Digital Realty Trust Inc (DLR) 2015 Q3 法說會逐字稿

Good afternoon and welcome to the Digital Realty third-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.

Great thank you, Denise.

The speakers on today's call will be CEO Bill Stein and CFO Andy Power.

Chief Investment Officer, Scott Peterson, Chief Operating Officer, Jarrett Appleby and SVP of Sales and Marketing, Matt Miszewski are also on the call will be available for Q&A.

Management may make forward-looking statements related to future financial and other results, including 2015 guidance and the underlying assumptions.

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

For a further discussion of the risks and uncertainties related to our business see our 2014 10-K and subsequent filings with the SEC.

This call will contain non-GAAP financial information.

Explanations and reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.

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

Thank you, John.

Good afternoon and thank you all for joining us.

Let's begin on page 2 of our presentation by recapping the guidepost for our strategic plan that we laid out investor day in Ashburn just a few weeks ago.

Number one is achieving superior returns.

We've always taken an investment management approach to our business and we remain focused on achieving the highest possible risk-adjusted returns at the asset level.

This is entirely consistent with our emphasis on driving improved return on invested capital.

And I'm pleased to report that we picked up another 10 basis points during the third quarter, bringing the total improvements since the fourth quarter of 2013 to 130 basis points.

That is a remarkable achievement for a portfolio of our size.

Next is capital allocation.

We believe that we have established a respectable capital allocation track record and we plan to build on that success.

In contrast to the past 18 months we expect to be committing capital to expand over the intermediate term.

We intend to expand on our existing campuses, expand in existing markets, and grow opportunistically in new markets all subject to the caveat, that perspective investments must be a accretive to our shareholders.

We also intend to expand our product offerings.

We are adapting our data center design to offer our customers a more agile solution.

And Telx enables us to significantly enhance our co-location and interconnection offerings.

Finally operating efficiencies: we are keenly focused on running this business as efficiently as possible.

This includes emphasizing investment on our campus environments where we can achieve significant economies of scale.

We are also focused on process improvement and leveraging technology to streamline day-to-day functions.

As we identify opportunities, we expect to realize significant benefits from these initiatives over the next several years.

Let's turn the page to Telx.

I'll begin by giving you a brief update on integration.

Matt Mercier, who many of you know led the first phase of our integration efforts through the closing of the transaction.

Matt and his team led our efforts to formalize the combined organizational structure, define key business risks and objectives, identify bottom-up expense synergies while ensuring we maintain sales velocity and operational integrity, and he's done a great job for us.

For that matter the entire finance, accounting and investment teams did a great job successfully raising almost $2 billion of capital in three separate transactions along with underwriting and closing the transaction.

The next phase of our integration efforts will be led by Chief Information Officer, Michael Henry.

Michael has worked on many large acquisitions most recently at Ericsson.

His program is designed to ensure that we deliver the value we expect from the Telx acquisition, including product rationalization, go to market alignment, and the overall customer experience.

I should also add that we recently brought on an interim head of HR who's organizational leadership experience includes helping to guide American Airlines through its $11 billion merger with US Airways.

I think it's safe to say that we will benefit from Cindy's perspective during this transformational event for our Company.

As you may recall we've identified $15 million of expected cost synergies, and we expect substantially all of these synergies to be realized in 2016.

I know that you are all eager to see guidance including Telx and to learn more about the potential revenue synergies and how soon we can roll Telx out across our global campus network.

In our view it's far more important to get this right than to get it right now.

With that said let me outline our priorities for you in broad brush strokes.

The first order of business will be leasing up the existing vacancy within the Telx portfolio.

It may not be sexy, but it drops straight to the bottom line.

The next opportunity will be to turn over to Telx the pockets of inventory within our gateway buildings where they already operate.

This includes space like the property management office that we previously kept at 111 Eighth Avenue.

The next step will be to have Telx takeover our existing co-location business, notably including properties like 365 Main in San Francisco, which we believe Telx will be able to operate very effectively.

Next we will turn to our domestic campus environments and look to build out a co-location and interconnection product offering on those campuses, notably including Ashburn, Dallas, and Chicago.

International expansion will be the final phase.

Planning for each of these initiatives is already underway, although revenue synergies are likely to be realized beyond 2016.

Moving on to capital recycling, we don't have much to report beyond what Scott covered at our investor day three weeks ago.

As he said we have seven properties on the market shown here on page 4.

