Digital Realty Trust Inc (DLR) 2015 Q1 法說會逐字稿

Good afternoon, and welcome to the Digital Realty first-quarter 2015 earnings conference call.

(Operator Instructions)

Please note: This event is being recorded.

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

Please go ahead, sir.

Great.

Thank you, Denise.

Hello, everyone, and welcome to the call.

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

The recently appointed Chief Financial Officer, Andy Power, and Chief Operating Officer Jarrett Appleby, are here as well, and will be available for softball questions at the end of the call.

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.

Management may make forward-looking statements on this call.

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

Forward-looking statements include statements related to future financial and other results, including 2015 guidance and the underlying assumptions.

For a further discussion of the risks and uncertainties related to our Business, see Form 10-K for the year ended December 31, 2014, and subsequent filings with the SEC.

This call will contain non-GAAP financial information.

Explanations and reconciliation to net income are included in the supplemental package furnished to the SEC, and available on our website at digitalrealty.com.

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

Questions will be limited to one, plus a follow-up.

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

Now I'd like to turn the call over to Bill Stein.

Thank you, John.

Good afternoon, and thank you all for joining us.

We had a solid first quarter, and I would like to begin today by providing an update on the progress that we've made towards our strategic priorities, which you can see laid out on the Way Forward slide on page 2 in the accompanying presentation.

First and foremost, we achieved a 40-basis-point sequential improvement in our return on invested capital during the first quarter.

This was driven primarily by the burn off of straight-line rent, and consistent lease-up of development projects.

This comes on the heels of the 60-basis-point improvement that we achieved for the full year in 2014.

Given the size of our asset base, we believe that this is a truly remarkable achievement.

I should point out that we have likely realized the bulk of the improvement that we expect to recognize this year in the first quarter.

And this measure is likely to plateau for the balance of the year.

You can be assured, however, that we are not content to rest on our laurels.

And we will continue to strive to optimize the return on our asset base, and drive greater profitability on every square foot in our portfolio.

Of course, Scott Peterson will provide greater detail on our capital recycling initiatives in his remarks, but we achieved solid execution on asset sales, at very favorable pricing, harvesting capital to fund significantly higher-yielding investments in our development pipeline, and enhancing the quality of our portfolio in the process.

We now have realized $95 million of gain on three asset sales so far this year.

As we stated last quarter, we expect gains on non-core asset sales to more than offset the impairment charges we took last year, and we are well on our way to the tipping point.

I'm proud of the job that Scott and his team are doing.

The execution of our capital recycling strategy is clearly resulting in steady progress towards our objectives.

Shifting gears now to our customers' business, it has become clear that the cloud is revolutionizing the delivery of IT across the corporate world.

As you know, the corporate enterprise segment is our bread-and-butter customer base.

And cloud service providers find our portfolio to be highly desirable, in part because they want access to our enterprise customer base.

As you've heard me say on previous calls, the attraction is mutual.

And our global footprint, high-quality product, and proven operating track record represent significant competitive advantages for landing the intersection of cloud and enterprise within our global portfolio.

We are also adapting our product offering to accommodate diverse IT workloads, incorporating hybrid clouds and value-added vertical solutions.

We aim to deliver what our customers want on a global basis, where they want it, and at a value in line with their needs.

We are making steady progress, and we look forward to continuing to update you as we deliver a more agile deployment method.

Moving on to inventory management, as you know, we have made significant headway leasing up our finished inventory, and improving the risk profile of our development pipeline in the process.

We have reduced our finished inventory balance by 40% since our Investor Day in November 2013.

And our active data center construction projects, which are expected to deliver stabilized cash yields in double digits, are currently better than 80% pre-leased.

Based on the current positioning of our existing inventory, and the strength of our sales pipeline, we are moving forward with new investment in key markets in a disciplined manner.

During the first quarter, we began construction on 12 megawatts across Silicon Valley, Chicago, northern Virginia, and Dallas.

These projects were 52% leased at quarter end, but now are 90% leased one month later.

We are tracking strong demand from new and existing customers in each of these markets, and we are confident in our ability to lease up incremental capacity at attractive returns.

Turning now to our human capital, as most of you are well aware, we have further strengthened our existing senior management team with three key hires over the past few weeks.

As mentioned earlier, Andy Power is our new CFO.

We have worked with Andy for more than a decade, and we look forward to leveraging his capital markets expertise and relationships in the financial community to support our longer-term growth, while prudently managing our balance sheet.

In addition, Jarrett Appleby and Michael Henry recently joined the Company as our new Chief Operating Officer and Chief Information Officer, respectively.

We believe that Jarrett will ensure significant alignment between corporate strategy and operations, while enhancing our ability to deliver the most efficient and effective solutions to our customers.

We expect Michael to facilitate the use of information and technology to unlock more value for our employees, our customers, and our shareholders.

We are confident that new hires of this caliber will serve to deepen our bench and strengthen our culture.

With a tailwind of improving data center fundamentals at our back, and these crucial leadership pieces in place, our entire management team is laser focused on delivering upon our strategic objectives.

With that in mind, let me pause here for a moment to ask that all of you mark your calendars for our upcoming Investor Day on September 15.

At that time, we will be prepared to unveil a comprehensive strategic plan which will go beyond the initial objectives that we outlined for you last year.

