Digital Realty Trust Inc (DLR) 2015 Q4 法說會逐字稿

Welcome to the Digital Realty fourth-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.

Thank you, Denise.

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

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

Management may make forward-looking statements related to future financial and other results, including 2016 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.

And now, I would like to turn the call over to Bill Stein.

Thanks, John.

Good afternoon, and thank you all for joining us.

I'd like to begin on page 2 of our presentation by reminding you that delivering superior risk-adjusted returns is our guiding principle.

That applies to the investment decisions under our control, and it also holds for the investment opportunity we expect to provide shareholders.

In terms of our capital allocation decisions, that means mitigating risk on development by requiring significant levels of pre-leasing, and building only into markets where we have high visibility on demand.

It means emphasizing profitability over velocity, and preserving the flexibility of our balance sheet.

We are highly focused on the accretive deployment of capital, and we decline deals that do not provide a sufficiently positive spread above our cost of capital.

We emphasize growth in our bottom line on a per-share basis.

In terms of the investment profile that we offer to shareholders, it means delivering consistent, uninterrupted growth in earnings, cash flow and dividends per share throughout the business cycle, firmly supported by the underlying value of owned real estate.

Let's turn now to our platform on page 3. We have made a very conscious decision not to directly pursue the enterprise vertical, with few exceptions, such as our traditional bread-and-butter customers like financial services companies.

We aim to enable our partners to service enterprise customers upon the real estate foundation that we provide.

In early December, we announced a colocation resale alliance with AT&T, as well as a direct link colocation partnership with IBM SoftLayer.

I'm pleased to report that our partners and alliances program continues to gain momentum, and that these partnerships have already begun to bear fruit, contributing meaningfully to our fourth-quarter signing total.

Through these strategic initiatives, we have onboarded some new target customers, such as a large and growing Asian multi-national communications networking company.

These wins certainly speak to our approach of supporting partners as they grow their business, while simultaneously leveraging a broader collective sales engine.

This pipeline is also growing significantly, including international opportunities and several large expansions for deals signed in 2015, as well as numerous enterprise logos not pursued by Digital Realty's direct sales force, highlighting the value proposition of this partnership model.

Turning now to capital recycling on page 4, we closed on the sale of a vacant industrial building in Franklin Township, New Jersey, during the fourth quarter.

This property had previously been held for redevelopment, but market conditions were unlikely to justify construction any time soon, and we determined to sell the property to an owner-user and move on.

Subsequent to year end, we sold the former Solyndra facility in Fremont, California, to a core real estate institutional investor for $37.5 million, or $188 per square foot, at a 7.2% cap rate on our 2016 contractual cash NOI.

This former R&D manufacturing campus was likewise vacant until we were able to successfully release it last year, significantly enhancing the execution we were able to achieve on the sale of this non-core asset.

We are now also under contract on the National four-property data center portfolio that we mentioned on our last earnings call and at our Investor Day.

There are no financing contingencies, and we expect to close during the first half of the year.

We've been quite pleased with the execution that Scott and his team have achieved on the sale of these non-core assets, and this portfolio sale will substantially conclude our capital recycling program.

We do, however, continue to believe that culling the asset base represents prudent real estate portfolio management.

And you can reasonably expect to see us periodically sell another asset here or there, particularly non-data-center properties or one-off assets that no longer fit our connected-campus strategy.

We've begun to shift from a harvesting mode to selectively investing to secure our supply chain and to carefully position the Company for future growth.

As previously announced, during the fourth quarter we acquired a land parcel in Ashburn, less than a mile away from 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 2 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.

We also established a foothold in Germany, a long-time target market, with the acquisition of a 6-acre parcel in Frankfurt during the fourth quarter for $6 million.

This parcel will support the development of a three-building campus, totaling approximately 340,000 square feet and roughly 27 megawatts of critical load.

We have begun the local entitlement process, and expect to be in a position to break ground later this year and deliver our first suite in the second half of next year, subject to market demand.

Moving on to market fundamentals on page 5, most markets continue to gradually tighten.

The data center demand backdrop remains incredibly healthy, driven largely by our target verticals, namely social, mobile, big data, cloud and content, along with financial and IT services.

We've seen a significant uptick in the size of the average scale requirement, particularly from the hyperscale cloud service providers.

The caveat here is that these requirements can be quite lumpy, and timing can be hard to predict.

The lumpiness of the large footprint business is complemented perfectly by the consistent cadence of the colocation and interconnection contribution from our Telx line of business.

Andy will provide an update on performance against our underwriting targets, but suffice it to say the integration is proceeding smoothly.

We are pleased by the contribution Telx is already making to our quarterly bookings, and we expect it will accelerate the overall growth rate of our Organization.