We expect to receive upwards of $150 million in proceeds from these properties and we expect our capital recycling program to be substantially complete by the time we report fourth quarter results.

We will remain patient, however, and we will continue to close when our value added efforts and market conditions enable us to achieve the best execution for our shareholders.

Moving on to market fundamentals, as you can see here on page 5, our recent leasing activity has been concentrated in our campus markets and with our target verticals namely social, mobile, big data, cloud, and content along with financial and IT services.

In addition, strategically expanding our global alliance program is a top priority, as we invest significant resources to develop a program of world-class partners who help our clients deploy their mission-critical IT workloads and digital realty facilities.

We are pleased to announce that during the third quarter ClearSky Data and CompuCom became global alliance partners, joining our existing technology alliance partners program including AWS, NaviSite, Rackspace, SoftLayer, Unit-OSS, Global, and VMware.

On a panel at a recent investor conference I made the observation that data center demands are stronger today than it's ever been in our 11-year history as a public Company.

I think you've seen that momentum reflected in the recent leasing activity reported by publicly traded data center peers.

And you may have also seen that we potentially hit the high end of the range for our upwardly revised speculatively leasing target for the full year.

Here's an interesting data point to demonstrate what I mean.

Within the past five weeks we have ordered 23 generators and have allocated 15 to projects scheduled for delivery over the next six months.

Throughout the course of 2015 we have allocated between three to eight per month, so this represents a dramatic uptick in our level of delivery.

Along similar lines I am very pleased to report that earlier this week we went hard on the acquisition of a land parcel in Ashburn in close proximity to our existing campus.

This is one of the few remaining Greenfield sites suitable for data center development in Loudoun County.

It will support the development of approximately two million square feet and the buildout of roughly 150 megawatts, and will facilitate our customers growth for the next several years upon completion of our existing Ashburn campus.

Turning to supply on page 6, big picture conclusion here is that most markets remain roughly in equilibrium and continue to gradually tighten.

New supply in Northern Virginia ticked up during the third quarter, but we remain very comfortable with the leasing velocity in that market.

We continue to closely match our new starts with customer demand and we continue to enjoy great success at healthy returns in Northern Virginia.

Sublease availability in Silicon Valley continued to contract during the third quarter.

Our view is that Silicon Valley has tightened considerably consistent with third-party market commentary.

Finally let's turn to the macro environment on page 7. Global economic growth has clearly decelerated over the past 90 days and monetary policy remains very accommodative.

In addition much has been written recently about a potential slowdown in the tech sector.

From where we sit, however, the rumors of the tech wreck coming back to the future have been greatly exaggerated.

For starters, cloud businesses appear to be some of the fastest-growing segments within the established publicly traded tech companies.

In terms of a slowdown in the IPO market it is certainly not uncommon to see a disconnect between public and private real estate market pricing.

REITs periodically trade at wide premiums or discounts to the underlying value of their portfolios.

And it doesn't seem unreasonable for private market valuations for tech companies to occasionally decouple from public market pricing.

Valuation aside, however, one key difference between the years 2015 and 2000, is the companies driving the bay area economy today have very legitimate business models, are generating significant cash flow, and the drivers of additional economy landing in our portfolio generally have very solid balance sheets with lots of cash and little or no debt.

With that I'd like to turn the call over to Andy to take you through our own financial strength.

Thank you, Bill.

As we pre-announced at our investor day and as shown here on page 9, we signed new leases representing just under $33 million of annualized GAAP rent during the third quarter.

Social, mobile, analytics, cloud and content accounted for over 70% of our lease signings during the quarter.

Existing customers represented over 85% of our third quarter leasing activity and we added 16 new logos in the quarter bringing the full year to a total of 51 new logos.

On page 10 you can see the weighted average lag between signings and commencement ticked back up to 5.4 months during the quarter from the record low of 2.5 months in the second quarter.

This was primarily due to limited remaining finished inventory on the shelves.

Going forward you should expect to see this measure hover around the historical average of about six months.

Turning to page 11, cash releasing spreads were positive across property types for the third quarter.

In place rents on the lion's share of our leases are now below market, although we do still have several remaining above market leases notably in Northern New Jersey and Phoenix.

And individual leases can be large enough to swing the mark-to-market into the red in any given quarter.

On balance however, we believe we have reached an inflection point and we expect to see continued improvement in the mark-to-market across our portfolio, driven by market rent growth along with the steady progress we have made cycling through peak vintage lease expirations.

