Digital Realty Trust Inc (DLR) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

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

(Operator Instructions)

Please note this event is being recorded.

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

Thank you.

Hello everyone and welcome to the third-quarter earnings conference call.

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 a 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 taken 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 at www.digitalrealty.com.

Questions will be strictly limited to 1 plus a follow-up and if you have additional questions please feel free to jump back into the queue and now I'd like to turn the call over to Bill Stein.

Thank you, John.

Good afternoon and thank you all for joining us.

I'd like to start today by providing a quick update on the progress that we've made toward the strategic initiatives we laid out six months ago.

These are highlighted on page 2 of our presentation.

First, we made continued headway on leasing up our existing inventory during the third quarter.

We have likewise made steady progress towards our top priority of driving improved return on invested capital which is up 30 basis points over the last year.

With respect to our capital recycling initiative, we took the first tangible steps towards pruning the portfolio to narrow our focus on the core.

We also closed a significant Turn-Key data center joint venture transaction during the third quarter.

Our capital recycling program is designed to refocus our geographic footprint and enhance the consistency of our product quality.

This program will set the stage for a faster more sustainable pace of growth in 2016 and beyond, even if it does create somewhat of a headwind to earnings growth next year.

If we have to choose between long term value creation or near term growth in FFO per share, we will choose the former.

We plan to exit several secondary markets, but we've also identified a handful of select global markets notably in Germany and Japan where our customers would like us to have a presence.

We plan to enter these markets with our customers over time.

Scott Peterson will cover our capital recycling efforts in his remarks, but suffice it to say that we believe capital is precious and at current pricing we view the equity embedded within our existing portfolio as a better source of capital than the public equity capital markets.

In addition to refining our focus, we expect our capital recycling initiative will also drive tighter utilization of our asset base and will likewise contribute to improvement in our overall return on invested capital.

Turning to our global alliances program, we recently announced a joint marketing alliance with VMWare and an agreement with Carpathia to make our respected product offerings directly available to each other's sellers.

In addition, we are in the process of significantly expanding the number of cloud service providers participating in our global cloud marketplace.

Our enterprise customer base is accelerating their adoption of the hybrid cloud model.

Digital Realty is uniquely positioned to enable our customers' needs by facilitating direct access to large and growing cloud service provider network within our portfolio.

Existing customers accounted for almost 90% of our third quarter lease signings, but we have also added nearly 80 new logos year-to-date.

These have included multiple instances of cloud production for a global software powerhouse currently servicing over 400,000 customers and one of the world's largest enterprise software providers currently serving clients in over 130 countries by supporting their cloud platform.

Moving on to inventory management, as discussed, we are committed to a much more disciplined approach with respect to development risks going forward.

We have primarily transitioned to a build-to-order inventory management program.

As you can see from the development life cycle schedule on page 30 of our supp, our active data center construction projects are now 86% preleased.

With progress against these initiatives in mind, I'd like to take a moment to share with you why I believe we have such a durable business.

For starters, we have a world class roster of customers with excellent credit.

These customers tend to sign relatively long term leases.

They typically make a significant investment of their own capital within our facilities and as a result they have a high propensity to renew their leases at expiration.

Our top 50 customers account for roughly 70% of our NOI.

This level of concentration allows for diversification, but it also tips the 80/20 principal scale contributing to a comparatively low cost of sale and a less operationally intensive business model.

These attributes underscore the stability of our cash flow stream, which has earned us the lowest cost of capital in the sector supported by the residual value of our real estate.

We've also been able to attract and retain a base of incredibly talented and hard working employees from around the world, whose skills and dedication would be nearly impossible to replicate by any competitor and thus represent an important source of competitive advantage.

In short, we are confident in our competitive position.

Over the next three to five years, we plan to strengthen our position by driving greater profitability per unit through our existing footprint.

In addition to emphasizing asset utilization, we aim to drive additional revenue through capturing a greater share of customer wallet via product diversification, exploiting opportunities for open and paid peering and driving the pairing of cloud service providers with our large enterprise clients.

Finally, let's turn to the macrooutlook laid out on page 3 of the presentation.

As you are surely aware, geopolitical uncertainty has risen over the last several months, while the outlook for global GDP growth has slipped a bit.

In contrast the US economy has remained relatively resilient, although growth has been modest.

Data center demand is not directly linked to the price of oil or to US payrolls but is secular in nature and is growing faster than GDP.

