Digital Realty Trust Inc (DLR) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the Digital Realty Second Quarter 2018 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 Technology Officer, Chris Sharp, is also on the call and will be available for Q&A.

Management may make forward-looking statements, 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 second quarter results.

First and foremost, consistent execution against our customer success initiatives drove new high watermarks for both bookings and backlog.

Second, we beat consensus by $0.05, driven by operational outperformance, and the beat flowed through to a $0.05 guidance raise in the face of shifting FX headwinds.

Last but not least, we further strengthened the balance sheet by terming out revolver borrowings with an oversubscribed offering of $650 million of 10-year paper at a $4.45 coupon.

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

Thanks, John.

Good afternoon, and thank you all for joining us.

Let's begin on Page 2 of our presentation, with a recap of the strategic initiatives we laid out at our Investor Day in December.

As you may recall, we told you then, our top priority was deepening connections with our customers, and we expected to achieve our objectives through a global, connected, sustainable framework.

We highlighted several initiatives we were undertaking to reorient our business around our customers, including our executive sponsorship program, our digital delivers customer success program and steps we've taken to streamline the customer contracting process.

A little over 6 months later, I'm pleased to report these initiatives are bearing fruit.

The strong performance the digital team delivered in the first half clearly benefited from a healthy economic backdrop and the robust growth of our customers' businesses.

But there's no doubt that our growing mind share with customers has also benefited from our concerted efforts to reorient our business around their needs.

Let's turn to sustainability on Page 3. We are committed to powering our global portfolio with 100% renewable energy because we believe it's the right thing to do and because it matters to our customers.

Our 20-megawatt utility scale solar power purchase contract, announced in December 2017, commenced operations in late March.

This is the most recent project in our 184-megawatt renewable portfolio to come online, and it is now delivering low-cost renewable energy in Ashburn.

We have been frequently recognized for our sustainability leadership, and in June, we were named a 2018 Green Lease Leader by the Institute for Market Transformation and the Department of Energy's Better Buildings Alliance at the BOMA Expo.

Green Lease standards have become common in the main food groups, but have not traditionally been used in the data center industry.

Digital Realty is the first global data center REIT to adopt Green Lease standards.

Our actions are helping to evolve industry practices, enabling mutually beneficial arrangements between building owners and customers that align the costs and benefits of energy and resource efficiency investments by both parties to improve PUE and reduce operating costs.

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

Let's turn to market fundamentals on Page 4. In North America, new data centers are popping up across the primary data center metros, especially in Northern Virginia, which is by far the largest and most active metro in the world and through which more than 70% of the world's internet traffic passes every day.

Northern Virginia is also Digital Realty's largest concentration.

We are blessed to own 370 megawatts of state-of-the-art capacity in our existing portfolio along with 63 megawatts currently under construction that are 87% preleased, in addition to 243 acres of strategic landholdings that will support the build-out of another 390 megawatts of future capacity.

The data center sector has been prone to oversupply in the past, but demand is rapidly outpacing supply.

And on current form, we see a greater risk of running out of inventory and missing the opportunity to support our customers' growth than risk of oversupply.

We are taking proactive steps to secure our supply chain and replenish our inventory balance, and you may have seen that we've acquired a 13-acre parcel in Santa Clara as well as a 62-acre parcel in Manassas, Virginia.

We've seen a similar dynamic in Europe where we did miss out on some recent business due to a lack of inventory.

However, as we told you last quarter, we restocked the shelves and made up for some lost ground in the second quarter with a total of 10 megawatts sold.

On the last call, we mentioned a 4-megawatt deployment in Amsterdam with a top legacy DFT customer.

Other key second quarter wins in Europe included a company that provides cloud-based solutions for the higher education sector secured a deployment in our Frankfurt colocation facility to provide local hosting services to German customers and to satisfy data sovereignty compliance requirements.

They selected Digital Realty as their partner for this project due to the technical strength of our Frankfurt facility as well as our ability to meet their aggressive deployment schedule.

Europe's leading provider of monitored security solutions for both business and residential properties selected Digital Realty in Amsterdam to consolidate their other data center deployments across the Nordics and Southern Europe.

A British multinational grocery and general merchandise retailer chose a digital location in London to replace their owned facility, meet their migration criteria and time line and provide immediately available inventory with room to grow.