Turning to our financial results on page 12, we reported 3Q 2015 core FFO per share of $1.32, $0.05 ahead of consensus.

The outperformance during the quarter was driven by a combination of a few items, including a large property tax refund in the West region.

This refund maybe one time in nature, but it reflects the operational excellence of our proactive portfolio management approach.

In addition the current year contribution for speculative leasing was ahead of plan, foreign currency translation represented a bit less than a headwind than expected and we did get a slight benefit from delayed timing on asset sales.

I would also like to point out the continued improvement in AFFO per share growth; specifically the non-cash straight-line rent and FAS141 adjustment, both continue to trend down and our recurring CapEx spend was also down significantly this quarter.

The lower recurring CapEx during the quarter is partially explained by seasonality, but in general these trends reflect the approved underwriting discipline we've instilled over the past year and a half, as well as a consistently improving data center market fundamentals.

Please note that the AFFO includes $11 million of Telx transaction costs.

Excluding these transaction costs AFFO would have been $1.10 per share and our payout ratio would have been below 80%.

The bottom line is the quality vertices is improving and the growth in cash flow is accelerating.

In addition FX continues to represent roughly a 300-basis points drag on the year-over-year growth in our reported results for the top to the bottom line as shown on page 13.

As you may have seen from the press release we are raising 2015 core FFO per share guidance by $0.05.

The upwardly revised ranged represents roughly 4% growth at the midpoint on our as reported basis and approximately 7% on a constant currency basis.

I should point out here that our bottom line FFO per share forecast includes the expected contribution from Telx, whereas the individual assumption underlying the guidance reflects standalone results for Digital Realty only.

Please keep in mind that the Telx transaction just closed in early October.

We are comfortable raising guidance while absorbing Telx into our financial forecast.

We expect to give formal 2015 guidance early next year, at which point we will provide greater visibility on the impact of Telx on our combined operating performance metrics.

In the meantime, I can confirm that we still expect Telx to be roughly 1% accretive to core FFO per share in 2016 and roughly 3% accretive to AFFO per share.

In terms of Digital Realty's third quarter operating performance same capital occupancy declined 90 basis points to 93.9%.

As we state for -- the past several quarters the occupancy drag during the quarter was anticipated and we do expect occupancy to bounce back and finish up slightly by the end of the year.

The occupancy decline was due to a few known power-based building move outs, which impacted our tender retention during the quarter as year.

I like to take a moment to provide some additional color on these non-renewals.

In our experience data center customers have a high propensity to renew unless their core business undergoes a material change and provided they've taken occupancy for their space.

The two largest non-renewals during the quarter had both been targets of M&A activity and neither had occupied the space for years.

In addition a significant portion of the space that was technically not renewed has either been released to sub tenants, or is currently under LLI to be released.

Also shown on page 13, same capital cash NOI was up 2.2% in the third quarter on a constant currency basis same capital to cash NOI would have been up 4.5%.

For the full year we continue to expect organic growth to trend toward the high end of our 2% to 4% guidance range on a constant currency basis, but towards the lower end of the range on an as reported basis.

I'm pleased to report that we are on the cusp of a happy ending to the Net Data Centers bankruptcy.

As you may be aware Net Data Centers completed a sale of their the East Coast operations last week including the path to emerge from bankruptcy.

Net Data Centers has elected to assume all of their leases with us in downtown Los Angeles and El Segundo with no change to the in place rents.

They've remained current with us on all post-petition obligations throughout bankruptcy and the only amount outstanding is roughly $1 million of pre-petition rent which we have fully reserved.

We expect to collect on the pre-petition receivable and reverse the reserve during the fourth quarter, which should represent upside of approximately a penny per share.

We mentioned in our investor day that we had begun the process of recasting that $3 billion of global credit facilities.

I'm pleased to report that we have over $4.9 billion of commitments to the credit facilities today, including more than $300 million of commitments for a new seven-year term loan.

We expect to tighten pricing and lower the cap rate used to value our portfolio for calculating total leverage and unsecured leverage under the loan covenants.

As shown on page 14, we expect to extend the maturity for the line of credit and the five-year term loan out from 2018 to 2021 and the new seven-year term loan would be scheduled to mature in 2023.

We anticipate in closing these facilities early next year.

As you can see from the left-hand side of the page, pro forma for the recash credit facilities, we have very modest debt maturities through the 2019, with no more than $200 million coming due in any of the next four years.

