Digital Realty Trust Inc (DLR) 2018 Q3 法說會逐字稿

Good day, and welcome to Digital Realty's Third 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.

Thank you, Andrea.

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 third quarter results.

First, we followed up our record bookings in the prior quarter with our second-highest, and our backlog reached another high-water mark.

Next, we announced our entry into Latin America.

Third, we beat consensus by $0.01, and we remain on track to deliver double-digit growth in AFFO per share for the third time in the past 4 years.

Last but not least, we further strengthened the balance sheet, extending our weighted average debt maturity by a full year with the issuance of $520 million of 12-year paper at $3.75 and the refinancing of our $3.3 billion credit facilities.

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

Thanks, John.

Good afternoon, and thank you all for joining us.

We had a very productive third quarter with consistent execution against our strategic plan.

Let's turn to Page 2 of our presentation.

The highlight of the quarter was the announcement of our entry into Latin America with a definitive agreement to acquire Ascenty for $1.8 billion.

Ascenty is the leading data center platform in a rapidly growing market.

Its best-in-class management team and propriety fiber network had made it the partner of choice for the leading global cloud providers and, as a result, it has the largest market share.

Ascenty's portfolio is comprised of 8 in-service, purpose-built, world-class data centers and another 6 data centers currently under construction, totaling 106 megawatts of planned capacity.

The in-service portfolio was approximately 97% leased as of September 30, while the data centers under construction were approximately 83% preleased.

Since our announcement, the Ascenty management team has continued to execute, generating additional fiber revenue and leasing another 3.6 megawatts in October to 2 leading global cloud providers, bringing their year-to-date leasing tally to approximately 30 megawatts.

Given its high-quality portfolio, Ascenty serves a blue-chip customer base of 140 logos, including the leading global hyperscale cloud providers.

In fact, investment-grade or equivalent clients account for over 90% of revenue.

In addition, more than 75% of Ascenty's contractual cash rent is denominated in U.S. dollars, substantially mitigating foreign currency exposure.

I might add here that the real has appreciated by 10% since we announced the acquisition just over a month ago.

This transaction immediately establishes Digital Realty as a leading data center provider in Latin America.

Ascenty enjoys approximately 30% market share in Brazil, far outstripping its competitors.

We believe we can further accelerate the company's success, capture additional market share and expand our total addressable market by leveraging Digital Realty's global platform.

In fact, we've received a number of inbound calls from existing customers inquiring about data center capacity in Brazil since our announcement in late September.

The transaction also presents significant growth potential in a key emerging market.

Brazil has the eighth largest economy in the world, and it's the fifth most populous country, but less than 60% of the population currently has Internet access.

As this relatively young market continues to come online and as consumers, local enterprise customers and global IT service providers begin to expand their presence in Latin America, we see significant opportunities to ride this next wave of growth.

Finally, we've structured the transaction to benefit from 2 sets of partners with local market expertise and a strong track record of execution.

We are pleased to be partnering with Brookfield, a leading global asset manager with a well-established track record of investments in Brazil across infrastructure, renewable power, real estate and private equity.

Brookfield has committed to initially invest $613 million in exchange for a 49% equity interest in a joint venture expected to ultimately own Ascenty.

Brookfield has been investing in Brazil for over 100 years and is now one of the largest investors in the country with over $40 billion of assets under management.

The partnership with Brookfield provides unparalleled access, experience and resources within the market to help us grow and roll out our strategy.

In addition, Ascenty's management team led by CEO, Chris Torto, is staying with the company.

Management is rolling forward the substantial majority of its equity in the Digital Realty OP units subject to a 3-year lockup as well as a 2% stake in the joint venture with Brookfield.

This transaction is prudently financed.

We raised common equity to fund our equity contribution the same day that we announced the acquisition, consistent with our historical practice in addition to the equity contributions from Brookfield and the Ascenty management.

We've also lined up nonrecourse debt financing.

Partly due to the conservative capital structure, the transaction is expected to be approximately 2% dilutive in 2019 and 1% dilutive in 2020.

However, we expect it to be accretive over the longer term and significantly accretive to Digital Realty's long-term growth profile.

Last but not least, the Ascenty acquisition is highly strategic.

The portfolio is comprised of great assets, along with a critical fiber network run by a topnotch management team, all in a tough market to crack with significant, verified customer demand.

We spend a lot of time assessing global markets, and we see precious few opportunities around the world with such a compelling growth trajectory.

At the same time that we announced Ascenty, we also announced the pending acquisition of 424 acres of land next to Dulles International Airport for $237 million or a little less than $560,000 per acre.

This is the parcel highlighted in royal blue at the bottom of the map here on Page 3. The land purchase is consistent with our stated objective of securing our supply chain, and our cost basis compares very favorably to recent comps of over $1 million per acre, demonstrating how our global scale, balance sheet capacity and real estate heritage have further enhanced our ability to support our customers' growth in the most important data center market in the world.

Let's turn to market fundamentals on Page 4. Construction crews remain active in the primary data center metros across North America, including Northern Virginia which is, by far, the largest and most active metro in the world and through which over 70% of the world's Internet traffic passes each day.

Despite the number of competitors and shovels on the ground, on current form, we see demand continuing to outstrip supply.

Northern Virginia is also Digital Realty's largest concentration, and we own over 375 megawatts of state-of-the-art capacity in our existing portfolio, along with 74 megawatts currently under construction that are 89% preleased.

Upon closing this most recent land purchase, we will own 667 acres of strategic landholdings that will support the build-out of over 1,000 megawatts of future capacity.