Nearly 3/4 of the recent activity has been with existing customers either expanding their current footprint or looking for new partnerships for their next phase of growth.

Similar to the U.S., given our recent success, we are focused on building out remaining capacity within our current footprint and we're kicking off the initial phases of the next buildings on our campus locations to maintain a healthy inventory balance.

Pricing is competitive, and customers remained focused on flexibility and expansion options in addition to differentiated connectivity solutions and a track record of operational excellence.

Market vacancy is low across the major European markets.

Both new and established competitors are bringing new supply to market, but is -- it is being met by healthy demand.

Across the Asian Pacific region, the robust demand we have cited for the past several quarters continues to accelerate, particularly from Asian cloud service providers.

Follow-on requirements from these clients are coming to market sooner than expected.

Deployments that were closed only a few years ago are already approaching full capacity.

On the supply front, the build cycle in many Asia-Pacific markets is longer than other regions, given complexity in the permitting and approval stage as well as the need to build vertically in urban land-constrained environments.

Net-net, we believe our customers view our global platform and comprehensive space, power and interconnection product offering as a key differentiator in their selection of data center provider of choice.

Let's turn to the intersection of supply and demand on Page 5. A lot of ink has been spilled recently expressing concerns about pricing and profitability on hyperscale activity.

I'd like to share a few data points that may help you understand our perspective on pricing and returns.

First of all, the average lease term on leases we've signed over the last 12 months is more than 2 years longer than the average lease term over the prior 12 months.

Quarterly bookings tend to get a lot of airtime, and obviously, our bookings have stepped up as well.

But when you take those 2 extra years of lease term into account, you will see that the total contract value we have signed over the last 12 months is more than double the contract value we signed over the previous 12 months.

It goes without saying that hyperscale credit quality is excellent.

In addition, the larger deal sizes we're doing today are also substantially derisking our development pipeline.

You can see that firsthand this quarter as the preleasing on our pipeline moved up from just over 40% to north of 60%.

Consequently, while development returns may be marginally lower today, we believe the returns on our current pipeline represent a respectable spread over our cost of capital, particularly on a risk-adjusted basis.

And when you consider the greater volume and longer lease term, we believe our recent activity has created meaningful value for shareholders.

Let's turn to the macroenvironment on Page 6. As I said earlier, the global economic backdrop has been quite supportive for the last several quarters.

We are mindful of the risk of a global trade war, which does have the potential to disrupt the broad-based current economic growth.

However, as you've heard me say many times before, we're fortunate to be operating in a business levered to secular demand drivers, both growing faster than global GDP growth and somewhat insulated from economic volatility.

To put a finer point on the secular trends, I'd like to highlight just a couple of the figures on Page 7. According to the Harvey Nash/KPMG CIO survey, over 70% of organizations report making significant or moderate cloud investments.

According to a recent Gartner forecast, nearly $74 billion will be spent on cloud application services, better known as Software-as-a-Service in 2018.

This makes SaaS the top category in global public cloud spending this year.

More than $40 billion or over 20% of the overall public cloud market will be spent on infrastructure-as-a-service in 2018.

While SaaS is the biggest piece of the pie and is expected to stay that way through 2021, infrastructure is the fastest-growing segment, up nearly 36% in 2018 according to Gartner.

The global spend on public cloud services is expected to grow by more than 20% in 2018, reaching over $185 billion.

IDC expects public cloud spending to grow over 20% a year for the next 5 years, reaching north of $275 billion by 2021.

To effectively address this market, data center providers must offer a global interconnected solution from colocation to hyperscale.

These trends obviously play directly to our strengths, help explain the quality of our recent results and bode very well for future demand cycles.

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

Thank you, Bill.

Let's begin with our leasing activity here on Page 9. We signed total bookings for the second quarter of $94 million, including an $8 million contribution from interconnection.

We signed new leases for space and power totaling $86 million during the second quarter, including a $7.5 million colocation contribution.

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

Our largest transaction was a 25-plus-megawatt win with an existing hyperscale customer who selected us based on our distinguished operational track record and ability to accommodate their future growth needs.

Second quarter wins were broad-based across products as well as geographic regions, and bookings would have been north of $60 million, even excluding the 25-plus-megawatt hyperscale win.

While the majority of our new signings were with existing customers, we added 39 new logos during the quarter, from an industry-leading aerospace company to an international provider of shared workspaces, sourced through one of our many partners.

