Digital Realty Trust (DLR) William Stein on Q1 2016 Results - Earnings Call Transcript

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Digital Realty Trust, Inc. (NYSE:DLR) Q1 2016 Earnings Call April 28, 2016 5:30 PM ET

Executives

John J. Stewart - Senior Vice President-Investor Relations

William Stein - Chief Executive Officer

Andrew Power - Chief Financial Officer

Matt Miszewski - Senior Vice President, Sales and Marketing

Jarrett Appleby - Chief Operating Officer

Scott Peterson - Chief Investment Officer

Analysts

Jordan Sadler - KeyBanc Capital Markets, Inc.

Jonathan Atkin - RBC Capital Markets LLC

Colby Synesael - Cowen and Company

Vincent Chao - Deutsche Bank Securities, Inc.

Jonathan M. Petersen - Jefferies LLC

Richard Y. Choe - JPMorgan Securities LLC

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Jonathan Schildkraut - Evercore ISI

Ross T. Nussbaum - UBS Securities LLC

Operator

Good afternoon and welcome to the Digital Realty First Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

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

John J. Stewart - Senior Vice President-Investor Relations

Thank you, Amy. The speakers on today's call will be CEO, Bill Stein; and CFO, Andy Power; Chief Investment Officer, Scott Peterson; Chief Operating Officer, Jarrett Appleby; and SVP of Sales and Marketing, Matt Miszewski are also on the call and will be available for Q&A.

Management may make forward-looking statements related to future financial and other results, including 2016 guidance and the underlying assumptions. Forward-looking statements are based on current expectations, forecasts, and assumptions that involve risks and uncertainties that could cause actual results to differ materially.

For a further discussion of the risks and uncertainties related to our business, see our 2015 10-K and subsequent filings with the SEC. This call will contain non-GAAP financial information. Explanations and reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.

Management's prepared remarks will be followed by Q&A session, questions will be strictly limited to one plus a follow-up, if you have additional questions, please feel free to jump back into the queue.

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

William Stein - Chief Executive Officer

Thank you, John. Good afternoon and thank you all for joining us. We had another very productive first quarter, characterized by solid execution against our strategic plan. In particular, we deliberately advanced our global footprint during the quarter, the second of the four guiding principles that we laid out at our Investor Day last October and is shown here on page two of our earnings presentation.

I'm very pleased to announce that we signed a multi-megawatt hangar lease with a hyper-scale cloud service provider in Osaka, totally pre-leasing phase one of our first project in Japan. We broke ground earlier this month and delivery is scheduled for the fourth quarter of next year.

We also announced that we established a foothold in Germany with the acquisition of a land parcel in Frankfurt. We have begun the local entitlement process and we expect to be in a position to break ground later this year and deliver our first suite in the second half of next year subject to market demand.

As you may recall, Germany and Japan have been our top two target markets. And we're very pleased with our progress during the first quarter, particularly in a manner that is consistent with our overarching objective of delivering superior risk-adjusted returns.

We also delivered solid current period financial results. Andy will take you through the details in his prepared remarks but the out-performance during the first quarter reflects consistent execution on the fourth objective here on page two achieving operating efficiencies to accelerate growth in both cash flow and value per share.

As we have explained, we have made a conscious decision not to go up the stack or compete with our customers or offer managed services. Nor do we intend to directly market to the broader array of enterprise customers and incur the overhead associated with building out the massive sales force necessary to target corporate enterprise directly.

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

Our Partners and Alliances program continued to build momentum during the first quarter, adding Sungard Availability Services as a global partner. We are very excited about this partnership, as it highlights our strategy of targeting enterprise via our partners by combining our best-in-class infrastructure with our partners' best-in-class services.

We are in discussions with several other parties about joining our Partners and Alliances program and we have added more resources to the team to support the growth of the program.

In terms of capital recycling, during the first quarter, we closed on the previously announced sale of the former Solyndra facility in Fremont, California to a core real estate institutional investor for $37.5 million or $108 per square foot at a 7.2% cap rate on our 2016 contractual cash NOI. We are still under contract on the national 4-property data center portfolio that we mentioned at our last earnings call and at our Investor Day. Due diligence is underway and we expect to close within the next several months.

Let's now turn to market fundamentals. As you can see, from the charts on page three, current construction activity represented by the green bars is most prevalent in Chicago, Dallas, and Northern Virginia. Given the sector's recent history, any uptick in supply bears watching carefully. However, absolute levels of supply should also be considered in context, which we provide here on page four.

First of all, current construction pipelines are generally concentrated in top tier national markets with high visibility on demand and pre-leasing levels are healthy. In addition, market vacancy rates within these markets are in the single-digits, and our own portfolios in these same markets are likewise north of 90% leased.

These markets have also been characterized by robust levels of leasing activity. And in each case, the level of 2015 absorption represents a multiple of two times to three times the level of current supply. Within the context of our own portfolio, we have delivered 38 megawatts of new product into these three markets over the last 12 months and our deliveries were over 94% leased on average. We would expect a similar level of leasing on our current crop of development projects upon delivery.

And now let's turn to the macro environment on page five. Global economic growth has stabilized somewhat over the last 90 days, although, the rate of growth still remains subdued.

Growth of total IT spending is likewise lackluster. As I said before, data center demand is not directly linked to job growth, household formation, or the price of oil and even the growth of total IT spending paints an incomplete picture. We have the good fortune to be levered to a subset of secular demand drivers that are both somewhat independent from and growing much faster than the broader economy as well as the broader IT industry.

Current industry trends are very favorable to our core strategy. Rather than spending more; CIOs, Chief Information Officers, are looking to stretch their IT dollar further, narrowing the focus to core competencies is the order of the day, and outsourcing of corporate IT function is being embraced as a more efficient model.

The rapid growth of cloud adoption is reflection of these same trends. IDC estimates that by 2018, 65% of companies' IT assets are expected to be located off-site in colocation, hosting, and cloud data centers, while one-third of IT staff are expected to be employees of the third party service providers. Similarly, IDC predicts that more than 80% of enterprise IT organizations will commit to hybrid cloud architectures by 2017.