In Europe, supply and demand dynamics are similarly healthy.

Global cloud providers continue to drive robust demand in the region, and multiple cloud providers have come to market for new deployments across the core metros.

Enterprise demand has also begun to pick up, particularly in London and Dublin.

Pricing is competitive, and customers remain focused on flexibility and expansion options along with differentiated connectivity solutions and a track record of operational excellence.

Market vacancy remains in check across the major European markets.

While competitors are bringing new supply to market, it is being met by healthy demand, particularly from existing customers either expanding their current footprint or looking for new partnerships for their next phase of growth.

Across the Asia-Pacific region, demand remains robust, with pockets of demand popping up in new markets along with steady demand for core markets.

Supply remains largely in check, and the complexity of local regulatory frameworks, vendor pools and even language barriers serve to limit the number of pan-regional competitors.

On balance, we believe customers view our global platform and comprehensive space power and interconnection offerings as a key differentiator in the selection of their data center provider.

Let's turn to the macro environment on Page 5. The global economic expansion remains intact, although we are mindful of the risk of a global trade war, which does have the potential to disrupt the broad-based current economic growth.

We are 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.

Given the resiliency of our industry, our business and our balance sheet, we believe we are well positioned to continue to deliver steady per share growth in earnings, cash flow and dividends, whatever the macro environment may hold in store.

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 7. We had a very strong quarter with balanced performance across regions, product types and customer segments.

The continued demand underscores the values customers see in Digital Realty.

We provide the trusted foundation powering our customers' digital ambitions.

Customers choose us for many reasons.

We offer them resiliency they can trust; we have secure, compliant and reliable data center solutions, including those powered by renewable energy; our global footprint of interconnected scale data centers and hyperconnected hubs offers a broad range of solutions when and where our customers need them; and finally, our solutions help customers manage their strategic, financial, operational and reputational risk.

During the third quarter, we signed total bookings of $69 million, including an $8 million contribution from interconnection.

We signed new leases for space and power, totaling $62 million with a weighted average lease term of 10 years, including a $10 million colocation contribution.

The total bookings number was our second-best quarter ever, close on the heels of our $94 million all-time high in the prior quarter, bringing our year-to-date total to $224 million compared to $198 million for the full year in 2017.

The $18 million combined colocation and interconnection contribution was likewise the second highest on record.

We are seeing solid traction with our Service Exchange platform powered by our unique partnership with Megaport.

This traction is partly due to the continued expansion of our key cloud destinations to include Salesforce, the largest SaaS provider and top destination requests for many of our enterprise customers.

Recent customer testimonials include a global voice solutions and service provider who reported, "We now have 10 times the bandwidth with painless provisioning to different cloud services." While a company using Digital Realty to accelerate their AI strategy stated, and I quote, "Having Service Exchange not only lowers the cost of our bandwidth by 80%, it also makes setting up virtual environments much easier." As these testimonials suggest, hybrid multi-cloud is the most sought-after and efficient architecture for the overwhelming majority of enterprise customers.

And our Service Exchange provides a simple, secure access to the most valuable ecosystems around the world.

During the third quarter, our largest transaction was a 20-plus megawatt win with a global hyperscale cloud provider who selected us due to our repeatable contractual framework, attention to detail throughout the pursuit and our ability to accommodate their future growth.

This is hyperscale, the ability to meet current demand and to provide highly sophisticated customers the ability to efficiently land and expand.

While the majority of our new business was with existing customers, we added 48 new logos during the quarter.

In addition, through our alliance partners' sales engagement, we added 8 of our partners' new end-user customers to our ecosystem.

Our enterprise segment delivered a notably strong contribution this quarter.

Key wins included a global investment bank who is leveraging Digital Realty's network density for 5 new colocation deployments that will be used to upgrade their current global wide area network; we will be providing one of the world's oldest stock exchanges with highly redundant, dual meet-me-room connectivity to their Ashburn data center deployment; a not-for-profit oceanography foundation chose Digital Realty for its colocation environment that will be used to store, analyze and distribute data in real time.

Within our network segment, key third quarter wins included an edge expansion in San Francisco and New York metro areas for a leading open digital media platform provider; a backbone expansion in New York and L.A. for a leading national provider of communication services to businesses; and new backbone and interconnection deployments in Dallas and Atlanta for a leading -- for a leader in content delivery, load-balancing and video and streaming services.

Turning to our backlog on Page 8. The current backlog of leases signed but not yet commenced reached another all-time high of $148 million.

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

Moving on to renewal leasing activity on Page 9. We signed $61 million of renewals during the third quarter in addition to new leases signed.

The weighted average lease term on renewals was 4.2 years, and cash rental on renewals rolled up 0.2%, driven by healthy cash re-leasing spreads on colocation and power-based building renewals.

Turnkey re-leasing spreads were slightly negative during the third quarter, largely due to a single enterprise customer who renewed their existing footprint in our Franklin Park connected campus in Chicago while simultaneously expanding the presence in Franklin Park and establishing a sizable new presence on our Elk Grove Village campus, also in Chicago.

This transaction is a prime example of what we mean when we talk about our holistic long-term approach to customer relationship management.

We believe we have a distinct advantage when we are competing for new business with a customer we are already supporting elsewhere within our global portfolio.

And that whenever we can, we try to provide a comprehensive financial package across multiple locations and offerings, including both new business as well as renewals.

This particular transaction was a legacy Digital Realty renewal and was not one of the above market leases within the former DFT properties we've called out previously.

We do still expect these leases to roll down.