And now, I would like to turn the call over to Matt Mercier to take you through our financial results.

Matt?

Thank you, Bill.

We reported first quarter of 2015 core FFO per share of $1.27, $0.03 ahead of consensus estimates, and ahead of our own expectations.

The upside relative to our internal forecast was primarily driven by timing of asset sales, as well as repairs and maintenance expense.

On a year-over-year basis, core FFO per share was down a little less than 1% from $1.28 in the first quarter of 2014.

Excluding the unfavorable effects of foreign currency translation however, core FFO per share would have been up a little over 2%.

As a reminder, roughly three-fourths of our portfolio is concentrated in the US, and we are exposed to non-US-dollar currencies, primarily the pound and euro, on the remaining one-fourth of our portfolio.

As I'm sure you are all aware, the US dollar strengthened considerably during the first quarter, and our reported earnings were impacted by currency translation swings, as shown on page 3 of the presentation.

The strong dollar shaved approximately 250 basis points off the year-over-year growth in revenue, adjusted EBITDA, and same-capital cash NOI.

At the bottom line, FX represents a 300-basis-point drag on our year-over-year growth in core FFO per share, in both the first quarter, as well as full-year forecast.

It is worth recalling that we manage currency risk by issuing locally denominated debt to act as a natural hedge.

So, only our net assets within a given region are exposed to currency risk, from an economic perspective.

We are well hedged, with less than 15% of net assets denominated in non-US-dollar currencies.

In addition, we generally utilize excess cash flows to repay non-US debt, or redeploy into local investment, rather than repatriating back to the US.

While our global portfolio exposes us to currency translation exposure, it enables us to satisfy the international data center requirements of global enterprises and cloud service providers, which represents a key competitive advantage.

Turning now to page 4, you can see the $0.05 impact from the additional strengthening of the US dollar during the first quarter, represented by the red block.

This additional currency headwind has been almost entirely offset by later closing on asset sales than initially projected.

As you may have seen from the press release, we are raising our core FFO per share guidance by $0.03, entirely due to an increase to our sales plan.

The narrowing of the gap to 3.7 months between the signing and commencement date on first-quarter leasing, along with a strong start to the second quarter, have already enabled us to hit nearly two-thirds of our initial target for incremental revenue from speculative leasing.

Consequently, we are raising the incremental revenue target by an additional $5 million, which accounts for the $0.03 raise to core FFO per share guidance.

Incidentally, we have also added two new rows to our guidance table to more clearly spell out the progression of incremental revenue from speculative leasing.

We are also introducing core FFO per share guidance on a constant-currency basis of $5.18 to $5.28, which represents year-over-year growth of 4.5% to 6.5%.

Investment activity will always be a wildcard, but going forward, we expect our sustainable growth rate to look more like constant-currency guidance than as-reported.

Turning now to operating performance, same-capital occupancy was in line with previous quarters at 93.4%.

And we have had success backfilling the very modest vacancy uptick from the first quarter.

The total portfolio occupancy decline was anticipated, and was flagged on our fourth-quarter earnings call.

We commented last quarter that we have several known move outs in 2015, and we expected portfolio occupancy to dip in the first quarter, and again in the third, before bouncing back to finish up slightly by the end of the year.

The primary driver of the first-quarter occupancy decline was a non-tech lease expiration at 1900 South Price Road in Phoenix, which was underwritten at acquisition as a redevelopment project with the expectation that this tenant would vacate when its lease expired.

Our cost basis in this property is a little over $100 per square foot, and the expiring rent was $13 per square foot.

This asset is adjacent to our 2121 South Price Road property, and we will continue to monitor market conditions to determine when it may be appropriate to start the next phase on our Phoenix campus.

Shifting gears to leasing activity, cash rents on renewal leases signed during the first quarter rolled down 3% on a cash basis, but rolled up 10% on a GAAP basis.

Matt Miszewski will cover re-leasing spreads in greater detail in his remarks.

Same-capital cash NOI was up just 0.6% during the first quarter.

As shown on page 3 of the presentation, FX represented a 250-basis-point headwind.

And on a constant-currency basis, same-capital cash NOI growth would have been a little over 3%.

The same-capital growth rate was also negatively impacted another 80 basis points by a reserve related to pre-petition rent for [Net Data Centers], a tenant at two of our properties in LA, which filed for bankruptcy during the first quarter.

Since filing for bankruptcy, the tenant has remained current on all post-petition scheduled base rent obligations, and we received May rent yesterday.

For the full year, we now expect same-capital cash NOI growth to trend toward the high end of our 2% to 4% guidance range on a constant-currency basis, but toward the lower end of the range on an as-reported basis.

Incidentally, we have revised our 2015 mark-to-market guidance from slightly positive to slightly negative on a cash basis.

However, this is entirely due to the earlier renewal of an above-market 2016 lease expiration, and not due to any erosion in market rents.

To the contrary, we see modest improvement in face rates, and meaningful improvement in net effective rents.

As you can see on page 5, we believe our balance sheet stacks up favorably relative to a blue chip peer group.

Debt to EBITDA stood at 5.0 times as of the end of the first quarter, 0.5 turns below our target of 5.5 times.

Proceeds from asset sales received since quarter end have been used to further pay down debt.

