Digital Realty Trust Inc

NYSE:DLR

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon and welcome to Digital Realty First Quarter 2019 Earnings 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] Today's call will end approximately after 60 minutes. Please note that 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.

[John Stewart, SVP of IR]

Thank you, Andrea. The speakers on today's call are CEO, Bill Stein, and CFO, Andy Power. Chief Investment Officer, Greg Wright, and Chief Technology Officer, Chris Sharp, are also on the call and will be available for Q&A.

Management may make forward-looking statements including guidance and the underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC.

This call will contain non-GAAP financial information. Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.

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

First and foremost, we continued to support our customers' global expansion requirements with an agreement to anchor development of a new campus in Santiago, Chile. Next, we demonstrated our commitment to deliver a sustainable growth for all stakeholders with efficient and socially responsible capital raises, renewable energy procurement and corporate governance enhancements. Third, we raised the dividend by 7%, our 14th consecutive annual dividend increase. Last but not least, we further strengthened the balance sheet, redeeming high coupon debt and preferred stock, lowering our weighted average coupon by 30 basis points while simultaneously extending our weighted average duration by more than half a year with the opportunistic issuance of $1.6 billion of long-term capital.

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

[William Stein, CEO]

Thanks, John. Good afternoon, and thank you all for joining us. During the first quarter of 2019, the Digital Realty team continued to effectively press our competitive advantages. We capitalized on the strength of our comprehensive multiproduct offering by capturing healthy enterprise demand across multiple regions. We also advanced our private capital initiative by closing our joint venture with Brookfield and we further strengthened our balance sheet by locking in fixed rate long-term capital at attractive coupons.

We continued to build upon our industry-leading commitment to sustainability and sound corporate governance, setting the stage for sustainable growth for all stakeholders. We further expanded our global platform with strategic land purchases in Tokyo and Singapore, as shown here on Page 3 of our presentation, and finally, we announced earlier this afternoon that we are entering Chile, Digital Realty's 14th country, with a 6-megawatt facility underway slated for delivery in the third quarter of 2020. Our strategy for new market entry is to follow our customers, and Chile is no exception. We are pleased to be supporting the growth of a leading global cloud provider who will be anchoring the first phase of our campus in Santiago.

Chile is one of the most economically and politically stable countries in South America and is considered a high-income economy by the World Bank with a clearly quantified business-friendly investment climate and the highest per capita GDP in Latin America. Our Chilean operations will be conducted by the Ascenty joint venture with Brookfield, our exclusive vehicle for data center investment in South America. It's obviously still early days since we just closed on the acquisition of Ascenty in December and the joint venture with Brookfield at the tail end of the first quarter, but and we are encouraged by our partnership with Brookfield, the early execution by the Ascenty team and the compelling growth opportunity within the region.

We also continued to advance our ESG priorities over the past few months, highlighted here on Page 4. In January, we issued the first-ever data center green euro bond. Late January, we announced a long-term renewable power purchase agreement to secure 80 megawatts of solar power on behalf of Facebook to support their renewable energy goals. In late February, our Board of Directors submitted our corporate governance guidelines to clarify that director-candidate pools must include candidates with diversity of race, ethnicity and gender. Finally, our Board also approved a proxy access standard for stockholders in late February.

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

Let's turn to market fundamentals on Page 5. As most of you are aware, 2018 was a record year for data center net absorption and the primary metros across North America are still in digestion and restocking mode. To provide some context, North America represents approximately 80% of our total revenue and was responsible for 75% of our 2018 leasing activity, but only half of our current availability is located in North America. The same dynamic is true in [states] for Northern Virginia, our largest market at over 20% of total revenue. It accounted for 40% of our 2018 bookings, but less than 15% of our current availability. We expect to see a pickup in North America data center absorption in the second half of the year as data center providers restocking their shelves with inventory coincides with the next phase of hyperscale users' incremental growth requirements, taking adjacency next to existing applications and continuous runway for growth on our campuses.

In Europe, recent leasing activity has been dominated by global cloud service providers who continue to sign expansions throughout the major metros. Data privacy and sovereignty rules are driving a distributed architecture, forcing cloud providers to establish a presence in all the major metros. So these expansions generally come in smaller increments than the hyperscale deployments in North America. Last year was likewise a record year for absorption in Europe with leading cloud providers deploying multiple megawatts across major metros. These cloud providers also exhibit a clear preference for expanding adjacent to existing deployments. So landing the initial deployment is key. Our Global Connected Campus strategy is uniquely positioned to capitalize on this consumption pattern.

Across the Asia Pacific regions, supply remains largely in check. The complexity of local regulatory frameworks, the difficulty of procuring power and the limited availability of sites with adequate connectivity all serve to limit competition. Demand is outpacing supply in several of our key APAC markets, notably, Singapore, Tokyo and Osaka. This is translating into solid execution and pipeline targeting our near and medium term available inventory in these markets, setting us up for attractive backdrop as we bring adjacent capacity online at our Singapore and Osaka campuses, in addition to our recently announced Tokyo campus development project.

At the macro level, the Asia Pacific region is still likely in the very early stages of its communications infrastructure build-out, and we see a significant runway for growth for years to come.

