Digital Realty Trust Inc (DLR) 2014 Q2 法說會逐字稿

Good afternoon and welcome to the Digital Realty 2014 second-quarter earnings conference call.

(Operator Instructions)

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

Please go ahead, sir.

Thank you, Denise.

The speakers on today's call will be Interim CEO, Bill Stein; Chief Investment Officer, Scott Peterson; SVP of Sales and Marketing, Matt Miszewski; and Vice President of Finance, Matt Mercier.

In addition to our press release and supplemental, 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'd 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.

Such forward-looking statements include statements related to the Company's future financial and other results, including 2014 guidance and the underlying assumptions.

For further discussion of the risks and uncertainties related to our business, see the Company's Form 10-K for the year ended December 31, 2013 and subsequent filings with the SEC.

Additionally, this call will contain non-GAAP financial information.

Explanations of such non-GAAP items and reconciliations to net income are contained in the Company's supplemental package furnished to the SEC and available on the website digitalrealty.com.

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

Questions will be strictly limited to one question plus a follow-up, and if you have additional questions, please feel free to jump back into the queue.

Now like to turn the call over to Bill Stein.

Thank you, John.

Good afternoon and thank you all for joining us.

Last quarter we outlined our strategic vision for the Company and the initiatives that we're pursuing to advance that vision.

Today I'd like to provide an update on the progress that we've made over the last 120 days, beginning here on page 2 of our presentation.

We've stated the driving improved return on invested capital through the lease up existing inventory is our top priority.

I am pleased to announce that we leased 9 megawatts of existing inventory during the second quarter.

We've reduced our finished inventory balance by over 25% since Investor Day last November.

This enhanced asset utilization has boosted our ROIC by over 20 basis points so far this year.

We're also well underway on a rigorous evaluation of the entire portfolio.

This process is designed to identify non-strategic and underperforming assets that can be harvested to narrow our focus on the core.

We expect our capital recycling initiative will likewise have a meaningfully positive impact on overall return on invested capital.

We expect to conclude this exercise over the summer and bring the first set of properties to market immediately after Labor Day.

Scott Peterson will have more to say about our efforts on this front during his remarks.

In early June, we announced our Global Cloud Marketplace.

A solution that makes our customers public, private, and hybrid cloud services easily accessible to our entire global customer base.

We believe that partnering with our customers is the best way to provide our enterprise customers with a differentiated offering and to create value.

The Global Cloud Marketplace will enable Digital Realty clients to instantly provision on-demand burstable cloud services from trusted cloud providers such as IBM SoftLayer, Internap, Interoute, GoGrid, and SingleHop.

The program is still in its infancy, but demand for the offering has been strong.

We expect to see healthy adoption as awareness grows.

I'd like to pause here for a moment and explain why the concept behind the cloud marketplace is so important for our future direction.

1.5 years ago at the Citi conference in Florida, Michael Bilerman stepped out of character for a moment and served me up a softball.

He asked what aspect of our story was most under appreciated by investors.

I responded that it was our global footprint and our enterprise customer base.

That was true then, but it's even more applicable today.

Modern cloud providers cater to small and medium-size businesses, but they all aspire to penetrate the enterprise marketplace.

The enterprise segment is our bread and butter customer base.

They already populate our data centers around the world.

Our recent leasing activity has been heavily skewed to cloud service providers, in part because they want access to our enterprise customer base.

Enterprise customers, in turn, are attracted by the ability to easily and securely connect to multiple areas of their hybrid cloud.

Both sets of customers choose to grow on a platform, in part because of the presence of the other.

The final catalyst connecting our incredible enterprise customer base to the cloud service providers they now need to grow, is the deployment of our global network ecosystem.

This mutual attraction and our interconnected global portfolio essentially act as a wide moat that is extremely difficult for competitors to replicate.

No one else has the footprint and the cost structure to effectively service the enterprise customer on a global basis.

The competitive advantage of this network effect is analogous to a network dense data center, but on a global portfolio scale, rather than a single building.

This premise will be borne out over time by the ability to attract new enterprise logos as well as new cloud service providers, the ability to retain these customers and the growth of existing footprint within our portfolio.

Back to current results.

Our mid-market segment turned in another solid performance this quarter.

The investments we've made in upgrading connectivity and expanding the amenities that we offer, are enhancing our appeal to retail customers.

As you can see from our press release, we've raised guidance for our capital spending plans over the balance of the year.

Over 90% of this additional capital commitment is due to incremental leasing activity.

This match between leasing and funding is exactly what we aim to achieve with a build-to-order inventory management strategy that we outlined last quarter.

Unleashing intellectual capital is something of a soft initiative, so let me give some tangible examples.

For starters, our General Counsel, Josh Mills' responsibilities have been expanded to include environmental affairs and corporate real estate.