These hybrid architectures require a colocation presence as well as close proximity to multiple clouds. Along with our partners, we provide the trusted real estate foundation for these deployments. The major cloud service providers are rapidly building out their compute note footprint to meet those demands. With our global foundation of data center solutions, we are uniquely positioned to support this rapid growth as we are one of the very few providers with the ability to meet these large scale requirements on a global basis.

And now, I'd like to turn the call over to Andy to take you through our financial results.

Andrew Power - Chief Financial Officer

Thank you, Bill. Let's begin with an update on Telx here on page seven. Telx generated $92 million of revenue during the first quarter, representing 10% growth year-over-year. Revenues remain split roughly 50%-50% between colocation and interconnection. From its existing 20 locations and prior to expense synergies, Telx generated $38 million of cash EBITDA during the first quarter.

Telx continues to perform at or slightly better than planned on all fronts. And we remain on track to meet or exceed our underwriting targets. Over the past 90 days, the Telx team has been focused on a few key areas within the business. First is our customers, where we continue to grow and expand our key communities and verticals within our Internet gateways.

Second is cash flow where we've been focused on the development of a commercial management team to drive additional revenue. Third is systems; we are in the process of integrating systems between the two organizations which will include a combined customer portal.

With respect to expanding our customer base and nurturing our colocation ecosystem, we have emphasized the continued development of targeted vertical and communities. During the first quarter, Telx added 35 new logos, a 30% up-tick from the number of new logos added during the prior quarter.

In addition to our focus on cloud service providers, we continue to see growth within our Internet gateways and areas such as content, wireless, and mobility services, undersea cable systems, and many other verticals that drive connectivity growth. We have been successful in enhancing the appeal of our facilities by attracting numerous undersea cable systems. We announced the Faster (11:54) and AquaComms cable systems last year and we plan to announce the signing of an additional underseas cable system within the next few weeks. We expect these efforts to continue to drive interconnection growth and offer our customer base continued diversity and global connectivity options from within our facilities.

With regard to the commercial management team, we have been very focused on revenue optimization to ensure accurate and timely billing and collection for space, power, and connectivity within our facilities. This team has increased its focus on pursuing contractual annual rate increases from our colocation customers while within their term and we're working to consolidate licensee contractual agreements across our data center platforms.

With respect to systems, we identified our target IT architecture during the first quarter and we are working quickly to consolidate these platforms, but we want to be sure that we deliver a seamless customer experience before introducing additional complexity to our systems' landscape. We're making solid headway and we expect this effort to continue as a top priority for the next few quarters.

Finally, we recognize that a Customer Portal is one of the top drivers for improving customer satisfaction to our over 1,600 customers. Telx introduced a world-class portal over four years ago to improve service capabilities to drive revenue as well as functionality allowing customers to easily discover and connect to each other. We believe the self-service storefront capabilities in this system, Marketplace, will help retain existing customers while growing the installed base with new entrants seeking the benefit from this developing ecosystem.

We hope many of you will be able to attend Marketplace Live in New York City on September 22 where we plan to unveil several new additions and upgrades to the portal. In summary, while integration is still underway, we remain pleased with the progress and the performance to date.

Let's turn to our leasing activity on page eight. We signed new leases totaling $39 million of annualized GAAP rent during the first quarter, including a $6 million contribution from Telx for space and power. In addition, Telx contributed $8 million of annualized interconnection revenue bookings during the first quarter.

Social, mobile, analytics, cloud and content accounted for approximately 80% of our leases signed during the quarter and over 90% was repeat business with existing customers. The combined organization added a total of 41 new logos during the quarter.

The weighted average lag between signings and commencements was eight months, driven primarily by the pre-lease Bill alluded on our first project in Japan. We broke ground earlier this month and delivery is scheduled for next fall. Excluding the new build in Osaka, the lag between signing and commencements was five months, in line with our customary activity.

As shown on page nine, the backlog of leases signed but not yet commenced now stands at $90 million, the bulk of which is expected to commence this year. I would also like to point out here on page nine that in response to feedback from analysts and investors, we have provided a bridge to reconcile the prior quarter backlog to the $90 million current backlog.

Turning to renewal leasing activity on page 10, we signed a little over $50 million of lease renewals during the first quarter in addition to new leases signed. The average cash re-leasing spread was up 2% with a positive cash mark-to-market on turnkey and colocation renewals, weighed down a bit by a modest cash rent roll-down on a relatively small sample size of PBB renewals during the first quarter.

As mentioned on previous calls, we do still have several remaining above-market scale leases, notably in Phoenix and in pockets of our East Coast portfolio, and we expect a couple of those to hit during the second quarter which will likely result in a cash rent roll-down during the second quarter. We expect to see positive cash re-leasing spreads in the second half of the year and for the full year we still expect to be roughly flat on a cash basis and up in the high single digits on a GAAP basis.

In general, we expect to see continued improvement in the mark-to-market across our portfolio driven by modest market rent growth and the steady progress we have made cycling through peak vintage lease expirations.

Turning to our financial results on page 11, we reported 1Q 2016 core FFO per share of $1.42, $0.07 ahead of consensus estimates. Several of the initiatives we outlined at our Investor Day designed to drive additional cash flow from our properties and leverage our scale to achieving operating efficiencies are beginning to bear fruit. And the upside during the first quarter was driven by operating outperformance as well as interest savings. Specifically, $0.01 was due to outperformance from the Digital Realty portfolio and another $0.01 was due to Telx outperformance during the quarter; $0.02 were due to lower than expected overhead. And lastly, interest expense was $0.03 lighter than expected due primarily to the timing and the pricing achieved on the term loan in January and the Eurobond in April.

AFFO per share was likewise well ahead of plan, partially driven by the (17:50) FFO line along with further reductions in straight line rental revenue. Recurring CapEx was also down significantly, although this largely reflects seasonally lighter CapEx spending and we do expect recurring CapEx to pick up over the course of the year.

