Digital Realty Trust's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.25.14 | About: Digital Realty (DLR)

Digital Realty Trust, Inc. (NYSE:DLR)

Q4 2013 Results Earnings Conference Call

February 25, 2014 01:00 PM ET

Executives

John Stewart - Senior Vice President, Investor Relations

Mike Foust - Chief Executive Officer

Bill Stein - CFO and Chief Investment Officer

Matt Miszewski - Senior Vice President of Sales and Marketing

Analysts

Emmanual Korchman - Citi

Ross Nussbaum - UBS

Jordan Sadler - KeyBanc Capital Markets

Stephen Douglas - Bank of America Merrill Lynch

Jonathan Schildkraut - Evercore

Vance Edelson - Morgan Stanley

Dave Rodgers - Robert W. Baird

Jon Petersen - MLV & Company

Jonathan Atkin - RBC Capital Markets

Tayo Okusanya - Jefferies

Michael Bilerman - Citi

Operator

Good day and welcome to the Digital Realty Fourth Quarter and Full Year 2013 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) In the interest of providing fair access to all participants, we do ask that you limit your questions to a single question and a single follow-up. Please note this event is being recorded.

I would now like to turn the conference over to John Stewart, Senior Vice President of Investor Relations. Please go ahead sir.

John Stewart

Thank you. Hello everyone and welcome to our fourth quarter conference call. The speakers on today’s call will be CEO Mike Foust and CFO and Chief Investment Officer, Bill Stein; Senior Vice President of Sales and Marketing, Matt Miszewski is also here with us and will be available for Q&A.

In addition to the press release and supplemental disclosure package we put out yesterday, we’ve also posted a presentation to the Investors section of our website to accompany management’s prepared remarks. You’re welcome to download the presentation and follow along throughout the call.

Before we begin, I’d like to remind everyone that management may make forward-looking statements on this call. Forward-looking statements are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual results to differ materially. Forward-looking statements include statements related to future financial and other results, including 2014 guidance and the underlying assumptions. For a further discussion of the risks and uncertainties related to our business, see our annual report on Form 10-K for the year ended December 31, 2012 and subsequent filings with the SEC. This call will also contain non-GAAP financial information. Explanations of such non-GAAP items and reconciliations to net income are contained in our supplemental package furnished to the SEC and available on our website at digitalrealty.com. Management’s prepared remarks will be followed by a Q&A session. Once again, questions will be limited to two per caller and if you have additional questions, please feel free to jump back in the queue.

And now, I’d like to turn the call over to Mike Foust.

Mike Foust

Great. Thank you very much John and welcome to the call everyone. As we discussed at our Investor Day last November, driving improved return on invested capital, especially to the lease up of existing inventory is the top priority across our organization. And I’m pleased to say that we made very good headway in that front during the fourth quarter.

As you can see on the first page of our presentation, we achieved record lease signings in the fourth quarter which also propelled the full year total for 2013 to our best year ever. In addition, we made good progress and we absorbed -- absorbing 12 of the 54 megawatts of finished turn-key inventory we had on hand at Investor Day last November.

We’re also pleased by the higher than anticipated contribution from the mid-market and colocation sales initiatives. We signed $7.7 million of annualized GAAP colocation revenue during the fourth quarter which is likewise a record high quarter for this segment. We don’t believe that the strong fourth quarter volume was an anomaly as our mid-market sales team is ramping up with management sales directors now in place. We’re encouraged by the early results and we’re cautiously optimistic on the prospects for repeat performances in the quarters ahead.

As you can see from the numbers at the bottom of page 2, base rents for our Turn-Key Flex product were lower than they had been in the recent quarters. However, this is primarily a function of market mix and was not due to rental rate erosion during the fourth quarter. Specifically fourth quarter leasing activity was heavily skewed by large cloud requirements in Ashburn, Virginia and in Dallas Richardson, Texas where absolute rent levels are lower than our global markets in Europe and Asia-Pac and elsewhere in the U.S. Most importantly from my perspective, the rents achieved during the fourth quarter represented consistent, very attractive returns in our invested capital in these markets.

Turning now to page 3, affirming of market rents was also apparent in our re-leasing spreads on renewal leases signed during the quarter. Cash year one rents and Turn-Key Flex and colo renewal leases rolled down only a little less than 1% and the overall mark-to-market was up over 3%, driven by another strong quarter of significantly positive cash re-leasing spreads and our Powered-Base Building products. This increase included but not exclusive to the renewal several of large long-term [Econex] leases. Overall, PBB lease renewals increased by 27% on a cash basis and fully 51% on a GAAP basis, reflecting long term growing cash flow for these leases.

In addition to signings, lease commencements were also healthy. The fourth quarter was our third best commencement quarter ever. And as you can see from the chart, at the bottom right of page 4, the weighted average GAAP between signing and commencement of these leases was only just over 5 months.

Moving onto page 5, the backlog of signed leases translates to an incremental $28 million of GAAP NOI in 2014, with an additional $48 million beyond that. We would remind you that this solid backlog of leases signed but not yet commenced represents contractual obligations for future rental revenue, setting stage for healthy growth and cash flows over the intermediate term.

Clearly leasing momentum picked up in the second half of the year. That momentum is carried forward into the first quarter, although slowed down a bit from the rapid pace in the fourth quarter. We feel very good about the first quarter leasing activity, particularly based on deals in the final stages of our sales process. But as typically the case, signings do appear to be back end loaded towards the end of the quarter. Overall, our team is engaged with more leased prospects than ever, representing over $3 million rentable square feet of 2014 requirements.