And as a result, the mix of renewal activity in any given quarter could push our cash mark-to-market into the red.

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

In terms of third quarter operating performance, overall portfolio occupancy ticked up 10 basis points to 89.5% due primarily to positive absorption in London, Chicago and Dallas.

Turning to economic risk mitigation strategies on Page 10.

The U.S. dollar strengthened somewhat over the past 90 days, and FX represented roughly a 30 basis point headwind to the year-over-year growth in our third quarter results.

We managed currency risk by issuing locally denominated debt to act as a natural hedge, so only our net assets within a given region are exposed to currency risk from an economic perspective.

In addition to managing foreign currency exposure, we also mitigate interest rate risk by proactively terming out short-term variable rate debt with longer-term fixed rate financing.

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 1% impact to full year FFO per share.

Our near-term funding and refinancing risk is very well managed.

In terms of earnings growth, core FFO per share was up 8% year-over-year and came at $0.01 above consensus.

As you may have seen from the press release, we are reiterating 2018 core FFO per share guidance.

Most of the drivers are unchanged except that we have now closed substantially all the asset sales contemplated in our plan.

We have raised our expected development spend to reflect the recent land acquisitions, and we may revisit the bond market later this year.

As you update your earnings models and begin to roll forward to 2019, please keep in mind that we expect to adopt the new lease accounting standard on January 1 of next year.

From a lessee accounting perspective, those situations where Digital Realty is the tenant, such as for corporate office space and for data centers we operate subject to a lease hold, the primary impact is that we will be required to recognize a right-of-use asset and a corresponding lease liability on our balance sheet.

We do not expect this to have an outsized impact on us, given that we own substantially all of our real estate, and we expect to gross up the balance sheet somewhere in the neighborhood of $600 million to $800 million.

From a lessor accounting perspective, where Digital Realty is the landlord, the primary impact is the indirect leasing composition costs will no longer be capitalized and will be expensed going forward.

If we had adopted the new leasing accounting standard on January 1 of this year, we estimate it would have lowered 2018 core FFO per share by $0.15 to $0.20, which should give you a good baseline as you begin to frame the impact on our 2019 estimates.

The irony is, while these accounting changes will be dilutive to our reported earnings, they'll actually be accretive to the returns on our development projects since costs that we -- were previously capitalized to our bases in that development project will now run through the P&L going forward.

At the end of the day, there is no change to the underlying economics or to our cash flows.

Last, but certainly not least, let's turn to the balance sheet on Page 11.

Over the past several months, the Digital team has consistently executed on our financing strategy of maximizing the menu of available capital options while minimizing the related costs.

In mid-June, we raised $650 million of 10-year U.S. dollars bonds at a 4.45% coupon.

In late August, our in-house team originated a $48 million 10-year secured CMBS mortgage loan at 4.3% for a joint venture property in Seattle.

In early September, we originated $212 million 5-year secured CMBS mortgage loan at 4.6% for a joint venture with Prudential Real Estate Investors.

In late September, we executed a forward equity offering to fund the Ascenty acquisition and development CapEx needs, and we expect to receive approximately $1.1 billion of net proceeds when we settle the forward sale agreements.

We also raised a $725 million private capital commitment from Brookfield, a leading global asset manager.

In early October, we opportunistically accessed the sterling bond market, raising $520 million of 12-year paper at a 3.75% coupon.

And finally, earlier this afternoon, we announced the refinancing of our $3.3 billion global senior unsecured credit facilities.

In the process, we were able to tighten pricing for the line of credit by 10 basis points, extend the maturity date by 3 years and upsize the availability by $350 million.

In the process, we also completed a roughly $300 million, 5-year revolving credit facility denominated in Japanese yen to fund our joint venture with Mitsubishi Corporation.

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

The success of these collective financing activities over the past several months is a reflection of our best-in-class global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers and enables us to prudently fund our growth.

As I mentioned a moment ago, we may revisit the Eurobond market later this year, consistent with our strategy of actively managing the right side of our balance sheet with an eye towards longer-duration financings across the currencies that support our assets.

As you can see from the pro forma maturity schedule on Page 12, the recent financings have extended our weighted average debt maturity to 6 years, and our weighted average coupon is 3.6%.

Net debt to EBITDA remained in line at 5.2x as of the end of the third quarter and fixed charge coverage remained healthy at 4.1x.

Roughly 40% of our debt is non-U.

S. dollar-denominated, acting as a natural FX hedge for our investments outside the U.S. Over 85% 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.

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 outyears.

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.

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

(Operator Instructions) The first question comes from Michael Funk of Bank of America Merrill Lynch.

One quick one to begin.

So earlier today, there was some commentary on pricing trends in Northern Virginia and the impact that the negative pricing from that perspective is having on the -- on project yields.

So hoping that you as a dominant operator in that market, maybe add your perspective and the expected returns that you're seeing in that marketplace.

Yes, thanks, Michael.

Look, I'm not going to speak for the returns that our competitors are earning, but our experience over the last couple of quarters is that rents have been flat.

And that includes some 20-plus megawatt deals that we've done in each of the last 2 quarters.

I mean just something to keep in mind, we hear a lot about demand in other parts of the world, particularly Europe.

But year-to-date, absorption in Northern Virginia is more than 2x the absorption in the rest of Europe combined.

So look, I mean global scale really matters.

It's part of our differentiated product offering, and we can and do provide the opportunities for our customers around the world.

But I think the ability to satisfy their needs to both land and expand in Northern Virginia, currently on both of our campuses, we have the legacy DuPont campus and the new Digital campus we're building out, is absolutely critical.