As you may have seen from the press release, we raised our core FFO per share guidance from $5.45 to $5.60 to a range of $5.55 to $5.65. We raised the projected EBITDA margin by 50 basis points, again reflecting the benefit of the operating efficiencies we have been able to achieve. This is reflected on the G&A line as well at the property level, and we raised both ends of the range for our 2016 same-capital cash NOI growth guidance by 100 basis points, from 0% to 3% to 1% to 4%, or roughly 2% to 5% on a constant currency basis.

Finally, interest rates on the term loan as well as the Eurobond, both came in tighter than expected and we have revised our financing assumptions to reflect the actual capital raised to date. The forecast does still include a potential $300 million to $400 million bond offering later this year.

FX represented roughly 100 basis points to 150 basis points drag on the year-over-year growth in our reported results from the top to the bottom line as shown here on page 12. Although foreign currency headwinds are abating somewhat, the U.K. represents our largest concentration outside the U.S. The dollar is currently stronger compared to the 2015 average sterling exchange rate, and our 2016 outlook contemplates a continued drag of similar magnitude for the remainder of the year.

I would like to remind you that we manage currency risk by issuing locally denominated debt to act as a natural hedge, so only our net assets within a given region are exposed to currency risk from an economic perspective. I would also like to point out that we completed our inaugural Eurobond offering in early April. We raised €600 million, further enhanced our international hedge and reducing our non-U.S. dollar denominated net asset exposure to less than 10%.

Finally, I'd like to point out that while our global footprint exposes us to currency translation exposure, it also enables us to satisfy data center requirements of strategic customers around the world, which we believe represents a key competitive advantage.

In terms of our first quarter operating performance, same-capital occupancy slipped 10 basis points sequentially. Same-capital cash NOI was up 4.3% year-over-year. On a constant currency basis, same-capital cash NOI would have been up approximately 5%.

I'd also like to remind everyone that our 2016 same-store presentation is somewhat theoretical since we have elected to report same-capital results for 2016, as if our leases with Telx were still in place, given that Telx was previously a customer in 11 of our properties, most of which are Internet gateways that comprised a huge chunk of our stabilized portfolio.

Let's turn to the balance sheet on page 13. As previously announced, we closed on the refinancing of our global senior unsecured credit facilities in January. In the process, we were able to tighten pricing by 10 basis points, extend the maturity date by more than two years, and upsize the term loan facilities by 550 $million, including $300 million of seven-year paper.

As you can see from the chart on page 13, the refinancing effectively clears the left hand side of the maturity schedule. We have just under $300 million or less than 5% of total debt coming due before 2020.

Subsequent to the end of the quarter, we priced our inaugural €600 million bond offering at a 2.625% coupon in early April. Just to be clear, since it may not have been for everyone, 2.625% was the all-in pricing, not just the spread. We were fortunate to price within one-basis point of the all-time low in the benchmark eight-year mid-swaps rate and needless to say, we were pleased with the execution.

We presented the pro forma impact of the Euro bond issuance here on page 14 of the presentation, and as you can see the eight-year term fit perfectly in the one open slot in our debt maturity ladder in 2024.

Proceeds were used to refinance and term out borrowings on the line of credit and the current balance on the line is less than $100 million with over $1.9 billion of availability. Floating rate debt now represents less than 10% of total debt outstanding.

In addition, as you can see from the co-op box on the left hand side of the chart, the weighted average debt maturity is now 6.8 years, two full years longer than the weighted average maturity as of the end of 1Q 2015.

Terming out over $1 billion of long-term debt does have a dilutive earnings impact, but we believe locking in long-term fixed rate financing from a new source of institutional capital providers is proven financial management. Consistent with our financial strategy, we are maintaining our balance sheet well-positioned for new investment opportunities.

This concludes our prepared remarks. And now we will be pleased to take your questions. Amy, would you please begin the Q&A session?

Question-and-Answer Session

Operator

Our first question is from Jordan Sadler at KeyBanc Capital.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Thank you. Good afternoon. First question was regarding the hyper-scale cloud lease, I guess you announced one that sounds like it will commence sometime later next year in Osaka, but just curious overall, the trend has been for pretty significant leasing across the board amongst your peers. You guys had an above average quarter relative to the last couple of quarters, but this is not – we haven't really seen a spike in overall leasing volume from you guys. Yet you do have some availability and obviously a sizable global footprint. Can you talk about what you're seeing on a hyper-scale cloud requirement side if there is more to do there or what have you?

Matt Miszewski - Senior Vice President, Sales and Marketing

Yes, hey, Jordan, it's Matt, and thanks for the question. In with regard to the quarter, of course, my team, my global team is very pleased with our most recent quarter coming in around $40 million kind of as you mentioned, not to mention the welcome revenue contribution of $8 million coming from our interconnection business. It is important to remember when we talk about the current leasing environment out in the industry that we aren't really new to this hyper-scale cloud game.

In fact, while we talked in the opening remarks about the one deal that was an anchor in Osaka, we have done more deals in Q1 with hyper-scale cloud providers as well. And we have been addressing this demand for more than a few years now successfully and during that time period as well as Q1, we captured multiple multi-megawatt requirements from various, not just one, but various hyper-scale cloud service providers around the world. And from our perspective, these requirements may be a little less conspicuous in our quarterly leasing results given the diverse nature of what has become a consistent $30 million to $40 million contribution of quarterly leasing activity.

So, for instance, this quarter, Jordan, about 30% of our signings came from the top three cloud service providers, about an additional 20% came from targeted cloud providers outside of those top three, and then a bit more than 30% came from our diversified stack of social, mobile, analytic, cloud, and content accounts. It's important that we keep in mind that in addition to our quarterly wins here in the U.S. we're also successfully landing requirements in our target global markets. Not simply in Japan, in London as well which tend to be comparatively bluer oceans, where our publicly traded domestic data center, read peers, may not have a dominant presence.