The Telx acquisition has introduced us to over 1,000 new logos, and the combined Organization is developing strong relationships with these new accounts.

Over the past two years, more than 80% of our traditional large footprint leasing activity has been repeat business with existing customers, highlighting the value of these new customer relationships and further underscoring the complementary nature of the Telx acquisition.

And now let's turn to the macro environment on page 6. Global economic growth has decelerated over the last 90 days, while volatility and uncertainty have increased.

As I've said before, data center demand is not directly linked to job growth, household formation, or even the price of oil, although the drop over the last 18 months is striking.

We have the good fortune to be levered to secular demand drivers that are both somewhat independent from, and growing faster than, GDP.

It's worth pausing here to reflect on our performance during the last downturn, which you can see represented in some of the visuals on page 7. By way of reminder, we have generated positive year-over-year growth in dividends and core FFO per share each and every year since our IPO in 2004, and the great financial crisis was no exception.

Our total shareholder return in 2008 and in 2009 also compared quite favorably to the REIT index, as well as the broader market.

During that capital-constrained environment, it was corporate outsourcing of data center requirements, along with a prudently managed balance sheet, that was responsible for our outperformance.

In the current environment, cloud adoption is the next generation of corporate outsourcing writ large.

The cloud is gaining traction because it enables corporate enterprise end users to achieve efficiencies and contain costs.

During a downturn, this becomes even more appealing.

In addition, our target cloud service providers are generally mature, well-capitalized tech companies, and the cloud platforms are among their fastest growing business segments.

Consequently, we believe that we are well positioned to continue to deliver steady per-share growth in earnings, cash flow and dividends, whatever the macro environment may hold in store.

And with that, I would like to turn the call over to Andy to take you through our financial results.

Thank you, Bill.

Let's begin with an update on Telx here on page 9. As you know, we closed the transaction in early October.

I'm pleased to report that we reached our commitment for $15 million of expense synergies during the fourth quarter, and we expect to realize the full run-rate benefit of these savings in 2016.

We also reached retention agreements with key personnel, and we are well on our way to integrating the two platforms.

For the fourth quarter of 2015, Telx generated $89 million of revenue, an 11% increase compared to the prior-year period.

Revenues are split roughly 50/50 between colocation and interconnection.

From its existing 20 locations, and prior to expense synergies, Telx generated $33 million of cash EBITDA during the fourth quarter.

Telx performed at or slightly better than our plan on all fronts.

That momentum has carried on into 2016, and we remain on track to meet our underwriting targets.

Bill has already alluded to more than 1,000 new customers with whom we were able to establish a relationship as a result of the Telx transaction.

Separately, Telx brought an additional 27 new logos into the fold during the fourth quarter as well, including new subsea cable systems, mobile operators and content suppliers.

The total number of cross-connects for the combined Organization is now more than 60,000, and we believe that connectivity represents a significant opportunity for cross-fertilization.

We told you on our last earnings call that the next order of business for Telx would be to transfer our existing colocation business at 365 Main, along with turning over pockets of available inventory within our Internet gateways.

I'm pleased to report that the transfer of 365 Main was completed earlier this month, and the buildout and transfer of approximately 10,000 square feet at 111 Eighth Ave.

should be online by the end of the third quarter.

In addition, our investment committee recently approved allocation of capital to build out a dedicated colocation suite at Building J on our Ashburn campus.

We expect to begin selling into that market during the second quarter, and to plant the Telx flag in Ashburn during the second half of 2016.

While revenue synergies will mostly be realized beyond 2016, we have begun to see some early successes through the collaboration of our scale and colocation sales force, including the recent signing by a top SMACC customer in a new location within the portfolio for that customer.

In summary, while the integration mission is not yet fully accomplished, we are pleased with the progress and performance to date.

Let's turn to our leasing activity on page 10.

We signed leases totaling $36 million of annualized GAAP rent during the fourth quarter, including a $6 million contribution from Telx for space and power.

In addition, Telx contributed $7 million of annualized interconnection revenue bookings during the fourth quarter.

Social, mobile, analytics, cloud and content accounted for more than 75% of our lease signings during the quarter.

Notable highlights include a multi-megawatt lease with a hyperscale cloud service provider at our Franklin Park campus in Chicago.

The weighted average lag between signings and commencements was 4.5 months.

And as shown on page 11, the backlog of leases signed but not yet commenced stands at $84 million, the bulk of which is expected to commence in the first half of this year.

Turning to page 12, the average cash re-leasing spread during the fourth quarter was a positive 15%, driven by robust mark-to-market on PBB renewables offset by a slight cash rolldown on a much smaller sample size of Turn-Key renewals.

For the full year of 2016, we expect re-leasing spreads to be flat on a cash basis, and up in the high-single digits on a GAAP basis.

