Digital Realty Trust Inc (DLR) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Digital Realty Fourth Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note this event is being recorded.

At this time I would 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 Investment Officer, Scott Peterson; Chief Technology Officer, Chris Sharp; and SVP of Sales and Marketing, Dan Papes, are also on the call and will be available for Q&A.

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

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

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

This call will contain non-GAAP financial information.

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

Before I turn the call over to our CEO, Bill Stein, I'd like to hit the tops of the waves on our fourth quarter results.

First of all, we came in $0.04 ahead of the high end of our initial 2017 guidance range, driven by operational outperformance within both the legacy DFT and Digital Realty portfolios.

Second, we've landed over 30 megawatts within the legacy DFT portfolio over the past 5 months, capitalizing on the value of the installed customers base to realize revenue synergies in addition to hitting our expense synergy targets.

Third, we expect to deliver double-digit AFFO per share growth in 2018.

Last but not least, we expect to achieve this growth while maintaining our target leverage and self-funding our 2018 capital plan through internally generated cash flow from operations and proceeds from asset sales.

With that, I'd like to turn the call over to Bill.

Thank you, John.

Good afternoon, and thank you all for joining us.

I'd like to begin today on Page 2 of our presentation with a recap of the principles that we laid out at our Investor Day in December.

We've set ambitious growth targets over the next several years and we expect to achieve them from a global, connected, sustainable framework.

What that really means is further leveraging our leading global platform to cross-sell in addition to addressing new markets that meet our risk-adjusted return criteria.

Our top priority is deepening our connections with customers to position us to meet their needs and support their growth.

In addition, we're focused on further strengthening connections across the organization, making sure that processes are streamlined, systems are integrated and people are performing efficiently.

We are committed to sustainability and we are focused on delivering sustainable growth for our customers, shareholders and employees.

Let's turn to our recent investment activity on Page 3. As you know, we entered Tokyo, a longtime target for us during the fourth quarter through a 50-50 joint venture with Mitsubishi Corporation.

We contributed our recently completed project in Osaka, and Mitsubishi contributed 2 existing data centers in Tokyo.

Japan is a highly strategic market and we see tremendous opportunity for growth over the next several years.

We expect this joint venture will significantly enhance our ability to serve our customers' data center needs in Japan.

In particular, we expect that Mitsubishi's global brand recognition and local enterprise expertise will meaningfully improve our ability to penetrate local demand.

We also closed on the acquisition of a data center in Chicago from a private REIT during the fourth quarter for $315 million.

This value-add play offers a healthy going-in yield along with shell capacity that gives us an opportunity to boost the unlevered return up into the high single digits.

The investment represents an expansion in a core market and is occupied by existing Digital Realty customers, with whom we had been independently working to meet their expansion requirements in Chicago.

Separately, we closed on the sale of 2 noncore assets at a 7.1 cap rate, generating a little over $70 million in net proceeds.

And we recognized gains of approximately $27 million during the fourth quarter.

Since year-end, we've sold 2 more noncore assets, generating net proceeds of a little less than $90 million.

And we expect to recognize gains of approximately $25 million during the first quarter.

Since embarking on our capital recycling program a little over 3 years ago, we have now sold a total of 14 assets, generating over $500 million of net proceeds and recognizing sizable gains in the process.

We've been quite pleased with the execution of Scott and his team have achieved on the sale of these noncore assets.

We believe that culling the asset base is prudent real estate portfolio management, and we expect to generate up to another $100 million of proceeds from asset sales in 2018.

Let's turn to market fundamentals on Page 4. Data center construction crews remain active across the primary data center metros, particularly in Northern Virginia.

However, some context may be in order.

It's helpful to remember that according to CBRE, the Northern Virginia data center inventory is larger than the total data center stock in any country in either Europe or Asia Pacific.

As a result, while the absolute number of megawatts under construction may be big, we are very comfortable with our development exposure as well as the pace of absorption in Northern Virginia, especially in the context of such a deep and active market with vacancy hovering in the low single digits.

In fact, those of you who saw the Ashburn time-lapse video at our Investor Day in December will be aware that we expect all the developable land in Loudoun County will be fully built out in the coming years.

We believe our strategic landholdings represent a precious commodity and a key competitive advantage.

Very few markets around the world operate at such a well-oiled cadence as Northern Virginia.

For instance, there has been very limited inventory available in Silicon Valley for over a year.

So recent leasing velocity has slowed considerably, pending the arrival of new deliveries.

In Europe, demand is likewise robust and 2017 was a record year for net absorption.

Our participation was somewhat limited, largely due to a lack of available inventory.

We have recently brought capacity online in Amsterdam and London.

And we expect to deliver additional capacity in Frankfurt, London and Amsterdam in the first quarter to position us to capture a greater share of the strong current demand in Europe.

Across the Asia-Pacific region, demand remains robust, particularly from the global hyperscale players.

The supply situation varies considerably by market.

The local markets tend to be dominated by large telcos.

There's generally a shortage of institutional-quality modern data center stock.

The region is highly fragmented with very few pan-regional offerings.

The limited available options for state-of-the-art carrier-neutral facilities across multiple markets plays directly to our competitive advantage.

In addition to our deliveries, competitors are also bringing supply online to meet this demand.

But the rapid pace of absorption is keeping vacancy rates below equilibrium in the single digits.

In sum, competition remains intense, particularly for larger requirements.

And given the sector's recent history, any uptick in new supply bears careful watching.

However, current vacancy rates are tight.

And we expect demand will continue to outstrip supply while barriers to entry are beginning to emerge in select metros, which bodes well for long-term rent growth as well as the enduring value of infill portfolios such as ours.

Now let's turn to the macro environment on Page 5. The biggest change over the last 90 days has been tax reform.