Within the enterprise segment, second quarter wins included: a global financial technology company chose Digital Realty as their go-to partner for data center consolidation and expansion.

The customer recognized Digital Realty's ability to provide best-in-class facilities that met the most stringent security needs, a strong partner ecosystem for migration enablement and robust connectivity solutions.

The Massachusetts Institute of Technology needed a specific connectivity solution in North America, and Digital Realty delivered.

The institute established a presence with us to accommodate high networking gear that will support research and development of internet platform technology.

An international semiconductor intellectual property supplier is expanding into new IoT services.

With existing data center facilities in the U.S. and the U.K., the company expanded with us with their presence in Texas, driven by security and their customer demand for a single-tenant environment.

We saw strong demand this quarter in our network segment across the portfolio, including: a 12-site backbone expansion for a leading global provider of communications and digital entertainment services, a new Edge deployment in Atlanta for a leading global provider of software-defined networking and other services, a new networking deployment in Miami for a leading national provider of fiber optic network solutions and services, a new Edge deployment in New York for a leading global provider of innovative solutions for satellite clients and an expansion of network deployments in Atlanta and New York for a global media and technology company.

Our strategic alliances and channel referral partner programs continue to help us drive growth and extend our reach to new customers.

We continue to build our capabilities through partners who integrate our world-class data center capabilities into the solutions they offer customers.

For example, during the second quarter, we partnered with Oracle to provide the right solution for a global mobile network provider with a set of private low-latency, high-availability connections through our Service Exchange platform to their globally deployed production environments and directly to Oracle OCI cloud nodes within our data centers.

As shown here on Page 10, we also continued to expand our capabilities with IBM, one of our key strategic alliances where we have been able to embed our capabilities into their Direct Link products that allow customers to connect directly to their cloud infrastructure and advanced cloud services.

We saw continued growth with that business in the second quarter by providing capabilities to IBM, its business partners and customers globally.

These capabilities now include access to IBM Cloud via IBM Direct Link on our Service Exchange Platform, providing customers, partners and IBM organizations the ability to choose how and where they want to connect to the IBM Cloud within our global footprint, providing a secure, low-latency, consistent and reliable set of capabilities.

This partnership illustrates the unique value proposition of Digital Realty's comprehensive product offering.

We are able to offer customers a wide variety of connection options, such as a flexible private cloud footprint on our campus directly adjacent to an IBM cloud compute node, enabling the customer to connect directly and securely to their public cloud instance at incredible low latency, especially compared to an off-campus, on-ramp, which is -- then has to tether back to the actual cloud compute engine sitting on a Digital Realty campus.

This flexibility gives us a unique ability to solve for the full spectrum of our customer's hybrid multi-cloud architecture requirements.

Turning to our backlog on Page 11.

The current backlog of leases signed but not yet commenced reached another all-time high of $142 million.

The weighted average lag between second quarter signings and commencements was 5 months, a bit below the long-term average.

Moving on to renewal leasing activity on Page 12.

We signed $76 million of renewals during the second quarter in addition to new leases signed.

The weighted average lease term on renewals was 3.5 years, and cash rents on renewals rolled up 3.4%, with positive cash re-leasing spreads across all product types.

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

In terms of second quarter operating performance, overall portfolio occupancy picked up 20 basis points to 89.4%, due primarily to positive absorption in Amsterdam, Frankfurt and Dallas.

We expect portfolio occupancy should be essentially flat in the second half as continued positive absorption in the same-store pool will be partially offset by placing in-service development projects that have not yet reached stabilization.

Turning to our economic risk mitigation on Page 13.

FX represented a modest tailwind to the year-over-year growth in our second quarter results.

However, the U.S. dollar began to strengthen over the past 90 days and has acted as a bit of a drag on growth relative to prior -- to the prior quarter.

We now expect FX to represent a modest headwind in the second half of the year.

Moving on to earnings growth on Page 14.

Core FFO per share was up 8% year-over-year and came in $0.05 above consensus.

The upside relative to our internal forecasts was primarily driven by operational outperformance, with lower-than-expected property taxes as well as operating expenses.

As you may have seen from the press release, despite the foreign currency headwind, we are raising 2018 core FFO per share guidance by $0.05.

Most of the drivers are unchanged, aside from higher development spending due to our recent leasing wins and updated assumptions for FX, financings and asset sales closed during the second quarter.