We do still have several remaining above-market scale leases, notably in northern New Jersey and Phoenix, and from time to time 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 and the steady progress we have made cycling through peak vintage lease expirations.

Turning to our financial results on page 13, we reported 4Q 2015 core FFO per share of $1.38, above the high end of our guidance range.

The outperformance was driven by a combination of several items, including: a few cents for Telx operational outperformance during the fourth quarter, and $0.01 or so for early achievement on our expense synergy plan; roughly $0.01 for lower Asia Pacific operating expenses; and lastly, our overall G&A did come in a little lighter than we had expected.

FX represented roughly 150- to 200-basis-point drag on the year-over-year growth in our reported results from the top to the bottom line, as shown on page 14.

And we expect this to persist and to represent a drag of similar magnitude in 2016.

It is worth reminding everyone 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 89% of our net assets denominated in US dollars.

You may have noticed from the press release that our guidance assumes $1.25 billion to $1.75 billion of long-term debt issuance.

This may include a potential EUR500 million bond, which would further enhance our natural balance sheet hedge, and increase our US dollar net assets to 95%.

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

While our global portfolio exposes us to currency translation exposure, it also enables us to satisfy data center requirements of cloud service providers and other strategic customers around the world, which represents a key competitive advantage.

We've attempted to frame our exposure to swings in currencies, interest rates and commodities here on page 15.

The overarching theme is that we benefit from our scale, as well as the diversification of our customer base and geographic footprint.

I would like to take a moment to highlight the long-term trend in straight-line rent, shown here on page 16.

A portion of the decline in the fourth quarter was due to the elimination of the straight-line rental revenue that Digital previously recognized under our long-term lease agreements with Telx.

The longer-term trend, however, also reflects the improved underwriting discipline we've instilled over the past two years, as well as the consistently improving data center fundamental landscape.

Our 2016 guidance calls for $10 million to $20 million of net non-cash rent adjustments, including straight-line rental revenue, straight-line rent expense, and FAS 141 adjustments.

Straight-line rental revenue and FAS 141 adjustments are fairly ordinary course for our REIT investors.

These items represent non-cash revenue that is recognized on our books and is deducted from core FFO to arrive at AFFO.

We expect these two line items, together, to total $35 million to $40 million in 2016.

This would be down considerably from $87 million in 2014 and $60 million in 2015, but does not get you all the way down to our $10 million to $20 million guidance.

The offset is $20 million to $25 million of straight-line rent expense that Telx recognizes on long-term leases with third-party landlords.

In contrast to straight-line rental revenue, this is a non-cash expense that runs through the P&L and is added back rather than deducted from our core FFO to arrive at AFFO.

When we first announced the Telx transaction, we stated it would be 1% accretive to FFO per share in 2016, but 3% accretive to AFFO per share.

These straight-line rent adjustments are the primary reason why Telx is more accretive to AFFO than FFO, and also, they are a meaningful contributor to our forecast for double-digit AFFO per-share growth in 2016.

In terms of our fourth-quarter operating performance, same capital occupancy slipped sequentially -- 60 bps sequentially, primarily due to a PBB move-out in Phoenix.

Same capital cash NOI was up 3.4% year over year; on a constant-currency basis, same capital cash NOI would have been up 4.9%.

As you may have seen from the press release, we guided to 0% to 3% same capital cash NOI growth in 2016, which is net of the foreign currency headwinds.

The 2016 forecast comes with a major caveat, however.

Telx greatly complicates the composition of our same-store pool, since they were previously a customer in 11 of our locations.

These locations are mostly Internet gateways, and represent a big chunk of our stabilized portfolio.

So, carving them out of the same-store pool would result in a much smaller sample size.

At the end of the day, we decided to continue to report same capital results for 2016, as if our leases with Telx were still in place.

Beginning in 2017, Telx will be included in the same-store pool, and we will revert to a less theoretical presentation.

In the meantime, however, same capital results should be taken with a grain of salt.

Telx had a similar impact on our reported occupancy statistics.

We previously reflected space leased to Telx as 100% occupied.

Now, however, this space is shown on a look-through basis, reflecting Telx's utilization of the space.

The look-through treatment results in a lower reported occupancy across the 12 properties where Telx has a presence, due to Telx's lower utilization and embedded lease-up potential within that space.

Irrespective of the complexities of portfolio reporting, we remain keenly focused on organic growth.

We will be aggressively attempting to renew expiring leases at higher rates, keeping our operating expenses in check, and being mindful of our cost structure.

Let's turn to the balance sheet on page 17.

In January, we closed on the refinancing of our global senior unsecured credit facilities.