In addition, supply is being consistently absorbed at the sector level and we expect continued gradual improvement in data center fundamentals.

And now I'd like to turn the call over to Scott Peterson for an update on our capital recycling initiatives.

Thank you, Bill.

As shown here on page 4, we closed a $187.6 million joint venture during the third quarter with Griffin Capital Essential Asset REIT for a Turn-Key data center located in Ashburn, Virginia.

We sold an 80% interest to Griffin Capital and we retained a 20% interest in the joint venture.

We will continue to manage the property and receive management fees.

The transaction valued the property at a 7.05 cap rate, or $20,600 per kilowatt.

We are pleased with this transaction, as it provides meaningful price discovery for Turn-Key Data centers and establishes a new capital partner relationship.

On last quarter's call we indicated we would begin marketing noncore assets for sale shortly after Labor Day.

We have identified an initial pool of nine properties for disposition.

As detailed in our press release, we've brought five of these assets to market and we've booked a $13 million impairment charge during the third quarter to write down two of those assets to their estimated fair market value.

Leasing activity at the four remaining properties has picked up considerably over the past 90 days, and we are in the process of finalizing some new leases which has affected the timing of bringing these properties to market.

However, this should increase the value of these properties and maximize proceeds for our shareholders.

In addition, several of these assets were encumbered by CMBS debt, which was paid off in September.

These nine assets represent roughly the first one-third of the property's underevaluation for the capital recycling program, which comprises roughly 5% to 10% of the portfolio.

This initial portfolio has some winners and some losers, but on balance we expect to recognize a gain well in excess of any impairment charges or losses.

We have been encouraged by the early indications of interest we have received, and we expect our capital recycling program will contribute to our objectives of narrowing our strategic focus, funding future capital requirements and driving improved return on invested capital.

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

Thank you, Scott.

As you can see here on page five we signed new leases totaling over $31 million of annualized GAAP rent during the third quarter.

Our recent leasing activity has been remarkably consistent.

You may recall 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 that one lease we have signed between $30 million and $35 million every quarter this year.

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

Our mid-market segment has delivered a consistent contribution of between $4 million and $6 million in each of the past three quarters.

This segment is representative of the steady pace we are seeing across our sales platform, but has also been partially responsible for smoothing out some of the traditional lumpiness in our quarterly leasing activity, just as we expected.

Turning now to page 6, cloud content and social media have been the major drivers of our recent leasing activity and accounted for nearly 75% of our lease signings in the third quarter.

We believe this demand represents a secular trend rather than a one time thrill and we believe we are still in the very early innings.

Cash rents on renewal leases rolled down by 6% as shown on page 7. The primary driver was a large lease with a financial services tenant in northern Virginia that was signed at peak rent which we have highlighted on the last several calls.

Needless to say, releasing spreads on power base building renewals remain quite healthy.

The face rates on Turn-Key Flex leases signed shown here at the bottom of page 8, were lower than last quarter albeit due to market mix reflecting a concentration of activity in lower cost North American markets primarily Ashburn, Virginia.

On a like-for-like basis, base rates were flat to up slightly and returns are right in line with our expectations.

In addition net effective leasing economics continue to steadily improve.

This improvement reflects the gradual recovery in data center fundamentals, as well as the behavior changes driven by our new sales compensation program and tighter underwriting discipline as a function of our revamped investment review process.

These trends are indirectly reflected in tenant credit quality.

Fully 60% of our third-quarter leasing activity was with investment grade credits.

We also turned down several large potential deals with exceptionally strong credit tenants during the third quarter due to terms that did not meet our underwriting criteria both economic as well as non-economic.

We believe our disciplined approach will lead to better returns for shareholders in the long run.

In addition to leases signed, lease commencements were likewise stable.

As you can see from the chart at the bottom right of page 9, the weighted average lag between signing and commencement ticked down to 5 1/2 months and has settled consistently in the 6-month range.

We leased a total of 14 megawatts during the third quarter, 6 of which were finished inventory.

We placed several megawatts in service during the third quarter and we did get back 2 megawatts in Phoenix from a tenant that was in holdover status as of June 30 that we discussed on the second quarter call.

The bottom line is that we generated 1 megawatt of positive net absorption within the finished inventory pool during the third quarter.

If as you can see here on page 10, we have made steady progress towards our objective of leasing up existing inventory since our Investor Day last November.

Incidentally, these numbers are as of September 30.

