Digital Realty Trust Inc

NYSE:DLR

Earnings Call Transcript 2020-Q3

[Operator]

Good afternoon and welcome to the Digital Realty Third Quarter 2020 Earnings Call. Please note this event is being recorded. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and callers will be limited to one question plus a follow-up. Due to time constraints, we will conclude promptly at the hour. I would now like to turn the call over to John Stewart, Digital Realty’s Senior Vice President of Investor Relations. John, please go ahead.

[John Stewart, Senior Vice President, Investor Relations]

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

Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC. This call will contain non-GAAP financial information. Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.

Before I turn the call over to Bill, I would like to hit the tops of the waves on our third quarter results. We built upon the recent momentum in our business, landing a record number of new logos across broad and robust bookings that were well diversified by customer type and geographic region. We delivered solid financial results with core FFO per share $0.05 ahead of consensus and we raised our outlook for revenue, EBITDA and core FFO per share for the second time this year. We extended our global platform, entering Croatia with the acquisition of Altus IT and securing customer growth in existing markets across EMEA, with key land purchases and new builds. Last but not least, we further strengthened the balance sheet, raising over $2 billion of long-term capital and retiring nearly $2 billion of high coupon debt and preferred equity.

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

[Bill Stein, Chief Executive Officer]

Thanks, John. Good afternoon and thank you all for joining us. Our formula for long-term value creation is a global connected sustainable framework. And despite the pandemic, our third quarter results demonstrate the strength of this framework. Our business is increasingly global, with nearly 60% of third quarter bookings outside North America and we landed a record 130 new logos from around the world. Bookings were also well diversified by customer type, with enterprise co-location and interconnection accounting for nearly half the total. This robust and diverse business mix demonstrates the power of our global platform and further validates our strategic vision of being the only global provider dedicated to the full customer spectrum.

Let’s turn to our health and safety measures on Page 3. We remain focused on keeping our employees, customers and partners safe during this pandemic. We remained fully operational across our 284 data centers and we continue to support our customers’ growth by bringing additional capacity online, while expanding our global platform. We have implemented enhanced safety protocols, such as requiring mass, social distancing, engaging specialty cleaning services, and maintaining rotational 24/7 staff coverage by leaning on local personnel.

As the pandemic continues, we are seeing signs of permanent adjustments that are likely to be long-term tailwinds for our business. More enterprises are embracing a distributed workforce with our growing work-from-home component, while our recent Gartner survey of nearly 2,000 CIOs around the world found that accelerating digital innovation and leveraging emerging technologies are key priorities during the pandemic. Of course, I would be remiss if I did not again extend our gratitude to our employees in critical data center roles who continue to come into work everyday at our facilities around the world. They make possible the service and support we provide our customers. Thank you to the terrific onsite Digital Realty team.

Let’s turn to our sustainable growth initiatives here on Page 4. In April, we reached a wind energy agreement to supply approximately 30% of our power needs in the Dallas, Texas area with renewable energy. In late August, we further expanded our renewable energy capacity in Texas by sourcing approximately 65 megawatts of solar power. Once the solar project is fully operational by mid-2021, our entire Dallas portfolio will be powered by 70% renewable energy. We completed our first wind power transaction in 2016. And we have since gone on to contract 240 megawatts of wind and solar energy in Texas. We remain committed to manage our environmental impact, optimizing our use of energy and natural resources, serving a social purpose and delivering sustainable growth for all stakeholders.

Let’s turn to our investment activity on Page 5. We continued to expand our global platform with a small, but highly strategic acquisition in Southeastern Europe, along with land purchases and groundbreakings in existing markets across the continent. In early September, we announced that we had acquired Altus IT, the leading carrier-neutral data center provider in Croatia, expanding our connectivity footprint into the Balkans and Eastern Europe and establishing a gateway to Southeastern Europe, through access to one of the most interconnected data centers in the region. This transaction was also a prime example of how seamlessly the classic Interxion and classic Digital Realty teams are working together. In Zurich, we are breaking ground on a new data center, two of our five biggest deals during the third quarter landed in Zurich and the expansion of our campus will provide runway for customer growth as the leading cloud and interconnection hub in Switzerland.

