and I appreciate the new disclosure, I'm just going to point you to Page 16 on the same-store capital table.

Is there any insight you could lend into the expense increases?

Some of the lines moving around in there, retail property operating versus R&M and property taxes.

Just some big swings up and down.

Any insight you could offer?

Kind of looking at it, I'll let Bill jump in.

If you compare the 12 months ended on the R&M item, we're looking at $86 million versus $88 million.

So it's very close.

It's --

Well, in the table below that, Mike, the same capital one, we're looking at just same capital employed.

So those are, if we look at the 12 months once, our operating expenses are up 15%, R&M is down 16%, and property taxes for the full year, this is the more surprising one, up 21%.

What would be the driver behind some of those?

We discussed the property taxes on the last call, where we're actively pursuing against the assessments, appeal against the assessments.

So what happened in both Texas and California, we believe that we're being charged twice for property tax and having property taxes included in the real estate tax.

So not only are we -- assessed value -- so not only are we getting taxed twice, our tenants are getting taxed for the personal property, and then it's getting taxed again as real estate, which is not correct.

And so we're actively appealing those.

But you have to pay them until you go back and get those.

And we're pretty confident that we're going to be successful, but you have to go through, as you can appreciate, a long process on those appeals, against what we perceive and our tenants perceive as double counting, if you will.

Yes, Jordan, specifically the two states involved are California and Texas that are taxing both realty and personally.

And in the third quarter, the incremental effect was 2.4%.

And in the fourth quarter, the incremental effect was a little over 3%.

So as Mike said, we're appealing those and hoping to win them.

That's net of reimbursements from our customers.

Okay, thank you.

Our next question will come from Stephen Douglas of Bank of America Merrill Lynch.

Please go ahead.

Great.

Thanks for taking the question.

I guess first, you mentioned the Yahoo!

sublease in Northern Virginia.

I'm wondering, is there anything you're able to do to kind of preempt that, either by trying to further differentiate your product or, in that market, or prevent feeling that impact in the same way that Facebook has kind of impacted Silicon Valley?

And then second, with the recently announced Comcast/Netflix deal, I'm wondering if you have any thoughts on kind of net neutrality and how you think the different outcomes impact your business?

Thanks.

Sure.

As to Yahoo!

that product in our competitor is very different from our POD 3.0 architecture.

So it's very much a shared back plain for the powertrain or UPS and panels and switch gear, electrical switch gear, and also your HVAC is not as modular as with our POD 3.0.

So our customers historically, and this is true in Ashburn as well, they really strongly desire the fully dedicated UPS dedicated power and cooling.

So that's a huge product differentiator for us.

We don't believe that this subleased space will have much of an impact at all on our customers.

And I think that's -- and the customers we're pursuing.

And I think that's reflected in the current good funnel of prospective tenants that we have.

Comcast is growing tremendously, as we can all -- even before their merger announcements.

And we're seeing quite a bit of business that we've been the beneficiary of from Comcast.

They are a very good customer for Digital Realty, and we see them and their subsidiaries growing and hopefully growing with us quite actively.

The kind of issues around net neutrality are probably inevitable as we need more and more bandwidth.

We see Netflix is entering into agreement recently with Comcast, and I just read yesterday where they are negotiating with other large carriers like AT&T and Verizon.

So I would bet appears to be an important trend in order to deliver low latency, very high-quality customer/consumer experience as we want more and more gaming, content, films, TV shows, et cetera, over broadband.

Steve, this is Matt Miszewski.

We've been very involved with obviously both Comcast and Netflix as well as a number of other content distribution networks and other providers of content.

So the Comcast/Netflix business terms were interesting.

I believe that the market from time to time confuses what's going on with Comcast/Netflix as a net neutrality conversation, and it's a little bit different if you look at the actual terms of the agreement.

But the one thing that it does point out is that when content providers are looking for peering arrangements, they are looking to get out of a current set of situations that they are with the current proprietary internet exchanges that exist, which highlight sort of the new Open IX initiatives sprouting up amongst the country in Northern America.

So we don't think that the Comcast/Netflix business arrangement signals anything with regard to net neutrality that's concerning.

But it does signal a move towards a more open internet exchange.

Got it.

Thanks, guys.

Our next question will come from Jonathan Schildkraut of Evercore.

Please go ahead.

Good afternoon, or morning for you guys.

But thank you for taking the question here.

I just was trying to get a sense as to what your expectations for commencements were for this year, those that are embedded in guidance.

I do see a backlog of $61 million based on the stuff that you've signed already.

In your guidance, you've talked about speculative leasing of $20 million to $30 million.