Finally, our pipeline of existing customer expansion and new customer opportunities is growing in both Brazil and now Chile, where we are the market-leading data center provider. On balance, we believe customers view our global platform and comprehensive space, power and interconnection offerings as key differentiators in the selection of their data center provider.

Let's turn to the macro environment on Page 6.

Global economic expansion remains intact. The U.S. unemployment claims recently dipped below 200,000. Interbanks the world over have adopted a dovish stance and the risk of a full-blown trade war appears to be receding. As you've heard me say many times before, we are fortunate to be operating in a business levered to secular demand drivers, both growing faster than global GDP growth and somewhat insulated from economic volatility. The hyperscale data center customers who drove outsized demand in 2018 marched to the beat of their own drum. Although they have largely remained in digestion mode in the early days of 2019, we remain highly confident in the longer-term trajectory of this demand. In addition, the resiliency of our business model enables us to capture robust and diverse demand from a broad swath of customer verticals across geographic regions around the world, as evidenced by our first quarter results.

To put a finer point on the secular demand drivers underpinning our business, I'd like to highlight a couple of the points on Page 7. According to Synergy Research, the total cloud market ecosystem passed the $250 billion revenue milestone in 2018, up 32% from the prior year. Separately, according to an IDC global study of 800 enterprise cloud users, 58% of respondents are now employing a hybrid cloud model, defined as using private and public resources for the same workload. Finally, an IDC study of 400 users of public cloud compute and storage services found that over 50% have recently moved the workload back on-premise. To effectively address the hybrid multi-cloud market, data center providers must offer a global interconnected solution from colocation to hyperscale. These trends obviously play directly to our strengths, help explain the durability of our recent results and bode very well for future demand cycles. Given the resiliency of our industry, our business and our balance sheet, we believe we are well positioned to continue to deliver steady per share growth in earnings, cash flow and dividends, whatever the macro environment may hold in store.

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

[Andrew Power, CFO]

Thank you, Bill. Let's begin with our leasing activity here on Page 9. As Bill indicated, our first quarter results highlighted the durability of the Digital Realty global platform with balanced performance across the regions, product types and customer segments. We signed total bookings of $50 million, including $9 million from Ascenty, a $7 million contribution from interconnection. We signed new leases for space and power totaling $42 million with a weighted average lease term of 10 years, including a $7 million colocation contribution. 5 of our top 10 deals in the first quarter were outside the U.S., including several top customers who were able to leverage our global platform to enable their growth across regions. For example, this quarter, we enabled the expansion of a cloud infrastructure provider, that specializes in helping developers launch applications into the cloud, helping them better serve their customers on the West Coast as well as APAC. Within our global account segment, we landed 2 sizable deployments north and south of the border with a leading global cloud service provider. Separately, we also landed a network edge node from another leading global cloud service provider, which we expect will enhance the interconnection profile of our campus in Dallas, Texas. We continue to track healthy demand within our global account segment, but the cloud accounted for just 1/3 of our first quarter bookings, as shown on Page 11.

On a majority of our new business during the quarter was with existing customers, we added 43 new logos, with a particularly strong contribution from our enterprise segment. For example, a well-funded software startup leveraging artificial intelligence to develop safe and reliable technology for autonomous vehicles selected a Digital Realty data center to help their production application and deliver their technology on a global scale. Afterpay is a global fintech provider based in Australia providing a "buy now, pay later" payment platform. Their proprietary decision-making engine determines creditworthiness of their retail customers in a near real-time on a global scale, and they are leveraging service exchanges from earning their gateways in the U.S. and in Europe to simplify, scale and improve the user experience. We continue to see traction from European-based organizations keen to partner with a data center provider able to facilitate their global growth well into the future.

A multinational semiconductor and software design company headquartered in New York selected Digital Realty to provide a global data center strategy to support the transition of their business services as the decommissioned data centers and extend their business reach. In particular, the partnership will facilitate their ability to extend their presence into Singapore in support of their APAC initiatives. They will now be able to deliver a full global services capability supported by Digital Realty in each region of -- around the world.

In addition, a British satellite telecommunications company is expanding with us in Europe to provide further colocation solutions for their London and Amsterdam operations. The solution underpins the infrastructure required to support the launch of their new satellite later this year and will provide high-speed broadband services to their customers.

Channel partners continued to contribute to our business and comprised 15% of our first quarter colocation and interconnection bookings and accounted for 25% of our new logos. One of our top channel partners brought us an opportunity to support a digital health care company that is redefining the way cardiac arrhythmias are clinically diagnosed by combining their wearable bio-sensing technology with cloud-based data analytics and machine learning capabilities. Their primary business model requires extensive data mining to help doctors predict and respond to cardiovascular events. The customer's proprietary cloud solution within Digital Realty required access to Azure, AWS and Salesforce cloud services. Digital Realty won the business by providing a superior low-latency and HIPAA compliant solution with the ability to connect to multiple cloud providers throughout our interconnection services, including Service Exchange.

We're also seeing traction with the strategic relationships we have forged with leading cloud and managed service providers. For example, we're engaged with one of our global cloud's hyperscale customers to provide best-in-class ultra low-latency hybrid services to end customers with specific performance requirements.