In the process, we were able to tighten pricing by 10 basis points, extend the maturity date by more than two years, and upsize the term loan facilities by $550 million.

We also established access to a new tender within the bank loan market with a $300 million, seven-year term loan.

The facilities were well oversubscribed, and we would like to thank our entire bank group for their support.

I mentioned earlier in the mid-point of our guidance -- excuse me, I mentioned earlier that the mid-point of our guidance assumes $1.5 billion of long-term debt issuance.

I would like to clarify that this total includes the incremental $550 million of five- and seven-year term loans, which was put to bed with this refinancing.

As shown on page 17, the refinancing effectively clears up the left-hand side of the maturity schedule.

We have clear runway with very modest debt maturities until 2020, with well-laddered debt maturities thereafter.

In addition, floating rate debt now represents less than 15% of total debt outstanding, and we currently have $1.5 billion of undrawn capacity.

We also generate approximately $150 million of cash flow after dividends, and we expect to realize up to $200 million in proceeds from asset sales.

Consequently, we believe we have ample liquidity to fund our capital requirements.

Debt to EBITDA stood at 5.2 times as of year end, and we expect to remain comfortably below our 5.5 times target throughout 2016, with a balance sheet positioned for growth.

This concludes our prepared remarks.

And now we will be pleased to take your questions.

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

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

Jordan Sadler, KeyBanc Capital Markets.

Thank you.

Good afternoon.

First question is regarding leasing and the overall environment.

Maybe Bill or Matt, can you speak to what you're seeing in terms of the hyperscale cloud players and some of these larger requirements that, Bill, you described in your commentary as lumpy and hard to predict.

We see some of your competitors landing some very large transactions during the fourth quarter and post-quarter end and just curious what you're seeing in terms of that?

Is it harder to compete?

Do you expect to see more of it?

That would be great.

Thanks, Jordan.

This is Matt.

Yes, I think Bill nailed it in his opening remarks and good focus on the hyperscale activity because those requirements really sort of form the foundation of what the demand is -- was in Q4 and is and will be as we move forward in 2016.

We see that demand as well as our regular demand accelerating, but we do have to keep an eye on the hyperscale requirements and the lumpy nature of those requirements.

We saw $36 million of revenue as a healthy pace for space and power in Q4.

When you throw in connectivity, that gets up to about $43 million in the quarter, and I think all of that is still a reflection of our desire to remain disciplined, not just in challenging times, but to remain disciplined in good times as well.

It's important to remember that we are seeing successfully signed deals at attractive cash returns.

And as Andy mentioned in his remarks, we were happy to land one of those very large cloud deals at a 15-year term in Q4 and we expect to see that continue in the first quarter.

Okay, and then perhaps as a follow-up, did you -- you mentioned the total number of cross-connects in the portfolio.

Did you mention or could you tell us how many were added in the quarter and maybe anything that might be embedded in guidance as it relates to interconnection?

Hi, Jordan.

It's Jarrett.

We are tracking our cross-connect growth, consistent with the colocation pull-through.

As Matt indicated, that incremental interconnection business, the connectivity we gave you some guidance on what that incremental $8 million was, that contributed to the sales.

And we are continuing to evaluate and roll out more details on the interconnection business.

But as Bill mentioned in his opening comments, we're very excited because it's very complementary.

It's a great add-on and it's fundamental to the connected campus to drive those connectivity solutions.

Matthew Heinz, Stifel.

Thanks.

Good evening, guys.

So your 2016 revenue target for Telx, I guess implies about 7.5% growth off of the 4Q run rate, but if I take the 4Q bookings you reported from Telx of about $13 million for interconnect and base rent, I guess that implies, alone, about a 4% increase off of that run rate, so it just seems pretty conservative there.

I'm wondering what sort of incremental leasing assumptions you have embedded in there or is -- should we just take that as the $385 million-plus as sort of the low-end of the guide and you probably expect to come in above that?

Hi, Matt.

This is Andy.

So the signings number, obviously, as you know, don't all come in the first day and roll into the next period, so it's not a direct correlation.

I think we feel good on that -- the guidance or the numbers that we laid out for Telx from a revenue and EBITDA perspective.

And it's going to be a combination of leasing the unutilized space and selling incremental cross-connects and getting flow-through on the revenue contribution.

Okay, how quickly do -- I'm assuming that interconnect bookings probably commence quite a bit faster than your typical four-, five-month lag on normal scale bookings.

Could you just comment on the book-to-bill?

Yes, so colo space and power could be a month to two months for deployment, and interconnection could be overnight.

Okay.

Thanks guys.

Jonathan Atkin, RBC.

Colby Synesael, Cowen and Company.

Great.

Great job with the last name there.

So I have two questions.