We also recently acquired land parcels within 1 kilometer of our highly interconnected campuses in Vienna as well as Madrid. These strategic land holdings will provide additional capacity, enabling local and global service providers to seamlessly expand adjacent to their existing deployments. In early July, we announced the opening of the first phase of MRS3, our data center in Marseille. Interxion’s Marseille campus is one of the world’s leading digital hubs for intercontinental data traffic with over 150 network service providers. The new facility will offer customers expanded access to the vibrant community in Marseille, including numerous connectivity providers, digital media and cloud segments, along with local as well as global enterprises.

Finally, in mid-July, we announced that we acquired the freehold to the land under Interxion’s 10-hour Landstraße campus in Frankfurt. In addition, we are also under contract to acquire the Neckermann site a separate parcel within a kilometer of Interxion’s existing campus that will support the development of up to 180 megawatts of IT capacity. We believe that we are creating significant value by combining the leasehold and freehold positions on one of the most highly connected campuses in Europe, while the adjacent expansion capacity provides runway to support customer growth in a key European metro for years to come.

Let’s turn to Page 6 for an update on the Interxion integration. As you have heard me say before, integration is our top priority for 2020 and we continue to make solid progress despite the pandemic. Both teams have risen to the occasion and have come together to continue to serve our customers’ needs throughout this crisis. It is great to see this collaboration. Andy will cover our customer wins in more detail, but both sales engines are working well together and we have begun to realize some of the cross-selling opportunities we envisioned when contemplating this transaction. We remain on track to meet our synergy targets and underwriting budgets. Title retention is also running ahead of plan at over 95% with no loss of key personnel.

Along those lines, as we announced when we first broke the news of our combination with Interxion 1 year ago today. Early next year, David Ruberg will be transitioning within Digital Realty from his day-to-day responsibilities as Chief Executive EMEA and will be moving into a global strategic advisor role. In this capacity, David will be responsible for the development and oversight of our corporate strategy, including the company’s effort to organize and execute a program to identify and develop High Value Communities ventures across our global platform. David plans to remain on the Board of Directors of our Dutch holding company and he will continue to play a leadership role on certain of our key global customer accounts, bringing to bear his longstanding relationships and thought leadership in addition to supporting our team on new market and product development, as recently demonstrated in Eastern Europe. Upon David’s transition, legacy Digital MD, EMEA, Jeff Tapley and legacy Interxion MD, [indiscernible], will continue to oversee the company’s EMEA business. I would like to thank David for his tremendous contributions and his successful efforts to integrate our businesses. We look forward to benefiting from his strategic insights for years to come.

Let’s turn to demand drivers on Page 7. We are fortunate to be operating in a business leverages secular demand drivers. As a leading global data center provider, we have a unique vantage point that enables us to detect secular trends as they emerge. Our customers are solving some of the most complex infrastructure connectivity and workload use cases across network peering hyperscale, low latency, high-performance computing, big data and artificial intelligence. Over the past several years, we have seen a growing trend of leading multinational enterprises deploying and connecting large private data infrastructure footprints across multiple global sites. We have conducted research, build a global database and devise a method to measure, quantify and forecast the growing intensity of the enterprise data creation lifecycle and its gravitational impact on IT infrastructure.

We have recently published our findings as the Data Gravity Index, a report designed to assist both enterprise and service provider customers as they shift their infrastructure strategies to address challenges presented by Data Gravity. Our global data center platform is uniquely positioned to help customers address the Data Gravity challenges. Given the resiliency of the demand drivers underpinning our business and the relevance of our platform in meeting these needs, we believe we are well-positioned to continue to deliver sustainable growth for customers, shareholders and employees, whatever the macro environment may hold in store.

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

[Andy Power, Chief Financial Officer]

Thank you, Bill. Let’s pick up here on Page 9. As Bill mentioned in his comments, the Interxion integration is coming along on schedule and we are seeing the power of the combined organization with more than 280 data centers in 48 metros across 23 countries on six continents. The power of the global platform is on full display for our installed base of 4,000 global customers and growing.