We're also teaming up with a major storage solution provider who offer services to end customers who wants to deploy private infrastructure in close proximity to the public cloud. Alliances like this greatly expand Digital Realty's addressable market and demonstrate our unique capabilities in terms of ubiquitous cloud interconnection and near-field proximity to underlying cloud infrastructure around the globe.

Turning to our backlog on Page 12. The current backlog of leases signed but not yet commenced stood at $144 million at the end of the first quarter. I'd like to point out here that the current backlog shown on Page 12 reflects the full contribution from Ascenty, whereas the Ascenty contribution will be shown in our 49% pro rata share going forward. The weighted average lag between the first quarter signings and commencements remained tighter than our long-term average and a little over 2 months.

Moving on to renewal leasing activity on Page 13. We signed $116 million of renewals during the first quarter, in addition to new leases signed. This is the second highest quarterly renewal leasing volume in our history, right on the heels of the all-time high of $138 million in 4Q '18. The weighted average lease term on renewals was nearly 13 years, while cash rents on renewals were down 6.9%, driven primarily by strategic portfolio transaction as a single customer deployed a multiple powered base building shell as well as fully built-out turn-key capacity in 15 sites across our global platform. We renewed their footprint for 15 years on triple net lease terms, walking in these cash flows for years to come and maximizing the value from these facilities. We also effectively tied the strategic renewal to a multi-region expansion opportunity with the same customer.

Excluding global relationships that have signed an incremental $15 million of annualized GAAP revenue over the past 6 months, the mark-to-market on first quarter renewals would have been essentially flat on a cash basis, as you can see from the data points on the bottom of Page 13. This incremental leasing activity is a prime example of what we mean when we talk about our holistic, long-term approach to customer relationship management. We believe we have a distinct advantage when we are competing for new business with a customer we are already supporting elsewhere within our global portfolio. And whenever we can, we try to provide a comprehensive financial package across multiple locations and offerings, including both new business as well as renewals.

In terms of first quarter operating performance, overall portfolio occupancy slipped 40 basis points to 88.6%, half due to development deliveries placed in service in Amsterdam and Chicago and half due to customer move-outs in Silicon Valley and Dallas.

The U.S. dollar continues to strengthen over the past 90 days and FX represented roughly a 100 basis point headwind to the year-over-year growth in our reported results from the top to the bottom line, as shown on Page 14.

Turning to our economic risk mitigation strategies on Page 15. 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 risks from an economic perspective. In addition to managing foreign currency exposure, we also mitigate interest rate risk by proactively terming out short-term variable-rate debt with longer-term fixed-rate financing. Given our strategy of matching the duration of our long-lived assets with long-term fixed-rate debt, a 100 basis point move-in LIBOR will have a less than 1% impact to full year FFO per share. Our near-term funding and refinancing risk is very well managed and our capital plan is fully funded.

In terms of earnings growth, core FFO per share was up 6% year-over-year or 7% on a constant currency basis and came in $0.10 above consensus. Delta relative to prior expectations was primarily due to interest income on the Brookfield joint venture funding as well as tax benefits due to a reduction in the corporate tax rate in the U.K., which came in effect during the first quarter.

In terms of the quarterly run rate, we expect to dip back down in the second quarter due to the deconsolidation of the Ascenty joint venture going forward, the absence of the tax benefit in future periods and the forward equity drawdown, as you can see from the bridge on Page 16. We're revaluing in the second half of the year as several large leases commence.

As you may have seen from the press release, we're reiterating 2019 core FFO per share guidance. Most of the drivers are unchanged, with the exception of updating financing activity and a reduction to our same-store growth outlook. In addition to continued FX headwinds, the primary change from our prior forecast includes the "blend and extend" component of the strategic portfolio transaction executed during the first quarter and bad debt expense related to a subscale private colocation reseller. We also face a particularly tough comparison in the second quarter due to a sizable property tax refund we collected in the second quarter of last year, which also weighs on the full year same-store growth comparison.

Last but certainly not least, let's turn to the balance sheet on Page 17. Net debt-to-EBITDA remains in line at 5.5 times as of the end of the first quarter. Our fixed charge coverage remains healthy at 3.6 times. Pro forma for the ins and outs of Brookfield's funding of the Ascenty joint venture and the forward equity drawdown, net debt-to-EBITDA is just over 5 times and fixed charge coverage is just over 4 times. Over the past several months, the Digital team capitalized on favorable market conditions to advance our financing strategy of maximizing the menu of available capital options while minimizing the related costs. In early January, we did all $500 million of our 5.875% senior notes due 2020. We also executed against our strategy of locking in a long-term fixed-rate financing at attractive coupons across the currency to support our assets with a green euro bond offering in early January. This was our second euro bond offering and also our second green bond, following the USD 500 million green bond released in 2015. But this was the first-ever data center euro green bond. The offering was well received, successfully raising gross proceeds of approximately $1 billion of 7-year paper at 2.5% while underscoring Digital Realty's industry-leading sustainability commitment.

Market conditions continued to improve over the quarter, and in late February on the basis of reverse increase from investors, we reopened both the 2.5% euro green bond offering due 2026 as well as our recently issued 3.75% sterling bonds due 2030. And we raised another $450 million of long-term debt at attractive coupons. We follow the same playbook with a perpetual preferred equity portion of our capital stock during the first quarter. We announced the reduction of all 365 million of our 7.375% series H preferred stock and we raised $210 million of permanent capital under our new series K perpetual preferred at 5.85%.