The first is with a bunch of your current customers, CenturyLink, AT&T, Rackspace, all being in, what we'll call, interesting positions.

CenturyLink and AT&T looking to potentially sell some of the facilities to which you're the underlying landlord, and then Rackspace, depending on one's opinion, is doing okay is a company.

Obviously going through change in their own business model, has a lot of space that's being not utilized.

How comfortable are you right now with the exposure you have to these customers right now?

And is there anything that you're doing to prevent or anything you can do to prevent any risk with these customers as you go forward?

Then my second question, the $43 million of new leases including the interconnects, based on your guidance that you have now for 2016, are you expecting that number to remain relatively stable through the course of the year or would you expect that or is that assumed -- or do you assume that in your guidance that ramps even further as we go into 2016?

Thanks.

I'll take the second one first.

I think we thought that the signings from a scale and colo and interconnection point of view was pretty good performance and we see that run rate continuing throughout the year, maybe a little bit of increase as it relates to the colo and interconnection piece.

And then going back to your first question, and I'll let others on the team jump in.

Holistically, the best way is obviously to mitigate this are through diversification of your customers, your locations, your leases, maturities.

We're always in constant dialogue with our customers, making sure we understand their business and where it's going and trying to help them with their space needs.

I don't think there's anything on the horizon right now, be it with a Rackspace, an AT&T or a CenturyLink, where they are actually looking to contract from our specific footprints.

I think some of the noise you're seeing in the market or on the news rags is more about folks, who some of them, excluding probably Rackspace, focusing on their core businesses and selling non-core businesses.

And Colby, it's Matt, and just to pile on a little bit to that answer.

It's really quite the opposite.

In fact, in some of the names that you mentioned, we saw upticks not just in last year's leasing but also in the pipeline moving forward to 2016.

Important to remember that these customers, especially the customers that you mentioned that are on our top 20 list, these folks are flexing into new opportunities, moving from a capital heavy to a capital-light perspective, and flexing towards focusing on their core objectives.

The great part for us is that we've got long-term leases in place with these particular customers, but we also have incredible relationships and we've developed strong partnerships over all of 2014 and 2015, so that we know exactly what direction they are moving in and how they can use our facilities to benefit from that.

And Colby, one final point from a legal standpoint, many of these leases require our consent in order to be assigned.

Vincent Chao, Deutsche Bank.

Hi, everyone.

Just want to go back to some of the sources and uses.

Just want to make sure I got this straight.

So on the $1.5 billion of debt, at the midpoint, I think that, Andy, you said that included the $550 million on the term loan, the upsize, but just curious, you also mentioned $500 million Eurobond potential.

But given the disruption that we're seeing in the markets today, is that something that could be done today, or do we have to see things calm down before that could actually even get off the ground?

I know it's a mid-2016 guide, but just curious what the conditions are today?

Sure, Vince.

The -- you were correct in your first statement, so of the $1.5 billion, $550 million was done the first or second week of the year when we closed our bank facility and that was incremental five- and seven-year term loan.

The next leg of it, or just under $1 billion, could be a potential $500 million Eurobond.

This would be -- we've been to the sterling bond market now twice, and obviously, been to the US dollar bond market many, many times.

This will be our first entry to the Eurobond market; it really aligns well with our investments on the continent over there.

We've done some pre-work in terms of meeting with different folks over there and fixed-income investors.

It's really opportunistic.

As you can see from our debt maturity schedule, it really would be capital that would term out a portion of our revolver balance, that's pretty far out there in general.

So we're playing it day by day, and we want to make sure there is a stable and receptive market to go to, so you will probably see us re-engage and looking at that even harder in the coming months.

Okay, thanks, and then my second question, sticking with sources on the disposition side.

It sounds like the four data center asset portfolio, you expect to be, I guess well -- I thought I heard in the second -- first half but end of first half of this year, but we have seen a fair amount of disruption in some of the CMBS markets and that kind of thing.

Not that, that's a big factor for data centers but just curious if it's having an impact on sales expectations?

I know there's no plans in contingencies but just in terms of buyer pools and that kind of thing?

We are quite fortunate that Scott and his team got going on this and worked diligently, really ahead of the game here, so you notice we sold the one property before the end of the year.

We sold another one just beginning of the year, and in this portfolio that you mentioned is under contract without a financing contingency.

So I think we got ahead of some of the supply coming to the market in terms of data center assets, and I think we've got a good buyer for these assets.

And realistically, I think that would be roughly 75% of our -- the $200 million or so in our guidance, so we're pretty much through with the bulk of our dispos.

Manny Korchman, Citi.

Hi, guys.

Just thinking about the commencements, I thought last call, you guys had talked about the commencement timing turning back to more normal, I don't know what we'll call it, six months time frame.