And the final piece of my response would be that, my team, as you know, remains intensely committed to strong leasing fundamentals beneficial to shareholders while we keep our eye on driving this growing hyper-scale demand.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Okay. That's helpful. And just as a follow-up, in terms of capital, I see leverage ticking up to 5.3 times debt to EBITDA and at the same time we've seen some of your smaller peers cap the equity market, given sort of the performance of the stocks and sort of the strong fundamentals seen in your sector. So, how are you guys thinking about equity here?

Andrew Power - Chief Financial Officer

Hey, Jordan, it's Andy. So the tick-up was 5.2 times to 5.3 times, but I think I got the gist of your question. So our funding strategy for the year remains the same, the base case is to fund our development with our retained capital proceeds from our asset sales and our debt raises, which are largely finished now.

With that funding strategy, we see our leverage throughout each and every quarter of the year between that targeted 5 times to 5.5 times net debt to EBITDA, so right around target levels. In addition right now we have less than $100 million on the revolver. Now, if the facts change and if we see an opportunistic investment opportunity, we will certainly look to issue equity similar to we've done in the past.

Operator

The next question is from Jonathan Atkin at RBC.

Jonathan Atkin - RBC Capital Markets LLC

Yes. So I was interested in Japan and Germany and what you were doing staffing wise, whether it's sales operations or other as you have obviously done leasing in one market and are going to be developing in another?

Matt Miszewski - Senior Vice President, Sales and Marketing

Thanks, Jonathan, for the question. With regard to both Japan and Frankfurt, as you know, we have got an EMEA team as well as an Asia Pacific team and in Asia Pacific as we announced last quarter, we brought on a new Managing Director in Ted Higase to be able to help us make sure that we hit that market extremely well. His background in Japan will coincidently or maybe not so coincidentally help us out a great deal in making sure that the Asia Pacific sales team has a head start and being able to hit the demand in Japan.

Similarly in Europe, Wendy Will is our Managing Director for the EMEA team and has the ability to help that team hit new markets including the new markets that we see in Germany. We've got a sufficient staff and leadership employees in EMEA from a sales and sales operations perspective to be able to hit that demand quickly and we have been monitoring the demand pipeline for Germany for quite some time and we've got a significant buildup pipeline that we are ready to clear.

Jonathan Atkin - RBC Capital Markets LLC

And then on the topic of Germany, I think there was a big German bank that was in your top 20 customer list that I don't see this time around, so I was wondering given that situation, the more broadly, if there's any, commentary on churn and customers that are coming in and out of that top 20 list?

Andrew Power - Chief Financial Officer

Sure, Jon, this is Andy. So that change in the customer list, you saw a German bank disappear and you saw HP Enterprises gain some exposure on our top customer list. So essentially that institution transferred over to HP and is essentially outsourcing via that route.

Operator

The next question is from Colby Synesael at Cowen and Company.

Colby Synesael - Cowen and Company

Great. Thank you. If I'm reading your disclosures properly, it looks like about $7 million of the leasing tied to TKF was tied to power enhancements. And I was hoping if you could talk about that a little bit, maybe what markets and if you had to do anything from an investment perspective to enable that and are those types of opportunities pretty prevalent in the business?

And then I actually just had a fairly high level question maybe more of an educational one for everybody on the call. Can you remind us what's happening with the GICS code change later this year and what if any impact you could see that having on DLR as a stock? Thanks.

Matt Miszewski - Senior Vice President, Sales and Marketing

Yes, thanks and great question. And there was a good deal of leasing in particular in one of our markets in the Central region, one of our great campuses in Chicago, where it was power – we'll call it power enhancements, but basically driving additional density into the floor space that's already taken by an individual customer.

We think these are fantastic wins for us. From an economic perspective, they're fantastic for us, from a power perspective, they are very good for us, even from a relationship with utilities that we do business with, it increases the utilization of the power that's committed by those individual utilities and we do see density plays continue to play out throughout our portfolio where we can increase the stickiness of those individual customers in our facilities by bringing them additional power.

It's also a great signal that our customers are doing well. In this case, this customer's doing extremely well and is taking power at a rate that we didn't anticipate, but it actually ended up helping a great deal.

Andrew Power - Chief Financial Officer

Hey, Colby, on your second question, and by far no one in this room is an expert on that topic, but essentially, the REIT sub-segment on financial exchanges is coming someone out of the shadows of being grouped with other financial services companies, such as the big banks and will be a standalone component of the indexes. There has been a lot of research reports out and market chatter with the thesis being that there'll be additional focus, attention and we hope capital inflows into REITs in general and especially in the Digital Realty stock.

Operator

The next question is from Vincent Chao at Deutsche Bank.

Vincent Chao - Deutsche Bank Securities, Inc.

Yes, hey, guys, just one follow-up on just – maybe a pricing question here. If you take out the $7 million of power expansion, it still seems like the base rents are going up a little bit here per square foot. Just curious if there's anything to read into that of if it's just quarter-to-quarter fluctuations, or it does seem like last few quarters we've seen a steady increase here?

Andrew Power - Chief Financial Officer

Hey, Vin, it's Andy. I think you're just seeing some of the power usage may be inflating it a little bit. I don't think we've seen any rent spikes in any particular market. We think our rents are still running healthy and support our development yields of the 10.5% to 12.5%. We see rents on a comparable basis kind of staying flat to having very modest increases right now.

Vincent Chao - Deutsche Bank Securities, Inc.

Okay. Thanks for that. And then just another question on the pipeline, the development pipeline, I think it's ended total active development pipeline just under $1 billion as of the end of the quarter. Where do you think that'll stabilize out? I mean, will this grow to $1.5 billion at some point or is there some limit on how much you'd grow that to? And then just on the yields that you're showing on that page, they seem like they're down from last quarter. I was just curious to get some commentary on that.

Andrew Power - Chief Financial Officer

Sure. So, Vin, the guidance yields are roughly 10.5% to 12.5%. It's really just a function of when you bring on new projects, how leased they are and if the initial yields are a little lower, it depends on the market. But all in all, we see the yields kind of still with our bogey.