We've absorbed 2 additional megawatt since the end of the third quarter.

Despite the space we got back in Phoenix during the third quarter our historical data center tenant retention track record has been quite strong.

As shown on page 11 we have traditionally retained 84% of data center lease expirees.

Leasing non-data center space has not been our forte and is part of the reason we are moving to rationalize our portfolio.

That said, we have very recently been able to generate some positive leasing momentum at several of our non-data center properties.

The incremental NOI should drive greater proceeds from non-core asset sales than anticipated just a short while ago.

Turning now to supply on pages 12 and 13, it's interesting to see that available inventory shrank a bit in both the highly scrutinized northern Virginia market, as well as Silicon Valley whereas we saw a modest uptick in Chicago and in Phoenix over the past 90 days.

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

Matt?

Thank you Matt.

As Scott mentioned we closed a $187.6 million Turn-Key joint venture during the third quarter and proceeds were used to pay down $130 million of CMBS debt at 5.65%.

Debt-to- EBITDA improved a tenth of a turn to 5 times as you can see here on page 14.

We still have a US dollar bond offering contemplated in our guidance for later this year.

As shown here on page 15 of the presentation, our credit spreads have tightened considerably over the course of the year and we believe the current interest rate environment is attractive.

We also believe it is prudent balance sheet management to finance long lived assets with long term capital.

And we expect to tap the corporate bond market either later this year or early next year.

Turning now to operating performance, portfolio occupancy ticked up 20 basis points, the second consecutive improvement in occupancy.

We expect to finish the year at or slightly above the current level of 93%.

As Matt indicated in his presentation, cash releasing spreads were negative in the third quarter driven by the large rolldown in northern Virginia.

We are not out of the rental rate rolldown woods quite yet, but we have worked our way through the worst of the above market lease expirations within our portfolio with a few notable exceptions, particularly in 2016 rollovers in northern New Jersey.

As market rents continue to improve and as we address the remaining rolldowns, the mark-to-markets should begin to approach zero and turn consistently positive over the next couple of years.

Same capital cash NOI growth was 5.9% for the third quarter, above the high end of our guidance range, and we've raised our organic growth forecast for the full year by 50 basis points to between 4.5% to 5.5%.

We've also whittled down the incremental revenue from speculative leasing embedded within our forecast to a very manageable $0 million to $5 million for the remainder of the year.

We've lowered our CapEx guidance for development spending by approximately 5% at the midpoint.

We have the ability to self-fund our near term capital requirements with proceeds from asset sales and we currently have no plans to revisit the public equity market any time soon.

At the bottom line we've raised the low end of the guidance range for 2014 core FFO per share, by $0.05.

The upward revision to our bottom line forecast while tightening our budget for development spending speaks directly to our renewed underwriting discipline and emphasis on return on invested capital.

Later this year we will celebrate our 10th anniversary as a public company.

As you can see from the charts here on page 16 of the presentation, we've generated positive year-over-year growth in both dividends and FFO per share every single year of our public company existence, including the financial crisis in 2008 and 2009 and we expect 2015 will be no different.

Bottom line growth will likely be modest next year and organic growth will be the primary driver as external growth will be muted due to asset sales.

We will also face a tough comp in the first quarter due to the $850 million of long term capital raised in March and April of this year.

We will provide formal guidance in January, but we expect to generate core FFO per share growth next year in the low single digits.

And now I'd like to turn the call back over to Bill.

Thank you, Matt.

I'd like to wrap up by recapping the highlights from our third quarter results, as outlined here on page 17.

We signed over $31 million of new leasing during the third quarter including a $5 million mid-market contribution.

We leased nearly 6 megawatts of finished inventory with 1 megawatt of positive net absorption.

We registered a 20-basis point sequential improvement in occupancy.

We delivered 5.9% same capital cash NOI growth and raised our organic growth forecast for the full year by 50 basis points.

Our third-quarter core FFO per share beat consensus by $0.02 and finally, we raised the low end of the range for 2014 core FFO per share guidance by $0.05.

We believe these results demonstrate consistent execution on our strategic objectives.

Our approach to capital recycling and disciplined leasing standards also demonstrate our renewed focus on generating long term shareholder value in everything that we do.

In closing, we are very pleased with our third-quarter results and I would like to thank our outstanding global team of employees, without whose contributions these results would not be possible.

And now we are pleased to open up the call and take your questions.

Operator?