In 2020 and beyond, maturity should likewise be manageable with a well-laddered schedule.

I would also like to note that we've reached a milestone during the third quarter.

With a $1 billion of annualized adjusted EBITDA.

Leverage dipped below five times as of September 30, 2015 although we have since issued additional debt to finance the closing of the Telx transaction.

Nonetheless we expect to end the year below our targeted leverage of 5.5 times with a balance sheet positioned for growth.

In summary, we just capped off another very busy, but very successful quarter.

And we are focused on maintaining our current momentum through the end of this year and into 2016.

This concludes our prepared remarks.

And now we would be pleased to take your questions.

Denise, would you please begin the Q&A session.

(Operator Instructions)

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

Thank you good afternoon.

My question is regarding production and general leasing.

So volume which you disclosed to us at the time of the investor day -- and we've obviously received the past couple of quarters -- it has obviously reflected a little bit of a lighter inventory as you guys have aimed to lease it up and do more profitable deals.

But I guess as you are integrating Telx, and I know it's early days, I'm curious about what a realistic leasing or production number may look like on a go forward basis relative to legacy digital?

Thanks for the question, Jordan.

This is Matt Miszewski.

We would anticipate -- and we're in the midst of actually baking the sales plan numbers for 2016.

But we would anticipate similar results to what we've seen on a quarterly basis for the core DLR facilities and product sets.

With a slight uptick depending upon which region we are talking about and then a slight uptick with regard to the combination with the Telx inventory that's out there.

Okay.

But you wouldn't yet venture a guess in terms of what sort of growth or -- either top line or on a quarterly basis we should anticipate from --

I wouldn't hazard a guess and we'll make those comments in the next quarterly results.

Jordan the plan is to have an announcement shortly after the first of the year where we will lay out the guidance for next year and that will include the assumptions for Telx as well as digital.

The next question will come from Matthew Heinz of Stifel.

Hi, good afternoon.

I was hoping you could talk us through how you are contemplating positioning the existing mid-market or co-location business as you think about consolidating Telx?

There's clearly a meaningful pricing difference in that area versus where Telx base is being sold.

And I'm just curious how as you contemplate your go to market for next year how that product is going to be positioned with customers?

Yes.

Thanks, Matthew.

Actually it's a fantastic combination of the resources that we have currently in place in terms of the mid-market attack that we've been under for the last few years.

And if you think about the new product set it's okay to think about it in the following way as we get these definitions out into the market.

The Telx facilities that we have and the Telx products that we have really satisfy a very concrete set of defined products fitting into that 0 kilowatts to 300 kilowatts range.

And then they have specific service levels that are attached to them.

If you think about the mid-market approach the sweet spot for the traditional mid-market team in Digital Realty has been between that 300 kilowatts space and 1 megawatts space for our clients.

We are certainly in the middle of doing a branding exercise, but right now we've got the major product that we've had historically called the scale product at about 1 meg and above.

If you think about that 300 kW to 1 meg space as a mini scale as opposed -- we're not finished with that particular product definition yet but mini scale or mini wholesale you'd be on the right track.

So we will be able to take advantage of the mid-market team that we've fielded for the last year and a half as well as the traditional scale team that I have and the Telx team will fit right perfectly inside of our portfolio.

Okay.

That's great.

Thank you.

And just one for Andy if I may.

Talking about the increase in the sign to commencement lag up around five months and I guess the expectation that we stay at that level.

You have been talking about an improvement in that area driving -- improvement in the straight-line rents and kind of the pass through to AFFO.

As we think about our models should we expect any change in that area going forward from the higher commencement lag?

Hey, Matt.

I think so we kind of ground that stat down as low as probably possible from a business perspective, at 2.5 months.

And it's really a product -- you literally have to have finished data center to go from a sign to commence in that timetable.

I think the more natural spot for that is closer to six months.

I think you will see our straight-line rents or non-cash and 141s hovering right around where they are today.

I think the other more meaningful part of that is not giving ramps upon commencement.

Meaning customers take over 100% of their space the day they commence their lease versus staggered commencements, which results in a straight-line rent adjustment and a gap between the cash and the gap.

And we are continuing to push that and that echoes back to the underwriting discipline that's been instilled over here the last year and a half.

So I don't think that stat is going to be changed based on this time to commencement.

The next question will come from Bill Crow of Raymond James.

Good evening.