Sustainability is an important issue for data centers given the sector's energy footprint and Josh will spear heading our efforts on this front.

John Sarkis, who many of you have met in various corporate conferences and investor events has recently been named Colocation General Manager, in addition to his responsibilities leading our connectivity initiative.

Scott Peterson's promotion to Chief Investment Officer, has arguably had the most immediate impact.

He and his team are restructuring that investment review process to ensure consistency across disciplines and regions.

Essentially, any deal that requires commitment of incremental capital is now brought before the investment committee.

This process is imposing tighter discipline on capital allocation decisions and promoting appropriate behavior from the sales team as well as the broker channels.

It also delayed two quarter-end leasing transactions which has traditionally been the window when customers were able to extract the most favorable terms.

One of these deals has come back to us and appears likely to close on terms that we proposed.

This underwriting discipline may impact leasing velocity in future periods, particularly as we continue to whittle down our stockpile of available inventory.

However, we are confident that this approach is translating to improved net effective leasing economics and better returns for our shareholders.

Looking forward, and turning now to page 3 of the presentation, we see robust demand for the premium data center solutions we offer.

Providing peace of mind to our customers and enabling them to focus on their core business.

The macro backdrop appears relatively benign, despite the recent rise in geopolitical uncertainty.

Data center fundamentals are gradually improving as excess supply is being insistently absorbed.

We're taking a much more disciplined approach to inventory management.

And we see more rational behavior for many other industry participants as well.

Consequently, we are cautiously optimistic that data center fundamentals will continue to approve underpinning acceptable risk adjusted returns as well as the stability of our cash flows.

And now, I'd like to turn the floor over to Scott to provide an update on our capital recycling initiatives.

Think you, Bill.

As mentioned last quarter, the investment team is undertaking a wholesale analysis of every single property in our portfolio.

This analysis is well underway and should be complete later this year.

The first phase of the project targeted a group of high priority properties consisting primarily of non-core assets, data center properties in non-core markets, underperformers, and at-risk properties.

As a result of this analysis, we expect to prune the bottom 5% to 10% of our portfolio in order to refine our strategic focus on future capital requirements and improve return on invested capital.

As Bill mentioned, we plan to start bringing these properties to market after Labor Day.

During the second quarter, we closed on the previously announced sale of a small single tenant building to the user for approximately $42 million.

Generating a gain on sale of approximately $16 million and realizing and levered ROIR in the low teens.

While the cap rate was at the high end of our expected disposition range, it is not a very relevant metric in this instance as they were only 18 months left on the lease term.

We did explore several options for the property and determined we could generate a better return on our capital elsewhere.

I'd now like to turn the call over to Matt Miszewski to discuss our recent leasing activity.

Think you, Scott.

As shown on page 5 of our presentation, we signed new leases totaling over $35 million of annualized GAAP rent for the second quarter.

The first half of the year tends to be seasonally slow.

The consistency of our recent leasing momentum is readily apparent from a comparison of our year-to-date leasing activity relative to the first half of any previous year.

Keep in mind that the $47 million we reported in the first quarter included a $12 million direct lease with a former subtenant at a power-based building in Santa Clara.

Excluding this lease, our second quarter leasing velocities was right on top of the first quarter.

And both quarters progressed according to plan.

This positive momentum has carried through to the month of July and the third quarter is off to a strong start as well.

Colocation revenue accounted for over 15% of our second quarter leasing activity.

This is the fourth consecutive quarter that our mid-market segment has delivered a contribution within a range of $4 million to $8 million.

To put this in context, it's helpful to realize that prior to the third quarter of 2013 this segment typically generated between $1 million and $2 million per quarter.

Cloud content and social media for the drivers once again accounting for three-fourths of our second quarter leasing activity.

Existing customers represented more than 80% of our second quarter lease signings.

But the new team has also added 60 new logos year-to-date.

Cash rents on renewal leases rolled up by mid-single-digits as shown on page 6. The large lease with a financial services tenant in Northern Virginia that was signed at peak rent and that we highlighted on the last call was finally renewed in July.

The rent rolled down 11% on a cash basis, a bit better than the 15% to 20% roll down we guided towards previously.

This renewal was not reflected in our second quarter leasing statistics, but will obviously leave a mark in the third quarter.

Although it is been fully baked into our guidance.

It is important to note that this transaction was also expanded to include one pod in Dallas, as well as a fourth pod in Ashburn.

Base rates on turnkey flex leases signed were lower than lower last quarter, entirely due to market mix, reflecting a concentration of activity in lower costs, lower rent North American markets including Dallas, Ashburn, and Phoenix.

On a like-for-like basis base rents were flat to up slightly.

More importantly concessions are abating.