Finally, we advanced our private capital initiative, closing on the $700 million Ascenty joint venture with Brookfield, a leading global asset manager. The successful execution against our financial strategy is a reflection of our best-in-class global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers and enables us to prudently fund our growth.

As you can see from the debt maturity schedule on Page 18, the recent financings have extended our weighted average debt maturity by more than half a year and lowered our weighted average coupon by 30 basis points. A little over half our debt is non-U.S. dollar-denominated, acting as a natural FX hedge for investments outside the U.S. Nearly 90% of our debt is fixed rate to guard against a rising rate environment and 99% of our debt is unsecured, providing the greatest flexibility for capital recycling.

Finally, as you can see from the left side of Page 18, we have a clear runway with nominal near-term debt maturities and no bar too tall in the out-years. Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy.

This concludes our prepared remarks. Now we'd be pleased to take your questions. Andrea, would you please begin the Q&A session?

[Operator]

[Operator Instructions] And our first question comes from John Atkins of RBC Capital Markets.

[John Atkins, RBC Capital Markets]

So two questions. One, on the sales pipeline, I was wondering if it looks measly different than earlier this year and late last year. Or do you see a greater mix potentially of double-digit megawatt opportunities as the company brings on more inventory? And are there any notable exchanges by region in Asia Pac, Brazil, Europe and North America as you sort of think about the pipeline rest of the year versus earlier? And then I have kind of a margin question more conceptually, do you see an opportunity to get sustainably past the 60% EBITDA margin level? Or is high 50%s kind of appropriate given your anticipated development pipeline or other investments you're making in the business?

[Andrew Power, CFO]

Thanks, Jon. This is Andy. Look, there's, I guess, still a handful questions in there, so let me try to unpack them. Overall pipeline, obviously, we're -- we don't only speak to a specific pipeline number. I think if you look at the composition of our signings in the first quarter, it's quite healthy across regions in terms of competition, size, the deals across industries, a great 43 new logos. So fairly healthy, and I think I've characterized the pipeline going forward consistent with that strength. Your question on the, I guess, more -- see more double-digit megawatt opportunities, say, on the whole, we've seen an increase in double-digit megawatt opportunities roll with additional inventory coming online. While that's been the case for Nashville or Dallas, Chicago, where we've been building out campuses for quite some time, it's been a little bit of a newer phenomenon in Frankfurt and Amsterdam or London or even in Toronto, and certainly Osaka, where, for example, where now these larger customers could see immediate inventory meets their needs, and you can see that runway to growth. So I do think you're going to continue to see that mix of more double-digit megawatt deals continue.

I think your next question was a little bit of kind of compare and contrast on the markets. I'll try to do that efficiently. Maybe starting in Asia, I think we've seen some great strength that Bill mentioned. Firstly, in Singapore and Tokyo, markets were literally trying to find extra capacity in the broom closet for some of our customers as it relates to the next leg of our campuses in SIN12 or our newest campus in Tokyo come online. Osaka, this is not to highlight there, where we are bringing on capacity in a series of adjacent campus-like facilities where our customers are growing with us in a nice smooth runway.

Hopping over to Europe, Frankfurt's going to highlight their great 3-megawatt signing to an IT service customer that had an enterprise customer that they exported from the U.S. into that market. We've seen some robustness there at a time where, I'd say, supply was quite limited.

Back in the Americas, as I think I mentioned in my prepared remarks, the competition was really Toronto. We're building upon our success there, and I think we've seen some incremental inbounds most recently there and some also -- some office -- the other wins in Dallas and Santa Clara. A little lighter on Ashburn, but that was very much subject to inventory. And then Bill kind of gave you a little preview of our entry to Chile and the success with Ascenty.

So the second question, just so I have it right, Jon, was about EBITDA margins and where we get to see that going from here. So I guess the midpoint of our guidance is to be at about 58% adjusted EBITDA margin. As a reminder, that's down over 100 basis points year-over-year from ASC 842 accounting change for the expensing of nonsuccess-based leasing compensation. Right now, I could tell you we're much more focused on expanding -- or actually I should say we're less focused on expanding our industry-leading EBITDA margin and more focused on growth. Over the longer term, I think it's pretty intuitive as we continue to scale our platform globally, particularly in new markets that I mentioned with more volume campuses and with greater times and scale. I do see a longer-term trajectory to further EBITDA expansion, pushing up closer to the 60% area that you mentioned. But right now, again, the focus is more prioritizing growth given the feel that we have quite a healthy EBITDA margin.

[Operator]

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

[Jordan Sadler, KeyBanc Capital Markets]

So first question is on guidance versus sort of the beat in the quarter. Andy, you touched on it when you went through Slide 16, which is always helpful. But I guess, just running the numbers as opposed to looking at the bars, if I backed the $1.73 in the quarter out of the $6.65, it implies that you're going to do $1.64 per quarter in order to get to the full year, or that's what you need to do, at least, which seems like a pretty sizable step down. I know you touched on some of the puts and takes, the Brookfield JV funding, obviously, is a little bit of a drag. The tax benefit, I guess, I could use a little bit of a better explanation for. And then separately, can you maybe elucidate what we should expect to happen on the forward equity a little bit better? Because at least in this illustration, it shows you taking down all of the forward equity prior to 2Q -- or before the 2Q bar? And then I'll have a follow-up.