In terms of the total size of pipeline, we haven't seen anything right now that's going to have a massive shift or increase in our pipeline. We still have that consistent amount of annual spend. The one point I would clarify though is, while we have $540 million of remaining spend for these projects, some of this is pre-leased, over half of it actually, and some of it is speculative. We're actually only contractually committed to finish roughly $380 million of that, so if the music did stop and there was oversupply delivered to any market, that would represent like 0.3 turns of debt to EBITDA, so our balance sheet leverage would still be in check. And as I mentioned before, we have $1.9 billion of availability on our revolver, so no crisis would ensue.

Operator

The next question comes from Jon Petersen at Jefferies.

Jonathan M. Petersen - Jefferies LLC

Oh, great, thank you. So, I just wanted to follow up on the hyper-scale lease that you guys signed. And I'm just curious what these conversations are like with these cloud guys. Obviously, you and your peers have been signing a lot of leases. So, I'm just curious when you sit down in meetings with them, is there so much demand that they're just scrambling to try to get as much space as they can or are these more strategic expansions, just trying to get into new markets and the business will grow into it? Just trying to get a sense of whether it is just one big wave, or whether this is just to meet the current demand out there and that's going to continue?

Matt Miszewski - Senior Vice President, Sales and Marketing

Yes, I think it is a little bit of a combination of both of those. And it depends on which one of the hyper-scale providers we're talking to and how far along they're in their planned execution and then what type of visibility they have into their own demand. And that really is a little bit different obviously from cloud service provider to cloud service provider. A number of them have had advance plans and it meets with their advanced planning. A number of them have seen a radical shift in terms of the demand coming to them and so in their hot markets which happen to line up with some of our hot markets, they want to occupy as much space and power as they can because they know that they will burn through it and utilize it.

So, it really does depend. I would say about half and half amongst the cloud providers in terms of the current large amounts of deployments that they're going through to hit their current set of demands, but also to make sure that they understand they can cover demand that they historically might have missed because they didn't have inventory in market.

Jonathan M. Petersen - Jefferies LLC

And I guess as my follow-up in terms of the decision they're making to lease space rather than build it themselves, obviously some of these guys like Amazon and Microsoft have the scale to do it themselves and they do. Is the reason that they're doing more leasing just because they need the space and you guys already have entitled space, so it's just easier or is there a strategic reason that they would want to be in a third-party leased facility?

Matt Miszewski - Senior Vice President, Sales and Marketing

Yes, there's a few of them and you can see that a number of these folks have actually done some of the builds themselves in the past. I would say part of that past activity was because of slow changes to the multitenant data center environment to adjust to their needs. I think over the past six months they have been satisfied that multitenant data center providers like us have the ability to hit their needs and their capital is better spent focusing on the strategic imperatives that they have in front of them. So while they may have hit a gap with their own builds, they all have sort of come to the realization that leasing is something that they need to not just explore but execute on. Jarrett...?

Jarrett Appleby - Chief Operating Officer

Yes, and just to build on the architecture trends, we talked about multi-cloud and hybrid cloud. It's really important for these cloud service providers to have colocation and interconnection on the campus as well. So I think this is a trend that you're seeing, a value proposition that we can, that they LAN their compute engine and support the cloud, but then enterprises and partners can deliver private clouding connectivity right next door and that's a great value proposition.

Operator

The next question is from Richard Choe at JPMorgan.

Richard Y. Choe - JPMorgan Securities LLC

Great. Following up on that question, now that you've signed (40:08) in Japan, how should we think about the lease up rate going forward? And I guess along with that, in Germany, do you need an anchor tenant or is demand strong enough where you can kind of move ahead and the sales force is there and everything is kind of set there, demand wise to move ahead with that one?

Scott Peterson - Chief Investment Officer

Yeah. Hi, this is Scott. Good questions on that. Japan, that represents phase one and that's 100% preleased with that anchor tenant. So, future development there would be subject to additional market demand. Germany, we want to develop in conjunction with market demand, although there's a pretty strong demonstrated pipeline of demand in that market. So, I think we would feel a little more comfortable pushing forward a little more aggressively there.

Richard Y. Choe - JPMorgan Securities LLC

And I guess as a follow-up, there wasn't much leasing activity in Europe. Is that mainly due to a lack of inventory in that region?

Scott Peterson - Chief Investment Officer

Yeah. So, as you know, there's a different set of demand drivers inside that European market and you sort of nailed it on the head. In the places where we see the most amount of demand, we found ourselves out of enough inventory to satisfy that demand. So, in particular, in Amsterdam and in London, where we are currently swinging shovels or swinging hammers or a combination of both – I don't know if you're supposed to swing a shovel – but it depends on what you're doing I guess. But we are satisfying that problem in London and Amsterdam; the same thing in Frankfurt, where we did have demonstrated demand, but obviously we didn't have a presence there as well.

Operator

The next question is from Matthew Heinz of Stifel.

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Thanks. Good afternoon. Just wanted to revisit the leasing results again, and I guess just trying to figure out, if you view the current run rate of about 70 to 80 megawatts annually is translating to an acceptable level of organic growth in the scale business? Or if maybe there's an elevated tightening of your underwriting standards that we should think about?

Scott Peterson - Chief Investment Officer

So, in terms of the leasing results, what we do every year and as part of the process of making sure that we understand what our commitments are for the year, we have a very specific leasing plan that we publish and work to and we're pretty satisfied with the leasing plan that we have in front of us right now. And we're pretty satisfied that we can hit the goals that we've set out, both internally and the goals that we've set externally.

Andrew Power - Chief Financial Officer

And Matt, this is Andy speaking. So, the underwriting and returns piece of the equation really – mostly applies to bringing on new supply, where we have to build either buy land or build from the ground up.

We've got a giant portfolio with pockets of vacancy throughout different markets, where it's not – whether the deal mix are underwriting hurdle, it's about marketing, finding demand and landing in locations. So, that settle the – underwriting is not always the governor for whether a lease lands or not.