Now, turn to some of the demand drivers. In addition to the success of the mid-market and colocation initiatives, large scale cloud deployments represented a significant portion of our fourth quarter leasing activity as well as demand in 2014 and above. Cloud infrastructure and applications are major data center demand drivers as represented here on page six of our presentation. And these cloud requirements accounted for over 60% of 2013 lease signings. IBM Software is a prime example. And many of you have seen them in January, IBM announced plans to spend $1.2 billion to open 15 new cloud data centers worldwide. We are working with IBM Software to ensure that we remain their trusted data center partner for much of their global expansion needs.

As you can see from the top tenants’ table, in our supplemental package that IBM is now our second largest tenant, representing over 5.5% of total revenues. We believe that we have a portfolio best capable of supporting IBM’s cloud platform on a global scale, much as we have with software over the past several years of their rapid growth.

Turning now to supply, the data center brokerage practice at Avison Young recently reported that there was 20% less wholesale data center inventory available for immediate occupancy or scheduled to be delivered by the end of the first quarter relative to this time last year.

It is certainly consistent with our experience and you can see from the charts on pages seven and eight that new supply remains relatively muted in most major markets across the U.S. One change of note in the past 90 days is that 13 megawatts of Yahoo sublease space in Northern Virginia not in digital data centers has been confirmed as available and it has been reflected as such in our charts.

We have seen several recent announcements of potential competitive starts in Northern Virginia and we are keeping watchful eye on the supply and demand dynamic in that market. But the fact is that Ashburn is a national market; it accounted for over 25% of our total leasing [environment] in 2013 and due to our continued leasing success in Northern Virginia it is a market where we continue to strategically invest our capital. We have a significant pipeline of good customers in that market today.

I’d like to turn to compensation. Finally before I turn the call over to Bill, I would like to address a couple of changes to our programs. First of all, we recently restructured sales compensation program to more optimally incentivize the sales force. Specifically we’ve emphasized a handful of simple controllable lever that will more closely align their variable compensation with our corporate objectives, particularly absorption of existing inventory, current year cash returns and lease term.

In addition, our Board of Directors recently approved a new long-term incentive compensation plan for senior management based entirely on total shareholder return relative to the RMS index, as shown here on page nine of the presentation.

In recognition of the comparably low starting point following last year’s stock price performance, the hurdles have been set approximately 300 basis points higher than REIT peers with comparable relative return plans. In the entire (inaudible) we’ll forfeited if we don’t have lease performing line with the RMS over the three year measurement period.

Similar to the philosophy behind the sales compensation program, this plan has been designed to incentivize the creation of long-term shareholder value in the more closely aligned management’s interest with those of shareholders.

With that said, I would now like to turn the call over to Bill to take us through our financial performance and earnings outlook.

Bill Stein

Thank you, Mike. Good morning and good afternoon everyone. Starting with the balance sheet metrics on page 10, net debt to adjusted EBITDA was unchanged from third quarter at 5.4 times and fixed charge coverage improved slightly to a healthy 3.3 times.

The balance on our $2 million line of credit stood at $725 million at year-end. And subject to market conditions, we expect to term out most of our borrowings on the line of credit with the combination of preferred equity and to our long-term debt over the course of the year. It is not our intent to take an outside interest rate risk and we’ve entered into a swap lock to hedge a potential U.S. bond offering midyear.

Turning now to page 11, our Board of Directors recently approved a 6% dividend increase. This is the 12th dividend increase since our IPO in 2004. And as you can see on the chart, we’ve grown the per share dividend at a 14% compounded annual growth rate over that time.

As we noted in yesterday’s earnings release and as outlined here on page 12, we acquired a datacenter in New Jersey for $35 million or $327 per square-foot late last year. The property is 100% triple net leased to an AA-rated financial services tenant with over nine years of remaining lease term.

The existing debt structure was complex and the seller was required to close by year-end. As a result, the seller chose to negotiate with the most credible buyer in the industry and we were able to structure transaction at a going in yield of roughly 100 basis points over market.

The going in cash cap rate was 9%, but we closed the project with the expectation that we would retire the existing mortgage and would incur a $4 million prepayment penalty which would run through P&L bringing the effective cap rate to 8%.

We’ve subsequently reached an agreement with Prudential Real Estate Investors core fund to contribute the asset to the joint venture that we formed with them last fall. The terms will be similar to the existing structure and we expect to earn a healthy double-digit return on our 20% equity stake in the property. The joint venture will assume, but expects to prepay the in place debt and will incur the prepayment penalty. The contribution is expected to close by the end of the first quarter.

Given the current cost and availability of capital, we remain sharply focused on discipline capital allocation. At the same time this transaction is an example of how we will also continue to take advantage of opportunities that arise and are aligned with our core competencies to create value for shareholders with the judicious deployment of capital.

Turning now to earnings, our fourth quarter FFO per share came in $0.10 higher than the third quarter and the final 2013 outlook we’ve provided on the last earnings call. As shown on page 13, the primary sources of upside include $0.04 per share due to lower financing cost, the delayed execution of both the preferred equity offering and the Sterling bond issuance that we previously expected to close in the fourth quarter of 2003 along with higher than expected capitalize interest.