[Andrew Power, CFO]

Sure. Thanks, Jordan. So I guess the components again. So Brookfield closed on its 49% joint venture the very last day of the quarter. So we had not anticipated that to take so long in terms of regulatory approvals and tax and legal structuring, but we did prepare for just in case, and they've compensated us for carrying their share in the investment with a current return. And that's, obviously, going to go away. So it's a bit of a onetime benefit to actually feel in the quarter. To a lesser extent, the U.K. corporate tax rates revised from 21% down with something slightly lower than that, I think, 17%. And obviously, we have non-U.S. dollar investments in London that we have to adjust our tax rate for deferred tax assets or liabilities in this case. So having a benefit to our core FFO, that appears in the quarter as well. So those are the things I'd say that contributed to the several pains of outperformance in the first quarter relative to our original guidance. And in terms of headwinds, that counteracted us in the quarter and also will counteract us in the full year.

I think I spelled out we had some bad debt expense. We have a more troubled private colo reseller customer that's a relatively small percentage of our total portfolio, but does provide some headwinds during the quarter. It certainly kind of dampened our same-store NOI pool year-over-year growth and also will provide a headwind to the core FFO per share growth on a full year basis. So I'd say, right now, consistent with prior practice, which is really a philosophy of not sending the starters into the locker room after 1 of 4 quarters, we do keep our guidance constant. And going to your question on the -- a drawdown on the equity forward, so there's a $1.1 billion gross equity. We have not drawn down on any of it. As you can see from the balance sheet at 3/31, we had just over $800 million of revolver balance on the $2.6 billion revolver. We had about $130 million almost of cash on hand. Brookfield literally came in the last day so we couldn't even pay down the revolver with a portion of that till a day later. And I would say we're going to be drawing down a portion of it before the end of the second quarter. We took a little bit of poetic license on the chart. We're putting that bar just to the left of the second quarter bar, but I'd say the bulk of it will be -- bulk, if not all of it, will certainly be done by the end of the quarter.

[Jordan Sadler, KeyBanc Capital Markets]

Just to clarify, the Brookfield cash doesn't -- didn't show up on the balance sheet at all. Is it because that's...

[Andrew Power, CFO]

I'm just stating we have a $127 million-or-so cash in the balance sheet at 3/31, because that money literally came in that single day and we couldn't send the wire to pay down more revolver balance for that piece.

[Jordan Sadler, KeyBanc Capital Markets]

Okay. My follow-up was more on sort of funding longer term. You've recently -- and maybe this is a good question for Mr. Wright. You've recently talked about a self-funding model potentially, and I'm just curious if we can get an update, maybe a few months into the year what it looks like as you've sort of gone after the market or have taken an assessment in the portfolio, how we should be thinking about Digital's funding and sort of harvesting of assets this year.

[Gregory Wright, CIO]

Yes, Jordan. Thanks for the question.

Look, I think, consistently, we've said previously, although our 2019 guidance does not include any of the disposition assumptions, we continue to remain focused on recycling capital and portfolio optimization. The company has a heritage to that. Bill was doing that 6, 7 years ago, and we continue to focus on those opportunities when they make sense. We're certainly continuing to evaluate the private markets as a source of capital, and clearly, what everyone know when we have anything to report.

And with that said, you can reasonably expect us to periodically sell assets, particularly nondata center properties or assets in markets that no longer fit our strategy. Specifically, we discussed selling certain triple net lease assets potentially as well as potentially joint venturing stabilized assets where we can pull out some of that capital. We would joint venture it and redeploy that capital into higher-yielding development assets, which we think is a prudent capital allocation strategy.

And look, I think, again, we haven't committed to any specific amounts and timing since. As Andy would touch on, we're fully funded through 2020. I want to say that it could be as high as a couple billion over multiple years, but again, no specific timing are announced.

[Operator]

Our next question comes from Michael Funk of Bank of America Merrill Lynch.

[Michael Funk, Bank of America Merrill Lynch]

Yes, just a couple, guys. I mean, first, Bill, during the call, you made some comments and expectation for maybe a pickup or an absorption in the second half of 2019 from a large to hyperscale guys. I hope you can connect that back to some of the comments we've heard in the last week-or-so from Intel, for example, unit weakness there; NTSI, talking about inventory oversupply. Contrast it with Microsoft talking about building out their global data center regions. Maybe help us pull that together and talk about your own -- your view on the second half pickup in absorption?

[William Stein, CEO]

So keep in mind in the first half, we really didn't have any inventory in Northern Virginia, which is our strongest and biggest market, and that's going to be coming on in the second half. So that, at least, will give us some product to sell. I could tell you that just based on conversations that we're having -- well, in fact, backing up, the purchasing cycle of these CSPs tends to be spiky. It can be -- it has been volatile. And not all CSPs buy on the same schedule and some buy in far greater quantity than others, and in some regions, see greater orders than others. I mean, in general, Virginia is the highest and we see smaller orders. Historically, we've seen smaller orders in Europe versus North America. So there certainly was a lull in the first quarter. And I think despite that, we did $50 million in bookings, so we're happy with that. And in some ways, we feel that the quality of bookings is better in the first quarter because it's -- we're less dependent on the large spiky CSP orders. But I have no doubt that those orders will resume in the back half of the year.