Thank you.

Thank you.

(Operator Instructions)

Our first question comes from Vance Edelson at Morgan Stanley.

Terrific, thank you.

I wanted to give you a chance to discuss outsourcing more.

You mentioned that existing customers drove 90% of the growth, but you also added the 80 new logos.

Is outsourcing still on the rise and that's what's supporting that 90% figure and similarly are the 80 new logos a sign that those companies are perhaps outsourcing for the first time?

Thanks for the question, Vance.

We do see outsourcing to be a continued trend that we discuss with our customers on an ongoing basis and we really see it in both of the segments that you identified.

Existing customers especially, our large enterprise existing customers continue to be on the road for outsourcing their IT as well as their business processes and we're there to support them.

Maybe surprisingly the new logos that we signed in both the large enterprise segment as well as the mid-market segment have a similar interest in outsourcing maybe for different reasons.

The mid-market companies simply don't want to get started behind an operationally expensive set of processes and our large enterprise customers have found a need to preserve some of their capital and to invest in strategic initiatives.

But for both of these segments, outsourcing remains incredibly important for Digital Realty.

Okay, great.

And then as a related follow-up could you describe the momentum that the mid-market segment has?

It seems like a relative new initiative and yet the new leases signed seem to have leveled off to some extent.

Is that something we can expect to see growing in the coming quarters?

Yes.

We're very pleased with the progress that we've seen in the mid-market since we announced it -- announced the initiative last year.

We've seen that team really step up and consistently generate now between $4 million and $6 million in revenues over the past several quarters and a very large quarter in revenue production in Q4 of last year.

So we couldn't be happier.

Really if you keep in mind that we basically grew a business that was producing between $1 million and $2 million of quarterly revenue, now we've increased that to $4 million to $6 million participation.

So we're extremely excited about the progress that the mid-market team is making and the mid-market sales team combined with the operational team that supports that set of products.

The next question comes from Jonathan Atkin at RBC Capital Markets.

Yes.

Kind of a related question to the previous one.

The connectivity initiative whether it's interconnection your own sites or Open-IX, I wondered if you had an update on that and then the colocation segments as distinct from the mid-market initiative, it looks like your colo rental rates increased and I wonder what drove that?

Was that deal size or geographic mix?

And then another kind of observation.

It looks like the Turn-Key rent dropped in Asia PAC and I wondered what drove that?

Thank you.

You managed to get a lot of questions in one question, but we'll try to address all of them.

First of all, the connectivity initiative, in terms of the connectivity initiative we're extremely pleased with the progress that the operational team has made and we moved the product ownership under the sales and marketing umbrella over this past quarter, quarter and a half as well.

Connectivity, the network ecosystem project under connectivity as you know, started in Europe and has moved its way throughout the United States.

We've connected up major data centers and campuses within the United States and we're in the process of doing the same thing in Asia-Pacific and so we're pleased to announce that we not only have completed most of that process, but that we're starting to see the results as well.

We measure the results of many of the partnerships that we do by the amount of GAAP rental revenue that they're able to influence, and the network ecosystem in and of itself to date has already influenced over $39 million of GAAP signings to date.

Probably more important to that is that the network ecosystem really underlies our customers' desire to tap into the power of the hybrid cloud.

This gets to the dual magnet metaphor that Bill uses from time to time when he talks about the cloud service providers that exist within our data centers in large numbers, a large portion of our revenue and how that attracts the large enterprises that are coming to our data centers and those large enterprises that we have also attracting additional cloud service providers.

By combining that combination of great customers with the network ecosystem that we now have deployed, as well as the global cloud marketplace that we're looking to expand this fiscal year, it's important to realize that this is really the connectivity that was missing to enable a hybrid cloud for our customers.

So we're extremely excited about that.

I'm glad that you called out the colocation product and rental rates in particular for that individual product.

It's important to remember that, that product actually goes across multiple segments, so we do sell colocation into the mid-market segment as well as into the enterprise segment and the increase in rental rates I think you've identified it already, really goes around the deal sizes that we landed within the quarter as well as the geographic diversity.

Market rates are different for colocation, the colocation products in multiple markets and we happen to be either lucky or smart enough to have landed them in the right markets this quarter to see a slight bump in the rental rates.

The third question I believe was on TKF rental rates.

Is that correct?

Correct.