Hey Bill, in recognizing that the ink isn't dry yet on the Telx deal and you've got a lot of wood to chop there, but interactions out there with other dance partner any thoughts on what you might do next?

What we're going to do next is integrate Telx.

And I just want to repeat what I said in the remarks, Bill.

Our highest priority is to successfully integrate this $1.9 billion investment.

And so the focus is for the next two months on achieving the operating synergies and then rolling out through 2016 the revenue synergies.

As far as additional inorganic growth the criteria is as we've always stated or as we've stated at least for the last 18 months, which is to say we want anything we do to be strategic and complementary and to be financially accretive as well as prudently financed (multiple speakers).

I was going to say given the recovery in the stock price the valuation there, does that change at all your thought process on uses of capital?

No, it doesn't.

I mean again this is -- if you think about Digital's history we've been an acquirer of real estate and developer of real estate.

This is really our first major acquisition of an operating platform.

And we want to make sure that we do this right.

But just add to that Bill, Scott here.

We do keep tabs that everything that's going on in the marketplace and we're are abreast of everything, but we don't want to lose sight of what our target is right now and that is getting Telx integrated properly and growing it within our platform.

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

Thank you.

You mentioned the plan to commit capital and grow in new markets.

Could you comment on the need to build out the sales force in certain markets post the Telx acquisition?

What's the rough magnitude that we are talking about there and what's the potential timing?

Yes Vance, this is Jarrett.

We are in the process of reviewing their full pipeline and the customer.

They have a healthy funnel in place.

We will ramp up some level of resources in some market gaps we've identified.

I think it's magnitude of 5 to 10 people and to continue to grow.

And again you traditionally see some level of folks churn in your sales organization, so I don't see any significant sales investment.

All the underwriting was really consistent with what we did as part of the acquisition and the diligence we did.

And Vance, across the whole sales force we do expect to see some interesting dynamics where the efficiency of each one of the assets that we have on both of the sales teams would be able to enhanced by the mere existence of multiple products.

So we're excited about that and that does deaden the need for us to hire additional staff.

Okay.

That's great color.

And then for my follow-up could you bring us right up to date on dispositions.

How many are under negotiation, how many under contract, and what's the timing for bringing them through to fruition?

Yes I think the disposition program will be largely done by the end of the year here.

We currently have one under contract that's going to close soon and we're negotiating a contract for four others, right now.

And we have a couple of others that we are working on just some value add, better sales outcomes projects on so we hope to get -- make some good progress on that shortly.

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

Yes.

So a quick question on Telx and as you think about potentially growing that platform outside the US into Europe.

And I wondered your interest level in purchasing divested assets, not platforms but individual assets in case anything were to become available as a result of the pending merger going on over there between at Equinix and Telecity?

And then on the different data center design that you talked about, if you could just give us your updated thoughts on what the implications are on yields that you hope to achieve, and cost to develop as a result of the new design?

Thank you.

Yes sure.

So the first part is European assets individual assets that may come for sale.

We've got a long consistent history of acquiring assets like that.

Certainly keeping our eyes open to see anything that may come about as a result of that pending merger.

We also are looking at some select individual assets out there as well.

Obviously we try to maintain all of our principles as it relates to that with respect to individual assets.

We want them to be represent good value to our shareholders and they have to be assets that fit well within our existing platform and portfolio.

To that extent will keep an eye on everything that comes available there.

And Jonathan on part two in terms of the new design, I think there are two components.

One, we did see an opportunity to really open up more opportunities so the first thing was more agility to drive service levels and innovate the product.

So in terms of the return profile I think we're just looking that we'll cover more of the market particularly in the M plus1 design or the different SLAs associated with that product and the yield implications.

And it also gives us the ability to serve and not strand on power for denser power solutions for those verticals in social, mobile, analytic, cloud and content.

But again our goal is to provide that high value to our clients and sell at the market rate which is what we're really focused on is serving those clients at the market rates.

Thank you.

The next question will come from Colby Synasael from Cowen and Company.

Great, thanks.

As we start to factor Telx into our models I was hoping you could give us an update on what Telx's third quarter revenue EBITDA were so we can start to think about that correctly?

And then also you did lower your I guess NAREIT defined definition of FFO.

Obviously there's some puts and takes there from the Telx transaction but I was wondering if you could walk us through what happened there and how that should perhaps change as we go into 2016?

Thanks.

Hey Colby, it's Andy here.