This improvement reflects our retooled sales compensation program and the revamped investment review process, as well as gradually improving data center fundamentals.

Turnkey leasing costs were elevated quarter driven primarily by one large 15 year lease.

Adjusting for term, on a per square-foot per-year of lease term basis, the second quarter leasing cost don't significantly diverge from the norm.

Turning now to lease duration on page 8, lease terms are admittedly shorter on colocation leasing, and as Bill mentioned last quarter, we're comfortable going a bit shorter in a rising rental rate environment.

The average term on leases signed during the second quarter was over seven years.

This is true whether the second quarter leasing activity is weighted by square feet or by rent.

The weighted average remaining lease term across the entire portfolio is half a year shorter, weighted by rent rather than square feet, but it is still well over six years.

The duration of our average lease terms supports is the stability of our cash flow stream and strengthens our cost of capital advantage.

In addition to signings, lease commencements were also respectable.

As you can see from the chart at the bottom right of page 9, the weighted average lag between signing and commencement inched up from 6 to 7 months.

This lag is entirely due to future delivery of committed space and is not indicative of either free rent or and elongation of the sale cycle.

The team leased a total of 17 megawatts during the second quarter, of which 9 -- or a little more than half -- came from our finished inventory balance.

To put this in context, the historical average mix of existing inventory as a percent of total leasing has been one-third of the total.

We started new pods in Ashburn and in Hong Kong this quarter.

And the net absorption of finished inventory was 4.5 megawatts.

As Bill mentioned during his remarks, and as you can see here on page 10, we have reduced our finished inventory balance by over 25% since the Investor Day last November.

The positive net absorption in Phoenix over that timeframe is particularly encouraging.

It was also encouraging to see this positive net absorption translate to a 70 basis point improvement in overall portfolio occupancy.

Following several quarters of declines, due to the move out of various non-data center tenants along with delivery of the inventory that we are now absorbing.

We did have one tenant occupying 2 megawatts in Phoenix, that was in holdover status as of June 30 and is expected to move out in the third quarter.

We have a very healthy demand funnel in Phoenix, however, and we expect overall portfolio occupancy to continue to improve in the second half.

Turning now to supply, on pages 11 and 12, the available inventory in Northern Virginia has actually come down by a few megawatts over the past 90 days while new construction is underway in Texas.

I would like to point out that these charts reflect total market supply and do not differentiate between shared back plain facilities and our dedicated infrastructure product.

We believe that much of this available supply is not directly competitive with our offering.

As a case in point, we have a very healthy demand funnel in both Northern Virginia and Dallas.

And we can scarcely keep any inventory on the shelf in either market.

The up tick in sublease space in Santa Clara resides within our portfolio.

We received notice from internet enterprise that represents approximately 1% of NOI that they intend to sublet approximately 10 megawatts they occupy in Santa Clara.

Their leases expire in 2016 and 2019.

And the in-place rent is well below market.

We're working with a client on the solution and do have interest in the space from multiple prospective customers.

With that, I'd like to turn the call over to Matt Mercier to talk you through our financial results.

Matt?

Thank you, Matt.

Most of the balance sheet activity occurred prior to our last earnings call, but several significant events took place during the second quarter.

In mid April, our exchangeable debentures were exchanged for common equity, which improved debt to EBITDA by 0.3 turns.

We also raised an additional $63.5 million in April under reopening of the 7 3/8% series A preferred and partial exercise of the underwriters over allotment option.

Including the sterling bond offering and original series H issuance that closed in the first quarter, this brings our year-to-date total long-term capital raise to approximately $900 million.

Subsequent to the end of the quarter, S&P revised outlook from negative to stable, reflecting our improved operating performance.

As shown here on page 14 of the presentation, the bond market has taken note and our credit spreads have tightened considerably over the past several months and have also outperformed the REIT triple-B benchmark most notably since S&P revised its outlook.

Turning now to operating performance, as Matt alluded to in his remarks, portfolio occupancy ticked up 70 basis points.

The first sequential occupancy gain in the past six quarters.

We have also raised guidance for the year-end portfolio occupancy by 75 basis points at the midpoint, on the strength of the second quarter rebound.

As Matt indicated in his presentation, cash re-leasing spreads were positive across product types in the second quarter.

Although the large roll down in Northern Virginia was signed in July and will have an impact on our third quarter leasing statistics.

Same capital cash NOI growth was 5.8% for the second quarter, above the high end of our forecast.

The year-to-date number is squarely within the 4% to 5% guidance range.

I'd also like to address our guidance for incremental revenues remaining to be recognized and 2014 from speculative leasing.

Which shows a reduction from $10 million to $15 million to $5 million to $10 million this quarter.

As of mid-July we have already achieved the full speculative leasing target that was embedded in our prior guidance.