Let’s turn to our leasing activity on Page 10. We signed total bookings of $89 million, including a $14 million contribution from interconnection, which along with the $29 million of network and enterprise-oriented deals of a megawatt or less accounted for a record contribution of nearly half our total bookings. The weighted average lease term was over 6 years. We landed a record 130 new logos during the third quarter, including 40 sourced by Interxion, again, demonstrating the power of our global platform. Activity was well balanced across all three regions, with the Americas and EMEA each contributing about 40% of total bookings, while Asia-Pacific accounted for nearly 20%. Singapore was the star in Asia-Pacific, while Zurich, Frankfurt and Marseille were staying out today in EMEA.

In the Americas, we again experienced strength in the New York metro area as well as Chicago and Toronto. In Northern Virginia, where we have leased more than 90 megawatts of the previous 9 months, we signed just over 2 million GAAP during the third quarter. As our active development pipeline remains 100% pre-leased while our in-service portfolio remains the only 94% leased. We do expect to get back to 17 megawatts of state-of-the-art capacity in Ashburn at the end of this year. And together with the existing vacancy within our in-service portfolio, this will give us a total of 40 megawatts of available inventory to meet demand and support customer growth for the next several quarters until we are able to bring additional capacity online around the middle of next year. Although we aren’t entirely out of the competitive woods just yet, we remain very well-positioned to continue to hit above our weight given the strength of our global platform and sales force, the large and growing installed customer base seeking growth with adjacency on our connected Ashburn campuses, and finally, our ability to future proof our customers’ growth with our strategic land holdings, providing the longest runway to support their future growth.

In terms of specific lengths during the quarter and around the world, in Marseille, we won a significant connectivity deal with PCCW to land the PC subsea cable at our MRS2 data center. This is a higher strategic deal as it enables our customers to directly access this 12,000 kilometer high capacity cable that will provide the shortest and most direct subsea data route from North Asia to Europe. In Hong Kong, we are excited to support a Fortune 500 multinational professional services firm, with the implementation of a data hub deployment on Platform Digital. In London, the classic Digital Realty and classic Interxion teams work closely together to add Canonical, a leading UK based software and IP service provider and the publisher of Ubuntu, a leading Linux distribution. Boosteroid, a cloud gaming platform expanded their platform across Western Europe in the third quarter with a deal that involved 4 metros, Paris, Marseille, Madrid and London. G-Core, a gaming CDN expanded their use of Platform Digital in four locations across North America and Europe for their growing infrastructure demands and new AI platform. Staying with the gaming theme in the Bay Area, we have the Blade Group a cloud-based gaming company enabled daily intensive gaming. While in Ashburn, Capital Online selected Platform Digital to support their cloud development platform for gaming, e-commerce, education and big data. Finally, in Brussels, we are helping Ahold Delhaize, a leading global grocery retailer migrate from their legacy on-prem facility to Platform Digital for multi-cloud access and flexibility for future expansion.

Turning to our backlog on Page 12, the current backlog of leases signed but not yet commenced stands at $229 million. The step down from the $251 million last quarter will fetch record commencers in nearly $100 million during the third quarter offset by the $75 million of combined space and power leases signed. The lag between signings and commencements was a bit longer than our long-term historical average at roughly 6.5 months.

Moving on to renewal leasing activity on Page 13, we signed $160 million of renewals during the third quarter in addition to new leases signed. The weighted average lease term on renewals signed during the third quarter, was a little less than 2 years, reflecting a mix of activities skewed heavily towards the deployments, smaller than 1 megawatts. Cash rents on renewals were essentially flat, down just 20 basis points across all categories and cash rents on renewals above and below 1 megawatt were both essentially unchanged, an encouraging sign for pricing. We retained 78% of expiring leases, essentially in line with our long-term trend, but dragged down a bit by network customer who churned out of powered Shell capacity at our downtown Los Angeles interconnection hub. Similar to our strategy we have successfully executed with recaptured self space in Chicago, we expect to redevelop this scarce inventory within a highly desirable interconnection hub into significantly higher yielding co-location capacity.