We could conceivably take leverage up to 6 times in a pinch, with a clear plan to bring it back down to 5.5.

Based on our existing cash flow stream, levering up by 1 turn would create nearly $1 billion of borrowing capacity.

Of course, as we continue to grow EBITDA, the incremental cash flow creates additional borrowing capacity as well.

We recently gave notice of our intent to redeem later this month $375 million of 4.5% bonds scheduled to mature in July.

We continue to believe the current interest rate environment represents an attractive opportunity to lock in longer-term capital at historically low rates.

We will look to opportunistically tap the fixed income market to continue to term out debt in a prudent manner, and we will evaluate US as well as non-US currency issuance.

Turning now to the chart on page 6, the pronounced drop in straight-line rent is one of the key highlights from this quarter's results.

The steady downward trend in non-cash rental revenue is a direct reflection of the revamping of our sales compensation program, and the more disciplined lease underwriting standards over the last year.

We have not traditionally provided guidance on straight-line rent, but the average analyst estimate is approximately $75 million for the full year.

We do expect a modest uptick in the quarterly run rate from the $13 million we recognized during the first quarter.

But we expect straight-line rent for the full year to come in around $55 million to $60 million, well below the average analyst estimate.

This will clearly have a positive impact on AFFO.

The CapEx deductions in our AFFO reconciliation are also down from the fourth quarter.

I would like to remind everyone of the more stringent classification of the property-level CapEx we announced last quarter.

I won't go into the ins and outs of the changes in classification, but for ease of reference we have provided, here on page 7, the same detailed explanation we included in the deck last quarter when the change was originally announced.

The bottom line is that, while there's some movement in terms of geography, the change in presentation does not have a material impact on our 2014 AFFO calculation, and the primary drivers of the improvement in AFFO in the first quarter of 2015 includes lower leasing volume and the previously mentioned turnoff of straight-line rent.

Now, I would like to turn the call over to Matt Miszewski to provide an update on the current data center leasing environment.

Thank you, Matt.

As shown on page 8 of our presentation, we signed new leases totaling approximately $21 million of annualized GAAP rent during the first quarter.

We've stated for the past several quarters that there was a distinct possibility the rationalization of our available inventory, coupled with tighter lease underwriting discipline, might impact leasing velocity at some point in the future.

That clearly happened in the first quarter.

However, we have also maintained that our focus on profitable growth would translate to improved net effective leasing economics, highly targeted capital deployment, and better overall returns for our shareholders.

That prediction was also borne out in our first-quarter results.

As Matt noted in his comments, and as you can see from the chart at the bottom of page 9, the weighted average lag between signings and commencements was less than four months in the first quarter.

In addition, the average return on our first-quarter leasing activity hit the high end of our 10% to 12% return expectations, and was over 100 basis points better than the average for the full year of 2014.

This is a reflection of both our tighter underwriting discipline and overall improved inventory management, as well as the continued firming of data center supply and demand fundamentals.

I'm also pleased to report that the second quarter is off to a strong start.

And we signed another $16 million in the month of April, bringing the year-to-date total to $37 million of annualized GAAP rent.

Our mid-market segment contributed $3.8 million to the first-quarter signing volume, which represented 18% of our total leasing activity.

This is roughly in line with the recent trend, although the contribution this quarter was at the low end of the $4 million to $8 million range we have come to expect from this segment.

I should pause here to point out that we revised our definition of colocation to less than 300 kilowatts, to better align our sales force with our customers.

As a result, you will see an increase of a little over $20 million in colocation revenue from last quarter's supplemental to the current quarter.

Clearly, this is not how we intended to reach our stated objective of doubling the size of this business from 4% to 8% of revenue within a three-year time frame.

We will continue to update you on the progress towards this goal, and we are, frankly, a bit behind schedule.

The mid-market segment has been punching above its weight, but the rest of the pie is much bigger and is also growing.

The mid-market segment accounted for most, but not all, of the 22 new logos we added year to date.

We also welcomed a large new financial services customer to the fold during the first quarter.

Our business mix was slightly skewed as a result.

And social, mobile, analytics, cloud and content accounted for a little less than half of our first-quarter 2015 leasing activity compared to 75% for the full year in 2014.

New customers represented 35% of our first-quarter lease signings, and existing customers accounted for the remaining 65%.

Turning now to page 10, the cash mark-to-market on data center lease renewals turned negative for the quarter, as the positive cash re-leasing spreads on power-based building renewals were more than offset by a big turn-key roll down.

The primary driver of the negative turn-key mark was an early renewal of a 2016 expiration.

On our third-quarter call, we flagged a handful of 2016 rollovers in northern New Jersey as the worst remaining above-market lease expirations within our portfolio.

The early renewal we executed during the first quarter enables us to address a significant chunk of that 2016 northern New Jersey rollover.

You can see from the inset chart here on page 10 that, while the current year expected turn-key cash re-leasing spread drops from negative 2% to negative 6%, the expected 2016 mark-to-market improves from negative 12% to negative 2%.

This early renewal was with a large and growing customer for an additional five years beyond the 2016 expiration.

There is no change to the in-place rent prior to the original expiration date, and the transaction did not require any tenant improvement.