And the Dulles land that we just acquired is a clear reflection of our real estate heritage, our DNA, and we view that as a critical piece of our supply chain going forward in our ability to continue to support our customer base.

So I mean the bottom line is Northern Virginia is a competitive market, but the current market dynamics we believe play to our strengths and enable us to achieve very attractive risk-adjusted returns.

Let me just follow up with one more quick one.

I know you maintain the guidance for a slight pressure on the rental rates and renewals for the full year, and I heard your commentary about still cycling through some of the larger DFT deals.

But thinking about fourth quarter and what we've seen year-to-date there, it seems to imply that you're expecting maybe to put at least one of those deals behind you in the fourth quarter.

Is that the correct read?

And what kind of visibility do you have on those larger renewals from the legacy DFT?

Thank you, Michael.

This is Andy.

I would say, listen, the timing of when any particular renewal gets done and over the finish line is always tricky to map to a quarter because our customers, obviously, don't necessarily march to that same cadence.

Based on, I would say, some advanced dialogue we have had with a few of our larger customers that have a handful of renewals coming up in the next several quarters and years, I think our estimation or -- is that we may get a few larger ones done in the fourth quarter.

Hence, we would have a little bit of a more cautious view to the mark-to-market which has been, year-to-date, positive 2.5% on a cash basis and I think close to 5.5-or-so percent on a GAAP basis, hence, the slightly negative on our full year guidance table.

Our next question is from Jordan Sadler of KeyBanc Capital Markets.

So I want to just touch base on something of a little bit of a disconnect.

Obviously, fundamentals, leasing, very robust.

The equity markets, not so much as it relates to data centers or at least it doesn't appear to be fully reflecting the success you guys have had this year in your stock price.

So I'm curious, how do you tweak the capital allocation model for a rising interest rate environment, given a capital intense business model like yours?

So Jordan, I think there are a couple of things.

First of all, we continue to work to drive down our build cost.

We've been quite successful with that.

But basically, the bigger the building, the more you can build, the lower you can drive your per unit cost.

And for example, in Northern Virginia, our building-out, which is almost 100 megawatts, it's 96 megawatts, that's up, and it's basically leased.

It is leased.

And we've built that in less than a year.

And so it clearly allows you to drive your unit cost down.

The other part of that and somewhat related is our vendor management initiative which -- through which we lock in our vendors on 3-year deals with fixed price contracts.

And that too, particularly, if there's some inflationary pressure, helps us keep our cost in line.

Because of our scale, we're able to buy both the equipment and power in significant bulk and similarly with land.

We bought over 400 acres of land there next to Dulles Airport at, I'd say, less than half the market cost per acre.

And I'd say the final piece of this in terms of how to function at a rising rate environment is -- relates to the balance sheet.

And it's just -- I'd say it's basic real estate fundamentals where you extend your debt, we just had a 12-year sterling deal, you fix your rates and you make sure you have plenty of liquidity.

And we just announced the refinancing of our revolver, both on upsized and reduced pricing.

So I guess what I'd say is as the competition intensifies, it's important that we continue to exploit our competitive advantages.

That's fair.

Just as a follow-up, you took down, and you mentioned, the incremental land here in Northern Virginia in the quarter.

Anywhere else where you see the need to backfill inventory in terms of land in a significant way?

Yes, absolutely.

So -- and I think we announced Sydney in this earnings release.

We're looking at a couple of other markets in Asia as well as Europe where we're going to be adding land.

I think we're in pretty good shape in the U.S.

Our next question is from Jonathan Atkin of RBC Capital Markets.

So a couple of questions on international.

So in Brazil, the sizes of those deployments are -- they seem a bit modest given the size of the opportunity and, essentially, its leadership position in that market.

And so I'm wondering, when do you anticipate that the deal sizes might get larger in Brazil as they have directionally in Australia, Europe, and the U.S.?

And then elsewhere in the region, curious about just any updated thoughts on Mexico and [Kiel] and other assets around there and how that might fit into your strategy.

And then, finally, if you could update us on the Japan joint venture and where things stand there.

Hey, Jonathan, this is Andy.

I'll tackle the second -- I'll tackle the first of, I think, kind of 3 in here, and I'll toss it to Bill, and he can toss it back to me if he likes.

So first, on the deal sizes, as we mentioned, a bit of a bringdown since we announced the Ascenty transaction we've signed an incremental or, I should say, we signed, the Ascenty team had signed an incremental 3.6 megawatts to 2 different customers, which goes -- speaks to your point that these are top cloud -- global cloud service providers buying in the, call it, less than 3.6 megawatts a turn sizing.

And that's consistent with their track record for, certainly, the last 12 months.

I think that is very much comparable to their stages of growth for those similar customer profiles here in North America or Europe or Asia, for that matter, going several years back.

And we're aware of the fact that the Ascenty team has been in dialogue with several of those customers in taking out slightly larger takes.

So we expect, similar to migrations in terms of size of capacity, that the deal sizes will grow.

We're quite pleased that the Ascenty platform and team has initially landed the initial cloud on-ramp and compute nodes.

And we'll -- our hit track record is where these customers typically land is where they expand, so we're quite optimistic on that.

Maybe I'll give -- hand it over to Bill to talk about Mexico and the other market, Jonathan.

Yes.

Jon, relative to other markets in Latin America, entry there will very much be driven in response to customer demand.

We're in close dialogue with almost all of our top cloud customers, as you might imagine.

And the extent to which we enter new markets will be driven by what we hear from them.