We expect minimal impact on our financials from the specific provisions of the tax reform bill, but we do believe it will be good for our customers' businesses.

And as a result, it should bode well for data center demand.

We saw very healthy growth from our customer base during the fourth quarter.

The 3 leading cloud service providers each generated over $5 billion in cloud revenue during the fourth quarter alone, all growing at a very healthy clip well into the double digits.

The top 7 cloud providers all generated over $1 billion of cloud revenue in the fourth quarter.

This broad-based growth plays directly to the strengths of our carrier-neutral, cloud-neutral platform.

Just a few weeks ago, we announced that we would be offering private connections to the Oracle cloud in 14 major metros and a total of 59 data centers through our Service Exchange.

Similar to other leading cloud providers, Oracle maintains a significant presence in numerous locations across multiple regions within our global portfolio.

This recent announcement demonstrates the value proposition to our joint customers by giving them the ability to connect directly, privately and securely to a public cloud compute engine that sits right next to their private cloud environment within the same campus environment, reinforcing one of the key differentiators of our offering.

The relevance of this capability was reinforced by the Rightscale 2018 State of the Cloud report published earlier this week, which found that on average, companies are using about 5 public and private clouds.

Separately, the Cisco Global Cloud Index forecasts that the number of hyperscale data centers will nearly double by 2021.

Hyperscale data centers will account for more than half of all installed data center servers by 2021, and traffic within hyperscale data centers will quadruple by 2021.

The opportunity to serve this rapidly growing segment of the market on a global scale meshes well with our competencies.

We believe we are particularly well positioned to capitalize on the favorable demand setup, given our global platform, our comprehensive product offering and our investment-grade balance sheet.

With that, I'd like to turn the call over to Andy Power to take you through our financial results.

Andy?

Thank you, Bill.

Let's begin with our leasing activity here on Page 7. We signed total bookings for the fourth quarter of $56 million including a $6 million contribution from interconnection.

We signed new leases for space and power totaling $50 million during the fourth quarter including a $9 million colocation contribution.

The weighted average lease term on space and power leases signed during the fourth quarter was approximately 7 years.

Our fourth quarter wins continued to showcase the strengths of our global platform as well as the demand for our multiproduct offering from both new digital economy customers as well as more traditional enterprises.

A leading Internet hyperscale user further expanded its footprint with us, taking down another 12 megawatts in Ashburn and underscoring the value of the installed customer base and new relationships inherited through the DFT transaction.

We also won a sizable new logo deployment from a significant online multiplayer, game creation platform, further diversifying our customer base in Northern Virginia.

Additionally, a primary global provider of financial market data and analytics grew with us in the tri-state area, citing our operational effectiveness and our relationships with many of their subscribers.

Finally, not that all roads lead to Ashburn, but it's certainly been a linchpin of our ability to sell to an international customer base across 4 global theaters, Ashburn twofers during the fourth quarter included: an expansion with a large Chinese cloud service provider on our newest Ashburn campus; a top 5 cloud service provider expanded with us not just in Ashburn, but also in Sydney; and we also expanded a European SaaS provider in Sydney in addition to their inaugural deployment back in Ashburn.

Combined colocation and connectivity signings rebounded strongly in the fourth quarter.

One of the world's largest telecommunications companies expanded in 4 locations across North America.

A leading provider of integrated telecommunications services in Latin America expanded with us in one of our lower Manhattan Internet Gateways, demonstrating that the critical connectivity points in our portfolio will continue to drive reasonably diverse demand.

Finally, on the enterprise front, one of America's oldest theater companies selected Digital Realty as their trusted data center provider for all of their mission-critical applications.

Of the record 51 new logos added during the fourth quarter, nearly 90% were sourced through our North American and European colocation platforms, including 13 in Europe, likewise a regional high mark.

Roughly half of these new logos were within the network sector including a nationwide managed service provider, a cable provider and a computer software company.

Roughly half were enterprise, including an artificial intelligence platform, an online trading community and a content provider.

The breadth and diversity of this new business should serve to drive new end users to the connectivity ecosystems and bodes well for future interconnection revenue growth, given the historical correlation between new logos and interconnection bookings in subsequent periods.

Our partners and alliance capability delivered strong fourth quarter results.

For the full year of 2017, we achieved significant growth compared to the prior year due to the establishment of an alliance partner framework in addition to our focus and execution against our existing partner programs.

We also provided our partners a set of standardized colocation and connectivity rate cards to make it easier for them to include us in their menu of services.

These programs effectively extend our reach to serve enterprises customer demand for comprehensive solutions through various leading IT services, network and cloud service providers.

Through our recently announced partnership with Oracle, we have significantly expanded our customers' ability to connect to the Oracle cloud through private, dedicated access to Oracle cloud infrastructure in 14 major metro areas and 59 Digital Realty data centers through our Connected Campus and Service Exchange interconnection platform.

Through our continued partnership with IBM and leveraging direct link capabilities, we have been able to provide customers and IBM business partners direct access to the IBM cloud in 20 data centers across 9 global metros.

These capabilities have allowed us to deploy a standardized hybrid colocation set of solutions sold with a direct dual fiber connection to the IBM cloud platform that provides extremely low latency and highly secure access to the IBM cloud.

As we've discussed on previous calls, we see substantial opportunity for our partners and alliances programs to create meaningful upside for our customers and our business over time through our referral, sell-to and sell-with partnership programs.

We are pleased with the results to date and we expect greater contributions in 2018.

Our current partners and customers continue to see the value of our focus on working with quality solution and service providers to create a comprehensive IT solution offering and capabilities.

In terms of integration, we made significant progress over the past several months, and we are nearing the finish line in many respects.