In terms of the quarterly run rate, as you can see from the bridge on Page 15, we expect to step back down by the extent of the beat in the third quarter due to higher interest expense from the recent bond issuance, timing of G&A investments and loss of NOI from our recent asset sales before rebounding sharply in the fourth quarter as several large leases commence.

Last but not least, let's turn to the balance sheet on Page 16.

Net debt to EBITDA improved slightly to 5.2x at the end of the second quarter, and fixed charge coverage remained healthy at 4.3x.

As you can see from the chart on Page 16, our weighted average debt maturity is approximately 5 years, and the weighted average coupon is 3.5%.

Nearly 90% of our debt is fixed rate to guard against a 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 long-duration financings across the currencies that support our assets.

Finally, as you can see from the left side of Page 16, 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 be from Jordan Sadler of KeyBanc Capital Markets.

So first, I just wanted to touch on investment activity for a second.

It was reported, I believe, by Bloomberg a few weeks ago that you guys were in talks, looking at a large-scale portfolio in Brazil.

Anything you can offer up in terms of interest level in expansion into South America?

Thanks for the question.

We, as you know, do not comment on market rumors.

But I'll share with you our thought process regarding investments.

First, as you know, we try to stay close to our customers, and in speaking with them, try to ascertain where they have an interest in growing.

Second, we truly believe that our global platform represents a key competitive advantage.

We think that's been validated with this quarter's results.

When looking at new investment opportunities, we pay particular attention to new capabilities, new markets, platforms that are appealing.

In our Investor Day last year, we did say that we were going to try to enter 2 new markets in the next 3 years, and we did.

And we put a map up of the largest economies.

So from those -- from that map, you can probably draw your own conclusions.

We do keep tabs on everything.

We see everything because of our size.

We look at potential markets all the time.

And when we do participate in a new market and buy a portfolio, we try to remain disciplined with respect to capital allocation.

So I hope that's helpful.

Yes, that is.

Separately, just on the results, I think congrats are due to you guys from the volume.

We don't offer those up lightly, but it's, obviously, a big quarter.

The one question regarding the volume is you did beat, and you did raise by a similar amount to the beat in the quarter.

Given the reasonably short lag between signing and commencement on this $94 million, why aren't we seeing a little bit more of a flow-through into '18?

Well, thank you, first of all, for the congratulations on the bookings in the quarter.

We, obviously, feel really good about that.

In terms of the specifics behind the guidance, I'll hand that off to Andy.

Thanks, Jordan.

So as you mentioned, we were certainly pleased with not just the volume but the composition of the new signings.

The one thing I would note is a significant portion of those new signings were executed in the back half of the quarter.

Thus, the 5 months from sign to commence really only trickles in a few weeks or months into the fiscal 2018 year.

The good news is that we are, once again, moving the chains on our guidance at the low and the high end, and moving that -- moving the guidance up to higher and higher single-digit growth.

And we will get the full year benefit of those signings we signed this quarter next year, which does derisk our growth in 2019.

The next question will be from Colby Synesael of Cowen and Company.

I also want to echo the congratulations on, obviously, very strong quarter.

Two questions, if I may.

First, on the interconnect revenue, it was flat roughly quarter-over-quarter.

And I'm just wondering what your thoughts are on that and what you're doing to potentially improve that, and maybe what you think it should be.

And then also, just in light of the very strong bookings, just wondering if you could remind us about your capital requirements.

Do you think an equity raise is coming at some point to support this, maybe not this year but next year?

Any color on what CapEx could look like in 2019?

Even if it's simply down, flat or up from this year would be helpful.

Thanks again, Colby, for the congratulations, appreciate it.

This is Andy.

Maybe I'll tackle, actually probably, both and let Bill and Chris chime in.

On the interconnection front, we were pleased with the overall signings on interconnection and the step-up quarter-over-quarter, and we kind of often lump that together with the colocation signings, which did improve on a quarterly basis in terms of signings.

They stepped up in Europe and North America, and in the aggregate, the largest contributors were some of our campus colocation expansions, be it Ashburn or Richardson.

Some new footprint in Atlanta we opened up in the last 6 to 9 months.

And also some of our core markets, like New York, Chicago and London, we had some -- several wins in there for some great customers.

And I think what you're pointing out to is what flowed through in the P&L, which was a little muted on a year-over-year basis.