So we're not going to embark upon a "build it and they will come" strategy as it to new markets, it will be very much driven by specific orders, if you will, from key customers.

I think it's suffice to say though, there's a high likelihood that we'd enter at least 1 new market within the next 12 months down there based on what we're hearing.

And then lastly, Jonathan, I think you asked about the -- also an update on our joint venture with Mitsubishi Corporation Japan.

I would say things are going very well on that front.

Last quarter, we announced a strategic win with a top cloud service provider through the Tokyo asset.

The capacity is coming online also in Osaka.

I think subsequent to quarter-end, we will announce a new win with a Top 5 cloud service provider on to that new campus.

I know we have a pretty long runway of growth on that campus and have seen a substantial amount of customer inquiry.

And I'd probably add Tokyo back to the list of locations where we'll be looking to continue to procure additional land capacity.

Our next question comes from Colby Synesael of Cowen and Company.

Two, if I may.

First off, on Ascenty, that deal is expected to close in the fourth quarter.

So I was hoping, Andy, you could remind us just how we should think about layering that into our models to get to that 2% dilution, including the equity raised, which is a forward deal.

How should we assume that, that actually starts to flow into the actual income statement?

And then as it relates to expansions, just piling on the last question, I think the market that Ascenty has talked about potentially going into is Chile.

So I assume that, that's the market within the next 12 months that you just referenced, but I just wanted to confirm that.

And then also just wondering what your interest is in markets like Africa as well as others such as India and so forth.

Thanks, Colby.

So you're correct, closing in the fourth quarter.

Our estimated timing is probably, call it, late November-ish.

And obviously, in conjunction with that, we'll close on a portion of the equity offering to fund our share into that venture.

We've, obviously, not given out 2019 guidance just yet given we're standing on the third quarter earnings call.

And we'll be happy to give you components of the model for '19 guidance when the full company guidance comes out.

I think the best thing I can give you is about 2% dilution in 2019, ultimately, then coming -- becoming accretive by 2021, a good chunk of that dilution due to the fact that we are mitigating risk through a nonrecourse secured debt financing that carries an interest rate double the Digital Realty interest rates.

So foregoing that near-term FFO in a risk-mitigated strategy, and you obviously, have the financing components, be it the cost of debt and the amount of shares.

So I bet you could back into the amount of EBITDA using the 3 numbers.

And maybe I'll toss it back to Bill for thoughts on some of these other international markets.

So Colby, I gather you're looking for confirmation on whether or not Chile is the next entry point down there.

And just keep in mind that when we enter a new market, we have a very rigorous process we go through here, looking at the political risk, economic risk, currency risk and everything that you expect.

And at the end of the day, it goes through our board for approval.

So I don't want to jump ahead of our board with respect to which new market we could enter next or the next one after that.

Relative to Africa, I know you're referring to a specific opportunity there that's in the market.

And you can assume that we see everything just because of our size and our history.

Again, whether or not we act is really a function of a lot of factors, and that's -- that includes how comfortable we are with the risk factors associated with that market and the opportunity.

Our next question comes from Simon Flannery of Morgan Stanley.

Bill, you talked a lot about the pipeline last quarter.

Can just update us in the various regions how the pipeline looks today?

And then, any changes in the cost of construction or other inflationary pressures given what we're seeing in the broader economy?

We actually have Chris Sharp here in the room, who runs design, and he might be able to speak to construction given an opportunity to speak.

And then we'll turn over to Andy to talk about the pipeline.

Thanks, Simon.

So just before we get to fourth quarter, maybe to recap on third quarter, we had a second best in the company's history, $69 million total bookings.

I would say it was robust and diverse, which is a great thing.

We had a marked step-up in our colo and connectivity signings on a global basis, which included a few multi-market signings, really leveraging the power of the platform.

We had a step-up in North America colo and interconnection by itself as well as EMEA, and kind of broad-based regional demand with key wins in Asia-Pacific, Europe and North America, not only the dominant Ashburn market but also in Chicago and Dallas, which is great to see.

Turning to kind of back half of the year, last quarter of the year and on to '19, I think we're seeing a continuation of similar trends on the global accounts.

We still -- we see the same customers where we've had success in the past continue to build out their footprints where they previously landed with Digital Realty and, at the same time, an active dialogue on some new market locations.

Within the enterprise and network sector, this whole past quarter, we had 48 new logos, call it 20-plus percent step-up from prior quarters, just a smidge below prior peaks on new logos, plus another 8 new logos we landed through some of our P&A channels.

So I think we're going to -- we're charting towards another strong colo and interconnect quarter as well across the board driven by some pickup in the enterprise demand as well as some new names within our network vertical, less reliant on some of the legacy network providers and somewhat some newer fiber and other over-the-top network providers.

And Chris, do you want to tackle the construction piece?

Absolutely.

Thank you, Andy.

Yes, so Simon, great question.

And it was kind of alluded to earlier by Bill with the fact that we have an industry-leading global supply chain.

And a part of that as a key element is the VMI program Bill had walked through.

But that VMI program is definitely something that's allowed us to really maintain relatively the same costs and the same delivery time lines that we have for the last couple of quarters.

I'd also try to emphasize the fact that, with the way that we've been building in larger chunks and being able to establish a longer-term relationship with a lot of the local construction teams and keeping them on jobs for a longer period of time, have been able to also alleviate any kind of spikes or mishaps in any of the construction projects that we have coming online in the market today.

But I'd also emphasize the fact that this is something that Digital has been doing for some time now.

And we have alluded to the real estate heritage of Digital Realty.