It's in particular in Asia PAC I think your question sort of focused in on the TKF rental rate numbers in Asia-Pacific and we did have to call out that we did have one large deal that we secured in Hong Kong which we view as a one time event with a very strategic partner.

We went into that deal for a very specific reason between the two partners in particular to open up some market opportunities that were closed off to us before.

We believe we successfully completed that set of transactions and that this one lease is really a one-time event.

It really highlights that we're able to make strategic decisions in concert with our greatest partners and our greatest customers throughout the world.

Thank you.

The next question is from Ross Nussbaum from UBS.

Can you talk a little bit about your weighted average lease term?

I noticed in the quarter it was down to 6.3 years from 6.8 last quarter, just maybe talk a little bit about why that number shifted so notably from Q2 to Q3?

So, Ross, thanks for the question.

The shorter lease terms we need to understand in a context of the duration of those leases that are being signed as well as understanding that obviously it's an average.

So we're still seeing some good lease terms come in, but understand that we're comfortable signing shorter term leases in the marketplace where we really believe that the fundamentals inside that marketplace are improving, especially at the time of potential expiration.

Also, important for everyone to remember that our retention rate remains high.

So we are comfortable with this shorter initial term.

It's also become a little bit of a trend in the marketplace for folks who initially say they want smaller term to actually go ahead and take their additional option earlier in that process.

So it may be a [tick] box in terms of procurement, but we're seeing those people renew early in some cases or do must takes early in some cases as well.

In essence what all this signals is that the fundamentals in this market are improving.

Hey, Ross, let me add to that, that we also see these same companies are doing shorter term leases putting significant investment into the premises even though they might be doing a 5-year lease.

Thanks, Bill.

I appreciate that.

As a followup not really much related, but what should we all expect, Bill, on the timing for the I guess full CEO announcement?

is that happening before NAREIT?

Before year-end?

What can you tell us at this point?

So, Ross, we had a bet here internally as to which question it would be.

I'm surprised [it took this long].

I am also, so thank you.

So we have heard that question before.

The answer to the question is that we fully expect that it will be before year-end.

That's what we've said really since the transition was announced last March.

And as we also indicated, the Board back then and still is comfortable with the current leadership that's in place, but the focus remains finding the right candidate and that is unquestionably the priority.

Fortunately in the interim the stock has performed well.

We're up over 40% since March.

We've outperformed the RMZ by 2,000 basis points and we remain focused on executing our strategic vision, and thank you for the question.

Thank you for the answer.

The next question comes from Jonathan Schildkraut at Evercore.

Great.

I guess my first question is really about sort of your view on global market.

You guys have had great success in Asia PAC and in a recent conference your fastest growing customer talked about going to dozens of new countries in the next few years.

So I was just wondering what your perspective was in terms of expanding your footprint globally beyond the markets that you're currently operating in?

Yes.

So, Jonathan, we do and I think as Bill said in his initial statements, we will certainly look at new opportunities with our great customers in tow, but important to also understand that one of our focuses, one of our strategic focuses within sales and marketing is targeting at the beginning, as well as targeting expansion with companies that have a stated desire or are already active in global expansion that matches our existing portfolio where we happen to have existing inventory or shell available.

So that alignment by us, the sort of generating demand across companies that have a desire to grow globally matches our current footprint in terms of what we have existing inventory in, pretty darn well.

We also happened to find out that those customers stay with us longer.

They're happy to give us longer lease terms and they're much more easy to satisfy in terms of customers because their value expectation is aligned very well with the value that we provide.

I think Bill mentioned in his opening statements two geographies that were of interest.

Maybe I'll turn it over to Bill, to see if he wants to talk a little bit more about future potential expansion.

Jonathan, so I'd mentioned Germany and Japan, but in addition, if we have a -- I'm sure we both know the customer you're talking about -- but if we have a strong customer that wants us to go to a certain market and in this particular case this customer, they lease multiple Megs from us at one time, so if we can get comfortable with the demand in that market and we can get comfortable with other risks, so currency risks, political risks, we can structure ample lease term to mitigate risk and we have a customer that's taking a significant percentage of a building, then we would be more willing to look into a new market.

That makes a lot of sense.

Just as my follow-up question are there any markets that you're concerned with?

There's a recent report out that the big four markets in Asia PAC were going to see something like a 40% inventory increase over the next 12 to 24 months.

Are there any markets that you're concerned about in terms of inventory?

We haven't seen that in Asia at this point.