As of year-end, all former DFT employees have been onboarded onto the Digital Realty benefits platform, and we have finalized the HRIS and payroll system conversions.

At the property level, we completed the rebranding of all former DFT assets, and we are wrapping up final security upgrades to bring all properties up to Digital Realty standards.

We have completed alignment of onsite assets and equipment.

And we are finalizing the migration of the legacy DFT computerized maintenance management system onto our new platform.

The systems integration is progressing well, and the migration of accounting, finance and HR-related applications have all been completed.

We expect to finish the network integration in the second quarter of 2018.

The marketing team completed the rebranding of all customer-facing collateral and transitioned the DFT digital and social properties to DLR.

All the acquired properties are now showcased on our website, and we've added materials to conform to our corporate standards.

We remain on track to meet or exceed our $18 million expense synergy target, and we still expect the vast majority of integration activities will be wrapped up by midyear.

Turning to our backlog on Page 8. The current backlog of leases signed but not yet commenced stands at $116 million.

The step-up from $106 million last quarter reflects the $50 million of space and power leases signed, offset by $38 million of commencements and a $2 million delta due to the contribution of our recently completed development project in Osaka to the joint venture with Mitsubishi Corporation.

The weighted average lag between fourth quarter signings and commencements was 8 months, reflecting large leases signed for space currently under construction and scheduled for delivery later this year.

Moving on to renewal leasing activity on Page 9. We retained 76% of fourth quarter lease expirations.

And we signed $64 million of renewals during the fourth quarter in addition to new leases signed.

The weighted average lease term on renewals was over 4 years.

And cash rents on renewal leases rolled up 2.3% with positive cash re-leasing spreads across product types.

We do still have a few above-market leases across the portfolio, most notably within the former DuPont Fabros properties.

As a result, the mix of renewal leases signed in any given quarter could push our cash mark to market into the red.

This is reflected in our guidance for slightly negative cash re-leasing spreads for the full year in 2018.

On balance however, we continue to see gradual improvement in the mark to market across our portfolio, driven by modest market rent growth and steady progress on cycling through peak vintage lease expiration.

In terms of our fourth quarter operating performance, overall portfolio occupancy slipped 60 basis points sequentially to 90.2% due to the development projects placed in service in Ashburn and Dallas, along with a churn event in Phoenix where an IT systems integrator lost their end user customer contract and let their lease with us lapse at expiration.

We do expect portfolio occupancy to dip below 90% in the first quarter of 2018, likewise due to a combination of development projects placed in service in Ashburn, Toronto, Silicon Valley and London, along with a churn event in Boston where an enterprise customer is consolidating their data center footprint.

Similar to other opportunities within our portfolio, like the space we took back in Chicago a year ago, this space will be repositioned to expand our Boston colocation product offering.

However, we also expect portfolio occupancy to rebound beginning in the second quarter and to finish the year essentially flat in 90 and change.

The U.S. dollar continued to soften during the fourth quarter, and FX represented a slight tailwind to the year-over-year growth in our fourth quarter results.

Interest rates on the other hand, began to rise during the fourth quarter, as shown on Page 10.

We target variable-rate debt at less than 20% of total debt outstanding, and we were at 14% as of year-end.

Given our strategy of matching the duration of our long-lived assets with long-term fixed-rate debt, a 100 basis point move in LIBOR would have less than a 1% impact to our 2018 FFO per share.

In addition, although the 10-year benchmark may have backed up considerably over the past 5 months, our credit spreads have actually compressed meaningfully over the past 2 years, as you can see depicted on the chart at the bottom of Page 10.

As a result, from an all-in cost of borrowing perspective, our near-term funding and refinancing risk is very well managed.

Turning to earnings growth on Page 11.

Core FFO per share grew more than 8% compared to the fourth quarter of the prior year.

For the full year of 2017, core FFO per share grew a little over 7% and came in $0.04 above the high end of our initial guidance range.

Aside from updating the low end of the range for asset sales closed to date in the first quarter, our 2018 guidance is essentially unchanged from the initial outlook we rolled out just over a month ago.

In terms of the quarterly distribution, we expect the first half of 2018 should represent approximately 48% of the full year results, while the second half should contribute roughly 52%.

In other words, the fourth quarter should represent a pretty good run rate for the first half of the year, with a step-up in the second half.

We don't typically give explicit AFFO per share guidance, but I would like to point out that recurring CapEx was up a little over $10 million sequentially during the fourth quarter.

The biggest portion of the higher spend in the fourth quarter was onetime in nature related to value-add activities at a noncore suburban office building in the Bay Area that was sold recently, and this investment more than recouped.

As a result, we now expect to deliver double-digit AFFO per share growth in 2018.

In terms of the quarterly dividend, the distribution policy is ultimately a board-level decision.

Given the low AFFO payout ratio along with the continued growth in our cash flows and taxable income, we would expect to see continued growth in the per share dividend, just as we have each and every year since our IPO in 2004.

Finally, let's turn to the balance sheet on Page 12.

Net debt to EBITDA improved from 6x at the end of the third quarter to 5.2x at year-end.

And fixed charge coverage improved from just under 4x in the third quarter to 4.2x in the fourth quarter.

As you may recall, leverage was somewhat overstated in the third quarter, since all the debt related to the DuPont Fabros acquisition was on the balance sheet as of September 30, but the third quarter P&L included just a 17-day contribution from the DFT assets.

We expect leverage to gradually improve over the course of 2018 as the full run rate benefit of DFT synergies are realized and our cash flows continue to grow as signed leases commence throughout the year.

It's important to note that our cost and capital structure affords us the ability to self-fund over $1 billion of development spending in 2018, largely with cash flow from operations and an assist from the asset sales Bill mentioned earlier.