In terms of third quarter operating performance, overall portfolio occupancy improved 20 basis points driven by fully leased development projects placed in service, primarily in Chicago and Hillsborough. Same capital occupancy was unchanged for the second quarter and same capital cash NOI growth was in line with expectations at negative 1.9%. As a reminder, Interxion and the Westin Building are not included in the 2020 same-store pool, but we expect both acquisitions will be accretive to organic growth going forward.

Turning to our economic risk mitigation strategies on Page 14, the U.S. dollar softened over the summer before steadying at those lower levels, providing a bit of an FX tailwind in the third quarter relative to prior year average. Overall, FX represented roughly 100 basis point tailwind to the year-over-year growth in our reported results from the top to the bottom line. As a reminder, 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.

In terms of vertical concentration, as you can see from the pie chart on the upper right, we are fortunate to be primarily serving customers whose businesses are thriving in the current environment, with limited exposure to sectors most negatively impacted. Rent collections remained in line with our historical average and requests for rent relief have largely subsided. In addition to managing credit risk and 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 and matching the duration of our long-lived assets with long-term fixed rate debt, a 100 basis point move in LIBOR would have roughly a 50 basis point impact on 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 down 8% year-over-year, but $0.05 ahead of consensus, driven by a beat on the top line as well as lower property taxes and a lower share count due to the late September settlement of the $1 billion forward equity offering offset by higher than expected corporate taxes due to the higher statutory rates in the UK. As you may have seen from the press release, we are raising guidance for revenue, EBITDA and core FFO per share again this quarter, reflecting the third quarter outperformance. We now expect to be at or above the high end of our original ranges for all three measures.

In terms of the quarterly run-rate, as you can see from the bridge chart on Page 15, we expect to be flat to down $0.01 in the fourth quarter, primarily due to the higher weighted average share count, as the additional shares from the forward equity offering will be outstanding for the entire fourth quarter compared to just 6 days in the third quarter. As you update your earnings models and begin to roll forward to next year, please keep in mind our 2021 results will entail a couple of partial periods complications. For starters, we all of course report a full year contribution from Interxion next year compared to just three quarters this year, which we expect will help drive double-digit revenue growth. On the other hand, the sooner we return to a more normalized operating environment next year, the tougher the comps as current period results are benefiting from the deferral of some overhead and OpEx as well as maintenance CapEx. Finally, the additional shares from settlement of the forward equity offering and mid-year ATM issuance will be outstanding for the full year in 2021 compared to a partial period in 2020. As a result, although we expect to rollout the formal guidance early next year, we are currently targeting mid single-digit growth in both earnings and cash flow per share.

Last, but certainly not least, let’s turn to the balance sheet on Page 16. As expected, the third quarter activity on the ATM and settlement of the forward equity offering brought leverage back down in line with our target range. Net debt to adjusted EBITDA stepped down to 5.6x, while fixed charge coverage remains healthy at 4.4x. We also capitalized on favorable conditions in the debt capital markets and executed several proactive liability management trades during the third quarter. In mid-September, we raised $750 million of long 11-year green Euro bonds at 1% and $300 million of 2-year floating rate notes at an initial coupon of 0%, achieving all-time low coupons for Digital Realty. We also retired $1.2 billion of bonds due in 2022 and 2023 and a blended coupon of 4.1% as well as $500 million of preferred equity, and a blended coupon of 6.1%. We had $970 million of cash on the balance sheet at September 30 although one of the preferred redemptions and one of the bottom redemptions straddled quarter end and approximately $650 million of that cash was used to fund those redemptions in mid-October. This successful execution against our financial strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers enables us to prudently fund our growth.

As you can see from the chart on Page 16, we have extended our weighted average debt maturity out to 6.5 years and ratcheted our weighted average coupon down to 2.5%, a little over 70% of our debt is non-U.S. dollar denominated acting as a natural FX hedge for our investment outside the U.S. Over 90% of our debt is fixed rate to guard against a rising rate environment and 98% of our debt is unsecured providing the greatest flexibility for capital recycling. Finally, as you can see from the left side of Page 16, we have a clear runway with virtually no near-term debt maturities and no bar too tall in the out-years. Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy.