We're seeing really good absorption in our two Australian markets and in Singapore we're basically full and Hong Kong is filling rapidly, too.

So we haven't seen the evidence of that and there have been commentary about excess supply in North American markets, in Silicon Valley and Virginia in particular, but once again there we've seen significant absorption of our inventory.

In fact, we can't even keep up in northern Virginia, but I think basically the difference, too, may be the type of product that we're delivering to the market.

We do provide the two end solution, the dedicated infrastructure.

I suspect that if there's commentary about excess supply, it's probably the shared infrastructure product.

That's an important distinction, Jonathan, that Bill is making.

As I look at our 12 month future pipeline, I see a good dominant part of that being the customers that regularly buy the dedicated solution from us here at Digital.

That doesn't foreclose us from making sure we truly understand the customers' needs in the four big markets in Asia-Pacific.

But as opposed to our competition who is testing the waters, we've got a proven product that we were able to deploy and have successfully deployed over the past five years.

We certainly will look at continuing to do that and then exploit any future opportunities that we see.

Listen, well, thanks for taking the question and really good execution.

Thank you, Jonathan.

Just to point out in Hong Kong and Singapore in particular, land is tight.

So it really is hard to get sites there.

I know there's one of our competitors is bringing on a site January 1, but I think that's really the only one that we'd be concerned about in Singapore.

Next question comes from Tayo Okusanya from Jefferies.

Yes.

Good evening.

I just wanted to echo Jonathan's comments on great execution during the quarter.

First question, Bill, you did discuss in your commentary about turning down quite a few deals with larger tenants because you weren't happy with the economics or the terms or what have you.

Could you just kind of give us a sense of what some of those type of deals were that you turned down and, if whether you would have actually accepted those kind of deals a year to two years ago?

Well, I don't know that those deals would have existed a couple of years ago.

Okay.

But I think my biggest objection to these deals was the customer's attempt to transfer what I thought were the customer's business risks to us for a standard of conduct within the data center's four walls that was quite low, i.e.

simple negligence as opposed to gross negligence or willful misconduct.

So what I'm referring to is indemnity clauses basically for mistakes or omissions inside a data center by the operator [with] what the right standard of conduct is, and we've held to a standard of willful misconduct and we do not indemnify for consequential damages, and in this case we had customers that are looking for a lower standard and a broader scope of indemnity.

So it wasn't a case of the pricing on the deals or anything like that?

It was more along some of the operational risk you would have to take if you actually accepted these deals?

Not so much.

That's why I made the comment in my remarks about being focused on long-term value creation.

Okay.

These were deals that would have been very beneficial to short-term FFO growth, but at the end of the day we're focused on residual value as well and what types of risks we might be creating for the long-term.

Great.

And just my second question, excluding the financial client this quarter, could you give us a sense of what GAAP as well as cash mark-to-market would have looked like excluding that large rolldown?

Yes, Tayo.

This is Matt.

I don't think we have that breakout at our fingertips, but we can follow up at a later date.

Okay great.

Thank you.

Great quarter.

The next question comes from Vincent Chao with Deutsche Bank.

Just wanted to go back to the noncore dispositions with the nine assets currently in market.

Guidance goes up to $400 million for the year in terms of the range, just trying to get a sense of over the balance of this year as well as 2015, I guess the nine represents about a one-third of the noncore that you identified.

I mean, how much of that noncore do you think could go between now and the end of next year?

In the first group that we have, that will all likely transact between now and the end of this year in January and that total volume is about $260 million in proceeds on that, and we expect that -- I'll give you a little more information on that -- we think that will go at an average cap rate overall of a little over a 6% cap rate on that.

Okay.

We then have three other -- than we have two other groupings of properties that we're looking at.

The next grouping is a group of six assets that are more -- rather than being noncore these are more noncore data center assets, and we're going through the valuation process of those right now.

So it's a little early to give you an indication but we'd expect that the ones of those that we do bring to market would be brought to market first quarter.

Okay.

And then on the internal growth side, obviously raised the same capital outlook by 50 basis points.

Now in past presentations you've talked about sort of an ongoing business model that talks about sort of 4% to 5% growth.

I guess is there any reason to think that 2015 should stray significantly from what we saw here in 2014 and sort of relative to that longer term outlook?

Yes.

Vincent, as we said, we'll give specifics on 2015 guidance later this year, and at that time we'll break down all those components as we have -- as we've done the last several quarters.