I'm just trying to understand if that implies expected commencements of $81 million to $91 million or if there's other numbers that go into that.

Thanks.

In our conservative view, we're looking at incremental income from commencements in the low $60 millions.

Annualized, obviously, that would be much higher.

Annualized is over $100 million, Jonathan, on a GAAP basis.

Okay.

Okay.

That's helpful.

If I can -- instead of asking a follow-up actually, ask you a different question.

I'd also be very interested in how your progress around fibering your buildings together is, whether you're seeing customer demand for that and how that's impacting the sales process.

Thanks.

Yes, I'll let Matt jump in.

It's been a tremendous boon.

I mean, it really has changed the landscape.

Our buildings were already well connected by networks.

And now with the network ecosystem in place in all these major markets we're able to provide a whole 'nother level of connectivity and interconnection for our customers.

And we're seeing in virtually every market customers utilizing that, or we've got the metro providers utilizing it to deliver lip services to our customers.

In fact, I just came from London last week and we've already sold 23 pairs of dark fiber to customers, and virtually every new customer in the London and connecting to Europe markets are taking dark fiber with us.

So it's been a tremendous addition.

And Jonathan, throughout, we got an early start in the European market with regard to the network ecosystem, but also throughout 2013, in North America have primarily finished connecting up the campuses internally and connecting the campuses together.

I can tell you from a sales perspective, it takes one of the concerns away from our customers in terms of easy network connectivity.

And then on the bottom line, it has a demonstrative impact on opportunities in the pipeline right now, where customers are comparing two properties, one that is connected by a digital ecosystem, and one that's not, which has a multimillion dollar effect on their total cost of ownership.

So the ecosystem process in Northern America and definitely the ecosystem process in Europe have both been tailwinds to the leasing process.

Thank you for taking the questions.

Our next question will come from Vance Edelson of Morgan Stanley.

Please go ahead.

Terrific, thanks.

Starting with your demand drivers, you talked about midmarkets and content providers.

Could you also describe your progress penetrating entirely new Fortune 500-type verticals that are moving to the cloud, petrochemicals and so forth, are any of them looking particularly attractive given your recent experience?

And then as you beef up the sales force to accomplish this, if it's going to take several years, should we expect gradual upward pressure on G&A going forward?

Yes.

So great question.

Within the content world, obviously content continues to be king across all of our customers, not just the CDNs and the ISPs out there, but other providers of content, and continues to be a heightened focus for us, especially given the digital Open IX initiatives, as well as the digital ecosystem initiatives.

But within the Fortune 500, there is an uptick in activity in several verticals, energy being one of them.

Inside our Q4 results, we saw some impressive TKF numbers coming out of the energy vertical, incredible numbers coming out of the cloud vertical, which we've talked about at length today on the call.

Continued performance out of financial services.

But in the midmarket in particular, new focus on smaller companies in the financial services industry, who are interested in leveraging technology.

But two that I would like to sort of highlight for folks are a little more complicated, but our pipeline is full with opportunities in the midmarket space, as well as the large enterprise space, in retail where big data initiatives are really the life's blood of retail's cash performance.

And then healthcare internationally, not in the personally identifiable health information space, but in the diagnostic space, which is something that we didn't necessarily anticipate, but were happy to find both in the US, as well as in continental Europe.

And if you look at G&A, we're projecting, because of our scale and our efficiencies, we're looking at G&A as a percentage of revenues, as a percentage of EBITDA, to stay pretty steady over the next couple years.

Okay.

That's perfect.

And then just one more demand-type question.

Could you attempt to size for us the opportunity to capture more business from existing customers, any estimate on what portion of their total data center needs they are currently outsourcing to you and whether that's slowly on the rise?

So we do see a good uptick in repeat performance.

If you look at the fourth-quarter numbers and the details of who we lease to, we're very happy with what we call multisite customers.

We anticipate that will increase.

I don't have concrete data on the exact share of wallet that we have in each one of those accounts, but our focus during 2013 was expanding that share of wallet and actually targeting on the front side enterprises that have international growth ambitions or even domestic growth ambitions outside of their headquartered activity.

So multisite for us is one of the competitive differentiators because we have 130 plus properties and we're in 33 markets throughout the world; when we target customers that have multisite opportunities, we do much better.

It's very dramatic.

And looking at folks in cloud, financial services, IT services of various, which include cloud, doing multiple markets, multiple contents, we've been very, very active in 2013 and continue to be very, very active in 2014.

It is a huge differentiator for us and we are really the only folks that can provide that consistent program, consistent quality of product, services, contracting across so many different markets.

Our next question will come from Vincent Chao of Deutsche Bank.