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Okay. Thanks. And then, as a follow-up, can you just give us some color on the 100 basis point increase in guidance for same-capital NOI? Is that being partially driven by the G&A improvement and kind of how does that reconcile against the lower pre-stabilized yield, is that factored in at all?

Andrew Power - Chief Financial Officer

Sure. So, those are probably separate parts of our P&L, so same-store capital for NOI is not really pick up new development contributions. Reasons for same-store or our view of increased optimism on same-store drove the results in the first quarter and what we've seen going into the second quarter. I think that's both on the top line and the bottom line.

You mentioned the bottom line is really – on a NOI basis, it's better operations at the property level. So, I think if you look through our P&L, especially in the same-store side of it, most of our expenses were flat or potentially down in some categories. So, we're running the properties more efficiently.

And then on the top line, we did have some mark-to-market outcomes that were a little bit better than we planned, which is driving some of the increase in the same-store cash NOI growth.

Operator

The next question is from Manny Korchman at Citi.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Hey. Thanks, guys. If we switch back to the Japan lease for a second, if we just think about the timing there, where they're not going to be occupying until essentially I guess early 2018 at this point touching by your development schedule, how did they think about the capacity that they need? And can we balance that against your comments about not building spec there. Do you think that you could sort of amplify the amount of leasing you could do, if you had the spec – product that are given unlikely inventory?

Matt Miszewski - Senior Vice President, Sales and Marketing

Yeah. So, hey, Manny, in terms of, just to clarify, actually I think the Japan lease will commence in late 2017. But, it's a good question, in terms of, is the demand that we're seeing not just with that particular and I assume your question applies to more than just the Japan deal and applies across the board with these types of deals that we're seeing. And how do the customers think about what their takes will be? And how do we respond to those?

We've got a really good process actually in place to understand the production capabilities that we have and how those production capabilities match up to what our customers really need, I'll talk about what our customers need. Then I'll turn it over to Jarrett to talk about the production capabilities that we have.

In terms of the way our customers look at this, they still sort of look at it as having a foot in each of these markets, in each of these buildings, in each of these facilities. That usually comes in the shape of at least one, what we used to call pod, but one scale oriented pod, sometimes two-scale oriented pods that they need in short order.

One is generally the size that they need upfront, and then they need to have visibility, so that they're not going to outgrow their needs, and they're not going to outgrow the co-lo needs that they know their customers are going to need in the hybrid cloud environment. And I'll have Jarrett answer the rest of the question.

Jarrett Appleby - Chief Operating Officer

Yeah. And I think, Manny, to build on what we just said, I think we talked about at Investor Day, the new agile product that we're rolling out globally. Once we really design two options, the power dense option that you're starting to see and the base option, which is the agility for the client. As well as once we have the shell up, we then can deliver pods, as Matt was talking about, every three months to four months. So, it gives us a lot more agility as we see demand in that market. And so, I think when you pair that, you can sell into a market and meet different customer needs on that timeline.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Maybe a question for Andy. So, Andy, if I look at slide 11 of the deck, I guess that's a walkover from consensus to actual. Maybe two questions related to that, if you were to make that left-most column not consensus, but where your expectations were, would the steps sort of be the same, so did you outperform your own expectations as well? And then secondly, how much of this was the timing shift and how much of it is going to impact the rest of the year as sort of more one-time in 1Q?

Andrew Power - Chief Financial Officer

Sure. Sure, Manny, this is Andy. I think that's your third question, but we're going to give you a pass today, because I like you so much. So, the $1.35 was roughly around our internal projections, so we're right in line, so everyone trying to – kind of these step functions kind of mirror what our internal results look like.

I would say most of these are flow through to the rest of the year, so Digital Realty NOI, Telx EBITDA. G&A, there may be some timing elements to it. Part of that's non-comp related travel consulting, fees like that.

So, if people exceed budgets in subsequent quarters, they're essentially using a budget, they didn't use in the first quarter. And then the lower interest expense, I mean that's a product of two things, the timing of when we did our capital raises and actually our execution on the capital raises.

The one thing I would caveat, it's not as simple as just taking the far right bar, and times it by four to get our full-year number. We do have some items that will reduce that full-year number and offset – are increases in revenue. One of those is that portfolio of datacenters that we have under contract and to sell, hopefully, in next month or so. That'll obviously be dilutive out of the gate when you sell $120 million-ish of assets that are income producing.

And then the second item is, we basically had the revolver balance at $600 million or $700 million for most of the quarter and then did a $600 million Eurobond. Subsequent to quarter end – and that was a fixed-rate eight-year piece of paper, which is obviously good for the balance sheet, locks in long-dated FX hedged debt, but is not as low as floating rate revolver debt.

Operator

The next question is from (sic) Jonathan Schildkraut from Evercore ISI.

Jonathan Schildkraut - Evercore ISI

Just call me Jeff. Listen, thank you for taking the questions. So, I guess, I asked almost the same question last quarter, but I'm still very interested, and really understand about the progress to keep getting another quarter under the belt of having both Telx and also sort of large campus datacenters and the interplay there, particularly in driving the cloud enterprise ecosystem. So, I'd love to get a little perspective on how that's coming along.

And I guess as a sort of sub-question there, Jarrett gave some good color I think in an earlier response about why the hyper-scale guys are interested in your assets, given the ability to drive that connectivity there as well. But, I'd be interested I guess sort of on the opposite side as to hear about the enterprises coming into connect with the scale cloud guys.

And you did call out the $7.5 million of incremental interconnection fee that you were able to book off of Telx this quarter. And it would be good to get some perspectives, I don't know what it was in the fourth quarter or what it might have looked like a year ago, but is this a number that was in acceleration, in line et cetera. Thank you.

Andrew Power - Chief Financial Officer

Hey, (sic) Jonathan, this is Andy. I'll take the first part, and then I'll open it up to the team to answer.

The Telx update integration, what you call it, we're making very good progress, as you can see from the numbers in the Investor Presentation. We're on track and it has to exceed our expectations from our initial underwriting.