We're not at the point where we can provide that detail at this time, but we'll definitely have it when we give formal guidance later this year.

Okay.

Thanks.

The next question comes from Jordan Sadler at KeyBanc Capital Markets.

Thanks.

I think you touched on a little bit sort of post-quarter end leasing, but curious more in terms of the seasonality that the portfolio has historically experienced in the second half particularly in the fourth quarter.

Are you still expecting maybe for Matt or for Bill the same sort of historical seasonality or would that -- so that tick up in the fourth quarter or has that been somewhat muted as well by the mid-market strategy?

Yes.

So the seasonality is interesting, given the launch last year of the mid-market strategy in general.

In general, we're pleased with our sales and marketing team, Jordan, being able to generate consistent results that are in line with our plan.

We consider quarters like this to be successful quarters when they meet the plan and you touched on one of the drivers which, of course, is the mid-market initiative which if you remember seems like way back, but it wasn't that long ago when we announced the initiative.

Part of the purpose of it was to smooth out the revenue lumpiness that came from the large enterprise segment and I think we've been fairly successful at doing that.

Unfortunately, one of the side effects of wiping out the lumpiness of the large enterprise segment is the perceived seasonality of the past may look a little less certain and so we need to get a few more quarters under our belt before we can identify what the true seasonality is given the new set of products and new set of markets that we're addressing.

We do think that the seasonality will reflect customer demand which have relatively unique drivers.

So inside an individual vertical, for instance, financial services, I'm having two sets of conversations, one with a company that has a large deployment that needs to go live in the first half of next year and we're having that conversation.

We'll strike the deal this quarter, and the other one who wants to start the conversation in Q2 but will deliver the actual project in Q4.

So unfortunately, seasonality is also at the call of our customers' internal calendars.

That's helpful.

I guess as a followup maybe for Scott on pricing and cap rates achieved obviously, the joint venture helped to sort of shed some light on pricing this quarter.

I'm curious, do you think the pricing achieved on this transaction is somewhat representative overall of the portfolio of assets, sort of excluding the platform value?

Especially obviously as it relates to Turn-Key?

Yes.

Just remember data centers are kind of complicated, but we happen to like this comp very much.

This is a good cap rate, 7.05%, but also when you keep that in light of the price-per-foot and the price-per-kilowatt that this traded at, I think this is a very good comp, and it shows that the private demand and pricing continues to grow for these assets.

We're also very happy with this access to another source of capital for our program.

Thank you.

The next question comes from Matthew Heinz at Stifel.

Hi.

Good afternoon.

I'm interested to hear more about the global alliances program realizing it's still very early in the process but I guess just hoping to understand how receptive existing customers have been to these offerings particularly within the enterprise segment?

And then maybe, the balance of engagement between mid-market versus wholesale customers?

And then as a follow-on to that, I'm hoping you could elaborate on sort of how you view the cloud marketplace initiative, I suppose in terms of whether you see it as a value enhancement to the existing service and connectivity offerings or is it more of an upsell opportunity with sort of longer term implications around ARPU?

Thanks.

So in terms of a global alliances program, the program when combined directly with the network initiative has influenced an awful lot of the deals that are out there, but what's interesting is what we're trying to enable is something that we're not unfamiliar with.

When we got started in this industry 10 to 12 years ago, we became a carrier control data center provider because of our customers' perceived challenges with network operator owned data centers, and so that shift in market dynamics allowed us to bring carrier neutral data centers to the fray and allowed us to capture that market opportunity.

We're seeing something similar here and it sort of will answer both of your questions.

The global alliances that we're striking are meant to give optionality to our customers that they're asking for.

The wider array of that optionality is what we need to provide as data center providers, so that no matter what direction our customers want to go to enable their hybrid cloud ambitions they can do it within a Digital Realty property.

So again, as I stated earlier on the hybrid cloud question, what we do here allows our customers to truly connect their services to data centers that they might have inside other Digital Realty data centers, but also they can connect to cloud providers outside of that venue and they can connect to cloud providers that are not within Digital's own network services.

So our network service partners can now securely connect those enterprise clients to all of their assets as well as to internal private clouds, and so what we're seeing is something very similar to the process that we came into a few years ago.

So now instead of it being carrier neutrality it really is cloud service provider, neutrality and part of our partnership efforts, our global alliance's efforts, is to make sure that we're able to bring the right cloud service providers to the foray, that worked this quarter in VMWare as well as in Carpathia.