I would also allude to the heritage of being a construction company that's operated in more markets around the world than a lot of our competitors.

So that has provided us a very phenomenal opportunity to kind of consistently deliver our product offerings in some of the most economical elements possible to our customer base and meeting the stringent time lines that we're seeing from a lot of these larger and smaller customer base that's coming into our asset class.

So I would say the short answer is we don't see any spikes today, and we've really locked in a lot of the variability.

And we continue to deliver, I think, an industry-leading price point to the market today.

Do you have any way of quantifying the gap, say, in your price -- your cost per megawatt versus maybe some of these private equity new builds?

Yes, that's a great question.

It depends on the market.

There are so many variabilities, we can't really go into an apples-to-apples comparison.

But I would tell you just some of the new money coming into the market, I don't think they really realize the stringent nature of getting power to the facility and securing the right resources.

And because of the competitive dynamic that exists in the market today, I would tell you that the talent that is required to build out these facilities is becoming extremely scarce.

And that's why we continue to secure long-term contracts with the appropriate people to do the very complex installs and builds.

And that's why I'd tell you, it's really hard to place a simplistic model against their money coming in, but there are a lot of pitfalls out there that we've seen certain providers with -- PE providers and even existing providers fall into on getting that power, getting those resources allocated.

And then also the last piece that we've talked about a couple of times, the supply chain, right, making sure you have the available infrastructure in inventory to hit those time lines.

And we've been able to achieve some industry-leading time lines on delivery of shelves, delivery of data halls and just a full fit-out.

But I would tell you, it's hard to give you any specifics, but we definitely are very pleased with some of the teams that we've had in the field for some time now.

Our next question comes from Michael Bilerman of Citi.

That was close, it's Michael Bilerman.

So first question, I don't know if Bill or Andy want to take it.

If you think about the Ascenty transaction, and you talked a lot about how strategic it was, at the end of the day, the deal is going to be somewhat dilutive to '19 and '20, given that there's a lot of development that has to be leased up in that portfolio.

But you also talked about how it accelerate your long-term growth profile.

How should investors think about you doing other deals like this that could take down current growth for the potential of growth going forward?

And perhaps, within that context, quantify a little bit how much you think this deal adds to your growth profile on a standalone basis.

Hey, thanks, Michael.

This is Andy, I'll maybe start off, and Bill and Chris can chime in.

I think what we found here was a quite unique and somewhat unusual opportunity to enter a market and essentially step into a dominant market-leading position, 30-plus percent market share, where the next competitor is close to 1/3 in terms of size.

So far ahead, already landed the initial critical compute nodes and network on-ramps for the top and largest buyers of what we offer and essentially have this dominant position to deploy incremental capital to support our customer's growth.

Now what's unique about that, what went with it was that close to half of the contractual revenue was associated with a project where the building is being constructed.

So there's certainly a time line that these projects need to be delivered and contracts need to commence.

And the other unique aspect, which I touched on earlier, is the fact that we went into this with a risk mitigation approach, not only by choosing Brookfield as equity partner given their experience in the region for close to 100 years and their massive investments in that region, but we also pursued a nonrecourse piece of secured debt financing that covers the cost of debt that is double the Digital rate.

So we actively diluted our earnings to be this heavier coupon debt in order to mitigate risk.

And I would say while it's dilutive to our core FFO and AFFO per share, call it 2%, we see it closer to 1% positive in 2021.

And I would say that's on our fairly conservative underwriting, really essentially building out capacity that team in hand has today and -- when in reality, I think this platform is going to grow, not only in Brazil on to the option land they have but also in other parts of the South America as our platform.

I don't think there's a lot of other opportunities that I've seen in my career inside or outside the data center space or opportunities that I see out there today that really line up like that, like there's another one of this out there, but maybe Bill can chime in a little bit.

Well, I think this is unique.

I mean, Mike, this is, in some ways, a giant construction project, development project, with the type of growth return -- returns growth that you expect over a multi-year period.

So while we've talked about unlevered returns that are in the high teens on these development projects, the EBITDA growth that I've seen in the underwriting year 1 was 50%; year 2, about 35%.

So obviously, that's off a low base, but that's fully accretive to our growth rates on a standalone basis.

Right.

Second question, and this goes back to the minimal lease spreads that you're getting, and I recognize there are some legacy leases that are in there, but overall, the lease spreads are largely uninspiring.

And when you think about the 2 real estate sectors that both have the secular demand trends, industrial and data centers, both have a lot of development going on, a lot of demand for space.

Industrial seeing rent spreads in the 20% to 30% range, and the data centers are not seeing much at all.

And I want to know, if you guys step back from just a real estate perspective, what is the factor overall because both of these sectors have a lot of supply, that supply is being taken up, there's a lot of demand for the assets themselves and there's a lot of institutional capital that's being attracted to the space.

So why do you think the fundamental trends within the data centers are not as strong as they are sort of within industrial?

Michael, I guess, my observation, and we're not nearly as versed in industrial space as our neighbors at Prologis, so they can give you -- maybe a good thing to ask their view on the same question.

But my understanding of the industrial space is that it's an asset class that did not have rent growth for a fairly long time.

And now a little bit more on the heels of some of the technology trends and the reorganizations of the supply chain, you have this very attractive rental rate growth and, ultimately, re-leasing spreads.

Our space has certainly not been as long as -- been around as long as the industrial space, really has -- it's a composite of leases that have, call it, 5-, 10-, 15-year leases with 2% to 3% bumps for a long time.

And I agree with you, what is surprising, you're not seeing much more aggressive cash mark-to-markets.