It is important to note here that we’re expecting a significant reduction in capitalized interest for 2014 as we slowdown our development spending and that is one of the reasons why the bid in the fourth quarter does not automatically fall through to higher guidance for 2014.

In addition, there is $0.02 of upside relative to our prior forecast due to lower bonus accruals. And this is evenly split between corporate G&A and property level compensation. In other words half was above the NOI line. Third one penny was due to other revenue and fee income which included a few small items such as a bit of development fee income and a small gain on the sale of the land parcel.

Four, we had one penny of tailwind from favorable foreign currency exchange rates during the fourth quarter. And last but not least, we have picked up a penny of savings at the property operating expense line, primarily from reduction in discretionary spending.

Our NOI margin excluding utility reimbursements were 74.2% in the fourth quarter and we expect a similar margin in the first quarter of 2014, as well as for the full year.

We are maintaining 2014 guidance that we provided in early January for core FFO per share of $4.75 to $4.90. On the heels of the beat in the fourth quarter, the year over FFO per share growth rate admittedly looks like, but I would remind you that it’s largely a function of what we believe to be prudent balance sheet management along with the dilution from the joint venture with Prudential Real Estate Investors that we closed in the third quarter late last year, I am sorry, late in the third quarter last year.

I would also like to point out that the greatest variable for guidance is financing, the timing and the cost of financings that we plan for the year. Finally as part of our ongoing commitment to excellence and financial reporting, I am pleased to report that we have recently engaged former [AMB] Chief Information Officer (inaudible) separate and integrate our existing IT systems and design leading future data center business intelligence platform.

We expect to have more report on these initiatives as they progress over the next several years. Similarly we have made several enhancements to our quarterly supplemental package in direct response to feedback from the investment community on our disclosure practices.

Most notably we provided a detailed components of net asset value calculation on page 12 of the supp. We added a second table to our same-store analysis on page 16 showing a same capital calculation which is our attempt to provide you a better measure of the true organic growth since our traditional same-store disclosure included properties under redevelopment. We have also provided the IT load by market across the portfolio for the first time on page 24.

We have added a development lifecycle schedule on page 30 through 32 with market level detail on our development pipeline and finished inventory. We have added a comprehensive schedule on page 33 of our current and historical capital expenditures, reconciling our supplemental CapEx disclosure to the footnotes in the 10-K, as well as the statement of cash flows.

And last but not least, we have provided summary balance sheets and the income statements for our unconsolidated joint ventures which allow you to ride at our pro-rata share of unconsolidated JV debt as well as NOI.

We aim to continue to improve the transparency of our financial disclosures overtime. And we welcome additional input from analysts and investors in that process. This concludes today’s prepared remarks.

I would now like to turn the call back to the operator and we will be pleased to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from Emmanual Korchman of Citi. Please go ahead.

Emmanual Korchman - Citi

Hey good morning guys. Thanks for taking the question. Just, Bill if we think about your 2014 guidance, I appreciate point on higher capitalized interest and conservative financing, but maybe you can help us bridge the gap sort of between your Investor Day presentation and the slide deck today, specifically if you look at slide 54 of the larger presentation slide five, today, it looks like your contractual NOI is much higher going into the year versus where you thought it would be. So I’m surprised that that hasn’t flown through the guidance? And similarly slide 53, which was the backlog, looks like it’s increased significantly as well, if we look at slide four today and again that didn’t seem to sort of flow into the topline may be you can help us sort of bridge that?

Bill Stein

So, NOI, we expect that Q1 NOI will be slightly higher than the run rate at the end of Q4, but the reason that hasn’t flown through the bottom of FFO is because there is probably around $0.15 of financing costs, $0.15 per share.

Emmanual Korchman - Citi

For those already in guidance, so why should that change? What we know is your contractual NOI for ‘14 is up $71 million from Investor Day that’s $0.05 and the NOI was higher in the fourth quarter than you thought. So the run rate is more aggressive. The financing, if anything got delayed and if anything is at better pricing, because rates are falling. And so how is guidance not moving up? We’re just taking your numbers.

Mike Foust

Well, and this is Mike. And on one hand, the financings are occurring later than we had anticipated. And we’re also being conservative in our outlook since it is early in the year.

Emmanual Korchman - Citi

So that should be accretive right, this is happening later to more accretive the guidance, your NOI is at least [$0.05] higher today than where you thought it was in the Investor Day? So, is the 475 to 490 just not a good range to use anymore or is it some negative offset that’s happened that you are not telling us about?

Mike Foust

No, we expect leasing was higher on Investor Day than it is today obviously, because we leased up a lot of space in the fourth quarter.

Emmanual Korchman - Citi

Alright. Thanks guys.

Mike Foust

Thanks Emman.

Operator

Our next question will come from Ross Nussbaum of UBS. Please go ahead.

Ross Nussbaum - UBS

Hey guys, thanks for taking the question. Can you talk a little bit about the same store occupancy rate? I guess I’m trying to put the 60 bps sequential decline and the 210 bps year-over-year decline in 2013 into some perspective given what was a record growth leasing year? So what should we be thinking about for our same store occupancy in 2014? And then as part of that, can you talk about the tenant retention ratio particularly for Turn-Key which I think was 79% last year and just talk a little bit about where you expect that to be?