While we would certainly prefer to see all of our leases roll up at expiration, this is a positive overall outcome, and a testament to the strength of our long-standing customer relationships.

We leased a total of 11 megawatts during the first quarter, roughly one-third of which was finished inventory, although it was offset by deliveries and expirations, so the finished inventory balance ticked up slightly to 25 megawatts.

Nonetheless, the balance is still down 40% since our Investor Day in November 2013.

Turning now to supply, as you can see here on page 12, we saw some additional positive net absorption in the Silicon Valley market during the first quarter.

You can see represented on the chart here some modest new construction under way in the Chicago market over the last 90 days, but on balance, market conditions are generally in equilibrium.

The current supply environment remains rational, and broadly supportive of continued gradual improvement in data center fundamentals.

With that, I'd now like to turn the call over to Scott Petersen for an update on our capital recycling initiatives.

Thank you, Matt.

As Bill alluded to in his comments, we are achieving solid execution on our capital recycling initiative.

We've closed on the sale of three non-core assets so far this year, totaling over $205 million, and generating gains on sale of approximately $95 million.

The weighted average cap rate on the two income-producing properties was 5.7%.

Last quarter, we announced the sale of 100 Quannapowitt, a non-data-center property in suburban Boston, to a regional investor for $184 per square foot at a 5% cap rate.

This sale generated net proceeds of approximately $29 million, and we recognized a $10-million gain on the sale during the first quarter.

We also sold a vacant former data center in southern California to an industrial developer for $14 million, or $206 per square foot.

This sale generated net proceeds of approximately $14 million, and we recognized an $8-million gain in the first quarter.

Last week, we closed on the sale of 833 Chestnut, a high-rise building in Center City, Philadelphia, for $161 million, or $228 per square foot, at an 8.5% (sic - see press release, "5.8%") cap rate on our 2015 contractual cash NOI.

The sale is expected to generate net proceeds of approximately $150 million, and we expect to recognize a gain of approximately $77 million in the second quarter.

A portion of this property had been built out as data center, but the bulk of the tenancy was healthcare related, a reflection of the vibrant university research and hospital cluster in the immediately surrounding area.

The building was marketed for sale as a medical office building, and the buyer was a leading healthcare REIT.

Proceeds from these asset sales have initially been used to pay down the balance on our line of credit, but will ultimately be redeployed into our core business, primarily funding our development pipeline.

We expect to earn stabilized cash yields in the 10% to 12% range on our development projects, which we believe represents a very attractive spread relative to the exit cap rates on our asset sales.

In addition to the three non-core properties we have sold to date, we are actively marketing three assets for sale, and we expect to bring another five to market as a portfolio package during the second quarter.

The rest of the properties targeted for sale are currently undergoing various value-add efforts.

We believe this approach will result in better proceeds for our investors, which is the primary objective of our capital recycling program.

And now I would like to turn the call back over to Bill for his closing remarks.

Thank you, Scott.

I'd like to wrap up our prepared remarks by recapping our first-quarter 2015 highlights, as outlined here on page 14.

First and foremost, we picked up another 40 basis points of improvement in our return on invested capital, followed by the 60-basis-point improvement we delivered in 2014.

We achieved favorable execution on our capital recycling program with the sale of three non-core assets, realizing approximately $95 million of gain on sale, and generating $190 million of net proceeds, which we expect to redeploy at attractive spreads.

I also want to point out here that the cap rate on 833 Chestnut was 5.8%; I believe Scott said 8.5%.

The balance sheet remains positioned for growth, with debt to EBITDA at 5 times.

We beat first-quarter consensus estimates by $0.03, and we raised 2015 core FFO per share guidance by $0.03 based on the strength of our leasing pipeline.

And finally, with the remaining critical pieces now in place, the entire senior leadership team is laser focused on execution.

In short, we continue to consistently execute on our top priorities that we set forth early last year, and have since updated as the way forward for our Company in 2015.

We believe that we have a unique, competitive footprint that can be leveraged further to the benefit of our shareholders.

I would like to thank the incredibly talented team of Digital Realty employees around the world who were responsible for delivering yet another solid quarter.

Once again, I'd like to remind you all to mark September 15 on your calendars for our upcoming Investor Day.

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

Operator?

(Operator Instructions)

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

Please go ahead.

Terrific.

Thanks.

I think you mentioned a few reasons for the reduced lag between signing and commencement, which is great to see.

The press release seems to suggest that it's the robust demand and the shrinking supply as part of the reason, and I want to make sure I understand that element of it.

Is it that a better supply/demand dynamic gets tenants to commence faster because of the competition for that space?

Or is it really the other factors that you mentioned that are driving the shorter time interval there?

Vance, I believe that you got it right.

Primarily the demand and supply characteristics are driving folks to do a few things.

First of all, to make commitments a little bit earlier than they had before, but also to make sure that they're deploying those ideas in a faster way, as well.

So, that reduced supply and that increased demand that our customers are feeling across the data center industry is really helping to reduce that lag.

Okay.

That's great.

And then for my follow-up, on 833 Chestnut sold post the quarter, I understand that it was non-core, but do you have you a feel for how much of the upside from the building was left on the table?

In other words, the 5.8% cap rate based on this year's expected NOI, was it your impression that those numbers were going to grow in 2016 and beyond, given the vibrant nature of that market as you describe it?