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

[Operator]

[Operator Instructions] The first question comes from Michael Rollins of Citi. Please go ahead.

[Michael Rollins, Citi]

Good afternoon and thanks for the opportunity to ask a question. Just curious if you could talk a little bit more about pro forma revenue growth in a couple of contexts. First, if you are to look at the third quarter, what would be the year-over-year constant currency growth by region, whether you are looking at Europe, U.S., Asia, just to get a sense of where each of these businesses are growing, as if you owned all of these assets a year ago in terms of what you acquired or what you have divested? And then secondly, as you look at the guidance or the indications or the aspirations you just described for 2021, can you further unpack with that double-digit revenue growth, what would be the organic part of that versus the benefit of the acquisition and maybe walk through a little bit more detail of the pluses and minuses that are affecting the core FFO per share? Thanks.

[Andy Power, Chief Financial Officer]

Hey, thanks Michael. So, this is Andy. Let me maybe try to take that in reverse order. And I will see if I can get all the details by region. So, I think the second part of your question was speaking to what next year’s growth looks like and we shared a little bit of preview although obviously our guidance will come out till early next year. Really there is no we were speaking to the bottom line or core FFO per share growth so there is no apples and oranges, benefits, because the cost of our Interxion acquisition is kind of baked in, the share count, and obviously, the debt. So it’s not like there is inorganic growth, supplementing those numbers. If you kind of deconstruct it, from the top line, I mean, I think you can look at our, our signings volume, probably the last two quarters is the best trend given those are two quarters, where we reported Digital plus Interxion together for 100% of the quarters. In terms of P&L contribution and signings this quarter is obviously a strong $89 million, the prior quarter was the record $144 million the two of them kind of averaged out to low 100 to 115 or so. And coincidentally our revenue in the in the quarter is now ready to billion dollars. So that makes the math easy for what kind of revenue growth would be kind of going forward called in the low teens, obviously have to net our any churn. But I still think you arrive at a high single digits revenue number at the top line for the aggregate business. And that obviously nets down to that mid single digit square foot per share growth model. I think that headwind or to obviously think about is we are having the less spend this year, well, obvious things less T&E, delay in maintenance of OpEx, right that was going kind of just critical staffing. And assuming we are all fortunate to be in a better place versus this virus next year, we would assume a lot of those costs involve them in some capacity return. Breaking that going back to your first part of the question and looking at the revenue contributions was I don’t I apologize, I don’t have a segment by segment P&L in front of me. But I think I can get to the crux of it, we just look at our development schedule, which is just under 200 megawatts of capacity under constructions 56% pre leased, was returns, it creped up a little bit in our favor, this quarter relative to last quarter. And you can see, relative to our existing mix of business, a disproportionate share of our new capacity coming online is outside the U.S. relative to our installed base. And was not on that schedule given unconsolidated joint ventures Latin America further amplify that math based on the activity we are doing with Ascenty. So, obviously, our growth relative to the install base is much larger in India, in Latin America, and Asia Pacific, given the amount of new capacity that we signed, or bringing online in those markets relative to those bases. Relative and makes sense. Obviously the North American market is by far the most mature and is our largest portion of the pie.

[Michael Rollins, Citi]

Thanks, Andy.

[Andy Power, Chief Financial Officer]

Thank you.

[Operator]

Our next question comes from Jon Atkins of RBC. Please go ahead.

[Jon Atkins, RBC]

Thanks. I wanted to ask kind of a big picture question about energy and sustainability and then a question about lease expirations. So wondered if you could maybe dive down a little bit into future initiatives around sustainability In any kind of future milestones that you are working towards, and then the in the supplemental looks like the lease expirations next year, you know, increase and a lot of that is in kind of the sub 1 megawatt range, although it does tend to there is a bump up in expirations in the annual rent across all categories. And I wondered as we think about 2021, how do we kind of frame that from the standpoint of lease roll downs or increases in rent or churn or whatnot? Thank you.