Mike Foust

Sure. What’s interesting to note that while we had a slight tick down in occupancy overall, if you look at the amount of space that’s leased in the portfolio, it continues to go up every quarter. So we have had occupied square-footage of 19.8 million overall this fourth quarter compared with the previous quarter of 19.55 million. So we’re bringing on more space and as that’s inventory so that inventory goes into your denominator and then as that space gets leased up we will increase our percentage occupancy. So, the good news is we continue to have net positive leasing and we’ve never had more occupied space than today. And so we expect that we will start catching up and continue to absorb that existing inventory we mentioned earlier and that will raise that occupancy.

Bill Stein

Hey Ross, I want to give you a little detail on the 60 bps in the 210 bps. So if you look quarter-over-quarter of the 60 bps, 100 bps of decline is due to delivering vacant inventory into our pool. There was plus 60 bps of increase in same store for new leasing and then there was a 30 bps decline due to terminations in the quarter. If you look at Q4 2013 versus Q4 2012 the 210 basis points we have an office building out in the East Bay which that’s the Ardenwood property we’ve had at base since our IPO. And we had a couple tenants leased in that period last year so we had 110 basis point decline in occupancy in 2013 because of that.

Again we had vacant inventory delivered that generated 40 bps decline and then terminations delivered 50 bps decline year-over-year 30 bps of that was data center and 20 bps of that was office or non-tech.

Ross Nussbaum - UBS

And just on the retention ratio do you expect it to be roughly similar in 2014 as you saw in ‘13?

Bill Stein

Yes, over 90% in 2014 is what we expect right now.

Ross Nussbaum - UBS

Thank you.

Operator

Our next question will come from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

Jordan Sadler - KeyBanc Capital Markets

Thank you, good morning. Wanted to just drill down a little bit on the middle market sales effort and what you are seeing vis-à-vis the sales funnel early in the year on that effort. It sounds like things are still good but maybe you could add some color around the number of new sales people that have been on ramped since the investor day and just what you are seeing momentum wise?

Matt Miszewski

Yes, this is -- thanks Jordan for the question. This is Matt Miszewski, happy to give you an update. We have added since the Q3 call all three of the mid market vice presidents and their staff and so we will have additions of the 15 sales assets in all of the relevant markets from a mid market perspective. So we see as though we are very close to fully staffed in the mid market space for 2014, again, we’ve got a three year target in terms of hiring rents. So there will be some additional work to be done in 2015 and 2016. But we are very close to fully staffed on the mid market side from a staffing perspective.

In terms of total pipeline, I think that I am comfortable with a number of dynamics in the mid market space coming off of a very strong $7 million plus mid market performance in Q4, I am pretty satisfied with the positioning of the pipeline coming in to the last month of Q1 to be able to hit our goals from a mid market perspective and I am also very satisfied right now with where the rates are looking for both the mid market space as well as large enterprise space not just for this quarter but for the balance of fiscal year ‘14.

Bill Stein

Well what’s interesting about a lot of our customers in the mid market space is they are not necessarily taking one or two cabinets, they are taking 2,000, 3,000, 4,000 square feet at a crack. So it’s we are ramping up very well because there are some really interesting requirements out there that this team is able to address in addition to our traditional large cloud and large enterprise and network customers. So we are very pleased on how far our prospect funnels built overall we’ve gone from 2 billion square feet of real prospects to over 3 million rentable square feet as we stand today.

Jordan Sadler - KeyBanc Capital Markets

Okay. And then a separate question, I appreciate the new disclosure I am just going to point you to page 16 on the same store capitals table. Is there any inside you could lend into the expense increases some of the lines moving around in there be it retail property operating versus RNM and property taxes just some big swings up and down any inside you could offer?

Mike Foust

We are kind of looking at, I will let Bill jump in. And if you compare the 12 months ended on the RNM item, we are looking at 86 million versus 88 million. So it’s very close.

Jordan Sadler - KeyBanc Capital Markets

Well I mean in the table below that Mike, the same capital one where you are looking at just same capital employed, it’s -- so those are -- if you look at the 12 months, once our operating expenses are up 15%, RNM is down 16% and property taxes for the full year is the more surprising one, up 21%. What would be the driver behind some of this?

Mike Foust

We discussed the property taxes on the last call, where we’re actively pursuing against the assessments, appealed against the assessments, so what happened in both Texas and California, we believe that we’re being charged twice for property tax and having property taxes included in the real estate tax. So not only are we -- assess value, so not only are we getting taxed twice, our tenants are getting taxed for the personal property and then us getting taxed again as real estate, which is not correct. And so, we are actively appealing those. But you have to pay them until you go back and get those. And we’re pretty confident that we’re going to be successful, but you have to go through as you can appreciate a long process and those appeals, again so we perceive and our tenants perceive as double counting if you will.

Bill Stein

George, specifically the two states involved are California and Texas that are taxing both realty and personally. And in the third quarter, the incremental effect was 2.4 and in the fourth quarter the incremental effect was little over 3. So as Mike said, we’re appealing those and hoping to win them. And that’s net of reimbursements from our customers.

Jordan Sadler - KeyBanc Capital Markets

Okay. Thank you.

Operator

Our next question will come from Stephen Douglas of Bank of America Merrill Lynch. Please go ahead.

Stephen Douglas - Bank of America Merrill Lynch

Great, thanks for taking my question. I guess first, you mentioned that Yahoo sublease in Northern Virginia and I’m wondering is there anything you are able to do kind of preempt that either by trying to further differentiate your product or -- in that market or prevent feeling that impact in the same way that Facebook is kind of impacted in Silicon Valley. And then I guess second, with recently announced Comcast Netflix deal, I’m wondering if you have any thoughts on kind of net neutrality and how you think that different outcomes impact your business? Thanks.