It would grow a little bit in 2016.

There's some free rent that's going to burn off so you have contractual bumps in all of that.

There had been a big expansion from the hospital there which really took up the bulk of the vacant space there.

So, there's a little bit of upside left there but really to a large extent the building was pretty well stabilized.

The next question will come from Tayo Okusanya of Jefferies.

Please go ahead.

Yes.

Good afternoon.

I just wanted to talk a little about M&A.

There's been quite a few transactions happening in this space.

Earlier comments that were made, it seems like you guys are looking to grow your colocation business even faster.

As you indicated, you feel like you're a little bit behind.

So just curious whether M&A is the solution to this or whether you still think you can build it organically to hit your targets.

As you can imagine, we see all the transactions that are out in the marketplace and we look at and evaluate all of them.

We try to judge them by their strategic fit and value to our Company as well as whether they represent an attractive investment for our shareholders.

We'll continue to judge all future opportunities that way and certainly we'll look at every M&A opportunity that's out in the marketplace.

And Tayo, this is Matt.

In terms of whether we see the growth on the colocation product in inorganic or organic, we see a significant amount of potential organic growth.

That certainly frees the rest of the Company up to make smart decisions on the M&A front.

And just one follow-up on that point, all the transactions that have happened or are going to be happening, is there anything thematically that made all of those acquisitions unattractive to you?

Was it really pricing?

Was it really the product mix?

I think, generally, if you look at the transactions that have occurred to date, they haven't had a great strategic fit and we can look at Cervalis as one.

It was concentrated in the Northeast, had a lot of financial services customers there, both of which we have a great deal of exposure to between the geographic exposure and our portfolio, as well as financial services firms.

So, it didn't really represent a strategic opportunity for us.

The next question will come from Jonathan Schildkraut of Evercore ISI.

Please go ahead.

Great.

Thank you for taking the question.

I just wanted to talk a little about capital allocation a and available capacity.

I know that during, Bill, your prepared remarks and, Matt, yours as well, you talked a little about inventory.

I think you mentioned 25 megawatts of available capacity.

But you also mentioned that you had built out or are in the process of building 12 megawatts in four markets, which you identified for us last quarter as markets that you'd be willing to speculatively put capital into -- Silicon Valley, Chicago, Northern Virginia and Dallas -- and that now 90% of that capacity was leased.

So, maybe if you could just bring us up to date on your willingness to add speculative capacity to certain markets, and, with 1.2 megawatts of available capacity from the construction pipeline in those four markets, maybe some perspective on those four markets in particular.

Thanks.

Sure, Jonathan.

We try to stay ahead of demand in the markets where we have great visibility on demand.

And so I think you can see us adding a new shell in Northern Virginia.

In fact, that's under construction right now.

We have a site in Singapore, as well.

It's a redevelopment site.

And that will hopefully be delivered by the end of this year or early next year.

As I said, we have good visibility because of the partnership that we have with our clients and we try to match their demand around the world.

And Jonathan, in the other core markets we see continued demand but the uptake of space and demand in Dublin, in particular, as well as Amsterdam in Western Europe become interesting targets.

But the four that we named really are the priorities with Singapore coming up right up behind it.

Great.

As a follow-up I'm going to ask a different question.

Is there a special dividend coming given all the gains on the asset sales?

Thanks.

Yes, hi, Jonathan, this is Matt.

We'll evaluate the dividend as we move through the year but right now we're not projecting any special dividend at this time.

And we'll evaluate it once we get a little through the year and some of the additional dispositions come to fruition.

The next question will come from Ross Nussbaum of UBS.

Please go ahead.

Hey, good afternoon, guys.

When I look at the first-quarter GAAP new lease revenue signings, call it $20 million-ish, I know you cited that you had increased focus on return on invested capital.

But is that really any different than the focus that you had in, call it, the second half of last year when you were doing, call it, almost double that leasing activity?

I'm just wondering, did anything change in terms of getting even more conservative or did everything that you've been working toward the last year start really clicking in a bit more in the first quarter?

Thanks, Ross.

You made the room laugh because I'm the only liberal in the entire organization, so I'm hoping that it didn't tip to being more conservative.

In essence, the question you're asking, is there something that's different in the fundamentals, are the fundamentals potentially weakening, I really and truly believe that that's not true.

You saw some of that conviction come through in the revenue base beat and raise that we put out.

But, even more importantly, the conservative nature of the discipline we do now have has led us to close deals when they're right for Digital Realty and not simply right for the calendar.

I'm thrilled that in April we were able to close an additional $16 million in GAAP, bringing the total around $37 million.

And I am actually looking at my phone because there's an additional $2 million in GAAP that's in processing right now.

So, April was another sign that there is significant strength and that strength continues in the market.

In addition, I was comfortable, as comfortable as I can be, raising guidance on our incremental revenue from speculative leasing based upon the progress that the team has made to date, as well as that shortened lag time between signings and commencements.

Getting it down to about 3.7 is impressive.

I'm thrilled to say that so far in Q1 we've improved that lag number even better.

In addition, we've got some better visibility into the year, so I'm able to make that commitment and be comfortable raising guidance on incremental revenue because of that visibility.

Would I like the Q1 new lease signings number to have been stronger?