As previously mentioned on prior call about our investor committee improving Telx expansion under our Ashburn campus, we've now started the pre-sale activity and we should have the doors open there, come September I think you can expect some additional new market expansion done full – throughout the remainder of the year.

On the West Coast, well, we've been fortunate enough to sign a subsea cable, which we think will enhance our Telx – the attractiveness of our Telx footprint and our entire footprint in that market. We're also looking – we're expanding our footprint in Atlanta, where we've been very successful at 56 Marietta. So far so good, as it relates to Telx.

Just not to jump around, but from our interconnection revenue line item, we're tracking year-over-year on just that revenue component, north of 10%, I think it was close to 11%; and then quarter-over-quarter, I think it's well about 2%ish, just for interconnection revenue. And then, I'll turn it over to the team to answer your middle question.

Scott Peterson - Chief Investment Officer

Hey, (sic) Jonathan, Amy, whatever your name is today, really quick on the first part of your question, hopefully to give you a little color on what Andy said and some pretty concrete examples of where we see the combination really coming together quite impressively.

We've been to a number of events where we bring both teams together to address customers. I would say it started very actively with PTC, we've got ITW coming up and we've been at a number of events in between. And what's interesting is the reaction from our customers has been absolutely fantastic. So, not only have they thanked us for coming together, for giving them in essence, one throat to choke for all of their scale, co-lo, cross connect and other services' needs.

But we've seen a number of them actually start to change their own individual organization structure to come to us in the same way that we are now coming to them all in one. So, we've seen – I've now seen this last week, the fourth large cloud service provider make a decision to consolidate their network folks with their datacenter folks to make sure that they're coming to market the right way. So, I don't know – I'm not claiming credit, if that's because of what we did, but I'm letting you know that it's landing pretty well, that Telx and large campus together.

Let me get to the heart of what I think Andy turned it over to me for, which is why hyper-scale is coming into Digital Realty, in particular with our set of assets. There's a couple that Jarrett has talked about individually.

One is, first of all, we get hyper-scale, we've been doing hyper-scale before someone truly turned it hyper-scale, we've been doing large deployments and we've figured out how to make a fairly profitable business out of it from the beginning. So, these folks are comfortable, that we know what we're doing and that we've got the size and scale, no pun intended to have a good counterparty on the other side of the transaction for their large compute-node needs.

But they also know that their customers' needs more than simply the ability to provide cloud services through one datacenter, five datacenters throughout the world. They also need to have co-location availability, so that those folks have the ability to land what they cannot put in the public cloud, cannot – maybe put into a private cloud, we have to put into their enterprise class datacenter and then they need connectivity to bring them all together.

We just came from our client advisory board and several of them came to us and said, we love the idea that we can now get this at one organization. They're looking for ease. They're looking to take the complexity out of the IT transactions that they have in front of them and we are able to act as that vehicle would takes that complexity away.

I would say in the future, we've had some future-oriented conversations about where they're taking the business into the future with their platform-as-a-service offerings. And they are very interested in being involved with the company that has now 1,600 customers, many of them IT service providers, many of them providing the service component, they are putting together into the applications of delivering into the future and they want to be able to offer that to their end customers. And Digital is uniquely situated to be able to provide that value proposition where nobody else can.

Operator

The next question is from Ross Nussbaum of UBS.

Ross T. Nussbaum - UBS Securities LLC

Hey, guys. Good afternoon. I'm looking at your top tenants roster and I compared it to where you were in the fourth quarter and you obviously did quite a bit of leasing with your top 20 tenants between the level threes and the AT&T's and Verizon's, et cetera. I guess I'm curious what percentage of your leasing is existing customers versus new ones at this point?

William Stein - Chief Executive Officer

I can tell you the stat from the first quarter – and the first quarter results from existing are upwards of 93% coming from our existing client base.

Ross T. Nussbaum - UBS Securities LLC

Okay. That's helpful. The second question comes on the development pipeline side; it comes from page 34 of your supplemental. Again, the development yield, I guess, on the current pipeline is 10.3%; last quarter, it was 11.2%. And I recognize I think part of that decline, I'm guessing, is you've got Osaka in there for the first time. I assume that's a lower yield, just given interest rates in Japan, you're willing to develop that at a lower yield, I'd be looking for you to A, confirm that?

But B, when I look at the development yields in the U.S. and Europe those also came down a little bit. So I'm just curious, if there's some commentary on the development yields? And then the last part of the development question, the cost went up $10 million in Singapore, and you delayed it a quarter, if you just comment on that one?

Andrew Power - Chief Financial Officer

Hey, Ross, this is Andy. So, you're right, I think the main driver's Osaka bringing down the yield. The other element, I would say is, if you bridge between the last quarter and this quarter, and I think we highlighted in one of our slides, we did deliver, I believe, 13.2 megawatts across Dallas, Chicago, Northern Virginia that was pretty well leased at an attractive yield. And we rolled on some – really the last phases of our Northern Virginia project before we have to move to our next land – and some other new phases in Chicago and Dallas, which obviously are less well leased.

And we include our underwriting estimate in this table until leasing actually comes in. And we typically outperform our underwriting, when we hit the leasing, you'll potentially see these yields go up. And then the other question was, Singapore timing...

Ross T. Nussbaum - UBS Securities LLC

And cost.

Andrew Power - Chief Financial Officer

...and cost. Maybe FX rates would be a driver there; I think we're either at budget or under budget there. I know we have the ribbon-cutting ceremony in May or June.

William Stein - Chief Executive Officer

Yeah, the ribbon-cutting's the first week of June for Singapore. We did stage it – first, we have some marketing efforts over there – but it is the second quarter and it's still scheduled for June.

Andrew Power - Chief Financial Officer

Ross, my guess is FX related on the cost side, but we'll follow-up just to check.

Ross T. Nussbaum - UBS Securities LLC

Thank you.