Our providers that our customers said they wanted to connect to more directly within Digital's data centers, we're being able to provide that sort of connectivity to them and we see that as the end in and of itself.

If you think about the global cloud marketplace as well as the rest of the partnership ecosystem as an amenity that is now necessary in a modern data center, as we move our customers from wanting simply to store data in a data center to want to actively exchange data within a data center and within multiple data centers, that's really the key that we're trying to provide to those customers.

That's very helpful.

Thank you.

And then just very quickly do you see any potential for a special distribution of the gains from a joint venture?

So, our Board meets next week and the Board sets the dividend.

So, it's something that we're looking at.

Basically the trade-off is going to be a pullback of the first quarter dividend or a special dividend, and we haven't decided on that and even if we had decided on it, we wouldn't jump ahead of the Board.

Thanks very much.

The next question comes from Emmanuel Korchman at Citi.

If I look at your lease rollover schedule, it looks like you still have a fair amount PVB leasing to do this year and those rates are well above average.

I was wondering if you could give us some insight as to what that is and how that's going to get addressed?

Hi [Manny].

It's Matt.

Actually, that -- the vast majority that has already been released.

There's actually a renewl or a release, we signed back in the first quarter.

And it's going to roll I think slightly either flat or slightly up on a cash basis.

So that is already taken care of.

Okay great.

And then maybe you can help me get through one other piece of disclosure.

On the market-by-market disclosure, it looks like the megawatts went up in northern Virginia but the rentable square footage, the occupancy and lease square footage all came down.

I realize that might be tied to the most recent JV but was just wondering how those could go in different directions?

Yes, Manny, I mean we'll have to -- I don't know -- there is obviously as you know, northern Virginia is probably one of our most active markets in terms of development.

So I'm sure it has to do with the development activity that we're bringing online as well as the joint venture that came out.

I don't have the specifics, but I'm sure it has something to do with those two interplays.

Great.

Thanks, Matt.

The next question comes from Stephen Douglas at Bank of America Merrill Lynch.

It's obviously been a while since we've seen [Digitalize and Acquire] in the space, and I'm wondering if you can comment on how you're thinking about consolidation now given the strength in your stock this year, and maybe some of the criteria you look for in a target?

And second, you touched a little bit on the macro outlook and I'm wondering if you could comment specifically on the leasing environment you're seeing in Europe?

And also maybe, the FX impact you saw in 3Q and expect for 4Q?

Thanks.

Yes, Stephen.

Hello, this is Scott answering that.

We're always in the market looking at M&A opportunities.

and we keep abreast of everything whether it's kind of near-term or long-term out there.

It hasn't been anything very compelling lately.

I think our primary focus is always how are we adding value to our shareholders when we look at these?

I think there are many opportunities that we look at which would give us a chance to get only larger, and not better or more profitable for a shareholder.

So, I think our first and foremost goal in all those, is to do something that's going to be compelling for our shareholders, and of late we haven't really seen anything that fits that bill, but we are always looking at opportunities and we'll always pursue those to the extent we think we can do something positive.

So on the lease, we'll do this in three parts Stephen.

On the leasing side in Europe without divulging the large enterprise software maker's name, we did see some great activity with what we call a potential franchise accounts happening within continental Europe this quarter.

And probably more important, as I look forward in the next two quarters as well as the 12 months looking forward, we see a very healthy pipeline for the properties that we currently have in Europe as well as some of the properties that we have looked to develop in the past.

Yes.

This is the other Matt.

On the FX issue we're about 80% hedged in terms of our FX exposure.

So it takes a pretty material movement to have a meaningful impact on our bottom line.

If rates had remained unchanged versus last quarter, our FFO in Q3 would have been about a $0.005 higher and I think that speaks to the advantage of being investment grade rated.

We can fund in multiple currencies and as you know, we raised a pretty large sterling deal earlier this year, a long-term bond, and overall I think we've raised over [GBP]1 billion in sterling since -- in the public market.

So it just goes to show what having a strong balance sheet can do for you in terms of hedging your risks.

And let me just sort of pile on here.

If we were to find an acquisition that were attractive, public equity is now no longer our only source of equity as we now have what I think is a fairly reliable source of private capital as well for deals of that type.

That's great.

Thanks, guys.

This concludes the question-and-answer session and concludes the conference.

Thank you for attending today's presentation.

You may now disconnect.