Certainly.

But the team has been successful in shrinking inventory, having 100 basis points improvement on return on invested capital for Q1 as opposed to 2014.

And continuing to burn off the old incentives program and lowering straight line rent I think are some great metrics that show some strengths in this industry.

Okay.

And as a follow-up, I just wanted to talk a little more about colo versus wholesale.

And I don't want to steal the thunder from your Investor Day this fall.

But it smells a little like, Bill, you're thinking about making a significant strategic shift here in moving the Company away from being a more traditional plain vanilla wholesale player into a data center company that's a little more, I'll call it, vertically diversified, if you will.

Am I going too far that it smells like this is a pretty big strategic change you're thinking about?

We haven't been 100% wholesale for a while, not since we bought 365 Main.

We've had a retail component to the mix.

So, I wouldn't say that there's a revolution under way in the strategy.

I think there could be an evolution in our strategy.

Jarrett Appleby has joined us because he currently has some deep expertise in that area.

And I would suspect that we'll be able to generate some additional revenue from new products and services sold to the existing footprint as well as new customers.

And Ross, I think it's important to -- there's a couple of dynamics that may look to be shifting.

The difference in colo and wholesale is one of the shifts to pay attention to.

But the new delivery methodology that we're embracing will enable new vertically oriented solution sets and differentiated IT workloads to land inside our current facilities and inside any of our brand-new facilities with a lot more ease.

And the next question will come from Matthew Heinz of Stifel.

Please go ahead.

Hi.

Thanks, good afternoon.

I've been hearing more about customers coming in a wider range of redundancy requirements, driving greater variability in base rates and making pricing comparisons a little more difficult.

I'm wondering how much of this you're seeing within your customer base and how it might be impacting underwriting, or perhaps how you look at risk-adjusted returns.

Matthew, we have seen a number of different requirements come from our customers.

Generally, when they talk about them, they'll talk about them in business terms.

But the core behind it will be a difference in resiliency that in the past we haven't necessarily been able to hit.

Currently and in the future we now will be able to hit, not because of a new product but because we're deploying an entirely different method as we move forward.

So, that new deployment methodology will allow us to satisfy our customers' needs with regard to resiliency, whether it be 2N, which is a fantastic business that we have, and a fantastic business that we will have going forward, whether it be N+1 on certain components or even in the rare case that it will be an N componentry organization that we need to address.

The flexibility of our new deployment methodology will allow us to do that.

Now, there will be some adoption timing so we'd need to build out in this new way and deploy in this new way.

We expect the impact to start showing up in the fourth quarter of this year and in early 2016.

But it will really enable digital to finally globally deliver what our clients want, where they want it, at a value in line with their needs.

And as Bill said in his comments, this is really designed to accommodate these diverse IT workloads that people are now trying to locate with different resiliency requirements, incorporate hybrid cloud in the planning, as well as to allow us to address some value-added vertical solutions that we're going to be able to bring to market.

So, really, this provides the openness and agility that our clients have been asking from us in order to accelerate their growth.

So, we're really just focused on meeting customer needs.

Matthew, I can add to that from an underwriting perspective.

We are highly focused on the different requirements that our customers will ask us.

Particularly you see this a lot in build to suits whether that's increased redundancy or lower redundancy.

We're very focused on do we have to amortize specialized improvements over the lease term or do we have to expect that we're going to have some capital expenditures at the end of the lease term to raise the quality level of the facility.

So, we're very focused on it and include it in our underwriting.

That's very helpful.

Thanks.

And then as a follow-up, I'm curious if currency volatility is at all impacting your investment decisions in terms of overseas development, whether we might see an acceleration in European or Asia-Pac expenditures to take advantage of the stronger dollar.

This is Matt.

In terms of the currency volatility, like we mentioned in the remarks, we're able to hedge our investments in any currency that we've deployed and we'll continue to do that.

So we're looking primarily for the best investment return we can because we know that we'll be able to hedge that investment properly throughout the world, as we've demonstrated, being 83%-plus hedged on all our foreign assets today.

Again, we look at it from where we can deploy capital and get the best return because we know we'll be able to hedge that investment properly and reduce the risk accordingly.

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

Please go ahead.

Thank you.

Good afternoon.

I wanted to go back to the M&A discussion a little bit.

There was a reference in the response, I think by you, Scott, regarding strategic fit.

I'm curious, as we think about potential investment opportunities going forward, M&A or otherwise, are you guys focused more on product and/or geographic diversity and strategic changes to the portfolio or would it be more like the DLR we knew from years past where these were bolt-on accretive acquisitions?

There are two answers to that.

I think if you were looking at a more horizontal integration where we bought another data center provider, that it could be a lot easier to view that as a bolt-on acquisition that might be more financially oriented, although we have to be very careful, given the current valuations in the market, that we're underwriting the assets that we're getting accurately and keeping in mind all the potential risks that are associated there.

I think if you're looking at something that might be considered more vertical, then the discussion focus is initially a lot more on the strategy.

And I think if you look at a lot of the trades that have occurred in the market they've been regionally concentrated, maybe secondary markets, don't necessarily integrate well in our geographic portfolio or their specific assets may not match up as well.

In addition to that, you look a lot at the platform of the people that are running it and how attractive are they to your organization, how well would they integrate.