We're not resting laurels for the rest of the year, however, we've raised the bar by an additional $5 million to $10 million of current year revenue we expect to recognize from leases that have not yet been signed.

We also raised CapEx guidance for development spending and capitalize leasing cost by approximately 15% at the midpoint.

However, as Bill mentioned in his remarks, over 90% of this additional capital commitment is related to incremental leasing activity.

We expect to fund near-term capital requirements with proceeds from asset sales and joint ventures.

We currently have no plans to revisit the equity market anytime soon.

At the bottom line, we've raised core FFO per sure guidance by $0.05.

Our improved outlook is entirely organic.

We've actually reduced our acquisitions guidance by half.

We've also introduced disposition guidance for the first time and we do expect a couple of pennies per share of dilution from a combination of asset sales and joint ventures contribution in the second half of the year.

To recap the highlights for the quarter, as advertised here on page 16, we signed over $35 million of new leasing during the second quarter, including a pipe with $5.7 million mid-market contribution.

We leased 9 megawatts of existing inventory with 4.5 megawatts of positive net absorption.

We achieved our full-year speculative leasing target.

We registered an up tick in occupancy for the first time in 1.5 years,

We generated positive cash re-leasing spreads across product types.

We delivered 5.8% same capital cash NOI growth.

S&P revises its outlook from negative to stable.

Our second-quarter core FFO per share beat consensus by $0.01.

And finally, we raised 2014 core FFO per share guidance by $0.05 at the midpoint.

We're quite pleased with our second quarter financial results.

As most people here at Digital know, I'm fairly hard to please.

And we will be pleased to open up the call and take your questions.

Operator?

Thank you.

Will now begin the question-and-answer session.

( Operator Instructions )

Vance Edelson, Morgan Stanley.

Great.

Thank a lot.

As you look to bring the first set properties to market after Labor Day, maybe if you could just provide an update on the money flows in the data center world.

Who the potential buyers might be?

I think in the recent past, you've mentioned [seeing] pension and other money looking to invest.

Any updates there on demand or even cap rates?

Will it be more users looking to buy?

And any appearance of [wealth] money yet?

Yes, Vance, this is Scott Peterson, here.

It's a little soon to say, but as far as the buyers -- we're seeing a lot of -- we're seeing demand on the buy side to be pretty robust in the private markets.

I think we'll find -- on the non-core assets I think we'll find traditional buyers for those types of assets, that will be interested in them.

The data center buyers, will be a mix -- in the non-core markets, will be a mix of may be value add, as well as traditional stabilize asset buyers.

And then for some of the under performers, I think we will see probably more of the value add type buyers there.

That might be private equity backed, but that's kind of speculation at this point.

What I can say, is we're getting numerous phone calls from potential buyers out there that are very interested in looking at anything that we're interested selling.

Okay.

That's helpful.

And then as my follow-up, you mentioned geopolitical risk.

Could you expand on that a bit?

Where you think there might be potential risk?

And perhaps while you're at it, just walk us through Europe.

Do Germany, France, and the UK remain strong?

Any updates on demand in Asia?

Do the inventory shortages continue there?

Just kind of walk us around the globe in terms of strength and weaknesses?

So, London is very strong for us, Vance.

In fact we are in the process of running out of inventory there.

We're bringing a project online in Dublin.

And we would expect the demand there to come mostly from this side of the pond.

We have very little inventory in Paris, I think less than half a pod.

We're considering Amsterdam, but we're not -- we have a site in Amsterdam, a LAN site, but we will be building there unless we have a pre-lease situation.

Asia Pac is also very strong.

Singapore we could be out of inventory in Singapore by the end of next quarter.

And I think in Hong Kong, there's a good possibility we will be out at the end of this year.

So we are looking for additional sites both in Singapore and Hong Kong.

Leasing in Australia has been steady; both Melbourne and Sydney.

Vance, this is Matt Miszewski, given my political background, apparently I get the answer the geopolitical risk questions.

I don't see any impact to us on the geopolitical conflicts in the Middle East or in Central and Eastern Europe.

It is important though to understand that the privacy concerns of the European Union and the nonunion countries that are inside Europe, does have a bit of an impact on operations of data centers through continental Europe, as well as the islands.

That actually ends up being a demand driver so for some of our key customers, including some very large cloud providers who are taking a deployment strategy to eliminate the data sovereignty risk that other providers have.

We're happy to see folks adjust the data sovereignty requirements within EMEA.

As Bill said, we see the Asia demand on the demand side extremely strong and we don't see any geopolitical risk throughout our Asia Pac portfolio.

Jonathan Schildkraut, Evercore.

This is Rob for Jonathan.

I was wondering if you guys could talk a little bit about the increasingly solutions-based sales approach under Matt's guidance and how the strategy is evolving in terms of the sales team and the reception by customers?