[Michael Funk, Bank of America Merrill Lynch]

Okay. And then you also announced the -- you talked it earlier, the Chile deal in the first phase. I think you announced the size of the deal. Any additional commentary on future phases, what that could look like, the timing, any kind of underwriting commentary you can give us as well. What kind of rates are you underwriting that at?

[William Stein, CEO]

Sure, Michael. I'd like to fill in some of the details here. So this is very consistent with our Digital Realty new market entry expansion. Purely customer-led. And this one, in particular, derisked by simultaneous customer signing and our control of land, and ultimately, start of construction. This is a -- initially going to be about a little over 6, 6.3 megawatts data center hall in Santiago, but has a runway for growth too. Could be another 20-plus megawatts with adjacency. So -- and I think on the heels of this, I think we'll likely see additional other customers looking to expand in this market as well.

[Michael Funk, Bank of America Merrill Lynch]

Okay. And then, real quick...

[William Stein, CEO]

Mike, you probably know it, but the initial structure is leased hall, and that is really a function of time-to-market. Our expectation is that we will purchase that asset.

[Michael Funk, Bank of America Merrill Lynch]

Okay. And then one quick clarification, Andy, if I could. So the adjusted EBITDA guidance, is that apples-to-apples, what you gave us at 4Q? I didn't notice some adjustments for the -- for Ascenty. So just to clarify, is that the same guidance, or was there a change there?

[Andrew Power, CFO]

Sure. The -- I think we gave you adjusted EBITDA margin guidance, not Chile EBITDA. But so I'd say, if you look across that guidance table for each of the assumptions and, ultimately, the output row at the very bottom, we've kept that on an apples-to-apples basis throughout without no change. I think if you go back to our initial guidance back in the first weeks of January, we did try to give you what '18 going to look like under the change in accounting for ASC 842.

[Michael Funk, Bank of America Merrill Lynch]

Okay. So no change, even though if I calculate the adjusted EBITDA. I look at the back of your supplemental, there is the difference with the unconsolidated JV and then the noncontrolling interest now contributing to that.

[Andrew Power, CFO]

No. I mean, no -- same accounting for the table and the -- from left to right on there. I mean, the only difference is Ascenty, Brookfield. We owned 100% of Ascenty from December 21 on through all but the last -- very last day of the first quarter. So we recognized consolidated or almost 99%, I should say, of that venture. It actually does only 1% interest through our P&L. And on the last day when Brookfield closed on its 49%, it slipped to an unconsolidated joint venture at the -- and ultimately, given it's literally 1 day, it really wasn't material enough for disclosure on the back of our financial sup. It will be next quarter when we own 49% for a full 90 days. And we did provide a reconciliation on our leverage stats for both net debt-to-EBITDA and fixed charge coverage to make sure you're apples-to-apples in numerator and denominator for our provider share of ownership on those cats.

[Operator]

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

[Colby Synesael, Cowen and Company]

Great. I guess just 2 high-level questions. Your -- Bill, I think in that last comment or question, you mentioned you've no doubt, I guess, to your assumption to the larger deals in the second half of '19. And I'm just curious is that based on recent trends in the last few weeks, in the last month? Or would you feel just as confident, call it, on January 1?

And then secondly, M&A. Obviously, it's been a key aspect of your strategy in the last several years. I know there's been some pushback on valuations, perhaps more recently over the last few quarters, if not a year. Are you seeing those change and are you seeing potentially more opportunities for you guys to do something than maybe you would have thought of just a few months ago?

[William Stein, CEO]

Sure, Colby, leet me -- I'll handle the first one and I think Greg can pick up on the second one. I wouldn't say that there's been any change since January that causes that. It's just a function of looking back over history and seeing what the buying pattern has been. Obviously the -- some of the CSPs have taken the very large blocks of space in the relatively recent past, which has taken some time for them to absorb. But if you've listened to the Microsoft earnings report today, their cloud business is clearly very robust. And I will assume that the other firms will report in a similar vein. And at the end of the day, you really need to procure a space to house these operations. And that's why we feel as we do.

[Christopher Sharp, CTO]

Yes. And just providing a little bit more color on that, Bill. A couple of the elements that we've been looking at the market is particularly around some of the services that we all see all these cloud providers launching. These services are becoming more complex and require a different type of infrastructure to meet their requirements. And so it's all about these huge data lakes and about the ability to do a cat cage or multi-megawatt deployments across our entire Connected Campus, which is where we still see every major provider out there launching a handful of new services every quarter. So there's -- all of that requires infrastructure to continue to meet the market demands of all the consumers globally.