Please go ahead.

Hey, guys.

Just want to go back to some of the comments, Mike, on the pricing trends.

I know you attributed a lot of the downward movement to mix, but just curious, it sounds like supply is also sort of stable, but just wondering if there are any markets where you are seeing incremental pricing pressure, either from reduction in demand or increase in supply.

And also as a follow-up, if you could just maybe comment on specifically what you're seeing in Phoenix.

I would say that there we're pretty well stabilized across the domestic markets.

And we're seeing very good pricing in Asia-Pac markets today.

So I would say stabilized in the European market even at this point.

We're not seeing blips up and down, though Asia-Pac continues to be extremely strong.

Yes, Vincent, this is Matt.

I did -- I pull a report daily to make sure we're on track.

And I looked at our current fiscal-year pipeline numbers in terms of pricing power and compared it to 2013 across the board, and what I can characterize it as I was pleased at the result of the data that I pulled.

Now, this is pipeline data, so certainly as we get into the negotiation process, I fully expect that the pricing I'm currently seeing in the pipe will constrain itself a little bit.

But even given that understanding, I'm very happy with where the pricing is today, and given our past performance, where we expect that to land once those deals get commenced into leases.

Yes, and Phoenix is going pretty well.

We had a lot of leasing early last year.

We had a kind of a quiet period the last couple of quarters and now the pipeline of prospects that we're pursuing actively has grown pretty significantly.

Yes, Vincent, we have a number of prospects that we're pursuing in Chandler and Phoenix currently, and I don't see any pricing trends that give me a great deal of concern in any of those deals that we're chasing in Q1, Q2, and Q3.

Okay, thanks, guys.

The next question will come from Dave Rodgers of Robert W Baird.

Please go ahead.

Yes, good morning out there.

I guess following up on the question about rates, I assume you're kind of talking about stabilized or lease-up assets.

As you think about new development, and thanks for the color on the breakdown of yields by geography.

But can you talk about given a more limited pipeline of development going forward whether the yields maybe should move up as you become more selective, or with the better real estate market overall or are those yields going to come in a little bit?

Expectation on kind of the next round of starts as you see them?

We're pretty pleased with what we've been achieving.

Certainly overall if you look at the leasing in the last quarter or so, we're looking at stabilized returns between 11%, 11.5%.

So we're -- on average, and so we're -- and that's unlevered.

That's based on projections for the individual leases.

So we look at these lease by lease with fully loaded.

Certainly as the mix expands in Asia-Pac, that will increase.

I think as we see kind of the more stabilized situations and we're fully implemented in POD 3.0, which is a very efficient way to construct, while we have flexibility that adapt for different customer requirements, we're coming in at pretty good pricing on these brand new ground-up projects, so I think that combination will put some upward pressure on yields.

And let me follow up a little bit on that, not directly responsive, but the ROA on the Company as a whole, on a portfolio level, will also be positively impacted by the lease-up of our existing finished inventory, which is fairly significant.

And as we lease up data center shells and we add additional PODs, we no longer have the drag on the vacant shell space.

So both those items will contribute to an increase in ROI on the entire portfolio.

That's helpful.

And then the $80 million to $90 million I think you had put in your original guidance for additional CapEx this year, tying that out to Page 33 on the supplemental line enhancements and other nonrecurring, does that suggest the $80 million to $90 million is down from the $111 million or $112 million that you kind of quoted in 2013 or is that an additional $80 million to $90 million on top of that number?

Well, it's somewhat of a reduction from what we invested in the properties in 2013.

And these are a wide range of improvements, replacing windows, replacing roofs, elevators, adding, adding UPS, additional UPS and additional capacity to buildings.

Those kinds of upgrades, so it's a wide range of activities at the properties that are nonrecurring and either adding more space or replacing items, like I said, like windows and roofs and elevators, etc.

You could see in the sup, and I think you referenced it, Dave, for the year 2013, we're showing $111.5 million and our guidance is $85 million to $90 million.

So it is down.

Our next question will come from Jon Petersen of MLV & Company.

Please go ahead.

Great.

Thank you.

Just wanted to ask a quick question on the development pipeline, the new disclosure since the investor day is really helpful.

But I'm looking at the Base Building construction and trying to kind of understand how to model that going forward.

I know that that includes some properties that are going to go on to be developed out of Turn-Key Flex and some of them are just going to be leased out as Powered Base Buildings.

Can you kind of give us an idea of kind of the breakdown of what falls into which one of those buckets, and any timing on when we can expect, when you guys expect to receive revenue on those investments?

Well, generally speaking, the large majority of our business is Turn-Key.