Mike Foust

Sure. As to Yahoo, that product in our competitor is very different from our POD 3.0 architecture. So, it’s very much of shared back claim for the power train or UPS and panels and electrical switchgear and also HVAC is not as modular as with our POD 3.0. So, our customers historically, and this is true in Ashburn as well, they really strongly desire the fully dedicated, UPS dedicated power and cooling. So that’s a huge product differentiator for us. We don’t believe that this sublease face will have much of an impact at all on our customers; And I think that’s -- and the customers we’re pursuing, and I think that’s reflected in the current good funnel of prospected tenants that we have.

Comcast is growing tremendously, as we can -- even before their merger announcements. And we’re seeing quite a bit of business that we’ve been the beneficiary of from Comcast. They are very big customer for Digital Realty. And we see them and their subsidiaries growing and hopefully growing with us quite actively. The kind of issues around net neutrality are probably inevitable as we need more and more bandwidth, we see Netflix is entering into agreement recently with Comcast, and I just read yesterday where they’re negotiating with other large carriers like AT&T and Verizon. So that appears to be an important trend in order to deliver low latency, very high quality customer consumer experience as we want more and more gaming, content, films, TV shows et cetera over broadband.

Matt Miszewski

Steve, this is Matt Miszewski. We’ve been very involved with obviously both Comcast and Netflix as well as the number of other content distribution networks and other providers of content. So, the Comcast, Netflix business terms were interesting. I believe that the market from time-to-time confuses what’s going on with Comcast, Netflix as a net neutrality conversation. And it’s a little bit different if you look at the actual terms of the agreement. But the one thing that it does point out is that when content providers are looking for purring arrangements, they’re looking to get out of a current set of situations that they are with the current proprietary internet exchanges that exist which highlight sort of the new Open IX initiatives starting up amongst the country in Northern America.

So, we don’t think that the Comcast, Netflix business arrangement signals anything with regard to net neutrality that’s concerning but it does signal a move towards the more open internet exchange.

Stephen Douglas - Bank of America Merrill Lynch

Got it. Thanks guys.

Operator

Our next question will come from Jonathan Schildkraut of Evercore. Please go ahead.

Jonathan Schildkraut - Evercore

Good afternoon or morning for you guys. But thank you for taking the question here. I just was trying to get a sense as to what your expectations for commencements were for this year, those that are embedded in guidance. And I do see a backlog of $61 million, based on stuff that you’ve signed already; in your guidance you’ve talked about expected of leasing of $20 to $30 million. I am just trying to understand if that implies expected to commencements of $81 million to $91 million or if there is other numbers that go into that? Thanks.

Mike Foust

In our conservative view, we’re looking at incremental income from commencements in the low 60s millions, annualized obviously that would be much higher.

Bill Stein

Annualized is over 100 Jonathan, on a GAAP basis.

Jonathan Schildkraut - Evercore

Okay, that’s helpful. If I can instead of asking a follow up actually, I have got different question. I’d also be very interested in how your progress around [fibering] your buildings together is, whether you are seeing customer demand for that and how that’s impacting the sales process? Thanks

Mike Foust

I’ll let Matt jump in. It’s been a tremendous boon. I mean it really has changed the landscape. Our buildings are already well connected by networks and now with the network ecosystem in place in all this major markets, we are able to provide a whole another level of connectivity and interconnection for our customers. And we are seeing in virtually every market customers utilizing that or we’ve got the metro providers utilizing it to deliver lift services to our customers. In fact I just came from London last week and we’ve already sold 23 pairs of dark fiber to customers and virtually every new customer in the London and connecting to Europe markets are taking dark fiber with us. So, it’s been a tremendous addition.

Matt Miszewski

Yes. And Jonathan, throughout -- we got an early start in the European market with regard to network ecosystem but also throughout 2013 in North America have primarily finished connecting up the campuses internally, connecting the campuses together. I can tell you from a sales perspective, it takes one of the concerns away from our customers in terms of easy network connectivity and then on the bottom line, it has a demonstrative impact on opportunities in the pipeline right now where customers are comparing two properties, one that is connected by digital ecosystem and one that’s not which has a multi-million dollar effect under total cost ownership. So the ecosystem process in Northern America and definitely the ecosystem process in Europe have both been tailwinds to the leasing process.

Jonathan Schildkraut - Evercore

Thank you for taking my questions.

Operator

Our next question will come from Vance Edelson of Morgan Stanley. Please go ahead.

Vance Edelson - Morgan Stanley

Terrific, thanks. Starting with your demand drivers, you talked about mid-markets and content providers; could you also describe your progress penetrating entirely new Fortune 500 type verticals that are moving to the cloud, petrochemicals and so forth or any of them looking particularly attractive given your recent experience? And then as you beef up the sales force to accomplish this if it’s going to take several years, should we expect gradual upward pressure on G&A going forward?

Bill Stein

Yes, so great question. Within the content world, obviously content continues to be king across all of our customers, not just the CDNs and the ISPs out there, but other providers of content and continues to be a heightened focus for us especially given the digital Open IX initiative, as well as the digital ecosystem initiatives. But within the Fortune 500, there is an uptick in activity in several verticals, energy being one of them. Inside our Q4 results we saw some impressive TKF numbers coming out of the energy vertical, incredible numbers coming out of the cloud vertical, which we talked about today on the call, continued performance out of financial services, but in the mid market in particular a new focus on smaller companies in the financial services industry who are interested in leveraging technology.