They're not -- I wouldn't say they're -- the 2.5% year-to-date cash mark-to-market is nothing, it's still decent.

I think what you're seeing with our space is it's in a different kind of cycle relative to the in-place leases relative to some of the industrial leases.

And I also think what's a little different about our asset class in our platform is, and we've mentioned this a little bit in the prepared remarks, we try to utilize our competitive advantages.

When we have renewals with a customer, like the one that I mentioned at one of our Chicago campuses, we're happy to take a less aggressive posture in that negotiation in order to either contractually tie up at the same time or to have a happy customer that wants to grow with us.

In that example, we renewed a less than 0.5 megawatt deal with a negative cash mark-to-market but, at the same time, we grew them at that same location where they were currently and also at our Elk Grove campus, a total of 3 megawatts across both locations.

So it's kind of a win-win where you look at that, just the renewal by itself, and you would come away looking fairly negative.

But I can tell you economically, it was an attractive value proposition for Digital, and I think it was attractive for the customer because they were able to enjoy the benefits of our platform.

Our next question comes from Robert Gutman of Guggenheim Securities.

Revisiting the pipeline, but I'm focused more on the hyperscale part of the pipeline.

So you've had 2 back-to-back very strong quarters with some larger deals both times.

And I was wondering, on that aspect of the pipeline, are you seeing it really replenished or stable?

Or is that part sort of kind of taking a pause?

Secondly, a similar question on a broader scale, I'd say that the Northern Virginia market absorbed like 168 megawatts in the first half, probably 8 times the next biggest market in North America.

So the same question, really, on a broader and not Digital-specific basis, do you think this pace continues the next quarter, the next few quarters?

Or does it take a pause, which is a more rational view?

Hey, Rob.

Thanks for the question.

So on the hyperscale platform, to have 2 quarters in a row with 20-plus megawatt deals is fantastic.

I can't tell you that I'm confident there's going to be definitely another one in the fourth quarter.

At the same time, looking at the pipeline, we're in numerous active dialogues with customers in numerous markets around the globe supporting their growth.

And they're in all shapes and sizes, but when you get into the hyperscale arena with these customers, be it top 5 cloud service providers or other customers with similar profiles, the deals do tend to be larger.

And I think we -- based on what we're seeing, we think there's going to be a continuation of these customers growing and rolling out their infrastructures, not only in North America but on our other markets as well.

Turning to your Ashburn comment, so we've -- I think we've averaged -- we've done about 100 megawatts of leasing in Ashburn over the last 4 quarters or so.

And obviously, based on the fact that we bought, I believe, the largest amount of contiguous land capacity in megawatts most recently in Ashburn, I think we're big believers in the continued growth of this market.

I think we have conviction around it based on a large and growing installed base of customers who keep coming back to us for their second, third and fourth takes.

And new customers are coming to market.

When you get into these large numbers, you never know what quarter you're not going to have another record for that market.

But I think I very much like our value propositions for any customer looking to tour Ashburn because it's not just an Ashburn location.

And I think we got -- it's a conversation about the whole Digital Realty platform.

I think we have a lot of other competitive advantages relative to other peers in the market.

Chris, do you want to add on anything on either of those?

Absolutely.

Thanks, Andy.

You had highlighted this earlier, Andy, about proximity.

And I think that's something that you have to look at, particularly in that market where we have this immense data lakes or immense set of infrastructure that's already deployed there.

So that's why we're looking at this longer-term, contiguous land where you have availability of power at a very proximate location.

And there's a bunch of benefits that are afforded to a lot of our top customers and being able to provide them that.

And so that's one element of why we see it growing within that market.

And in particular, we're also seeing the fact that there's so many new applications coming to market, and we highlighted this in our Investor Day where we talked about the second generation of cloud and the next wave of cloud infrastructure, so any of the AI or any of the new blockchain and any of the new technologies coming out, Ashburn is a critical epicenter to be able to leverage the existing data to support these new services.

So they're not standalone silos, they need a consistent set of infrastructure to efficiently launch them at the global scale needed, but that's why we believe very strongly in the Ashburn market.

Our next question comes from Sami Badri of Crédit Suisse.

My question pertains to interconnection revenue growth that is decelerating on a year-over-year basis consistently through year-to-date 2018.

And on the interconnection signings, it looks like you're flat quarter-on-quarter.

And I just wanted to get a better understanding of the dynamics that are at play here.

Is it because wholesale is just predominantly taking off, diluting out kind of the effects of interconnection?

And do you anticipate a complete swing the other way around, maybe in about a year or 2 years' time, regarding interconnection business?

Is there a scenario where this accelerates?

Maybe you could give us some color on that, especially as it pertains to some of these new applications you just mentioned in the prior question.

Sure.

Thanks, Sami.

I'll talk a little bit about the most recent trends in both the interconnection revenue recognized through the P&L and also signings where we think both are going, and then I'll ask Chris to time on it -- chime in about applications and the implications from the applications.

So obviously, we had a somewhat muted year-over-year growth in the P&L from the interconnection revenue, closer to mid-single digits.

Certainly not pleased where we think that product offer can go.

I would say -- we are, I would say, a little bit in the result, you saw a little bit of headlines from some of the M&A consolidation on the telco space where those buyers are just not as demonstratively large buyers of interconnection offering when 2 of those companies have combined.

Net trends have been playing out in the M&A world for a while and now starting to flow through a little bit on the P&L.

I would say I remain optimistic for the ensuing quarters or next year in getting that revenue line item to be getting closer to high single digits, if not double digits, on the P&L.