We did have some credits from our Amsterdam data tower migration moving some of our legacy customers from their existing footprint to newly built colocation facility.

To facilitate that disruption, we gave some credits on their connection revenue.

And we do think the other signings we signed will ultimately continue to grow that line item in the future.

And I look at it as more of a longevity here of the rearchitecting of the sales and marketing team, going vertical, getting the right reps on the right accounts and driving the cadence to drive more colocation interconnection revenue over the next several quarters.

I think your second question was kind of around capital planning and financial policy.

So we did inch up the development CapEx guidance line item due to some of the wins we had on the signing front during the quarter, and also attributable to some of the land purchases for current and future supply chain.

Luckily, we ended the quarter at 5.2x debt to EBITDA, in line with our targeted leverage levels.

And turned out our floating rate debt.

So we have, call it, less than $0.5 billion of revolver borrowings.

So substantial liquidity.

And remained focused on organically or self-funding all our needs for 2018.

Looking forward to 2019, call it, the next 12 to 18 months from here, we're certainly going to have to evaluate all of our sources of capital, be it proceeds from our dispositions, capital recycling program as well as other common, preferred equity and bond financing alternatives.

The next question will be from Simon Flannery of Morgan Stanley.

I wondered if you could just talk a little bit more about some of the land acquisitions in Santa Clara and Manassas.

How are you thinking about the potential build-out of those properties?

And what's the long-term thought there, particularly about -- you talked about Ashburn, but establishing a bigger footprint in Manassas?

And then you did some divestitures in the quarter, can you just help us think through it, is that it?

Or are there likely to be more?

And how do you think about -- why get out of a market like Austin?

What's the framework there for deemphasizing some of those?

Sure.

Simon, this is Bill.

I'll start and let other fellows here clean up.

But first of all, relative to Manassas, what we're seeing is that the CSPs are basically going with 3 availability zones in a market, and so Manassas represents a different availability zone than Loudoun.

So it gives us the opportunity to land the same customer in the market but in a slightly different location.

So Manassas is very attractive from that standpoint.

And Santa Clara is a very tight market.

And we've talked about it before.

It's the one market where supply is constrained, and we see rents improving.

And so this particular location was adjacent to an existing data center of ours, and it allows us to create a campus in that particular submarket.

Relative to dispositions, we're not finished.

I mean, we are -- while we are a data center company, we're also a real estate investment trust.

And we're all about prudent portfolio management, which means we are monitoring the portfolio regularly and looking to sell assets that are less core to our strategy, maybe have slower growth, maybe some CapEx requirements.

And so those are typically markets that we don't see as having the same demand characteristics as some of our core markets, and those might be one-off assets.

And that will continue.

Andy or Chris, anything?

Yes, I'll just say that the theme on the markets where we're concentrating our investment focus versus markets where we're monetizing, similar trends, be it when we exited Philadelphia, St.

Louis, Sacramento, and redeployed those capitals into Ashburn, Chicago, Dallas, Santa Clara and similar markets abroad.

It is targeted markets with robust and diverse customer demand from across all of our verticals, be it on our global accounts, enterprise or network verticals.

And moving out of markets or less concentration in markets that are much more dependent on regional IT outsourced demand and somewhat single thread.

The next question will come from Erik Rasmussen of Stifel.

Just two questions.

First, as it relates to your 2018 outlook and your expectation for slightly negative cash renewals, but your commentary seemed to be somewhat positive.

So I'm just trying to balance out what your guidance is versus some of the commentary that you made.

And then secondly, in Europe, obviously, it was a little light in Q1, but your business had picked up.

How do you feel you're positioned now to capture some of that demand that you're seeing and the market is demonstrating?

Relative to Europe, we think we're in a good spot.

We have -- in Frankfurt, we've leased 3 megs out of a 9-meg-total building, and we're planning to begin construction on the other 2 9-meg properties on the site.

And similarly, in Amsterdam, we have some additional capacity and will be beginning construction soon there.

Andy, you want to handle the...

Sure.

I'll just round that out, and then I'll turn over to the mark-to-market.

I mean, I think the Europe activity has certainly picked up on the execution front.

I mean -- and it's been broad-based to -- ranging from top 3 global cloud service providers to Asia-based cloud service providers to local -- a win we had in London market from a enterprise customer.

So broad-based, and traction continues and pipeline grows.