Latisys would be a good example of one -- great asset, fits geographically, like the Company.

All the senior leadership team was going to leave, and really didn't get a platform with that.

I think when you look, every one's been a little bit different when you look at them, but there hasn't been a really great fit in those sorts of companies that have come to market.

So it's been more of that than really evaluation argument so far.

Okay.

As a follow-up -- I guess for Bill -- how important is accretion today in an investment opportunity, given where you are positioned today or how you may want to be positioned as you look at opportunities?

Does it have to be FFO accretive or how should we be thinking about it?

We certainly have a strong preference for investments being FFO accretive.

We obviously would look at efficiencies that could be achieved, both on the operating side and the capital side.

But we do believe that any investment we make for our shareholders should be accretive.

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

Please go ahead.

Hi, guys.

I just want to go back to the conversation about some of the more flexible deployments you're going to be offering in future years.

I think there was an expectation of some product being available in the third quarter.

I'm just curious if there's anything that you can share with us in terms of demand for that product, if there's any marketing going on yet in terms of what you're going to be offering the market and just how that's being received.

Yes, Vince, a couple of things.

We did business requirements gathering on the front side of what I won't call product development but is a new deployment methodology that we have.

We met with our customers early to figure out if there was a significant amount of revenue on the table that we were missing.

And we were fairly satisfied that there was and that there would be a good product market fit for the new solutions that we're bringing to market.

So we did that on the front side.

And then as we deploy, similar to in software there's a bit of an agile method that we've done in order to get some proof of concepts out, some early thinking on what that design could be.

That's what you heard us reference in terms of potential 3Q availability of what we would call internally a new methodology.

You're going to see some of that new product hit the market before the end of the year, and then you should see sufficient amounts of it at the Q4 and then moving into 2016.

Got it.

Thanks.

And just going back to the M&A conversation, we talked Latisys, Cervalis, and why maybe those didn't fit strategically.

Just curious, Telex is out there potentially exploring options.

Can you talk about the strategic fit there and how that might or might not fit?

Yes.

You don't know anything more about the Telex opportunity than we do.

There's an article that's been written.

There's nothing out there right now to address directly.

I think it's reasonable to assume that there's some compelling strategic rationale around that but beyond that it's impossible to make any further comments until there is something to look at.

Our next question will come from Emmanuel Korchman of Citi.

Please go ahead.

Hey, guys.

Matt, maybe just so that I'm understanding this correctly, you guys did $21 million of leasing in the quarter.

But if I look at your backlog commencement schedule, it looks like a lot of that is going to be commencing in 2016 and 2017, and I was wondering how you reconcile that to the 3.7 months average commencement timing.

We'll have to go through the details of the backlog because things shift.

But, like you said, since the average lag is 3.7 months, the majority of that leasing in the first quarter we expect to commence this year.

And again, that's why we've increased the sales guidance for the year and is what's contributing to our raise in core FFO guidance, as well.

Okay.

Then switching topics, back to 365 Main for a second, the actual 365 Main asset looks like it's been losing occupancy for the last three years.

Is there something happening there that's underlying that vacancy increase or something else going on?

365 Main is more of a pure play in the colocation market than we have anywhere else in our portfolio, and so there certainly is churn management that we have to do there that we don't have to do elsewhere.

We've also been very happy to see expansions coming in from the existing client base that we have at 365 Main.

And then the last piece is that, with the installation of AMS-IX and eventually other open IX initiatives, we fully expect 365 Main will be able to take advantage of the new connectivity options that we have there and the new open infrastructure that we have, which will allow for new providers, new content providers that had historically not located within that facility to be able to install inside 365 Main.

So, we think that, while it's a little bit different than our traditional properties, we've got a pretty good plan and we're working that plan pretty well.

The next question will come Colby Synesael of Cowen.

First on the dispositions, I appreciate with the cap rate information we could probably back into it, but I was hoping you could tell us how much core FFO is associated with the properties that you're selling.

And then you mentioned earlier on, John, about softball questions for Jarrett, and I'd throw one out there.

I was wondering, Jarrett, based on where you've worked historically or at least previously what are some of the low-hanging fruit opportunities you see with DLR in terms of transitioning their colocation strategy perhaps a little bit more aggressively.

Matt mentioned during his comments that they're a little bit behind schedule.

I'm just curious if you see anything that you think could put them back on schedule.

Thanks.

In terms of the dispositions we've closed to date, that's impacting core FFO around $0.04 for the year, $0.04 to $0.05.

So, that's the impact for this year.

And then in terms of full-year impact for what we expect to sell in terms of our total capital plan, it's around $0.07.

But that obviously depends on the ultimate timing of the sales of the rest of those properties in that disposition plan.

Is that an annualized number of $0.07 or is that based on the timing you guys have already assumed in our own guidance?

That's the FY15 impact so it reflects the timing of the sale.

In terms of the second part, just week three into the journey with Digital, one is, from a culture side I think the solutions are evolving, but in the theme of hockey season, go where the puck is going.

I've been looking at Digital for quite a long time in terms of this opportunity and pleasantly surprised with where the future of particularly the cloud compute and service providers are going and where they live.