As a result, we expect to maintain our target leverage and coverage levels throughout 2018 without the need for additional common equity.

As you can see from the chart on Page 12, the weighted average maturity of our debt is approximately 6 years and the weighted average coupon is just under 3.5%.

Over 85% of our debt is fixed rate to guard against a potentially rising rate environment.

And nearly 100% of our debt is unsecured, providing the greatest flexibility for capital recycling.

A little over 40% of our debt is non-U.

S. dollar denominated, acting as a natural FX hedge for our investments outside the U.S. We will continue to actively manage the right side of our balance sheet with an eye towards longer duration financings across the currencies that support our assets.

Finally, as you can see from the left side of Page 12, we have a clear runway with nominal near-term debt maturities and no bar too tall in the out years.

Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy.

This concludes our prepared remarks, and now we will 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.

My question, I wanted to harken back to the Investor Day commentary.

Bill, you talked about the opportunity to take share on the leasing front going forward, recognizing that the market cap of DLR was larger in proportion relative to the leasing overall versus peers.

And I just wonder a couple of months later if you could maybe take stock a little bit and talk about the measures you've implemented, and what kind of progress you're making, and then maybe offer a little bit of context in terms of that progress around one of your large competitors, peers in the space coming into the hyperscale build business, and one of the former CEOs announcing or launching a new platform in the business.

Thanks, Jordan.

First of all, I assume you're referring to Tom Ray with your last point.

Yes, Tom Ray at Equinix.

Right.

We have the highest regard for Tom.

We welcome him back to the space.

He is what I would call an absolutely rational competitor.

I think he has been a responsible steward of investors' capital and a great allocator of capital.

So he's the type of person that we like to see coming into this space.

But back to Investor Day, the steps that we outlined at that time were at the executive sponsor program, a number of investments in customer success as well as a streamlining of our underwriting and contract approval -- contract negotiation and process.

And I can tell you that during the fourth quarter, 2/3 of our fourth quarter wins involved an executive sponsor.

So I think that part of the program is working quite well.

On the commercial side, the legal and commercial teams have worked very hard to put standard forms in place with quite a few of our customers, most of them major customers.

And that's made it much easier to execute business with us with very minimal additional negotiation.

In fact, 90% of the fourth quarter scale business was done with this type of arrangement in play.

So we're very encouraged by what I'd say are the early results, but we recognize that there's always room for improvement.

But importantly, I think in terms of the benefits of doing business with Digital, clearly the global platform is quite important, anchored by irreplaceable gateways.

We've got our comprehensive product offering from a single cabinet all the way up to hyperscale.

And I think without our investment-grade balance sheet is without peer.

And I think that's clearly very important in terms of minimizing counterparty risk for these firms that are signing up for long term with us to lease their mission-critical facilities.

So I think this, once again, this sets us up quite well for capturing what we think is going to be not only additional share, but a rising tide of demand in 2018.

Okay.

And then -- that's helpful.

And then as a follow-up maybe for Scott, I'd just be interested in his thoughts on the capital that seems to be cramming its way into this space.

Your balance sheet is good, for sure.

But is there an opportunity beyond these noncore assets that you've sold to opportunistically monetize some of your stabilized assets?

Just seeing the multiples being paid in the high 20x EBITDA or what have you for certain assets, is there an opportunity here for Digital?

Yes, Jordan.

That's an interesting question.

And I do agree with you, there's an awful lot of capital coming in market.

And clearly, we're seeing some pretty big valuations out there.

We're going to take a deep dive in our portfolio a little later this year.

And we're going to look at noncore assets, noncore markets, underperforming assets, assets which may become at risk for underperforming.

But I think your point is good.

And part of that would be looking at assets where essentially we've created all the value we can create, and would it make more sense to redeploy that capital somewhere else in our portfolio.

And as you know, we've done that before with a joint venture that we put together with Pru several years ago.

So I think it would be reasonable for us to bear that in mind as we review the portfolio later this year.

The next question will be from Jonathan Atkin of RBC.

Yes, so following a bit on Scott's comments about valuations, I mean the Infomart deal announced yesterday points to a pretty attractive cap rate.

And I just wondered to what extent do you see that as being transferable to your Internet gateway assets.

And anything you're seeing out there in terms of valuations around regular currency product?

I'd be kind of interested in your perspective.

Yes.

Yes, thanks.

We think it's entirely applicable to the -- to our Internet gateways.

It's a -- Infomart's a great asset, highly strategic, a little more so for Equinix I think than others.

And I think they're in a good position to add value there.

But you're right, we can all kind of sort out what that multiple is there.

And if you look at those multiples and apply that to our Internet gateways, I think you're going to get some rather full valuations on that.

As it relates to other assets out there, we've seen a compression in cap rates.

I mean clearly, the Infomart multiple relates to these kind of highly strategic Internet Gateways, but we've seen cap rates in general come down and compress.

There used to be a lot more differentiation across product types of assets, and they're getting a lot closer.

I think that bandwidth is maybe 100, 150 basis points wide, where it used to be more like 300 basis points wide for kind of the more traditional assets.

That's very helpful.

And then with your major global peer kind of going hyperscale, getting more into kind of wide area connectivity, I just sort of wanted to maybe get an update on the flip side in terms of your retail initiatives, Megaport partnership, and anything else that is kind of worth highlighting that maybe Andy and Bill didn't capture in the scripts.

Thanks, Jonathan.

We're absolutely committed to the retail colo business.

In the fourth quarter, we had 51 new logos, fully 90% of those came through colocation, half from network and half from enterprise.

Since we acquired Telx, we've doubled our megawatt capacity committed to the colo product.

We're up to 92 megawatts, and that's both organically and through acquisitions.