But due that I’d like to sort of highlight for folks are little more complicated, but our pipeline is full with opportunities in as a mid-market space, as well as a large enterprise space in retail, where base data initiatives are really the light spot of retails’ cash performance. And then healthcare internationally not in the personal identifiable health information space, but in the diagnostic space, which is something that we didn’t necessarily anticipated, but we’re happy to find both in the U.S., as well as in Continental Europe.

And if you look at G&A, we’re projecting because of our scale and our efficiencies; we are looking at G&A as a percentage of revenues as a percentage of EBITDA to stay pretty steady over the next couple of years.

Vance Edelson - Morgan Stanley

Okay. That’s perfect and then just one more demand type question, could you attempt to size for us the opportunity to capture more business from existing customers, any estimate on what portion of their total datacenter needs that currently outsourcing to you and then whether that’s slowly on the rise?

Mike Foust

So, we do see a good uptick in repeat performance. If you look at the fourth quarter numbers in the details of who we lease to, we’re very happy with what we call multisite customers. We anticipate that will increase, I don’t have concrete data on the exact share of wallet that we have in each one of those accounts, but our focus during 2013 was expanding that share of wallet and actually targeting on the front side enterprises that had international growth ambitions and or even domestic growth ambitions outside of their headquarters activity. So, multisite for us is one of the competitive differentiators because we have a 130 plus properties and we’re in 33 markets throughout the world. When we target customers that have multisite opportunities we do much better.

Bill Stein

It’s very dramatic looking at folks in cloud, financial services, IT services are various which include cloud doing multiple market, multiple continents we’ve been very, very active in 2013 and continue to be very, very active in 2014. It is a huge differentiator for us that we are really the only folks that can provide that consistent program, consistent quality of product services, contracting across so many different markets.

Operator

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

Vincent Chao - Deutsche Bank

Hey guys. Just I wanted to go back some of the comments Mike on the pricing trends; I know you attributed a lot of the downward movement to mix. But just curious it sounds like supply is also sort of stable. But just wondering if there are any markets where you are seeing incremental pricing pressure either from a reduction in demand or increase in supply? And also I had a follow-up, if you could just maybe comment on specifically what you’re seeing in Phoenix?

Mike Foust

So, I would say that we’re pretty well stabilized across the domestic markets. And we’re seeing very good pricing in Asia-Pac markets today. So I would say staying stabilized in the European market even at this point. I mean we’re not seeing blips up and down, Asia-Pac continues to be extremely strong.

Matt Miszewski

Yes. Vincent this is Matt. I did, I pull the report daily to make sure we’re on track and I look at our current fiscal year pipeline numbers in terms of pricing power and compared to the 2013 across the board and what I can characterize it is I was pleased at the result of the data that I called, now this is pipeline data so it’s certainly as we get into the negotiation process I fully expect that the pricing I am currently seeing in the pipe will constraint it’s up a little bit but even given that understanding I am very happy with where the pricing is today and given our past performance where we expect that to lend, we’ll get in leases.

Mike Foust

Yes. And Phoenix is going pretty well. We had a lot of leasing early last year we had kind of a quite period the last of couple of quarters and now the pipeline of prospects that we’re pursuing actively has grown pretty significantly.

Matt Miszewski

Yes. Vincent, we have a number of prospects that we’re pursuing in [Chickie] and Chandler in Phoenix currently and I don’t see any pricing trends that give me a great deal of concern in any of those deals that we’re chasing in Q1, Q2 and Q3.

Vincent Chao - Deutsche Bank

Okay. Thanks guys.

Operator

The next question will come from Dave Rodgers of Robert W. Baird. Please go ahead.

Dave Rodgers - Robert W. Baird

Yes, good morning out there. I guess following up on the question about rates, I assume you’re kind of talking about stabilized or lease up assets, but as you think about new development and thanks for the color on the breakdowns of yields by kind of geography. But can you talk about given the more limited pipeline and development going forward whether the yields maybe should move up as you become more selective or with the better real estate market overall are those real, you are going to comment a little bit expectation on kind of the next round of start as you see them?

Mike Foust

We are pretty pleased what we have been achieving. Certainly overall, if you look the leasing in the last quarter, so we are looking at stabilized returns between 11.5%, so we are on average and that’s unlevered that’s based on projections for the individual leases. So we look at this lease-by-lease look fully loaded.

Certainly as the mix expands in Asia-Pac that will increase. And I think as we see kind of the more stabilized situations and we are fully implemented in POD 3.0 which is a very efficient way to construct, while we have flexibility that adapt for different customer requirements. We are coming in at pretty good price on this brand new round of projects. So I think that combination will put some upward pressure on yields.

Bill Stein

Let me follow-up a little bit on that, not directly responsive, but the ROA on the company as a whole on a portfolio level will also be possibly impacted by the lease up of our existing finished inventory, which is fairly significant and as we lease up datacenter shells and we add additional thoughts. We no longer have the drag on the vacant shelf space, so both of those items will contribute to an increase in ROI on the entire portfolio.