Turning to the mark-to-market, we've had -- we had a positive cash mark-to-market on our renewals in the first quarter.

We had another positive mark-to-market in the second quarter.

It was a -- it is broad-based across all of the major product lines.

That being said, as we've referenced before, we do still have a handful of large re-leases in the portfolio, most notably those we've inherited and somewhat underwrote in our acquisition of the DuPont Fabros portfolio that will likely renew in the coming quarters, that could bring the overall year slightly negative or into the red.

So we're not -- it's not a definitive timetable of when -- which particular quarter those get executed, but we did want to make sure that we incorporate that into our full year guidance.

And the next question will be from Frank Louthan of Raymond James.

I wanted to touch base in sort of the inflation pressure that we're kind of seeing in the industry, both on raw materials and labor.

And what's sort of your outlook there over the next 12 months and your ability to pass that along?

And do you think that could possibly affect your development yields as you look at building over the next 12 months?

Frank, we've touched on this before, but we have a program in place where we lock in our major equipment costs for 3 years, and that's really insulated us from equipment costs and material costs.

The other thing that we do is we keep our contractors fully employed.

In fact, even if we're no longer building in one region, we'll move that contractor out to another region to keep them fully engaged.

And we find that, by doing that, it gives us very attractive labor costs as well.

Andy, anything you'd like to add there?

I mean, just something that was akin to the legacy DuPont portfolio as well is, on many of our larger footprint customers, we've been moving forward with a triple net lease structure that allows us to pass through escalations and costs over the term of the contract, but also insulates us on our returns over time.

The next question will be from Richard Choe of JPMorgan.

I have two quick ones.

One, in terms of the signings that you mentioned in the fourth quarter, how should we think about the level of contribution it has, and then going into '19?

And then in terms of the top 3 customers that you have, there is a little bit of a shuffling in terms of the level in a positive way.

How should we consider that?

Sure.

I'll start, Frank, and let the team chime in.

We do have a slide that kind of rolls forward our commencement timing in which we somewhat segmented of what's kind of commencing in the back half of '18 and on into '19.

As I mentioned in response to, I believe, the first question, a good portion of the 4Q '18 commencements are late 4Q '18, but there are some large re-leases in there that will kick in.

And obviously, the positive of that is we'll get a full year's benefit in 2019, derisking our growth there.

So that should give you a little bit of color on the backlog.

And we also kind of provided some rough guidance in the composition of the quarterly '18 core FFO per share.

To your second question, you're correct.

We have a new name on the leaderboard in terms of our top customer list here at Digital.

I think we all love each and every one of our customers equally, so I'm not going to say that's a good thing or a bad thing.

But certainly, like seeing customers that are already on there, adding more locations and expanding with us, and also new names jumping on that top 20 list any time we can.

And the next question will come from Michael Bilerman of Citi.

Just two quick questions.

One, what are you guys seeing in potential replacements for Dan and Scott, or whether you're going to replace them at all and then may be talk a little bit about the organization's structure in that case?

And the second is, Andy, I was wondering if you could just be a little bit more specific, I guess, about the 3Q guidance.

And then what's implied for 4Q just on a per share basis?

Michael, I'll handle your first question, and Andy will handle the second one.

Relative to replacements, first of all, I think we clearly believe in our team.

We think we have a very talented team.

We think that is validated by the last -- the second quarter that's been delivered.

But having said that, we're looking at both internal and external candidates for both the Head of Sales position and the Chief Investment Officer position.

And we are looking at some, what I think, are very high-quality, high-caliber candidates.

We've engaged a search firm.

We're also mining our own network, which we think is very good.

But given the strength of our platform and the existing team, we're focused on bringing on the right people versus timing.

And we're in no rush to fill these positions.

We have a deep and talented team, and we remain focused on executing our strategic vision.

And then, Michael, turning to your guidance question, I probably -- I'm not going to hit the nail on the head with this answer, given that we -- our policy is really to give full year guidance, not quarterly.

We did try to be helpful, on one of the slides on the deck that kind of bridges you from the second quarter to the third and fourth.

The couple of things I'd highlight -- or the 3 things I'd highlight are, one, some of the step-down between second quarter and third quarter is we did execute an upsized U.S. dollar 10-year bond offering last month that turned out our revolver borrowings.

And as you can see on the guidance table, we did that a little bit earlier than we had previously assumed, taking advantage of a market window and preserving liquidity, which we think is the right thing to do for the balance sheet.