[Andy Power, Chief Financial Officer]

Bill, do you want to take the first part and I can take the second part on expirations?

[Bill Stein, Chief Executive Officer]

Yes, sure. Hey, thanks, Jon. Okay, here at Digital we are committed to going well above and beyond minimum renewable standards. We think that the consistent renewable sourcing efforts allow us to decouple the growth of our portfolio from the growth in our carbon footprint. Our approach prioritizes cost competitive net new renewable energy sourced within the same grid regions where our data centers are located. We work with electric utilities to support them in bringing new renewables on the grid and our customers strongly prefer local net new renewables and our approach reflects that. We do not use unbundled commodity renewable energy credits. These are called RECs to meet our long-term objectives. We price what’s called additionality in our approach. That’s a concept where more renewables are brought online because of our actions. And also when we sign on to a project early on in its development cycle, it’s important to recognize that as an investment grade counterparty, this enables that project to both be financed and built. Andy, you want to handle the renewals question?

[Andy Power, Chief Financial Officer]

Yes. Thanks, Bill. So, John, obviously, we are still in 2021 budget season, but I don’t – I do look at kind of what’s ahead in 2021 in terms of expirations as being very favorable in terms of volume mix, mark-to-market relative to our history, which I have shared for some time in some of our investment polls you have obviously hosted. If you kind of go to our expiration table and our supp, I look at them really two discreet buckets, the first one being call it that 01 megawatt category, with about 17% of our expirations in 2021, which is concentrated in our most highly connected, highest pricing power sticky albeit shorter term co-location contract bucket, pro forma for our combination about half of that, contracts coming due in that from legacy Interxion in the Western portfolio. So, we do expect to continue to see very strong pricing power there and the other half is really from our legacy North America co-lo portfolio. Overall, the markets are call it major metros, the London and New York cities, Frankfurt, San Francisco, Paris’ in terms of the top markets coming due in that bucket. If you do look at what I think maybe was the emphasis of your question was kind of looking at the greater than a megawatt bucket that category is a little bit less than 8% as you can see on the supp and it has stepped down about 300 basis points from I think the peak was the third quarter of 18%, about over – just over 11%. Other than Ashburn in that category of expirations north of megawatt, no market other than Ashburn is greater than 1%. So, it’s pretty diverse. And when you – I mean, I know it’s a little bit of tough comparison, because we broaden our definition or change our definition slightly when we changed our disclosures a couple of quarters ago, but if you look at the rates per kilowatts, we look at our rates on expiring contracts having come down call it $15 or so per kilowatt in that time period from that prior peak, so setting us up for more favorable comparison. And then last but not least, as I highlighted in the prepared remarks, really the most concentrated expiration is just under 17 megawatts. Fortunately, it is in the Ashburn market, obviously our largest market and probably going to come at a better time given how well our team has done in leasing that market, 90 megawatts of the last 9 months really [indiscernible] organization on that. So I know I am certainly aware of customers right now that are anxiously, awaiting for that adjacent hall in their buildings and one of our connected campuses to become available. So, I think we will be able to weather our way through that. After that concentration, the next largest call it chunk would be less than 4.5 megawatts from any single customer and half of that expiration in Santa Clara, which is a really tight market for us. So, hopefully, I will provide a little bit more color and a little bit more about the [indiscernible] index as what we see ahead in the expirations.

[Jon Atkins, RBC]

That’s very helpful. Thank you.

[Operator]

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

[Jordan Sadler, KeyBanc Capital Markets]

Good afternoon. So, I wanted to start with sort of capital, it would be hard not to notice the move in the stock year-to-date in the extraordinarily low cost of debt, which you guys have availed yourself of Digital has historically been pretty active on the M&A and investment front. So maybe you could tell us what you are seeing in the market today and the opportunity set for inorganic growth as you see it?

[Bill Stein, Chief Executive Officer]

Maybe I will hand it off to Greg to speak to cover the broader M&A landscape. I think you are on mute Greg?