We're actually lower now with 4.5 months.

Is that just depending on the pool or the mix of the leases, or is that where we should expect things to remain going forward?

Manny, you're saying the time from signing to commencement?

I just want to make sure we heard you correctly.

Yes.

Manny, it's Matt.

I would still expect that the normalization will come out at that six-month level.

Remember the impact of Telx hit inside the quarter and that certainly had an impact on the 4.5 months.

Sorry, just so I understand that, wouldn't the impact get greater as you do more with Telx, so why would that -- why would Telx be a factor now and not in the future?

So Telx, Manny, has a shorter sign to commencement; that goes back to, maybe I think it was Matt's question, as he asked about.

I said one to two months from when they signed to take the space.

And keep in mind, Manny, that when you say the question about whether Telx will normalize to 4.5 months across the entire year in 2016, there is also these hyperscale environments that may extend that period a little bit, so we do still feel that 6 months is the accurate time frame.

Great, and then just if we think about the returns you get on one of those large cloud deal versus your overall return targets or guidance, where would those two lie?

Is it 200 basis point gap?

Is it 400 basis points?

Just, if you could help us think about that.

On the large hyperscale cloud deals that we've signed to date, including the one in the last quarter, they were within our 10% to 12% range.

Now, they are obviously closer to the lower end of that range, but they're still -- they still met our overall hurdles.

Jordan Sadler, KeyBanc Capital Markets.

Thank you.

Just a quick follow-up on New Jersey.

You did say that, I think, most markets are tightening.

You were blowing out of -- or you've gotten out of one of your assets here in New Jersey.

Just can you maybe talk about conditions there and your appetite looking forward?

And then as a follow-up, just maybe discussion a little bit about markets that are seeing a little bit too much supply right now or not much demand?

Jordan, thanks for jumping back into the queue.

We like the position that we have in New Jersey.

There's an interesting transition happening that continues to have the growth that we have in the financial services, which is what we established ourselves in New Jersey.

But with the addition of Telx in particular, our focus on content and cloud in that particular market is starting to add to the pipeline in a way that we hadn't seen before.

So I'm hoping that the pipeline that's developing right now will allow us to get to that good balance between supply and demand in New Jersey.

And then just markets where you're not seeing the strength right now that you -- are a little bit more concerning?

So to go through strength of the markets, and as you know, Jordan, I look at that from a forward-looking pipeline perspective.

We continue to see strength in northern Virginia, incredible strength in Chicago, especially over the past few quarters, and in Dallas.

Continued support in Singapore, especially with [Sing 11], the new property coming online, and maybe partially due to China demand moving over from the mainland into the rest of Asia-Pacific, and then some continued strength coming out of London in the social, mobile, analytics, cloud and content markets.

We do have a significant amount of both market-ready, but more importantly shell, available inside New Jersey, and as I said, I'm looking that as an opportunity for us.

And then we've identified a number of strategic assets where we've had opportunities to lease in the past, and we've increased our marketing focus on those markets.

So I'm hoping our increased marketing focus will have a very positive effect, not just in those particularly strategic assets, but in our cash position as well.

And Jordan, just to one -- add one thing, going back to, I think, your first question.

I don't think we hit the nail on the head for what you were looking for.

The cross-connects at Telx were over 55,000 just by itself, so Digital contributes about 5,000 to get over 60,000 combined.

And on a year-over-year basis, that was about 7% growth in cross-connects on Telx standalone.

Jordan, adding to the list of weak markets, or weaker markets, you could probably put Houston on that list.

And I think Phoenix is on the bubble.

Richard Choe, JPMorgan.

Great.

Thank you.

In terms of the interconnection revenue growth, should we see that ramping through the year?

Is it going to be something that's more back-end loaded or the revenue is coming in right away?

That's the first question.

So I just quoted you growth on actual cross-connects, about 7%.

I believe the year-over-year rate growth is closer to 8%, so it's combined pretty strong growth.

I'm not sure it's going to ramp above that combined rate and growth volume in the mid- to high-teens, so I'm not sure that I can have a good view on the quarterly guidance, but we do see strong growth in terms of volume growth in the 7% range and rate growth around the 8% range.

And just to add on that, a couple of things.

We are now in the position to leverage the Telx product capability on the Digital side to monetize that at a higher level than we've done in the past.

And we are now mining the data to who's connected to whom, really, to leverage the interconnection business and start scaling that, and that will take a little bit of time, but it's definitely the SMACC focus that we're taking and the networking and the cloud providers are definitely interconnection-rich, as you see in the industry.

And just adding to that, I'd like to answer that question so I think we're all going to jump in.

In terms of timing, in particular, the revenue optimization procedure that Jarrett just described, we're expecting that to start to take effect at the end of 2016 into 2017.