[Gregory Wright, CIO]

This is Greg, responding to the M&A question. Look, I think when you take a look at the landscape right now, and so we've mentioned it before. We constantly monitor all opportunities, whether in the public market and the private markets, whenever it may be. At this time, I think your point is right. We're seeing a lot of potential M&A opportunities in the private market especially. And as you can imagine, given our position, we see everything. I think you also -- due to the fact that the pricing remains fairly robust, and that's true. With that said, I think we've shown our discipline and commitment in the past to only do deals that make strategic sense and we believe is the appropriate risk-adjusted return, and that's the way we're going to continue to pursue our M&A strategies. With that said, also another leg of that stool, it's not necessarily M&A, but we're looking at land purchases as well to continue to fund the company's growth. So the reality is we look at 3 different prongs, really: M&A, whether it's public or private; we look at both portfolio -- our private portfolio and one-off acquisitions; as well as land acquisitions. And again, this may change by market. But we go back and we monitor each market, determine what we think appropriate returns are and what our strategy is and what our customers are driving us in that market and weigh all those factors before we embark upon any M&A activity.

[Operator]

Our next question comes from Erik Rasmussen of Stifel.

[Erik Rasmussen, Stifel]

Maybe just circling back in Northern Virginia. Obviously, there's a slowdown we're seeing -- slower absorption in this market. Hearing a lot of inventory in the market and putting pressure on pricing. But can you just kind of talk to some of those sort of dynamics in that market? I know from what we're hearing and some of the things that we've seen so far reported kind of all jives with maybe a second half pickup. But can you just give a little bit more color on what you're hearing from customers there and just some clarity?

[Andrew Power, CFO]

Eric, this is Andy. I mean, I'll try to tackle that. So we've obviously been monitoring this market quite closely. It's certainly the most competitive market in the arena. I would also say it's historically been the largest and have the largest amount of demand and most robust and diverse demand across all cloud service providers and enterprise customers. We've, as Bill mentioned, had a pretty great phenomenal success of latest 12-plus months, call it, close to 99 megawatts to the point where pretty much all of our existing inventory had been leased. So we came up -- although short, now we did not anticipate that was going to happen a year prior when we would have grown incremental inventory. I think the way we think about tackling that market, we are closely monitoring relative competitiveness. We are very, very pleased with the fact that we are selling to a very large and growing installed customer base. Many customers want to grow with that adjacency, adjacent suite, adjacent buildings, really a short walk across the road or a conduit for the fiber to be pulled. And many of these customers who have already landed with us have that game plan already rounded out incremental capacity they want to take once they're fully utilizing their existing suites. So having that installed base is certainly a competitive advantage to date, and I think that will bear fruit as our new inventory -- our latest inventory comes online in the back half of 2019.

The other thing I'd say is the tool we utilize in pretty much defending our rate of returns of profitability. And any more competitive market is really flexing the muscle of the global multiproduct portfolio and bringing together opportunities for our customer to grow in various supply constrained more rare and unique opportunities, be it Tokyo or Singapore or Osaka or Frankfurt or South America, kind of patching opportunities for these customers and not beholden necessarily do that private one-off competitor that has only has -- anything to sell is rate.

So obviously, more to come. I will be even more close to the front lines as we have inventory to sell against that market. But I think we've got a tremendous value proposition and some pretty good tools in our toolkit to make sure we maximize value for that market and for the company.

[Erik Rasmussen, Stifel]

So great. And so what I'm hearing is that, even though you may have lost out or you could be losing out on deals, it's not like because of your competitive advantage in this installed base, if you lost or out on this sign of first go-around, that business will come back or maybe even customers are kind of waiting for that incremental capacity to come online. And again, it's not just a pricing game or if you had -- because there was a lot of capacity that's in that market and a lot of inventory. So is that a fair way to capture that?

[Andrew Power, CFO]

Honestly, I would say that the timing of inventory tightness and demand is taking a bit of a pause kind of coincided for us in that market. So I'm not sure we really lost out based on our look at the market in the first quarter. There was a tremendous amount of deals we lost out on, even if they were at more competitive rates due to our lack of inventory. And I think that goes back to some of Bill's commentary of there we landed large consumers of our product in the prior 12 to 18 months that often take kind of several months to digest in the restocking mode, and then come back and want to grow with that capacity with adjacency. So today, I don't think there's really any regrettable losses in that market of any substance, even with a fairly competitive pricing opportunities out there from certainly many of our competitors that do not have other value-add for their customers beyond just offering a new price.

[Operator]

Our next question comes from Michael Rollins of Citi.

[Michael Rollins, Citi]

Just curious if you can unpack a bit more of the same-store NOI for 2019. As you look into 2020, how should we think about the change in same-store NOI based on the mix of business that you have in the renewals for next year?

[William Stein, CEO]

Michael, why don't I -- maybe I'll start with actuals and kind of bridge to guidance table, just to kind of put a -- make it more clear. So our same-store NOI came in at negative 2.5%. That's cash NOI year-over-year for the quarter. I would splice it into there were normal course business that would have had that number coming closer to 1% positive or at least 70 basis points positive, for sure. And we had 3 more episodic -- at least 2 or 3 more episodic headwinds that hit us during the quarter. I mentioned there's bad debt expense that is the net against the revenue and obviously the cash NOI from the coprivate colo reseller that is a customer within our same-store pool. We also have that global relationship multimarket 15-year renewal, which had a, call it, blend and extend component. The customer had like 2.5 years left and we pushed them out 15 years. And while we lowered the rate, which you'll see in our PBB renewals and some of our TKF renewals, those leases are now cut on in the 2.5-plus rate for now 15 years, which we think is a value maximization path there.