And secondly, regarding the launch of the global marketplace can you talk a little bit about take rates, or how those services are been adopted with new customers or with new leasing?

And the impact on pricing?

Happy to, Rob.

Your first question is about the solutions-based sales approach and we continue to see this evolve in the best of possible situations where we're getting closer to our customers and really starting to approach the customer base from their point of view as opposed to from our point of view.

We did need to make some fundamental adjustments to the sales force, including the compensation plan adjustments that we made this past year, before we went after the more advanced selling process in terms of solution selling.

Now we see solution architecture as part of what we do inside the sales force, as well as inside the small marketing team that I have on my team.

If you think about the basics of this, instead of us simply providing fantastic technical solutions for customers, that we create here in San Francisco or in London or in Singapore, now we do this in partnership with our customers by sitting down with them, talking to them about what their needs are.

And then making sure that our products and our solutions fit and meet their needs.

One of the things we found that we started the solutions-based process was that we did need things like the global cloud marketplace.

And so the conversations that we're having with our customers are leading us to do things that make them more sticky inside all of our properties.

The global cloud marketplace is one of these.

The global network ecosystem is another one.

This has been successful.

As you know, we started in Europe.

We finished the North America rollout.

And the Asia-Pacific rollout is scheduled to be completed by the end of the year.

When we finish that rollout, our network ecosystem will feature connectivity to over 1,000 available networks across the world.

The last piece I'll talk about, in terms of this solution approach, is our open IX initiative.

Not our open IX initiative, but the community's open IX initiative is really starting to take off.

We've, of course, landed the Amsterdam Internet Exchange inside one of our New York facilities.

As well as landed them into one of our western coast facilities.

And we're talking to four more providers right now.

As you can see, as we've taken this approach and we've lead this approach in terms of solution-based selling, you can start to see the data center industry itself start to transform from storage to a more affordable way for our customers to exchange data.

Which is truly the value that they see inside data centers today.

Okay.

Anything about take rates?

Or any sort of -- can you quantify any of, related to new leasing activity or anything?

Yes.

When we announced the global cloud marketplace in June, we announced it early and we're in the early innings of the consideration of the GCM.

What we've also noticed is that there's an awful lot -- we're learning more than we thought we would learn initially.

And that learning is that there's an awful lot of demand for a global cloud marketplace that we didn't anticipate.

We're starting to see not just the cloud marketplace that we've launched, but individual cloud marketplaces that are starting to come up in the conversations that we have with both our partners, as well as our customers.

I think that take rate question is a little bit too soon right now.

We've just operationally launched the facility.

We are filling it up with partners today.

And once we start to see -- start to actively market that solution, I think you're going to start to see the uptake increase.

And so we should be able to give some updates on that on the next call.

Tayo Okusanya, Jefferies.

Good afternoon.

Just a quick question on the economics around some of the deals that were signed this quarter.

Specifically, page 17 of supplemental, if you just kind of take a look at leasing cost per square foot, it's gone up quite a bit.

And then your average lease term roughly about the same for a lot of your new leasing activity.

So I am just a little bit curious about why the higher leasing cost and what may be going on in regards to who you're negotiating with tenants that's resulting in this?

Tayo, there was one long-term deal in the quarter that drove an external commission, that was quite substantial.

So the leasing costs were based on that one commission, not TIs.

And we don't see this as a trend.

I think importantly, we're still seeing our ROIC's, including TIs and LCs hitting our target range of 10% to 12%.

The comp plan that we put in place at the beginning of the year, we think it's improving the leasing economics.

Tayo, this is Matt.

When we took a look a the total leasing costs across the quarter, of course we dug in a little bit deeper.

As the guy who launched the new comp plan, I wanted to make sure with having the demonstrative effects that we anticipated we would.

And as I said in my opening statements, we've seen the rent abatements go away and lease ramps shorten.

We've also seen TIs in our world start to decrease.

When we do quarter-to-quarter comparisons, it is a significant decrease, especially across the TKF product

So if we took out that large tenant, do you know what the number would have been for the quarter in regard to leasing cost per square foot?

On that one tenant?

I don't know that I have that data immediately in front of me, but I'd be happy to provide that right after the call.

Ross Nussbaum, UBS.

Thanks.

Good afternoon.

Can you guys talk a little bit about the lease expirations for the remainder of the year?

I see you have 5.4% of your rent roll expiring at about $190 a foot.

Can you just give us a little bit of color on what you think the retention rate is going to be on that?

I know you talk about that one lease in Phoenix, but beyond that, what do you expect the retention to be?

This is Matt.

We actually showed, in terms of rent, what we expect to expire over the balance of the year.

It's on the NOI step up chart as part of the presentation.

And it's the $5 million that's included.