Operator

The next question is from Jordan Sadler at KeyBanc Capital.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Thanks. I was just hoping to follow up on the Telx run rate on the EBITDA. I guess I'm looking at the number from the deck and on a run rate basis it seems like you guys are running a bit ahead, maybe 5% ahead, of the $148 million. Can you maybe walk us through some of the puts and takes or how we should be thinking about how EBITDA flows from Telx during the year?

Andrew Power - Chief Financial Officer

Sure, Jordan. So, as a reminder, that top row was our initial underwriting when we announced the transaction back in the middle of July, the key and repeated number, $148 million plus of cash EBITDA. We are, I would say, ahead of plan for just the first quarter. Some of that beat was on the expense side that may have been a little seasonal and timing related, the timing for the annual SKO, or sales kick-off and marketing and sales initiatives around that event, actually moved. Last year it was in the first quarter; we actually pulled it forward and did in December this past year. So, again, that's probably not a number you can necessarily just annualize to get the run rate.

We are ramping additional resources on the sales and marketing front there, but all-in-all we're making good progress on the revenue and the EBITDA line item and feel like we're on track to meet or exceed our underwriting estimates.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Okay. And then separately, just in the partners and alliances program, can you maybe just give us a sense, how do you get – how are you confident in that program and the potential of that program or what gives you confidence, should I say – as opposed to the other route of sort of bolstering or building out the sales platform like some of your competitors have?

Matt Miszewski - Senior Vice President, Sales and Marketing

Yeah. Thanks, Jordan. First of all, Bill and Andy won't let me build out the sales force to address that potential demand and I am happily compliant with not building it out. And just to be clear, right, it was – it clearly is a differentiator between us and other folks in this industry. So, it was not that we didn't have some trepidation in making the decision to address a large segment of the potential revenue in what amounts to an entirely different way for us as a company.

So, that was not without personal risk on my side, but also just a little bit of risk on our side, but it's a great question. How do we feel confident that it's going – two main components make me feel confident – and the first, it always starts with our customers. I think during the last earnings call we had just come from a meeting with one of our top five customers, and the reception from us having a conversation with those C-level folks and talking to them about not competing with them and asking for their support and signing up for the partnership program and being actively involved in helping us pass leads back and forth and being true partners, gives me a great deal of confidence.

And then secondly, nothing brings confidence like pipeline, especially in my particular world. And so, the guys this year said, in the first quarter have already generated $40.1 million in pipeline inside G&A to date.

Now, obviously we do not close all of that pipeline and we're starting small and learning, make sure we get it right and we are growing the program as we move it forward; added another program to the reseller partnership program this particular quarter. We'll continue doing that with some of our key partners moving forward. But nothing gives me peace of mind like having $40 million in pipe in a brand new program.

Operator

The next question is from Jonathan Atkin at RBC Capital.

Jonathan Atkin - RBC Capital Markets LLC

Yes. So just on Telx, when you made the announcement, you talked about some of the underutilized capacity out on the West Coast and it looks like you made some progress in Seattle if I'm reading the portfolio detail correctly, but less so in Santa Clara, and maybe just more generally, can you comment on where you're seeing success more versus less in the acquired assets.

And then, the other question I wanted to ask was just on recurring CapEx, and I think Andy mentioned it's going to pick up in the latter part of the year. What's driving that? Thanks.

Andrew Power - Chief Financial Officer

Hey, Jonathan, it's Andy. So, we're seeing, I would say, increases in our occupancy utilization pretty much across the board. I'd say from a utilization standpoint, we're kind on track with our plan moving into the 70%s now. And I didn't mention we had some wins that signed that I mentioned for the undersea cable actually hasn't flowed through the utilization just yet ,and actually will probably be something that's more attractive to draw (65:29) customers to that location.

I know we see a lot of demand pointed at our Telx location in Santa Clara. And we continue to see tremendous success, be it at Cermak or 56 Marietta in Atlanta, or the New York City Trifecta. So I can't tell you one asset is pulling far, far ahead in terms of percent change from another, so it's been kind of fairly broad-based.

And then your second question was about CapEx, I think it's really just timing related, as you can see, from our AFFO reconciliation, if you take those last three line items before our AFFO, they sum less than $26 million of recurring CapEx and commission and compensation for the quarter. But if you multiply that by four that's like a – just a $100-ish million of recurring CapEx. And we have affirmed our guidance table North of $145 million for the full year. So, I think it's just a function of timing and didn't want anyone to think that that lower number could be truly run rated throughout the rest of the year.

Jarrett Appleby - Chief Operating Officer

And hey, Jonathan, to give you a little more color on the West Coast activity. We've really integrated the efforts of the West Coast team that we have had historically at Digital with the West Coast team, especially on the business solutions side with the Telx Group and a number of the properties that we've looking at, end up having enough contiguous space to be attractive to the digital traditional sales methodology.

Now the challenge with that is the Telx sales methodology has a tighter turn, a quicker return, and a faster rate of adoption. The larger deals that we see going up against the Santa Clara facility, as well as the Seattle facility, as well as the Portland facility that we have simply larger deals take a little bit longer for us to close. But the cooperation is working exactly as planned.

Jonathan Atkin - RBC Capital Markets LLC

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Stein for closing remarks.

Andrew Power - Chief Financial Officer

Thank you, Amy. I'd like to wrap up our call today by recapping our first quarter highlights, as outlined here on page 15.

First, we made significant progress towards extending our global footprint to our top two target markets with the acquisition of a land parcel in Frankfurt and the signing of an anchor lease on our first project in Japan.

We also made headway towards a strategic objective of achieving operating efficiencies to drive accelerating growth in cash flow per share. And we delivered first quarter results well ahead of our own forecast and $0.07 ahead of consensus. We raised guidance by $0.075 at the midpoint on the strength of the beat in the first quarter. And finally, we further strengthened our balance sheet with the success of refinancing of our global credit facilities in January and the completion of our inaugural Eurobond offering in early April.

In conclusion, I'd like to say thank you to the entire Digital Realty team, whose hard work and dedication is directly responsible for this consistent execution against our strategic plan. Thank you all for joining us. And we look forward to seeing many of you that at May REIT in June.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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