We plan to launch our colo business in Asia Pac later this year.

But I will say that we're definitely seeing a convergence of strategies.

We can see that with the Equinix announcements today with customers and competitors recognize the value of an interconnected scale.

We're offering the full menu of options from a single rack to multiple megawatts along with the ability to connect directly privately and securely from the enterprise customer's private cloud instance to a public cloud compute engine, in order for there to be relevance to the -- to their hybrid cloud architecture.

So we think the colocation product is a very important element of our comprehensive product offering, and we're going to continue to invest in this business to support our customers' needs.

The next question will come from Colby Synesael of Cowen & Company.

Two if I may.

You did $199 million in annualized revenue in bookings or leasing in 2017 with 2 strong quarters in the last 2 quarters.

Based on what you're seeing, while I appreciate that bookings could jump quite a bit from quarter to quarter, I was wondering if you could just give us some color on the momentum that you're seeing and what your expectations are for 2018.

Do you think you could be above the $199 million in 2018?

And then secondly, CapEx, when you gave your guidance earlier this year for the $900 million to $1.1 billion, that was meaningfully below what we were anticipating.

That was already -- and we had already been modeling something less than what if you just simply added DFT and DLR together.

Can you just talk about your confidence that this is the right number of CapEx, and the risk that we could find ourselves in a year from now that you're undersupplied with inventory?

Thanks, Colby.

This is Andy.

I'll try to take the -- start the first half of the first one, maybe have Dan chime in as well.

So kind of just speaking to our most recent fourth quarter, overall, we thought this was great results in terms of overall robustness in volume, in terms of diversity by customer, geography and product line.

We had numerous customers expanding with us.

As you heard in the script, we had numerous customers sign in multiple geographic regions.

Our -- the biggest signing was into the legacy DFT portfolio for -- only made up about 25% of all the signings.

So 75% of the signings were in the legacy Digital portfolio, and as Bill just mentioned a second ago, 51 new logos, which was a new record for us.

So all in all, great.

I would say the trends we experienced in the fourth quarter seem to be continuing into the beginning of the year.

And I -- we are certainly shooting for higher than $200 million of signings in 2018, albeit, we're not providing any specific guidance on that line item.

Maybe I'll ask Dan if he has any other color on fourth quarter or pipeline.

Yes.

Thanks, Colby.

Thanks, Andy.

So the fourth quarter and our positive feelings about the first quarter at this time, I don't think are any coincidence, given the restructuring that we went through last year from a go-to-market perspective.

We have a lot of things that play into our success teams outside of the sales organization, for sure.

But in the second and third quarter, we went through a major restructuring, Colby, as you know.

And that all started to settle in, in the third quarter.

And we believe it started to pay some dividends for us in the fourth quarter.

It's early in the first quarter.

We're 6 weeks in.

We feel positive about what we've done so far, even with a very busy January with PTC and a sales kickoff.

And the pipeline that we see going into I'll say, the rest of this quarter and into the second and maybe early into the third, makes us feel positive, makes us feel very good.

Of course as I always like to say, we have to execute against that pipeline, but we do feel like we're in a very good position.

And Colby, to your second question on capital.

So when you do a deal with a company like DFT, I think there are going to naturally be some capital synergies.

You're not going to expand at the same sort of planned rate in certain identical markets, where if you had remained independent.

So I think there's clearly some shrinkage of capital deployment from that standpoint.

But when I look at our inventory, I think it's -- I think we're in pretty good shape, to be quite candid with you.

And frankly, if we see additional demand in any of these markets, we'll add more capital.

We'll tune it up.

So we're pretty flexible in that area.

Just to round out your question on the CapEx, which was part 2. So our midpoint of our guidance is about $1 billion, about $1.1 billion on the high end.

I would say we as a team have certainly learned a lesson over the last handful of years in making sure inventory coming online and making sure that we have that fine balance, especially in our core active development market.

So our active pipeline has about 123 megawatts under construction, half of it leased, the other half available.

And many of these markets, be it like in Ashburn, we have delivered large shells and have had active signing into filling up our legacy campuses and into the latest buildings in our new campuses.

So trying to obviously not overextend ourselves and put our balance sheet at risk, but not put us in a position where we're missing a good opportunity for one of our customers, due to timing of inventory.

The next question will be from Michael Rollins of Citi.

A couple of questions.

First, you mentioned the idea of revisiting some of the portfolio for noncore assets.

Is this the time, given where some of the strategic transactions have taken place on multiples and cap rates, is this the time to consider a more aggressive exploration of monetizing the power base buildings that would be very valuable to some of the tenants that sit inside of that?

And then secondly, curious as you talked about the competitive environment, if you can unpack maybe how the environment for pricing might be changing in '18 versus '17.

And if you can put the -- some context around the cash re-leasing spreads you saw in the fourth quarter on a cash basis, relative to the guidance for slightly negative in 2018.

Yes, Michael, Scott.

I'll take the first half of that question, and I think it's an excellent question.

I assume you're saying on some of those PVVs perhaps thinking about selling those to the customers that are in the building.

I -- listen, I think everything is on the table.

I will say that mitigating issues on that though typically are what is the nature and design of the building and what market is it located in.

Many of those still represent tremendous upside opportunity for us in the event we were to get them back.

Our basis is relatively low and they are extremely good investments for what they are.

But in some cases, we could actually generate some pretty impressive returns if we got those back.

So wouldn't want to forgo future upside for the sake of a good cap rate today, but we'll keep that all in mind as we evaluate these opportunities.

And Michael, on the pricing and re-leasing question, I think there was kind of 2 parts packaged in there.

I guess '17 versus '18 overall pricing.

I mean, while it's -- we are in a competitive market for sure, we are seeing a tremendous amount of demand.