We literally closed the transaction October 9, so we've gotten preliminary readouts on the numbers but obviously we haven't had our team go through and scrub all of the financials and get to a comfort level where we want to tell the public markets where we are coming out.

Preliminary review is that they are on track from a revenue and EBITDA standpoint.

Nothing is changing with our expectations for underwriting for 2016 where we're pacing.

We did commence, literally in conjunction with the closing, we commenced the execution of our synergy plan.

We had a handful of executives depart on that day.

We entered into transitional agreements with a handful of executives throughout the end of the year roughly.

And we've commenced on that rest of the expense plan, which we expect to be done with and deliver on those synergies before the end of the year.

That leads me to your second question.

NAREIT definition doesn't add back the transaction expenses.

So we will have transaction expenses associated with Telx including severance that will run through the P&L in the fourth quarter.

And do you expect those costs to be done as we go into the first quarter or could there be a little bit of bleeding into the first quarter as it relates to those things as well?

I think most of them will be done in the fourth quarter.

The large majority of it.

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

Hey, good afternoon everyone.

Hey Bill, just wanted about your comment about the demand being as strong as you've ever seen it.

You mention the generator example but just curious your development CapEx guidance did come down relative to prior.

Just curious if you could provide some commentary around what was driving that?

And then I have a follow-up.

Yes that's basically timing, Vin.

The generators are a leading indicator and we would fully expect that the CapEx guidance will increase next year.

Okay.

This is Andy.

Before you ask your second question, it's just a timing thing when you release to shelf, when you spend the money to construct.

We basically released to shelf a little bit later so the bulk of dollars are going to bleed into next year versus this fiscal year.

Okay.

By that so I think it was $750 million to $850 million before if you have a similar level for next year does that mean we will be in the billion-ish range just to make up for some of the timing?

I think it will be closer to the high end of what we put out in investor day, plus or minus $50 million.

And the next question will come from Jon Petersen of Jefferies.

Great, thanks.

Actually just wanted to pick up on development spending for next year.

Obviously it sounds like you guys are going be more aggressive in terms of committing capital to expand.

But to do that does that mean you will increase the amount of spec development in the pipeline?

I don't think so.

I mean we are signing a lot of leases right now for space that doesn't exist.

So I think you're going to see a decent amount of pre-leasing percentage on everything that we develop next year.

Okay, great.

And then just one point on guidance that I'm a little bit confused about.

So in terms of the long term debt issuance you're still saying $500 million to $1 billion, I know you did $500 million around in June and then another $950 million, which I assume gets put in with Telx not part of this guidance.

I'm trying to figure out between now at the end of the year are we still expecting another debt deal?

So the table on page 10 -- all of the assumptions from the slightly positive renewals down to timing on the debt are all standalone and do not include Telx at all.

So you don't see $1.9 billion acquisition, you don't see the $250 million preferred, you don't see the $714 million of equity, nor the $950 million of bonds.

We are factoring the impact of Telx in our end results here.

So we think we will achieve this core FFO per share including Telx for 2.5 months in the results.

But the financings do not include it.

We've completed $500 million of debt this year it was a green bond.

We are still evaluating the potential Euro bond before the end of the year.

Now there's only so many weeks to the end of the year so that may roll into next year.

And the next question will come from Manny Korchman of Citi.

Hey guys, good afternoon.

Andy if I look at your -- the combining two pieces, your revised guidance as well as the walk to consensus to $0.05 beat, I would think that the FX would probably replicate itself again in the fourth quarter.

So was just curious why at the top end guidance is going up less than the $0.05?

You'd [be by] in the quarter especially with FX repeating again.

Manny, the reason it's not up higher is that we are factoring a couple of pennies maybe up to a nickel potential dilution from Telx.

For the fourth quarter.

That's not for 2016.

Remember we literally closed on the 9th.

Our assumptions for Telx 2016 include synergies being executed.

We're working through that plan but those individuals are still on the books.

We have not consolidated our office space and haven't achieved some of those expenses synergies.

And that doesn't include some of the underwritten growth so there is some dilution, a couple of pennies, from Telx that brings down that high end.

Does that make sense?

Sure.

And then if I turn back to the commentary on commencement timing.

Does that mean you're going to have less take-up of the pre-stabilized space as you develop more new space and that's why you are going to six months?

Or is it just that new space magnitude-wise is just so much bigger than stabilized space or the pre-stabilized space that will be leasing?

I hope we don't have less take up of the pre-stabilized stuff.