And then we also had some FX headwinds doing track with the dollar, because now then you hedge on an unlevered basis from the same-store NOI pool. So negative 2.5% as reported cash NOI. If you were to back out the bad debt, the FX and our strategic renewal, that would have been about 0.7 positive. I would say if you kind of then translate actuals for 1 quarter into guidance table for a full year, I would say about half of the decrease in the NOI is due to the bad debt expense and the blend and extend renewal. Again, that's not something we do every quarter or every year. We don't have that many customers that have that much capacity with that short of duration available to renewal at once, and you do renew it once and resets. And I'd say the other half, just overall, the FX, let's say the other half and just what I'd say we're seeing kind of outcomes on potential expiration, potential downtime for re-leasing. So nothing tremendously new, just maybe we're more cautious around looking at the same-store pool.

Before I let you get to your second question, I would remind you and others on the call, the same-store pool is one piece of the puzzle just like our cash mark-to-markets. We do a tremendous amount of business that have new leasing tied to existing renewals. I think we've called out that on one of the slides in the deck that our mark-to-markets have actually been flat on a cash basis and positive on GAAP basis, about 1% to 3%. And the subset was customers did $50 million of GAAP with us. So on a relationship return versus same-store versus renewed capacity splicing, it's actually accretive to our cash flow and to our revenue.

[Michael Rollins, Citi]

And then how do you think about that for next year?

[William Stein, CEO]

Next year, we're really finding our way through the major renewals this year. So we've talked about the big 15 sites strategic portfolio of customer that was not a CSP. We are just at the very beginning of the second quarter executed with a top CSP, a long-term legacy digital customer for about 250,000 square feet, 20-plus megawatts at a pretty attractive renewal, call it, 5 years in term. And I'd say that one is kind of through now. And I'd say other than 1 legacy renewal from a company we've acquired 12 years ago, we're really getting to, I think, finer waters here in terms of these renewal headwinds. And I think we'll talk a lot less about them in 2020 and certainly 2021.

[Operator]

Our next question comes from Jon Petersen of Jefferies.

[Jon Petersen, Jefferies]

Maybe just very quickly. I just want to think it's not in the guidance, I know people will keep asking about it, but I just wanted to clarify. So the onetime payment you got from Brookfield and the U.K. tax benefit, were those contemplated in the initial guidance or was that not expected?

[William Stein, CEO]

Jon, we did not expect Brookfield to close 90 days into the first quarter. We thought that transaction was going to close very early in the year. It's not prior to the end of the year, quite honestly. And now we didn't expect that in the guidance, but we're planning for that in structuring of our deal with Brookfield and part of our transaction with Brookfield in exchange for us to assure them a 49% share of the incentive business. As they've navigated their regulatory and legal approvals, they were to compensate us for fronting their capital for what ended up being called just over 90 days. So that was not contemplated and we did not contemplate the change in U.K. tax -- corporate tax rates in our guidance.

[Operator]

Our next question comes from Richard Choe of JPMorgan.

[Richard Choe, JPMorgan]

In terms of the commentary you made about focusing on growth, especially with the development coming on at the end of the year. Does it make sense that -- to look at the dividend growth kind of slowing to help fund the growth aspect? Or is that just kind of the law on large numbers? And if we can get a follow-up on how you think about the dividend growth rate, that would be great.

[William Stein, CEO]

Thanks, Richard. So I don't think this is a zero-sum game between dividend growth investing the platform for future top line growth. Really the dividend growth is predicated on really the growth in the taxable income as a REIT and ultimately our cash flows. We're now, call it, a 70% AFFO P/E ratio. That's on the heels of our dividend increase of just under 7% last quarter. And as to CF figure, I think you'd see the cash flows grow onto '19 and beyond. I think you'll see the dividend kind of move -- waxed up. Always what I'd say, I'll lean towards not overdistributing and maintaining a good portion of our capital in order to prevent the lines on external markets for funding our developmental growth opportunities.

At the same time, we are certainly investing and focusing on accelerating our growth. I think that's a few points across the board. It's, obviously, I think, top of mind for our new Global Head of Sales and Marketing, Corey Dyer. We've made some changes to kind of accelerate the growth and to kind of further emphasize our focus on the enterprise customer seeking colocation and interconnection on a global platform. But again, I don't think this is one thing or another. These are both missions that I think we can deliver simultaneously.

[Operator]

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

[William Stein, CEO]

Thank you, Andrea. I'd like to wrap up our call today by recapping our highlights for the first quarter as outlined here on the last page of our presentation. First, we further expanded our global platform, closing the Ascenty joint venture with Brookfield, securing strategic landholdings in key global metros and announcing our entry into Chile in support of our strategic customers' global growth aspirations. Second, we also underscored our commitment to delivering sustainable growth for all stakeholders with efficient and socially responsible capital raises, renewable energy contracts and corporate governance enhancements. Third, we raised the dividend by 7%, the 14th consecutive year we've raised the dividend, dating all the way back to our inception in 2004. Last but not least, we further strengthened our balance sheet with redemption of high coupon debt and preferred equity and the opportunistic issuance of $1.6 billion of long-term capital.

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

Thank you all for joining us, and we look forward to seeing many of you at NAREIT in June.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.+