So that intersection is kind of keeping pricing relatively intact with some exceptions to the positive and the tight ends of the market to be out in Santa Clara where supply is so limited.

On the re-leasing spreads, I mean, we've been coming through this kind of journey where we've been bringing our re-leasing spreads further into the positive territory.

This quarter was a positive outlier, positive across the major product sets.

Our colocation re-leasing spreads ticked up to 3.5%.

We had a positive on a TKF.

Now we do still have, as I mentioned in my prepared remarks, some above-market leases in certain parts of the portfolio.

Those are largely related to leases that were -- came to us via one of our -- the major acquisition last year with DFT.

The timing of when those renew and the rates that they renew at obviously would put a -- put a negative into those stats in any given quarter.

But by and large, we see it slightly negative for the full year together for the combined portfolio, largely driven to those select above-market leases.

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

Just wanted to ask a question about some of the initiatives, Bill, that you mentioned earlier, the executive sponsorship and some of the customer service initiatives that you meant -- talked about at the Investor Day.

First, just curious if from a spending perspective on the SG&A front, how much of the cost for some of those programs are already in the run rate?

And how much is on the [comm]?

And also just curious, I think speed, which you mentioned, has been a criticism of the company in the past.

Curious if you have any stats on how long it takes to get leases done today versus maybe 6 months ago?

And then just one other follow-up.

I'll ask Andy to cover the SG&A question.

On the second part, we actually looked at this in the fourth quarter.

And we've taken 8 days out of the process for documentation in this last quarter on average.

So we've shortened that I think pretty substantially.

But I will tell you there's a great deal of variety.

I mean, look if we're doing business with a customer with whom we've done a lot of business before, we can make a deal in just a couple of days, and it can be a very large deal.

If it's a new customer, then that obviously would-- can take longer.

And then on the spend and kind of investment in our customers, and our systems and our teams, Vin, I think you're probably harkening back to a slide from our Investor Day in December really showing the power of the platform and our scale and being able to invest, I think, an illustrative 100 basis points of revenue back into the business and still maintain industry-leading EBITDA and G&A margins.

That spend was really illustrative.

It's going to come in many forms.

It's going to come in the G&A line in terms of investment in our team hiring the right sales personnel.

It's going to come in our systems.

We've launched a new accounting system for our colo platform in Europe this year.

It's going to come in the capital side in terms of integrating our latest acquisition.

It's going to be coming on the marketing side.

But all in all, that spend is going to be spent throughout 2018 and is fully baked into the numbers that we put in our guidance table released at the beginning of the year and fully incorporated.

Vincent, it's Dan Papes.

If I could just add a few comments to -- actually, on top of Bill's.

Our executive sponsorship program relating back to the SG&A question, costs us a little bit of airfare.

Other than that, having our leadership team out in the field talking to our customer executives, understanding their needs, responding to unique requirements that they may have has paid great dividends at very little expense to the company.

And has also informed us as a leadership team, to be more effective in some of the strategic decisions we make.

So that's made a big difference.

Another is again, didn't take any G&A for us to take a look at our processes and our approval processes and how we work bids through our system and shorten those time frames meaningfully in order to be able to accommodate our customers and eliminate this stigma that you mentioned of us being slow.

We get -- we -- in the last 6 months, we've gotten just really, really positive feedback from our customers, from brokers, from partners about the fact that people are seeing us to be faster on our feet, more flexible and working together with our customers in a customer-centric way that's making a difference.

All of those things translate into less tangible, but certainly very meaningful benefits to us as a company.

I think that the business results have been and will continue to be positively influenced by that.

That's very helpful.

My second question is just trends seem to moving in the right direction.

Leasing volumes have been pretty healthy here over the last couple of quarters.

Industry commentary also seems to be pretty favorable from a demand perspective.

The one metric that seems to be a little bit at odds with this is the same-store NOI growth, which it seems has been softening a little bit.

it's still positive.

But curious if you could provide any color on what's driving that trend?

Hey, Vin.

I think we're going to give you an exception for a third question here, and I'll do the honors.

So same-store NOI growth, a little softer this year in our guide and our guidance relative to '17 and also we put up in the fourth quarter.

And really has to do with some episodic churn and the re-leasing of that capacity.

Obviously as you see from our stats, we typically retain 75% to 80% of our customers at expirations, even higher than that sometimes on the colocation, but we don't retain 100%.

Two specific churn events that are impacting the same-store pool, one in Phoenix where a systems integrator lost its end customer and let its lease lapse at expiration.

That happened at the very end of the year.

Another one that's expected to happen at the very beginning of '18 is in Boston.

Now again, these are down -- essentially downtime for associated with re-leasing of that space that is putting a negative headwind to the year-over-year same-store growth.

Not all just glass half-full, because in Phoenix, that's a market where we've been essentially full in terms of capacity.

So this brings on some attractive inventory.

It's a space where actually, we should be able to densify it and bring incremental power.

So we're able to generate potentially higher revenue from that footprint.

So there is an upside, but there will be a downside in terms of the end year cash for that asset.

And then in Boston, this -- that was a scale customer that is churning out, and that gives us -- gave us an opportunity to re-productize a portion of that space as a colocation.

And we launched that along with service exchange in the Boston market.

That goes very well with our recently hired sales team members to farm the Boston market coming online at the end of last year.

So we think that same-store pool should accelerate coming out of 2018.

The next question will be from Frank Louthan of Raymond James

Looking at the joint venture with Mitsubishi, can you give us some color on their data centers are contributing and how utilized they are and how we should think about that?

And I guess a question for Dan around the sales force, have you completed the reorg with sort of all the moving parts there?

And where are you finding the salespeople here?