What gives me optimism is, well, we have been putting up some more solid signings quarters, about $8 million for the last couple of quarters.

The composition of that signings have been from -- you can see some of these in the anecdotes we've put from the customer signings about multimarket, rearchitecting the backbones multisites where they need new interconnection.

And also what gives me confidence is the new logo trends, which has been trending up quarter-over-quarter each quarter this year to 48 new logos plus the 8 through our P&A channel.

And as we've seen in prior experiences, when new logos land, they obviously take initial connectivity offering.

But then they subsequently grow their customers' connectivity profile in the high teens.

So every new logo connecting within our ecosystem spurs incremental interconnection revenue.

The composition of locations, it's certainly been the dominant North America sites, including New York City market, Chicago, Atlanta and then London in Europe.

And I think one thing that's been a pretty good uplift is actually seeing a material pickup in our interconnection or connectivity booking within Ashburn, which I'd say is on the heels of launching a fairly quite successful colocation and interconnection offerings on that market.

I'm not sure if we're on to our second or third [product] dedicated to that offering.

So all these things to me, in my mind, are going to drive incremental interconnection bookings.

And maybe I'll let Chris speak to a little bit of the longer-term trends.

Absolutely.

Thank you, Andy.

Yes, Sami, so I think you're very aware of the interconnection dynamics that exist out there, but one of the other elements I would highlight is just some of the new cloud onramps that are coming into our facility.

So those have a bit of a lag in picking up and customers really starting to be able to leverage that new interconnect paradigm that's core to Digital.

And I would tell you that as the interconnection shifts to where the actual clouds reside, it's creating a brand-new opportunity, right, where you probably hear a lot of people talk about a cloud-first world.

Well, one of the things we've often looked at is we have to provide a different type of interconnect model to meet these new application demands.

And so I would tell you that with these onramps coming into our Connected Campus and getting it set up to where they can leverage the broader markets, and these are enterprise customers and it's across all the verticals, but they can leverage our Service Exchange to start to seamlessly start to consume all of these major cloud services privately in a much more secure, broader manner.

I definitely see that picking up.

And one of the things we've also referenced at a high level is just some of the newer cloud applications that we brought on to the Service Exchange where it's not just about your traditional IaaS infrastructure, it's about SaaS.

And so with the recent announcement of our Salesforce.com capability and bringing that SFDC infrastructure online so you can consume it privately as well is definitely setting us apart in making more and more ecosystems represented inside of our Digital Realty campus so that customers can get value out of that.

And so there's not a new application coming to market that doesn't have very dynamic interconnection requirements.

But I would say the last high-level element I would leave you is the most efficient supply chain wins.

So the more you can directly connect to where the actual cloud and network nodes are or where those services reside, the better off your overall performance is going to be.

And that's something that we've touted on previous calls and we talked a lot about is the fact that we've brought to market what we feel is a very unique offering with interconnected scale, which represents the best of both worlds for the cloud providers and the cloud consumers.

And so that set us up for some future growth potential around our interconnection, and we look at that very positively over the next couple of quarters.

And then my next question is just on bookings visibility.

And I really just wanted to get an idea, for example, after 2Q '18 results, how much visibility into 3Q '18 signings did you guys have?

Like would you say half of the potential bookings, you had visibility on?

I just want to get an understanding on how we could like put confidence in the long-term model as far as the same amount of bookings generated.

And like maybe you could explain to us, are the lease -- are the leasing conversations completely changing with your customers versus about 3 years ago regarding future pipeline?

And I just want to get a better feel on that.

Sure.

Thanks, Sami.

So listen, this is, as I mentioned, another robust and diverse and successful quarter on the signings, 6 of the last 7 quarters now over $50 million.

And it was -- showed strength across the product offerings and sectors.

If you look at the, call it, $69 million of bookings, the colocation and interconnection piece of the pie which was, call it, approaching $18 million, that has much more of a monthly cadence to it.

So obviously, we have an idea of the pipeline, but those deals move from upside to outlook and commit every month in a monthly close.

So that's, call it, just a little bit less than a 1/3 of the signings.

On the larger end, on the bigger side, including the 20-plus megawatt deal, that work -- that deal started well before June 30, and it probably went on for a couple of quarters.

The tricky thing about that is it's a large massive project and aligning contractually and with deliveries operationally, it takes a lot of work.

And we have a very talented sales team member taking the lead on that one but really supported by the entire Digital Realty organization to bring that over.

And that could have signed on September 1 or September 30, there's no -- nobody can control that -- the destiny of that deal.

After that, you got several in the, call it, one 5-or-so megawatts, and they're all on different tracks with different customers in different markets.

And then we also have a handful of deals in the middle.

So I think the key is maintaining a very large and diverse pipeline and making sure we are delivering for the customers and try to bring -- meet their time lines as fast as possible.

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, Andrea.

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

We advanced our top priority of deepening connections with our customers, delivering our second-highest quarterly bookings on record, and our backlog reached another all-time high.

We further extended our global platform with a definitive agreement to acquire Ascenty, the leading data center provider in the rapidly growing Brazilian market.

We, once again, delivered solid current period financial results, beating consensus by $0.01, and we remain on track to deliver double-digit growth in AFFO per share again in 2018.

Last, but not least, we further strengthened our balance sheet, raising $1.1 billion of common equity to fund our future growth and refinancing our $3.3 billion of credit facilities to extend the weighted average maturity of our debt by a full year.

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 for your interest in the company, and we look forward to seeing many of you at NAREIT in November.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.