But it does have somewhat of a little drag in the quarter-to-quarter earnings.

We also will get hit with the loss of NOI and the timing delay between redeployment and those funds coming on -- back on through our development yields from some of the acquisitions we completed during the second quarter and are planned to complete in the third and fourth quarter.

And then that kind of stair-steps you down to 3Q '18.

And then lastly, the fourth quarter, we do have already signed leases, several in Northern Virginia that have signed and are commencing in late -- or a portion of which will commence in 4Q '18.

And then also, there's another large re-lease in the Santa Clara market.

It's multiple megawatts that I'm aware of coming online and kicking into fourth quarter '18 contribution that steps that core FFO per share back up for our guidance.

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

Congratulations on a very big leasing number.

I have a question about a smaller item on the property taxes, which it looks like that was a big part of the beat in the quarter.

It was a significant step-down.

Do you expect this to be the recurring rate going forward?

Or will that be stepping back up sort of more in line with where it's been historically?

And secondly, in terms of hyperscale, I was wondering what you're seeing generally outside of the Northern Virginia market.

The Northern Virginia market seems extremely strong and we hear a lot about it, but what are you seeing in terms of the scale of deployments in other locations around the country?

Sure.

Maybe I'll start off and let Bill and Chris chime in here.

On the property taxes, that's really due to proactive management, always chasing down appeals and working wherever we can, and also a bit of conservative accruals in terms of our estimates.

A portion of that, it would be nonrecurring, unless we continued to achieve on a different appeal in a different market.

They really were broken up between our U.K. portfolio and the West Coast region of North America portfolio.

So a little bit of that, I would say, is onetime in nature, but all baked into the full year guidance, we've kind of -- already incorporated.

Turning to hyperscale or scale, maybe I'll just kind of hit the tops of the waves, and guys, chime in as you see fit.

Outside of Northern Virginia, we had, in North America, scale signings, the larger -- on the smaller end, the scale signings ranged from, call it, north of 500 kilowatts to as high as 6 megawatts in Austin, Phoenix, Toronto and Santa Clara, one of which I just mentioned.

As you move over to Europe, there was some of the transactions I mentioned with the enterprise customer in London was, call it, 700 kilowatts.

And then we had other transactions in London, Amsterdam and Frankfurt, ranging the 2- to 4-megawatt each from 4 -- 3 different customers.

And then in Asia-Pacific, we had, on the smaller end, a 3 -- or excuse me, 600-kilowatt transaction from a European SaaS provider in Australia, multiple megawatt -- and then multiple-megawatt signings from some of our other customers into Hong Kong and Tokyo.

The next question will be from Nick Del Deo with MoffatNathanson.

Bill, you touched on this in your prepared remarks, but how would you describe the risk of running short of inventory over the medium term to sustain the sales momentum you've seen as of late?

I mean, is that something we should actually be concerned about?

Or do you feel comfortable with the pipeline?

Well, that's why we have acquired the land that we did in Virginia.

We acquired the land in Santa Clara.

We'll probably have some other land announcements this quarter.

So we're very focused on securing the front-end of the supply chain.

We're laying down pads on our campuses so that we can build quickly when the demand materializes.

So -- and there are some markets where the inventory is being churned through very quickly, particularly in Northern Virginia.

But that's why we're adding land.

Okay, got it.

And maybe on the colocation side, now that you've been operating them both for a couple of years, can you help dimension the magnitude of the benefit that stemmed from pairing the Telecity divestiture assets with the Telx assets?

Help us understand how valuable it is having a global presence in that business versus a regional presence?

Sure.

This is Andy, and then I'm going to pitch this to Chris to add on.

I mean, I think we're seeing more and more multi-market, multiproduct deployments.

And the customer is coming to us with, I need these many -- 8 locations across North America, Asia, Europe, of ranges of different sizes and different uses.

And we -- there's specific signing I can recall during the quarter with some of our network customers and some of our social media customers who have bought with us, not only large but also small network deployments in multiple markets, multiple geos, and I'm aware of many other transactions in the pipeline as well.

We're having -- being able to be at the table with these customers and being able to prevent -- provide a solution, be it Amsterdam or London, Ashburn or Santa Clara and Asia-Pacific's equivalents is a key differentiator relative to our competitive set, and something we would not have had or would not be able to compete with just going back a handful of years.