Are you seeing with demand high for the industry, are you having trouble with churn?

How should we think about that?

Frank, Scott here.

I'm looking for the exact numbers.

They're largely utilized.

I think they're north of 80% utilized in there.

And I can get you -- I'll get back to you with the exact number on that.

But there is some upside potential there with additional leasing.

Okay, Frank.

Frank, to your second question about the sales force, so yes, the restructuring of our sales force is completed.

Always will be some small adjustments here and there, but we really completed the major part of the restructuring in the second quarter last year.

And then it was a matter of it settling in, which happened in the third quarter for the most part.

And then the fourth quarter was us operating in the new business model, which to me will -- that new business model will just get better and better for us as we go forward.

As far as churn goes, there's no question, it is a very competitive market for talent, especially in the colocation space.

But we are -- we're finding people.

We're not finding them quite at the pace that we'd like, but we have most of our headcount slots full now, which is great.

And the places that we're getting them, we're getting them at our competitors.

We're getting them from our competitors with our -- I'll call it sort of our new story about the way we're trying to operate in the market with customer centricity.

We're getting them with our, basically, our very strong business results.

They want to come work in a company that's stable, established, doing well and has a growth plan.

I'll also say that they -- there are a couple of companies that have exited this -- the colocation and connectivity business or sold their businesses or been acquired.

And those salespeople, the top salespeople in those organizations, they don't want that instability.

They want the stability of being in a firm like ours.

And so when we have conversations with them and we tell them our story, it's been positive for us from a recruiting perspective.

Yes.

Frank, just to give you the breakdown, the north building in Mitaka was 73% occupied, and the south building is 86% occupied.

And then blended together, it's 78% occupied.

The next question will come from Richard Choe of JPMorgan

I just wanted to follow up on the colo business [it brought] with the scale business, we could see volatility.

But it seems like there's been more focus on the colo business, more capacity dedicated to it.

Is this level of signings, the [9 million] range and maybe higher kind of the new level we should be looking for?

And what's driving it?

Is it the focus?

Or is it the supply or kind of everything kind of coming together on that aspect of the business?

And then a quick follow-up on maintenance reoccurring CapEx.

That kind of was up a little bit.

Wanted to get a little more detail on how should we think about that going forward?

I'll take the first.

Andy will address the second.

The colo business at -- not sure exactly how you phrased that, Richard, but we're -- we want to grow that colocation business.

Back to Jordan's question about growth from Investor Day, we're trying to grow meaningfully in our scale business, and we're trying to grow meaningfully in our colocation business.

A lot of the transformation we went through last year was in that colocation go to market space.

And we -- it is our strong intent to continue to grow our colocation business.

It may be just a little bit lumpy, less lumpy of course in the scale business, but we intend to make that go up and to the right with our team.

Just to round that out, and I'll hit on the CapEx.

I think it's -- if you look at the progression through the year, you should look at kind of the colocation and connectivity lines almost kind of hand in hand because the bulk of that connectivity are from those colocation customers.

The trajectory of the year during the changes in the sales team -- we were a little bit softer in the first 2 quarters in our new logo adds.

That stepped up in the third quarter from 30 to 36, and then stepped up to a record of 51 in the fourth quarter, including a record in Europe in particular of 13 new logos, all colo-oriented.

And then that ties to the mix of space and power, which flows through the colocation side and connectivity.

A lot of those new logos coming to Digital for the first time, coming to our ecosystems within our gateways or our campuses, taking our initial cage cabinets and power requirements and base requirements from connectivity.

And we think that will spur incremental connectivity from other customers in those assets wanting -- seeking to connect to them.

So we're quite pleased with the overall combined results.

It's about a I think 14% step-up on -- for colo and connectivity combined quarter-over-quarter, and we're looking to continue to drive that growth.

And then lastly on your other question, about a $10 million increase quarter-over-quarter to recurring CapEx.

The bulk of that was actually related to something not core to our business.

We spent some capital on the tenant improvement front to re-tenant a office building in California in the East Bay, an asset that was not a data center that dates back to our pre-IPO days.

And we re-tended that asset and just sold that beginning of the year for I believe north of $70 million, $75 million, so part of our capital recycling program.

So that noncore spend was a major driver in that quarter-over-quarter CapEx -- recurring CapEx step-up.

The next question will be from Jon Petersen of Jefferies.

In your prepared remarks, Bill, you talked about the tax reform and the benefits from companies bringing tax -- or bringing cash overseas, and investing more in the U.S. Apple is somebody who's talked a lot about that.

Just kind of curious if you could expand more on what the opportunity is there, and if you're actually seeing an increase in RFPs out there in the market from these type of customers as a result of tax reform?

And then somewhat related, it seems like every year, we're hearing more and more about sustainability.

You guys have been certainly talking about it more.

I'm curious if you could -- I don't know if you have any numbers to quantify around this.

But to the extent that you have customers that are able to build their own facilities, what can you offer in terms of facilities you build that are sustainable, comparable to what a lot of these large guys can build on their own?

Sure.

So on tax reform, I would tell you that the pipeline of opportunities that we're seeing right now is bigger than anything I've seen since I started with the company in 2004.

Now whether that's attributable to tax reform, I don't know.

It may be due to just cloud and other technological trends.

But it's definitely larger by a fair degree than anything I've seen before.

So in terms of the sustainability initiatives, we've been pursuing that for the last few years.

We've won a number of awards for it.

We've been recognized for it by NAREIT as the -- it's called the Leader in Light Award within the data center group.

And so we're very proud of that.

And we've actually partnered with some of our customers trying to, let them leverage our contracts and our connections in this area in sustainable power.

So -- and we've actually -- some of the RPs we've responded to have green energy as a prerequisite to bidding.