That stuff has already kind of -- I mean it's already staying in that rate so it should be easier to attack then from a leasing standpoint.

And if we're very focused on that in our sales discussions in our [vestment committee].

I'm just saying that 2.5 months is a very low time from sign to commencement.

And it feels like from looking at the business over a longer time period when you don't have lots of standing finished inventory, six months is a closer amount to a regular time period.

I think Matt wants to jump in and give a little more color as well.

Manny, thanks for asking a question to Andy then made him give me a curse look.

Our focus on the pre-stabilized space remains intent and I would say laser focused as we've been saying around the table.

And the history of the folks in my organization are such that pre-stabilized space has become a pretty profitable target for us.

So we're going to keep focused on it.

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

(technical difficulty) in the prepared remarks but could you give us a sense what is out there that might be over market that is still in the portfolio that might need to be marked down maybe magnitude or just some sort of sense as to that?

And then I'd like to circle back to a question I had asked last quarter and sort of get an update.

But you guys have opportunity to host the big cloud platforms from a large footprint perspective, but also really drive connections within the campus environment to the enterprises, obviously something enhanced through Telx.

But I'm just wondering in terms of seeing the demand for enterprise to cloud, cloud to enterprise, seeing that develop if you have any update or perspective on where we are in the cycle?

Thanks.

So Jonathan, I think your phone may have been on mute for the first second when you chatted so maybe just make sure we answer your full question.

On the mark-to-market piece two examples are northern New Jersey where we obviously have a heavy concentration of financial services.

A lot of activity that would happen on the backs of the financial crisis where it was a very tight supply market and we delivered and signed pretty great leases.

In that tight market some of those leases have rolled down historically and there's onesy, twosies in that market to come.

Another example is in Phoenix, off the top of my head, where we bought a portfolio and when we bought the portfolio at the time it had above market lease; we underwrote that.

We factored that into what we paid the seller of the portfolio.

And there is a lease or two in that market from that portfolio acquisition that will come through in the next year or two and roll down.

And Jonathan, this is Matt, to answer your question on big cloud platforms and driving connections.

That's exactly the strategy that we have been looking at executing before the Telx acquisition, but the Telx acquisition just makes it that much more crisp.

We've been having conversations Jarrett and I have been having conversations with most of our major customers and all of the major cloud providers in the space.

And very specifically we've started to see an interest on their side to not just land the large compute, cloud compute loads in our facility, which we've become expert at, but also making sure that there is available co-location space right next to that at extremely low latency and providing some direct connect facilities so that they can connect securely as well as with low latency.

So we're seeing increased demand not just for the large cloud workloads to continue to land in our space, but to have those enterprise clients land right next to them in co-location space.

In fact I'm proud to announce that just late last night we were able to land another major cloud provider in our Chicago facility and the conversations have began on just that structure.

And then just to build on that Jonathan, I think what's really unique I think the industry is out there a lot with these cloud on ramps and providers who are really going after the enterprise or providing cloud or managed services.

What makes us really unique and different is our focus on the foundation and partners for the scale.

And we're seeing larger enterprises deploy right next to the compute engines and directly connect.

So that is a very much a unique pattern which makes us very compatible with partners who are focusing on the enterprise side of the business.

Thanks for taking the questions.

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

Please go ahead.

Thanks.

Bill, if you could, you mentioned the last five week statistic where you have ordered a significant number of generators.

Could you expound on that a little bit?

We've only ordered the generators, Jordan, because we have clear visibility into the demand, which is to say that Matt's team has been busy signing leases.

A decent amount of which has occurred at the end of the quarter so it's October business rather than September business.

Okay.

That's fair.

But sounds like essentially it's correlated or related to a spike in leasing activity.

Perfectly correlated.

Okay.

And then we've danced around the mark-to-market a little bit but do you have a sense for what the mark-to-market looks like for next year?

I know Andy just laid out the Phoenix one that could expire or mature in the next year or two, but if you are looking at the portfolio for next year, does it look like a positive mark overall or is it flat?

How should we think about that?

Jordan, so we're still going through budgets for next year to give you the most up-to-date data.

I mean we are looking at the numbers it looks like it's around flat across the entire portfolio.

We're trying to push it into the positive territory.

But it's these one-off exceptions which have reasons to it, not due to other anything other than being signed at peak rents or something we underwrote that are driving the down piece of it.

So you're going to get a full picture when we put out our guidance at the beginning of next year.

The next question will come from Will Clayton of Macquarie.