So of what is expiring, we expect about $5 million in annual base rent not to renew as of today.

Okay.

That is helpful.

Bill, can you give us an update on where things stands with the CEO search overall and the timing there?

Thanks.

Sure, Ross, be happy to.

Like I said on the last call, the Board -- our Board is comfortable with the leadership that's in place.

I think that comfort has been validated by, what I would say is improved employee, customer, and investor confidence, both on the equity side and the fixed income side.

I think it's interesting to note that, since the change in leadership, we've recovered almost $2 billion of market cap for our shareholders.

So the Board continues to be focused on sourcing the right candidate for the job, but no less the timing is still expected to be this year.

And meanwhile, this team is focused on executing the strategic vision which we played out to be optimized and return on portfolio, recycling capital, and unleashing the intellectual capital to firm.

Vincent Chao, Deutsche Bank.

Hello.

Good afternoon, everyone.

Just want to go back to the new lease pricing in the US, which dropped down to $130 per square foot.

I know a lot of that was attributed to the particular markets in the US which are lower-priced in general.

Just curious those three markets, what percentage of the leasing was in those three?

Was all of it?

So, Vin, the drop as you said in rates is all market mix.

North America -- thinking from a North America perspective, quarter to quarter, in the first quarter, 44% I think of our TKF gap rents came from Toronto.

While in second quarter, 48% came from Dallas in Phoenix.

That should give you an idea of the rough make up in the North America sense.

Globally, in Q1 we had some very large deals and APAC and EMEA, about 62% of rents coming in across APAC and EMEA in the first quarter.

And again, that comes back to North America in the second quarter, about 75% of the rents.

Right.

Okay.

I'm sorry you also mentioned, I think, Northern Virginia being a fairly big part of the mix this quarter.

What was a percentage of leases?

So Northern Virginia -- there was a sizable lease in the quarter and I'm just going to back into that number.

I've got to that number for you.

I don't have it in front of me.

You mentioned the quarterly same capital growth -- NOI growth of 5.8% exceeded expectations.

Can you talk a little bit about what the upside was relative to your own expectations?

And the implied guidance at the midpoint suggests some slowing from the 5.8% that we saw here in the second quarter.

Just curious if that's really what you're expecting us to see?

Or maybe your trending towards the higher end of that range?

I mean it's -- obviously that's just one quarter comparison.

I think that's why we also stated what the year-to-date growth was, which is squarely in the middle of where we're guiding.

And right now we're comfortable that with the year to date reflects fairly accurately where we expect to become the end of the year.

Vin, just to get back to you on Northern Virginia Q2, it's about 10%.

Steve Sakwa, ISI Group.

Thanks.

I guess good evening at this point.

Or good afternoon.

Just two questions.

I guess on the turnkey joint venture, Bill, what exactly are the goals that you want to get out of that?

Is it to kind of establish pricing in kind of core markets for yourself?

Is it to eliminate some of the smaller markets that you're in?

Or markets where you really have one or two assets?

What's the immediate goal of that joint venture?

There are two goals, Steve.

The first is, I think it's prudent for any company to diversify its capital sources.

So we clearly have access to public and private debt, and access to public common debt and preferred.

This, we believe, will give us access to a reliable source of private capital.

In addition, we expect this will provide some transparency on private market valuations, from a sophisticated investor for our turnkey product.

We think that is important, as well, particularly for the NEB evaluations of the analyst community and our investors.

But I guess from a market perspective, are you looking to kind of prune in the Northern Virginia, Silicon Valley, Chicagos?

Are you looking to kind to sell maybe in the Bostons and the St Louis, where you have one, two assets?

And maybe those markets are quite as core?

At this point, the view is that when we prune the non-core markets that will be through outright sale.

The joint venture would be in core markets where we want to retain an interest and retain management of the asset.

This joint ventures is being structured in a similar way to the Prudential joint venture, with a retain 20% interest asset management and property management fees, as well as promote on cash flowing back in.

John Bejjani, Green Street Advisors.

Hello, guys.

Is the current $20 million or so quarterly G&A run rate, is that fully incorporating the mid-market sales team ramp?

Or how much further do you see this growing?

The G&A numbers do have baked into them the entire mid-market sales addition.

So we've completed that process from a mid-market perspective.

Across the G&A in total, we do anticipate that we'll see a mild increased this year.

But also important to remember that this is all already baked into guidance.

And I always like to point out as the head of sales and marketing, that additional costs in my area always results in higher revenue, so we continue to see great steady progress on our strategic plan.

Great.

Thanks.

Just one quick follow-up on the turnkey JV.

You guys had been talking about this for better part of the year at this point.

Is anything you can share on the status there?

What's caused the delay to this point?

John, I'm not sure that I'd say there is a delay.

We've taken it out to multiple counter parties.

We have identified one counterpart.