So it's very important to us, an it's important to, I would say a high percentage of the customers with whom we work.

Andy or Dan, anything you would like to add?

Yes, I would add, Jon, on the sustainability point that Bill made, we -- our customers talk about it, talk about that with us all the time.

And it's one of those situations where we can make it work for our customers.

And it ends up just being a good thing because sustainability, we all would agree, is a good thing in principle.

It also happens to be very good business.

And our customers are urging us to focus on this.

We're doing so, and that works really well between them and us.

The next question will be from Robert Gutman of Guggenheim securities.

Two if I may.

First, I believe commencements were 38 million in the quarter.

And according to the last waterfall chart, I think it implied 48 million.

So commencements were a little lower.

And I was wondering if that was just -- if that was customer-driven or availability-driven?

And secondly, I appreciate all the really positive commentary about the scale of the pipeline.

And I was wondering, if given the secular strength and the progress you've made with the sales organization and flexibility, if you could -- if there was a way to quantify that difference and maybe from a year-over-year perspective.

Rob, this is Andy.

I'm just trying to find the prior quarter commencements.

I -- the bridge I know is we added 50, and we took out 38, and we lost 2 because of the JV.

So maybe we can follow up just to figure out the details.

there's a nuance quarter-over-quarter.

And then the second question was quantify the difference a year makes in terms of all the changes.

Dan, do you want to take a stab at that?

Yes, sure.

Robert, this is sort of this early on in these changes, I wouldn't dare to quantify it, the impact at this point.

I do know we've won some deals that I suspect we might not have won had we been the company of 18 or 24 months ago.

I know that we're having discussions with some customers who previously wouldn't put us on the bidders list or call us when they had a requirement.

So there's no question in our minds that the changes in the way we're doing things is having a positive impact.

I'm sorry, I'd love to put a number on it.

But we know it's making a difference.

And it's my hope and expectation that, that's going to be one of the factors that's going to show in the growth results that we're going to deliver here as a company over time.

The next question will be from Sami Badri of Crédit Suisse.

Just a clarification on the $6 million contribution from interconnection bookings that was highlighted in the press release, I was hoping you could tell us more about this.

Was this from a handful of customers?

Or was this from a single -- or the majority from a single customer, for instance, that global cloud provider that is trying to aggressively expand globally right now?

Sami, our interconnection signings is incredibly diverse.

I can tell you, the largest single contributor is in the hundreds of thousands of dollars.

I mean, it's in any given signing.

So that was not one big cross-connection, a cross-connect signing.

It was a -- it's from numerous carriers.

It's from numerous cloud providers, enterprises, assortment.

Now it's largely concentrated, one in our colocation facility, both in North America and Europe, 2 in our most highly corrected ecosystems within our Internet gateways and then supplemented with connectivity on our campus colocation outfits.

But it is a very diverse mix of signings.

Got it.

And then recently, Digital announced Oracle will be expanding in 14 new locations.

And then at their cloud event earlier this week, they announced global plans.

Will they be building their own data centers in some of these new markets?

Or are they -- or is this announcement in coordination with Digital as they go global and expand and kind of play a little bit of catch-up with the bigger cloud providers?

Sami, why don't I have Chris Sharp, our CTO, tackle that one because he's heavily involved with that announcement.

Absolutely.

Thank you, Andy.

Definitely, Oracle is growing rather rapidly.

And so we're very proud of the partnership we've been able to put into the market with them.

And it's definitely in early innings, I would say, on the amount of ecosystems that are going to be built around that infrastructure.

So we're very excited about that.

But definitely the growth that they're starting to put out into the market, I think they'll look at all of their options.

And what's nice about Digital is we have the heritage to do it from build-to-suit, where we can support them in that manner, but all the way across the board to helping them in our existing facilities globally.

And so that's why we see a lot of early success in this already.

And we continue to see a growth pattern, not only for Oracle, but all these major cloud providers as they start to really invest in that global platform to access their customers privately and securely in a very efficient manner.

And just to clarify, I think the second part of your question, Sam, the -- not to name any specific customers, but I would say by and large, the majority of our customers are seeking us to pursue and outsource third-party multicustomer data center environment, not to go do it on their own, even the most well large capitalized.

I think that's due to our value proposition, having a global footprint, the highly connected assets, the campuses and the land to future proof our customers' growth.

And I would think based on the fact that you've seen that name you just mentioned, quickly ascend our top customers list, that they are no different.

And 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 the last page of our presentation.

One, we demonstrated our commitment to prudent capital allocation on behalf of our shareholders.

We harvested mature assets to recycle capital where appropriate, we invested opportunistically in core domestic markets to earn an acceptable current return with an opportunity to generate future upside from further value creation.

And we extended our global platform to enter a highly strategic new international market with a well-respected local partner.

Two, we made significant progress towards finalizing the integration of our recent acquisitions, delivering on our stated expense synergy targets and building on the established customer relationships to realize revenue synergies as well.

Three, we beat the high end of our initial 2017 guidance range and set the stage for sustainable growth in earnings, cash flow and dividends per share in 2018 and beyond.

Fourth, last but not least, our disciplined capital allocation and deliberate balance sheet management has positioned us to safely navigate a rising interest rate environment and self-fund our 2018 capital plan through internally generated cash flow from operations and proceeds from asset sales.

As I do every quarter, I'd like to conclude today by saying thank you to the entire Digital Realty team whose hard work and dedication is directly responsible for this consistent execution.

Thank you all for joining us, and we hope to see many of you later this year at the various investor conferences.

Thank you.

Thank you, Mr. Stein.

Ladies and gentlemen, the conference has concluded.

Thank you for participating in today's presentation.

At this time, you may disconnect your lines.