Chris, I don't know if you want to add on to that?

No, I'd definitely echo the sentiment on the fact that it's not just about colo, it's in the interconnection as well.

And so taking that interconnection capability and applying it to our scale portfolio has definitely broadened the solution set that we can provide to the customer base.

And it's very much a multinational type of customers coming to digital, where they land and they have the ability to expand, not only into colo but also in the scale, which is really a differentiator going forward.

And so being able to apply these services in a very seamless fashion so that not only a lot of the large clouds that we've been talking a lot about today can land their initial deployment, but they have a lot of smaller customers that need that colo capability in close proximity to their cloud node where they have the most efficient way to achieve that hybrid multi-cloud model, which a majority of enterprises are looking for.

So the culmination of all those products coming together in a very efficient manner has really differentiated Digital going forward.

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

I wanted to follow up on the hyperscale requirements and with regard or some focus on the 25-megawatt deal that was signed this quarter.

I'm just curious in terms of the nature of the requirements you're seeing and the specific markets.

Are you able to flag for us or identify the types of workloads that are driving this acceleration in demand that you're seeing?

Is it the use of AI and ML that's driving it?

Or anything specific you could point to?

Excellent question.

Thank you, Jordan.

It's a mix, right?

So inside of 25-megawatts, you can do a lot.

I would tell you that what we're seeing is there's a lot of demand for new services that are adjunct to an existing set of services.

So customers are really landing and expanding and really looking at how they can future-proof their deployment.

But the culmination of a lot of this infrastructure coming to market is not only supporting AI and some of the new ML services, but if you look at any of these major cloud operators today, I mean, they're announcing services -- a couple of services a week.

And so the way to support those services, and the fact that it's a bit of an arms race, is why they're coming to Digital.

And Bill had touched on this around the land banks that we have in place, the power that we've procured, the fact that we're master planning a lot of the infrastructure we have out there and can turn around a lot of this infrastructure in some of the shortest time frames in the market is definitely top-of-mind for these customers.

And then I would tell you the last piece around some of the workload dynamics is, it's a mash-up of services for a lot of these operators.

So as I referenced earlier, that interconnection component is also top-of-mind, not only achieving the 25 megawatts and having a line of sight to future expansion for their own needs but where their broader ecosystem of partners also are going to be placed.

And that's why you see us really master planning and looking at building some of the largest campuses that are out in the market today that are fully interconnected to support that.

We talk about this at the highest level that the cloud is a supply chain, the most efficient supply chain brought to market, which supports every workload permutation we've seen in the market today.

Just let me add to that.

So one thing that's really important to our customers, I don't think we've exactly hit on it here, but it's the ability to expand.

So not only do the customers want to be able to bid into what we have built or will soon have built, but they want to be able to look and see that there's room for their growth on a campus, and that's either in the existing facility or in a building next door.

And that's I think one thing that Digital provides that many of our competitors can't offer.

And it goes to our point that we think that scale, and particularly at the global scale, is a key differentiating factor in this business.

It's becoming more and more important to our customers.

And when you look at the scale requirements and this potential -- and this acceleration, is it -- are -- is pricing holding, would you say?

Or is it strengthening?

How would you characterize it as it relates to these various requirements?

I'd say, it definitely varies by market, as you'd expect in any real estate business.

But I think the pricing is actually, on a risk-adjusted basis, it's pretty darn good for the -- even the largest deals.

You look at the term in the contract, you look at the credit quality, and the bumps over the term of the contract and you take those returns against our weighted average cost of capital.

And so it's a very healthy spread that I don't think you can find in many other parts of the real estate world, if any.

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

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

Thank you, Denise.

I'd like to wrap up our call today by recapping our highlights for the second quarter, as outlined here on the last page of our presentation.

We advanced our top priority of deepening connections with our customers, reaching record highs in both our bookings and our backlog.

We further extended our sustainability leadership with our industry recognition as a Green Lease leader.

We delivered solid current-period financial results, beating consensus and raising guidance.

Last but not least, we further strengthened our balance sheet by terming out borrowings on our line of credit with the successful issuance of $650 million of 10-year investment-grade U.S. dollar corporate bonds.

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 you all enjoy the dog days of summer.

Thank you, sir.

Ladies and gentlemen, the conference has concluded.

Thank you for attending today's presentation.

At this time, you may disconnect your lines.