Terms have been negotiated.

Now, that you have the process of sourcing debt as well and all the conditions that are associated with the debt arrangement.

So I think we're making good progress.

I think perhaps there was a bit of delay earlier in the year, as we were looking at generating capital from asset sales.

Now we've more or less sized the asset sale program.

And have a sense for the sequence there.

And we have a view as to how the joint venture would fit into that program.

John Petersen, MLV & Company.

Great.

Thank you.

Quick question on the guidance.

Maybe it's not quick.

I don't know.

In terms of disposition obviously you have a pretty wide range.

I know you said you get more details after Labor Day.

But on the cap rate, the range is from 0% to 12%.

I was hoping you guys could kind of elaborate on what to expect.

Obviously 0% means you have some assets, that's their negative cash flowing.

Just curious what percent of that zero to 400 would kind of fall into to that bucket?

I guess, how do I think about that really wide range?

And where you see it realistically falling out at?

I apologize for the wide range.

It's kind of tough to try to ballpark that.

It's a little early in the process to nail it down.

I think it's reasonable to expect that the average cap rate for the dispositions will be below our implied portfolio cap rate.

If that helps.

Okay.

That's fair.

(multiple speakers) Go ahead.

That's okay.

Okay.

In terms of debt maturity, just hoping for an update.

You have got about $130 million of secured debt maturing, a big loan, in November of this year.

And $375 million of unsecured notes in July of next year.

What can we kind of expect in terms of how you guys plan to refinance that debt?

Sure.

This is Matt.

Over the balance of this year, our thinking is we'll effectively repay most of the secured debt that's maturing through a revolver.

We do have in our guidance an additional capital raise, an additional US bond, late in the year that you could say effectively would be part of that refinancing.

And then in terms of next year, we're still putting together our, call it capital plan, but I would think, given where rates are today in terms of the first bond maturing we have mid next year, that we should be able to refinance on a longer-term, at effectively the same cost.

So basically take out a 5-year paper with a 10-year money.

So we feel very confident about our ability to fund the business through 2015 at this point.

We will be generating a liquidity through asset sales as well as the joint venture we talked about, which will not only pay down debt, as well as keep leverage in line.

Jordan Sadler, KeyBanc.

Thanks.

Just wanted to come back to demand that's driving sort of the optimism for data center fundamentals, that Bill, I think you referenced in your prepared remarks.

Sequentially supply seems to be up a little bit overall with Dallas and Houston up and Silicon Valley up -- I realize offset by a little bit of the decline in Northern Virginia.

What can you tell us about what you're seeing on a demand-side, particularly domestically?

Sure, Jordan.

First of all, we are constricting our supply and we see supply constricting from others as well.

And demand remains strong.

In fact it might even be stronger than it was 6 or 12 months ago.

So based on that, we think market rates will inflect.

And within our own portfolio, we're seeing a positive cash mark to market in 2015.

I think it's important to note here that there's a definite difference between product offerings.

Matt mentioned that in his prepared remarks.

And by that I'm referring to shared versus dedicated.

We're seeing significant demand for our dedicated two-end product in what we would call national markets, as well as the other markets where we have finished inventory.

That really leads to our conclusion that fundamentals are improving at least for our product.

Jordan, as you think about the shared backplane versus the dedicated infrastructure, you don't have to search long for proof points, right?

Largely reported over supply in Northern Virginia, but I can't keep the two-end dedicated solution that we have there on the shelf.

Same situation in Dallas.

So you don't need to search long and hard to find the proof points that the dedicated offering that we have is different, and therefore that supply is constricted.

Okay.

Just maybe as a follow-up, given sort of the increase in the development spending guidance surrounding sort of this optimism around demand in fundamentals, and this significant recovery in the share price that we talked about.

How do you feel about raising equity here, given sort of where you are in the leverage spectrum, positioning the balance sheet for 2015?

This is Matt.

I think we said in our prepared remarks, with some of the capital recycling initiatives that we have underway, we don't currently have any plans to sell equity.

We've got a plan for the year that fully funds all of the capital needs that we have while keeping in line with the covenants and relevant leverage ratios that we like to operate within.

Particularly in light of our upward revised stability outlook from S&P.

So as of today, we don't have any plans and guidance to issue any equity.

Let me add to that, Jordan.

While the stock has done well, we still think it's trading at a discount to NAV.

We also are looking at significant -- what we think is significant growth in NAV due to improving fundamentals, inventory absorption, and thus value creation through our development program.

We don't think it makes sense to sell equity at this level.

Emmanuel Korchman, Citi.

Actually, it's actually Michael Bilerman with Manny.

And Bill, you've got a pretty good memory from 1.5 years ago.

(laughter) I'm curious on the (inaudible) program.