Dave Rodgers - Robert W. Baird

That’s helpful. And then the $80 million to $90 million I think you had put in original guidance for additional CapEx this year, telling that out to page 33 on the supplement the line enhancements and other non-recurring, does that suggest the $80 million to $90 million is down from the $111 million or $112 million that you kind of quoted in ‘13 or is that an additional $80 million to $90 million on top of that number?

Mike Foust

Well it’s somewhat of a reduction from what we invested in the properties in 2013, and these are wide range of improvements replacing windows, replacing roofs, elevators adding UPS, additional UPS and additional capacity to buildings, those kinds of upgrades so it’s a wide range of activities at the properties that are non-recurring and either adding more space or replacing items like windows and roofs and elevators et cetera.

Bill Stein

You could see in the supp and I think you referenced it Dave, for the year 2013 we are showing $111.5 million and our guidance is $85 million to $90 million, so it is down.

Operator

Our next question will come from Jon Petersen of MLV & Company. Please go ahead.

Jon Petersen - MLV & Company

Okay. Thank you. Just wanted to ask a quick question on the development pipeline, the new disclosure at the Investor Day is really helpful, but I am looking at the base building construction and trying to kind of understand how to model that going forward, I know that that includes some properties that are going to go on to be developed out of Turn-Key Flex and some of them are just going to leased out at power base buildings. Can you kind of give us an idea of the kind of the breakdown of what falls into which one of those buckets and any sort of timing on when we can expect, when you guys expect to receive revenue on those investments?

Mike Foust

Generally speaking, the large majority of our business is Turn-Key, I mean that really is -- not exclusively, but I would say 80% to 90% of our leasing is fully fitted out Turn-Key data center space. And that’s both the TKF in the custom. So the customs often has other ancillary facilities like office space and testing space along with it.

So I think it is safe to say that 80% to 90% of our base building development is going ultimately toward Turn-Key. If you look at the Turn-Key in custom that’s under construction now that’s data center construction, 79.4% as we say is leased currently over 550,000 feet. And so we’ll continue as we continue to build out POD 3.0’s pod by pod that will be built out in these base buildings and continue to add to that finish inventory.

Jon Petersen - MLV & Company

Okay. All right that’s helpful, thanks.

Operator

Our next question will come from Jonathan Atkin of RBC Capital Markets. Please go ahead.

Jonathan Atkin - RBC Capital Markets

Thanks. So the connectivity offer, I just wanted to see kind of where that stands, you’ve fully built out across all three major regions and are you seeing different demand profile by region?

Bill Stein

So, we’re fully built out in our, as of early February in all of our markets here in North America our major markets. We’re fully built out in London, there we have some interesting new opportunities at variable cost to add to that. And that connectivity in London goes right into the continental networks.

So, essentially we have connectivity to our continental data centers today back to the major pairing points especially in Amsterdam, Paris and London. In Asia-Pac, it’s a little bit different [technology] of networks. So, we’re really focused on the international, inter market connectivity and for example between Singapore and Hong Kong, between the Sydney and the Melbourne bringing that connectivity between these markets.

Mike Foust

And Jonathan, the connectivity in particular in Asia-Pacific is coming as a result of customer requirements first and foremost. So again my comments about Sydney and in particular Melbourne as well as needs in Singapore and Hong Kong are really sort of developed directly from customer requirement. It had been the plan on digital ecosystem to make sure that Asia-Pac was covered to this fiscal year and we’re blessed to be able to do that at the same time that we’ve got customer request asking for that connectivity.

Bill Stein

And I will say that in Singapore with our flagship, the property there, we’ve developed quite a bit of new metro fiber connectivity through different carriers in that market. So we have a very good network architecture now of metro carrier serving our Singapore facility.

Jonathan Atkin - RBC Capital Markets

And then on the Turn-Key rent trends you talked about how geographic mix kind of influenced that more than the same markets rental trends. And looking forward would you expect to further influence of geographic mix or if the current mix that is reflected in 4Q kind of carried through the year, if that result for Turn-Key?

Bill Stein

I hold that match, but we will definitely have a different mix, because we have so many different major markets and it varies quarter-by-quarter as to the particular market mix in any particular quarter.

Mike Foust

Yes. So like I said as I take a look at current fiscal year forward looking pipeline I saw healthy pricing power in each of our markets but regionally there is pricing differential. So we need to keep that in mind but I didn’t see a disturbing trend in any of the major markets we’re involved with.

Operator

Our next question will come from Tayo Okusanya of Jefferies. Please go ahead.

Tayo Okusanya - Jefferies

Yes. Good morning over there. First of all, thank you so much for all the new disclosure that’s really, really good to see. And then question for you guys, the asset that was bought recently and contributed towards the JV, the acquisition price was in 8 cap. Could you talk a little bit about on what cap will you be contributing in towards the JV?

Mike Foust

Yes, so going in was a 9 with the debt restructuring because to make it more efficient for the JV, that cause turns it into an 8. And then…

Bill Stein

We haven’t closed on that contribution yet Tayo, we expect to do that by the end of the first quarter and I would rather not comment on the cap rate at which it is being contributed till after we closed.

Tayo Okusanya - Jefferies

Okay, that’s fair enough. And then second follow up question, the new hire for [AMB] just trying to understand a little bit better what his responsibilities are going to be and over the next one to two years whether it is some kind of the critical things you expect him to achieve for your bottom line?

Mike Foust

Just to be, it is not a hire. We have engaged Wayne, he has a firm here in San Francisco. And so we have engaged his firm. And he is going to, I think basically significantly upgrade our corporate information system. A few thing in portfolio reporting area right now basically the back half of itself that you see, a lot of that is excel based and our expectation is that data will be pooled from Yardi, which is the automated economic system that we use and use to populate the back half of that report.