So, if you look at the Digital Realty campuses, these are really enabling hybrid cloud, and I think there's some great opportunities for connectivity options.

I just was on a wonderful tour for the grand opening with Rackspace in the UK and seeing the capabilities there.

I hope they'll apply the knowledge I've had over the last seven years in this space in terms of really driving some of the product engine around the solutions that we have and taking great advantage of the team we have here and the assets.

So we'll definitely be working on that this summer as a team and talk about it at Analyst Day.

The next question will come from John Bejjani of Green Street Advisors.

Please go ahead.

Thank you.

It looks like you guys reduced your earn-out contingency on the Sentrum portfolio by roughly $45 million in the quarter.

Can you explain why this change was so large and, more generally, how the Sentrum portfolio performed the past few years relative to your underwriting.

Yes, sure, John, be happy to address that.

The answer's a little longer than I think you're going to hope for.

It really has to do with the structure of the original deal, the accounting treatment of the earn-out, and then finally I can address the asset performance.

When we acquired the Sentrum portfolio, a central component of that was we only paid for the income-producing portions of the portfolio.

And so we paid a multiple based on the EBITDA that was in place, so essentially we got all of the vacant space for free.

So, a big part of the negotiation was how do we come up with a value for the vacant space.

We arrived at this earn-out methodology which had a three year tail on it and there was a calculation as to how we might pay for that additional space as it was leased.

The good part about that is you actually get all that vacant space for free and now that that earn-out period is expiring in July, whatever hasn't been leased at that point is going to be ours for really zero basis on that within the construct of the deal.

From an accounting perspective we have to have a reserve for the earn-out, so you have to be conservative in the way you run those calculations.

You calculate your reserve based on leasing all of the space, so we had to assume that it all got leased.

At this point, with it burning off in July, there's no reasonable expectation of any additional events that would give rise to an earn-out payment.

As a result we were able to unwind that reserve.

As it relates to the asset performance, it's performing better than when we acquired it.

It's performing better than underwriting.

So we're extremely happy with the performance of it, both to date and in the future.

Great.

Thanks.

And just one quick follow-up.

Can you speak to supply/demand dynamics in London and your key European markets more broadly?

Yes.

John, the supply and demand characteristics in London are roughly in equilibrium right now.

We're happy with the pricing position that we've got in London.

Of course, we just launched the Rackspace, as Jarrett mentioned in his comments.

We just launched the Rackspace piece in Crowley, UK and we do have some available dirt there, as well.

Across the rest of Continental Europe, we see consistency with the comments that I just made with regard to supply and demand in the UK, with sufficient balance within Amsterdam as well within France where we have a small amount of market ready inventory left.

And then a little bit of a distortion in parts of Germany where there is a little bit of excess demand and not exactly enough supply to satisfy the market dynamics there.

When you push out to the edge of components of the data center industry, there may be a little bit of distortion out towards the edge, simply because the data center industry in Europe as well as the data center industry in the United States haven't focused on that over the past decade.

But I would expect that picture to clear up in the next five years.

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

Please go ahead.

Great.

Thanks for fitting me in.

I'm wondering if you could maybe help us think through the shape of the year from an FFO standpoint, just as you look at what your leasing pipeline looks like, the churn that you talked about in third quarter and the more extended time line on some of the asset divestitures.

And then, second, just a quick follow-up on Telex.

I'm wondering if you can maybe just comment on how you view any potential risk to that if that asset were to fall into someone else's hands.

Thanks.

This is Matt.

In terms of the FFO outlook for the year, as we noted, we over achieved on even our expectations for the first quarter.

And, as we noted, a lot of that was due to disposition timing as well as some timing on repairs and maintenance.

As that pushes out, as evidenced by 833 Chestnut, which sold in the second quarter, along with some catch-up on some R&M that wasn't spent the first quarter, we're looking at the second quarter has, as well as some additional G&A that usually comes as a result of some of the [Borg] grants that are issued and vest immediately, and that usually happens annually in the second quarter, we're expecting a slight down tick in the second quarter and then a hockey stick from there, as all the backlog leasing kicks in and the rest of the speculative leasing that we expect to sign commences.

So, we're looking at an accelerated back half of the year.

And, Stephen, with regard to your question about what the shape of the pipeline looks like, we can give you advanced look of shape of the pipeline in our large enterprise segment.

The square footage -- it seems just about once a year I update this -- the square footage existing in the pipeline for large enterprise sales remains roughly equivalent to what it was about 12 months ago.

But we did, of course, add additional streams of income including the mid-market attack and co-lo products.

We see some potential improvements especially over Q1 as we move forward.

That visibility was part of what allowed us to beat and raise.

And then the last piece is that with some of Jarrett's involvement we've been able to uncover and unlock certain additional cash performance that should help us to increase revenue per square foot in the existing portfolio that we have.

So, the shape -- if this was the state of the union, I would say the state of the union is strong.

And on the last point, first of all, Stephen, I'd like to compliment you on getting three questions in on your one question there.

But the last one on Telex, we don't view that somebody else acquiring them poses a significant risk.

That relationship and economics are governed under contracts and we view that as being an extension of the status quo.

Great.

Thanks, guys.

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

The Digital Realty first-quarter 2015 earnings conference call has now concluded.

Thank you for attending today's presentation.

You may now disconnect.