The zero to $400 million -- is that all-encompassing for this review that you did -- I think Scott talked about 5%, 10% of the portfolio, which I think would be greater than zero to $400 million unless they're really low valued assets.

So I'm just curious, sort of how big that portfolio is?

And whether you want to -- you're going to start after Labor Day -- I assume not all the stuff will come in at that point.

So can you just give us a little bit more color surrounding it?

Sure.

The first question -- I kind of a lost track of you for a minute there.

We plan to initiate the program after Labor Day, so obviously assets will bleed out from that point.

We're not going to hit the market with every asset that we intend to -- that we have slated for disposition at that point.

Then I think you're the question was about the size?

Yes.

You said 5% to 10%, which to me is a lot greater than zero to $400 million, so I didn't know whether the basket of assets that you identified to eventually liquidate was in excess of $400 million?

So the basket of the high priority assets, is an excess of that.

And we're still finalizing which ones we're actually going to be taking the market right after Labor Day.

Michael, let me follow up though.

The zero to $400 million are asses that will be sold this year.

That does not represent 5% to 10% of the portfolio that is slated for sale.

That's sequencing and timing that's what would be sold this year.

Right.

So what I'm trying to picture of, I assume you're going continue this program to next year -- you said you want to sell 5% to 10%.

How big of a disposition plan do you envision happening over the next 12 to 18 months?

Are we talking about $1.5 billion of assets, $2 billion of assets?

What I've seen, Michael, would say $600 million of proceeds roughly.

Do you agree with that?

Yes.

That's pretty close.

And that's probably over the course of the next eight or nine months.

Okay.

Thank you.

Tayo Okusanya, Jefferies.

Just a quick follow-up.

Page 16 when I take at look at the same-store results.

Just kind of curious from an OpEx perspective clearly large increases in utilities and properties operating expenses -- repairs and maintenance and things like that.

Just kind of curious why the big year-over-year bump, number one?

And what we should expect kind of going forward in regards to a run rate?

Tayo, this is Matt.

There's a couple things.

Some of that was as we expected and sort of included in guidance as part of our guidance we give on margin.

Some of that is seasonal initiatives for preventative maintenance, so mainly just as a matter of timing.

And additionally, as we've been rolling out some of the data center services and the ecosystem features that's what's driving some of that increase, which again is all baked into the guidance that we provided.

And we expect to be within the margins that we laid out as part of that guidance come the end of the year.

Okay.

Thank you.

Steve Sakwa, ISI Group.

Thanks.

I didn't get to ask my second question.

I guess maybe for Matt, as you guys thought about the kind of the lease up potential that it takes for an asset to get from kind of starting point to stabilization.

I know that number had kind of got extended out to almost 12 quarters, and just giving the leasing environment that you're seeing today, and that seven months I guess number that you talked about from a tenant signing to sort of taking occupancy.

Do think that 12 quarter stabilization period has shrunk?

Or is in the process of shrinking?

And if so, what do you think the right number is today?

Great question, Steve.

I do think that the number is shrinking and what I'm looking for in the data is a pattern I can sort of solidify myself to give you some guidance as to what I think the new number is.

There's a number of things that go into that equation.

The gap from signing to deployment is certainly one of those pieces, but the other correction that we made in the sales process helps to speed some of that up as well.

I would anticipate that we'd be able to get to a more crisp number as to what it takes for us to get fully stabilized on a building over the next few quarters.

But it is improving.

If I can give you a trend guidance, it's certainly improving.

Steve, it definitely varies market by market though.

Northern Virginia's pretty brisk at this point.

And Dallas is brisk.

As Matt said, we can't keep the inventory on the shelf.

We build the shell, we finish the data center, and it will be fully leased within 12 months.

Steve, with the focused new discipline that we have here, you can expect that our focus will remain on increasing that ROIC by leasing existing inventory, but also leasing into the markets that are similarly hot, that Bill just described.

So like I said, I think you should see market to market differentiation, but you should see a constriction of that time to stabilization.

Thank you.

Michael Bilerman, Citi.

We just like confusing you.

It's Manny here with Michael.

Had a quick follow-up on the dispositions.

Would you ever consider selling some of those pre-stabilized assets to both help the ROIC, maybe bring in some incremental proceeds, and sort of move that along, especially in those ones that have been on schedule for a while now?

Absolutely.

As a matter fact, I think you will see that some of those are on the list of high priority candidates.

When you said, Matt, earlier $600 million of proceeds, did you mean $600 million gross or net?

Gross proceeds.

That's probably net of sales expenses on that, but pretty close.

Got it.

Thank you.

And ladies and gentleman at this time, this will conclude our question-and-answer session.

The Digital Realty 2014 second-quarter earnings conference call has now concluded.

We thank you for attending today's presentation.

You may now disconnect.