And in addition some of that data will be summarized on a very frequent basis to provide real time management to exports for the executive team and the board.

Operator

Our next question will come from a follow up from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

Jordan Sadler - KeyBanc Capital Markets

Thank you. A couple of things, first on investment as we think about capitalized interest declining overtime and overall investment declining overtime, it didn’t really happened in the fourth quarter. So I am curious what timing would look like, I guess what I am showing is, it seems to me that the total CAP or committed active development increased from about 900 million at the Investor Day to about 971 million today. I am curious at what point we should expect that to tail off and how low we should expect that to get or when the low point of the year should?

Mike Foust

Well it starts the first quarter of this year. And at least over the course of this year the lowest amount of capitalized interest would be in the fourth quarter.

Jordan Sadler - KeyBanc Capital Markets

Is it just tail off consistently throughout the year?

Mike Foust

Steps down each quarter, correct.

Jordan Sadler - KeyBanc Capital Markets

Okay. And then Bill you talked about the financing timing. I am not sure if I am reading you right here, but in the guidance originally it said, not originally but now it says early 2014 for these financings to take place, but it sounded like you were looking more at a potential mid-year timing in terms of at least the swaps that you have -- the hedge that you have entered into?

Bill Stein

Well that’s correct, at least in the case of the U.S. dollar -- we have U.S. dollar bond deal in our planning and we have the swap lock expires basically July ‘15 so we would do something in the mid June to mid July timeframe to make sure that hedges appropriately effective. We would do either a sterling or preferred I suspect sometime from mid March until or blacked out in early April so that would the window for that financing assuming the markets are open and conducive. And then the final financing it could be then, it could midyear or just could be towards the end of the third quarter and that’s going to be really a function of markets.

Operator

The final question will be a follow-up from Emmanual Korchman of Citi. Please go ahead.

Michael Bilerman - Citi

Yes, Michael Bilerman, I had two follow-ups; one was just Bill to sort of a little bit on the timing on these capital raises, because it sounds like it’s later than early ‘14, from what you just said, but you given the fact that you said it’s the biggest component, the biggest variable in guidance, can you at least be very specific about sources and uses, right? So if you think about what you’ve put down in guidance call it 800 million to 1.2 billion of proceeds, about $450 million of debt rolling this year, I assume the balance, 350 to 700 is used to pay down the line at 1.6%. Obviously given the math, raising capital 5.5 to 6 and paying down the line is dilutive. But given when you do it, it’s more dilutive to ‘15 than it is to the ‘14, as you delay it. So I just want to make sure that we completely understand what’s embedded in guidance from a dilution standpoint of capital rates.

And then the second question is, the disclosure in the supplemental on the NAV components, which is extraordinarily helpful, I’m just curious, if you look at that relative to what was presented at Investor Day, there seems to be much more NOI, which given that the trends that you are talking about make sense, but a number of other asset categories changed and it would appears though if you were to put the same cap rates on the NOI that you put at Investor Day that NAV could be upwards of $5 higher than what you presented. So if you presented 54 to 63, you could be talking something like 59 to 69. I don’t know if there is other things going on in here that make it not comparable, but I wanted you to be able to go through that as well.

Bill Stein

Sure, okay. With respect to the financing, we’re assuming and again this is all subject to change based on markets. But we are assuming a preferred and a Sterling offering in the first quarter essentially. And then the U.S. dollar deal as I said would be midyear since where we’ve hedged it. In terms of -- and I think you’re looking for amounts to, so for preferred we are assuming upwards of $300 million of Sterling debt, $480 million and U.S. dollar bond deal $250 million. So, that’s our best estimate today. But again, that could change. And then you’ve asked for NAV….

Michael Bilerman - Citi

Just on the financing. So I mean based on the disclosure, I recognize how much you are rising; you’ve laid it out in the guidance and the rates that you’re targeting. What I’m trying to understand is what you’ve embedded in for the uses of that capital and the dilution associated with it that’s embedded in guidance, because you spent a lot of time talking it, the most important variable in terms of timing. And so what I want to understand is what’s actually in your guidance.

So you have $450 million of debt coming due at 5.6% this year. The only other use of proceeds could be the line of credit and if you just take your billing dollars of financing that will lease about $550 million to pay down the line. That result in a lower payback rate than what your raising the capital. So, I’m just trying to figure out based on that guidance you gave, how much dilution have you embedded in for capital raising?

Bill Stein

Right now all of the new capital is going to pay down the revolver. That is obviously are very modest rate, (inaudible) so that’s where the dilution is. And then revolver has been taken up over the course of the year as we complete our construction program which is what’s in the -- was about in the guidance.

Michael Bilerman - Citi

Okay. And then on NAV how does it compare Investor Day to today, it does look like there is additional other assets and obviously the NOI is very higher, so if we were to take the same cap rates is that the right math to do?

Bill Stein

Right. So there is about $26 million of increase in annualized NOI growth from Q3 to Q4. There is $14 million increase in NOI in the fiscal year ‘14 backlog. There is $500 million plus of CIP related asset value. And that’s really the upside potential slide that we’ve presented and then there is a $300 million increase in debt which would obviously from the NAV.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. We thank everyone for joining today’s conference call. You may now disconnect your lines.

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