So there's a decent amount of runway for growth on the interconnection side?

It seems like it's just starting.

Yes.

Great.

Thank you.

Matthew Heinz, Stifel.

Thanks for circling back to me.

I just have a couple of follow-ups.

The first is coming back to Telx.

I was wondering if you could share the churn assumptions embedded in your 2016 revenue target, or at least just remind me what the historical range has been there?

And then secondly, regarding the AT&T agreement with IBM to manage its cloud and hosting services, I'm curious if that has any bearing on your relationship with either customer, and if that partnership includes the management of AT&T's NetBond offering?

Sure.

Well, on -- we're not giving guidance on the churn, but like I said, we are pretty much assuming in our projections that are in line with historical averages.

I don't want to give you all percentage, but 0.6%, so relatively low and then your second question, Matthew?

I'll be happy to answer that, Matthew.

So in the two agreements that you mentioned, the AT&T agreement and the IBM agreement.

The AT&T agreement contains two main components, and one of them is fairly far along, that's the reseller portion of that agreement.

That has been significant and we've actually done joint trainings with our sales forces at our sales kick-offs and through -- on multiple continents.

So the progress being made on the AT&T side is fantastic and the progress on the IBM side is incredibly promising.

We have a unique situation with IBM where we happen to have the core compute nodes located on our campuses.

We happen to have colocation space and colocation experts in Telx right next to those core compute nodes.

And we have the magic of Telx's interconnection, as well as a number of products that are in the funnel to bring to market in the future to provide our customers with the ability to securely and privately connect at lower than 1.5 milliseconds, which is incredibly important for them.

And we think that we are one, if not the only folks, who can provide that environment for our customers.

One small thing to clear up.

We don't -- NetBond is the second part of the AT&T agreement that we have.

We don't manage NetBond as part of that process, but we do have a partnership with them so that they can land NetBond assets on our connected campuses.

Okay.

Thanks for the color.

Jonathan Atkin, RBC.

Yes, so I was wondering of the non-SMACC verticals, if you had to choose, maybe two or three that are showing promise for potentially outsized growth, what would they be?

And then on the JV front, there's a couple of assets where you have a partial stake, and I wondered if you had any thoughts of securing full economic and operating control of any of them?

Thank you.

Jonathan, thanks for getting back on the call.

We certainly don't like to pick amongst the non-SMACC verticals because we are very big fans of the SMACC verticals, but in particular, financial services for us.

And to go one click deeper, financial technology we think is one of the places that holds a lot of promise, not just for large-scale deployments on our scale team, but colocation requirements on our colocation team.

And then multiple points of connectivity.

It's actually probably one of the best cases you can think about where these FinTech companies have to connect to other providers, have to connect to other institutions, and have to connect to consumers, so FinTech within FinServ is one of the excited places that we've found.

The Internet enterprises is another one of the verticals that we really like to have a focus on, not just because of our historical performance in those particular verticals, but because of the necessary growth that's coming out of some of the activities.

So some of the both the M&A activity that we see happening here, as well as some of the divestitures, creates for us an incredible opportunity.

When one of our great customers decides to split into two large companies, sometimes we get double the opportunity.

Now I know I wasn't supposed to talk about anything inside SMACC, but we think the mobile vertical for us is one that's incredibly ready for us to continue to exploit, and with the expertise of Telx now on board, we're well-situated to be able to do that.

Jonathan, the -- on the JV front, really not much new to report there.

We have several great partners from different types of capital sources.

There's no real activity underway there.

Thank you.

Manny Korchman, Citi.

Andy, just a quick follow-up for you.

The $0.03 of G&A outperformance, I guess you would call it, that you show on slide 13 of the presentation.

What specifically drove that much G&A savings versus where you expect it to be?

Really, the outperformance was just based on our internal estimates that drove our underlying guidance.

I'm not sure there's one decisive thing that calls out over any of the others, and I'm not sure all that can be normalized into the go-forward projections either.

It was a handful of things that kind of, going into a quarter where we acquired a company, went through integration, we definitely didn't think we would come up light on the G&A front, with overlapping teams in the midst of reorganizations, but we did it, and it was better than expected.

Okay, thanks.

John Hodulik, UBS.

It's actually Ross Nussbaum here with John Hodulik.

A couple questions, guys.

Obviously, the tone here, I think, has been pretty positive, but I guess my question is occupancy was down almost 200 bps year over year in 2015; it slid a little in Q4.

You're guiding to flattish for 2016 for the same capital portfolio.

So I guess my question is, why isn't the occupancy rate of the core business trending higher, given all the positive commentary I am hearing here?

I think we're basically -- we're looking at the occupancy going into the year, Ross, and seeing we have some renewals.