Thanks for the question guys.

I was just wondering as you work through the four stage strategic priority list on Telx, how should we think about the timeline capital intensity profiles and margin impacts of these different stages?

And what are the targets or metrics that we should use to hold people accountable for executing on strategic objectives?

Sure Will, this is Andy.

So out of the gates what we've said before and what we continue to plan to deliver is essentially $148 million of EBITDA from the 20 Telx locations, $15 million of expense synergies, $10 million of it roughly flowing through the P&L.

We expect to meet or outperform in all of those metrics.

Capital intensity, recurring CapEx associated with that 2016 plan is 20% of that EBITDA, there is a little bit more of expansion CapEx outside of that.

But obviously the expansion CapEx won't have a massive EBITDA contribution in 2016.

Anything beyond that we view as a revenue synergy which we've been doing a lot of work towards and continue to develop throughout 2016 but we think it will be a small contributor to 2016.

And those are the examples we've outlined before and some of which on this call, be it bringing Telx to an Ashburn, [domestically] expanding their presence in some of our Internet gateways.

[Tethering] in certain assets, we're eventually bringing the Telx product of co-location and connection into our international campuses such as a Singapore or London.

But I would say that's a more -- we'll be doing a whole lot of work on that in the next 12 to 18 months, but I don't think you'll see a ton of capital intensity or a ton of EBITDA contribution during that time period.

Will, Scott here.

To help you out a little on that, if you look at the different stages of the priorities, they go from an ease of execution, but if you also look at them they go from a higher initial gross margin business and a lower capital intensity.

So I think you see the initial stages will have better impact than the more capital intensive, longer lifecycle later stages.

But that's a good way to think about it.

Okay.

That's very helpful.

And I'm just wondering if you could talk to us a little bit about what you are noticing in terms of industry fundamentals?

You seem to have sustained momentum in leasing volumes, but also on the pricing side.

Where do you see prices on new leases and renewals over the next four or five quarters and how do you think about that relative to current levels?

Yes, thanks Will.

In terms in the industry fundamentals, of course it is as a real estate business region by region specific, but we see the industry fundamentals as strong and growing in certain accounts.

If you look at, if you go back to the slide where Bill highlighted our focus on the SMACC accounts and the SMACC portfolio.

We continue to see an increasing amount of interest in our facilities from the social, mobile, analytics, cloud, and content providers which suggests that there is a great deal of strength in the industry that we're going after to address.

The second piece is if you think about the shift that we talked about at analyst day and the conversations that we've had, if you look at the historic approach that we've had in going after enterprises directly and the shift to go after those enterprises indirectly, that gives us the ability to have a lower cost of sales and take advantage of the core competencies we have to hit the high growth, high potential SMACC workloads.

In terms of pricing and I will turn it over to Jarrett in a little bit, butt in terms of pricing I continue to see that the discipline that we're exerting in our piece of the industry and the rest of the discipline that the industry has with regard to supply, is having a positive effect on pricing.

And just with the contract vehicles and the pricing, what's very interesting is you sell frequently and this quarter was 85% of our sales came from existing customers.

We are adding 1,000 new customers that we can now sell a full suite of products.

So I think both sales organizations are very excited to sell co-lo, connectivity and scale and we have to take advantage of that with the assets that we have as a combined Company.

And at this time we will conclude the question and answer session.

I would like to turn the conference back over to Bill Stein for his closing remarks.

Thank you, Denise.

I like to wrap up our call today by recapping our third quarter highlights as outlined here on page 16.

First and foremost we picked up another 10 basis points of improvement in our ROIC during the third quarter bringing the total improvements since the fourth quarter of 2013 to 130 basis points.

I would also like to point out the 10 basis point improvement during the third quarter excludes the one-time property tax refund and the 130 basis points since year end 2013 likewise excludes the impairment charge we booked during the fourth quarter of 2014.

These items would've added another 10 basis points each to the total.

As you know, we recently closed on the acquisition of Telx, which we believe will be a truly transformational transaction for our Company.

We beat third quarter consensus estimates by $0.05 and we raised guidance for core FFO per share from the prior range of $5.05 to $5.15 up to $5.12 to $5.18.

In short, we continue to execute on our top priorities.

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.

Many of whom have been working around the clock on the Telx acquisition and integration.

That concludes our third quarter call.

Thank you all for joining us.

Thank you.

Ladies and gentlemen, the conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect your lines.