I mean, that really is what, not exclusively, but I would say 80% to 90% of our leasing is fully fitted out Turn-Key data center space.

And that's both the TK up and the custom.

The customs often has other ancillary, ancillary facilities like office space and testing space along with it.

So I think it's safe to say that 80% to 90% of our Base Building development is going ultimately toward Turn-Key.

If you look at the Turn-Key and custom that's under construction now, that's data center construction, 79.4% as we show is leased currently, over 550,000 feet.

And so we'll continue, as we continue to build out POD 3.0s pod by pod, that will be built out in these Base Buildings and continue to add to that finished inventory.

Okay.

All right.

That's helpful.

Thanks.

Our next question will come from Jonathan Atkin of RBC Capital Markets.

Please go ahead.

Thanks.

So the connectivity offer, I just wanted to see kind of where that stands.

Are you fully built out across all three major regions?

And are you seeing differing demand profile by region?

So we're fully built out as of February, early February, in all of our markets here in North America, our major markets.

We're fully built out in London, though we have some interesting new opportunities at very low cost to add to that.

And that connectivity in London goes right into the continental networks.

So essentially we have connectivity to our continental data centers today back to the major pairing points, especially in Amsterdam, Paris, and London.

In Asia-Pac, it's a little bit different topology of networks.

So we're really focused on the international, intermarket connectivity for example, between a Singapore and a Hong Kong, between a Sydney and a Melbourne, bringing that connectivity between these markets.

And --

Jonathan, the connectivity particularly in Asia-Pacific is coming as a result of customer requirements first and foremost.

So again, Mike's comments about Sydney and in particular Melbourne, as well as needs in Singapore and Hong Kong are really sort of developed directly from customer requirements.

Then the plan on digital ecosystem to make sure that Asia-Pac was covered through this fiscal year, and we're blessed to be able to do that at the same time that we've got customer requests asking for that connectivity.

And I will say that in Singapore with our flagship property there, we've developed quite a bit of new metro fiber connectivity through different carriers in that market, so we have a very good network architecture now of metro carriers serving our Singapore facility.

And then on the Turn-Key rent trends, you talked about how geographic mix kind of influenced that more than the same markets rental trends.

And looking forward, do you expect a further influence of geographic mix or is the current mix that we see reflected in 4Q -- does that carry through the year, as best as you can tell for Turn-Key?

We'll definitely have a different mix because we have so many different major markets and it varies quarter by quarter as to the particular market mix in any particular quarter.

Yes, and so like I said, as I took a look at the current fiscal year forward-looking pipeline, I saw healthy pricing power in each of our markets, but regionally, there is pricing differential.

So we need to keep that in mind, but I didn't see a disturbing trend in any of the major markets we're involved with.

Our next question will come from Tayo Okusanya from Jefferies.

Please go ahead.

Yes, good morning over there.

First of all, thank you so much for holding your disclosure.

That's really, really good to see.

And then a question for you guys.

The asset that was bought recently and contributed towards the JV, the acquisition price was an 8% cap.

Could you talk a little bit about at what cap rate you're contributing towards the JV?

Yes, so going in was a 9% with the debt restructuring because to make it more efficient for the JV it turns it in, that cost turns it into an 8%.

And then --

We haven't closed, we haven't closed on that contribution yet, Tayo.

We expect to do that by the end of the first quarter.

I would rather not comment on the cap rate at which it's being contributed till after we closed.

Okay.

That's fair enough.

And then a second follow-up question, the new hire from AMB, just trying to understand a little bit better what his responsibilities are going to be and how over the next one to two years what are some of kind of the critical things you expect him to achieve for your bottom line?

Just to be clear.

He's not a hire.

We've engaged Wayne.

He has a firm here in San Francisco.

Okay.

So we've engaged his firm.

And he's going to I think basically significantly upgrade our corporate information system, particularly in the portfolio reporting area right now, basically the back half of the sup that you see.

A lot of that is Excel-based and our expectation is that data will be pulled from Yardi, which is the automated accounting system that we use, and used to populate the back half of that report.

In addition, some of that data will be summarized on a very frequent basis to provide realtime management dashboards for the Executive team and the Board.

Our next question will come from a follow-up from Jordan Sadler of KeyBanc Capital Markets.

Please go ahead.

Thank you.

A couple things.

First, on investment, as we think about capitalized interest declining over time and overall investment declining over time, it didn't really happen in the fourth quarter.

So I'm curious what timing would look like.

I guess what I'm showing is it seems to me that the total CIP, or committed active development, increased from about $900 million at the investor day to about $971 million today.