We have some space that we've been seeing from coming back to us in the form of some PBB space that was either dark space as a consequence of a former telco merger.

There are some silver linings in that because we're seeing some of our cloud service providers really engaging around taking that space.

And we are just trying -- just being conservative on our occupancy forecast throughout the year.

Okay, and then as a follow-up, if I could, your stock has obviously has done quite well over the last four months or so.

How does your positive shift in your equity cost to capital here influence how you think about additional acquisitions, and in particular, looking at, say, things like the Verizon or the CenturyLink portfolios?

How do you think about cost to capital versus acquisitions and has that changed from the commentary, I guess, you had last fall when you did the Telx deal and said you were just focused on integration?

Okay, so -- and just let me go back to your first question because I might have missed a piece of it.

Just to make sure we're all on the same page.

The decrease in total portfolio was occupancy by 140 bps or so, as of this quarter.

That was due to look-through on Telx, so 11 or 12 locations were 100% occupied at 3Q 2015, and then we bought their business and they were not 100% utilized within their four walls.

So that was a step down there, so I just want to make sure we didn't miscommunicate on that front.

Going back to cost of capital, the base plan, which we put out on our guidance roughly seven weeks ago had a sourcing usage plan that was funded through retained cash flow, a little bit from dispo proceeds and CapEx below our 5.5 times debt to EBITDA, while at the same time, funding a pretty large investment in our development pipeline.

That's the base case plan that doesn't require equity.

I think that you could expect us to follow our past track record.

If an opportunistic investment came about, whether it's some large-scale increase in our development from landing a hyperscale deal, or some M&A or other acquisition, we look to go to the capital markets to keep our lever stats in line, and equity has, time and time again, been a part of that.

Colby Synesael, Cowen.

That response to that last question just made me ask one more.

Obviously, there's a lot of speculation on whether or not you'll be interested in doing M&A this year, or whether you'll wait to do something perhaps later on.

As it relates to the Telx acquisition, and now that integration, is there a point where you will feel more comfortable doing a deal or is that time now?

Just help us give an -- give some perspective on the timing on when you think you would be ready to handle a fairly large transaction, considering everything else that's going on inside the Company.

Colby, it's Bill.

So I think -- and Andy said this in his remarks, but we think we've made really good progress there, on the Telx integration.

We've obviously retained the talent that we thought was critical to retain.

We have over $15 million of synergies there, coming into this year, which is great, and we've established a joint go-to-market plan.

We've moved inventory from various Digital locations to Telx, both 365 Main, we're going to do that at 111 Eighth.

And we've approved, in our investment committee, a Telx site at our Ashburn campus, so all that's great.

We are laying the revenue synergies groundwork here, for 2016, and expect to realize that in 2017 and beyond.

I think what should be clear to you is this is really a continuum.

There's no clear point in time when you can say, hey, green light, we are ready.

We make progress every day.

We actually, as a leadership team, we review that progress once a week on Monday.

There's work to be done, but at the same time, we're open to look at other investment opportunities, other M&A opportunities, and the criteria is what we've said from the very beginning, getting back to Ross's question.

We wanted to be strategic and we wanted to be accretive, and of course, we'll finance it in a prudent manner, keeping it leverage neutral.

Great.

Thank you for the color.

Ladies and gentlemen, this will conclude our question-and-answer session.

I would like to hand the conference back over to Bill Stein for his closing comments.

Thank you, Denise.

I'd like to wrap up our call today by recapping our fourth-quarter highlights, as outlined here on page 18 of the deck.

First and foremost, we closed on the acquisition of Telx, in what was truly a transformational transaction for our Company.

Telx checked all the boxes for us.

It was highly strategic and extremely complementary to our existing platform.

It was accretive to FFO and AFFO per share in year one, and it was prudently financed.

We reported fourth-quarter results that were well ahead of the high end of our guidance range.

The quality of our earnings is improving, with the burn-off of straight-line rent and the contribution from Telx.

Growth in cash flow is accelerating, and we are poised to deliver double-digit growth in AFFO per share.

We also took deliberate steps to secure our supply chain, with the acquisition of a highly desirable land parcel in Ashburn.

We also entered the Frankfurt market, a long-standing target.

Last, but not least, we also raised the dividend for the 11th consecutive year.

We've grown the dividend each and every year since our IPO in 2004.

And we remain committed to delivering superior risk-adjusted total returns to our shareholders.

Finally, I'd like to thank -- say thank you to the entire Digital Realty team, whose hard work and dedication is directly responsible for this consistent execution.

That concludes our fourth-quarter call.

Thank you for joining us.

We look forward to seeing many of you in Florida over the next several weeks.

Thank you, sir.

Ladies and gentlemen, the conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.