I'm curious, at what point we should expect that to tail off and how low we should expect that to get, or when the low point in the year should be.

Well, it starts in the first quarter of this year.

And at least over the course of this year, the lowest amount of capitalized interest would be in the fourth quarter.

It tails off consistently throughout the year?

Steps down each quarter, correct.

Okay.

And then, Bill, you talked about the financing, the timing.

I'm not sure if I'm reading you right here, but in the guidance originally it said, or not originally, but now it says early 2014 for these financings to take place, but it sounded like you were looking more at a potential midyear timing in terms of at least the swap that you've -- the hedge that you've entered into.

Well, that's correct, at least in the case of a US dollar, we have a US dollar bond deal in our planning and we have the swap lock expires basically July 15.

So we would do something sort of in the mid-June to mid-July timeframe to make sure that hedge is appropriately effective.

We would do either a Sterling or a preferred I suspect sometime from mid-March until we're blacked out in early April.

So that would be the window for that financing, assuming the markets are open and conducive.

And then the final financing, it could be then, it could be midyear or it just could be towards the end of the third quarter and that's going to be really a function of markets.

The final question will be a follow-up from Emmanuel Korchman of Citi.

Please go ahead.

Yes, Michael Bilerman.

I had two follow-ups.

One was just to Bill, a little bit on the timing on these capital raises because it sounds like it's later than early 2014 from what you said.

But given the fact that you said it's the biggest component and the biggest variable in guidance, can you at least be very specific about sources and uses?

If you think about what you've put down in guidance, call it $800 million to $1.2 billion of proceeds, you've got $450 million of debt rolling this year, I assume the balance, $350 million to $700 million is used to pay down the line at 1.6%.

Obviously given the math, raising capital 5.5% to 6% and paying down the line is dilutive, but given when you do it, it's more dilutive to do 2015 than it is to 2014 as you delay it.

I just want to make sure that we completely understand what's embedded in guidance from a dilution standpoint of capital raise.

And then the second question is the disclosure in the supplemental on the NAV components, which is extraordinarily helpful.

I'm just curious, if you look at that relative to what was presented at investor day, there seems to be much more NOI, which given the trends that you were talking about make sense.

But a number of the other asset categories changed and it would appear as though if you were to put the same cap rates on the NOI that you put at investor day, that NAV could be upwards of $5 higher than what you presented.

So if you presented $54 to $63, you could be talking something like $59 to $69.

I don't know if there's other things going on in here that make it not comparable, but I wanted you to be able to go through that as well.

Sure, okay.

With respect to the financing, what we're assuming, again, this is all subject to change based on markets, but we are assuming a preferred and a Sterling offering in the first quarter essentially.

And then the US dollar deal, as I said, would be midyear, which is where we've hedged it.

In terms of -- I think you're looking for amounts, too.

So for preferreds, we're assuming upwards of $300 million.

The Sterling debt, $480 million.

And the US dollar bond deal, $250 million.

So that's our best estimate today.

But again that could change.

And then you asked for NAV.

Well Bill, just on the financing.

So I mean, based on the disclosure, I recognize how much you're raising it.

You've laid it out in the guidance and the rates that you're targeting.

What I'm trying to understand is what you've embedded in for the uses of that capital and the dilution associated with it that's embedded in guidance, right, because you spent a lot of time talking, it's the most important variable in terms of timing.

So what I want to understand is what's actually in your guidance, right?

So you have $450 million of debt coming due at 5.6% this year.

The only other use of proceeds could be the line of credit, and if you were just to take your $1 billion of financing, that leaves about $600 million, $550 million to pay down the line.

That results in a lower payback rate than what you're raising the capital.

So I'm just trying to figure out based on the guidance you gave, how much dilution have you embedded in for capital raising?

Right now, all of the new capital is going to pay down the revolver, obviously borrowed at a very modest rate, LIBOR plus 110.

So that's where the dilution is.

The revolver is being taken up over the course of the year as we complete our construction program, which is what's in the development guidance.

Okay.

And then on NAV, how does it compare investor day to today, it does look like there's additional other assets and obviously the NOI is very higher.

If we were to take the same cap rates, is that the right math to do?

Right, so yes, there's about $26 million of increase in annualized NOI growth from Q3 to Q4.

There's $14 million of increase in the NOI in the fiscal year of '14 backlog.

There's $500 million plus of CIP-related asset value.

And that's really the upside potential slide that we presented.

And then there's a $300 million increase in debt, which would obviously be a deduct from the NAV.

And ladies and gentlemen, this will conclude our question and answer session.

We thank everyone for joining today's conference call.

You may now disconnect your lines.