[Greg Wright, Chief Investment Officer]

Sorry can you hear me now? Sorry about that, Jordan, okay sorry about that. Look I think the current market we are seeing today, which I don’t think will surprise you seeing demand for the data center assets is really strong. This was previously really a niche asset class that I would say is going mainstream, or has gone mainstream, we are seeing more core like capital come into the sector, given the strong supply and demand fundamentals, and how well, the sector has performed during the pandemic. And both of those things, I think, combined with the credit worthiness of the customer base, all of those underlying elements drive for more core like capital. So look, we think you are going to continue to see a focus on data center and asset class this capital is capital that was previously invested in areas like offices or strip malls, and they started to migrate towards our space, I would say the environment is increasingly strong right now. So I mean, again, I think we will continue to see strong demand for the sector for quite some time, Jordan, on the M&A front. I think we have seen, we have seen some of these private portfolios trade, and they continue to trade at, decent levels, for example, I mean, you saw the asset that we sold last quarter in the Netherlands, we sold that and it was a non core asset. And we sold it for roughly a 6.7 cap rate. So, look, I think when you look at the overall environment right now, I would say there is a lot of interest and a lot of demand, which should bode well for the sector.

[Jordan Sadler, KeyBanc Capital Markets]

And just maybe as a follow-up along the same lines in terms of let us say, the net dollar of investment, where would you be focused in from an M&A front? Is it increased market share in a mature market like North America or is it adding new markets?

[Greg Wright, Chief Investment Officer]

Look I think there is yes, when you look at our global strategy, I think it’s different for each market. Jordan, I think, look clearly in Asia right now, the way we have been growing is organic growth in our existing markets through land acquisition and development of near term in our existing land bank, right. I mean, we have rolled out products across seven of the APAC markets for example, we created the first network mutual data center in South Korea, we build out a campus of 100 plus Meg’s in Tokyo. I think it was 5 or 10. Meg’s in Osaka, we powered on a 50 megawatt building in Singapore, which is our third asset there. And that you also saw us announce our second site in Hong Kong. So clearly, when we look at, we look at Asia right now. it’s a harder market to grow in, right because it’s much more fragmented. But we like it. I think in terms of Europe and EMEA, I think you got to look at first thing you have look at is really our under construction pipeline, which we had in legacy Digital as well as the legacy Interxion but you look at markets like Frankfurt, Amsterdam, Zurich, Marseille Stockholm, we have assets in each of those markets under construction and really being driven by customer demand, as well as in those in that same European markets, organic growth, again, in existing markets through the land acquisition, or development of our existing land pipeline things places like Madrid, Frankfurt, Vienna in Paris, clearly in that market to, as you saw in this press release, we will have select dispositions in capital recycling. and you will see some redevelopment, right on our head, our campus that Bill mentioned, one of the beauties of that transaction is we get a, we are going to have redevelopment opportunity for several buildings that we did not previously own. I think when you keep going back then across the globe, and you look at South America, Andy mentioned in organics really been organic growth through land acquisitions and development in South America. Again, like all markets, that’s really a customer driven approach. So you talk about incremental dollars, a lot of times where we go is dictated on where our customers want to be right. And I was – there are no two places that are better examples of that in both Chile and Mexico. Obviously, Brazil was the same. And then when you come back to the U.S., which is a more developed market, again, you will see development in select markets. But I think you will see continue to see acquisition of highly connected assets with what we would call established communities and interest in buildings such as the Westin. And again, there just like in Europe, you will see select capital recycling. So, when I say when you talk about incremental dollars, there is just a quick snapshot of how we are thinking about things across the globe.

[Operator]

Our next question is from Matt Niknam of Deutsche Bank. Please go ahead.

[Matt Niknam, Deutsche Bank]

Hey, guys. Thanks for taking the question. So, my questions are on the hyperscale. So one of your peers this morning was talking about getting more aggressive lowering the yields they are targeting for hyperscale deals down to the 8% to 10% range. So I am wondering if you can talk a little bit about the pricing and competitive backdrop you are seeing in the hyperscale arena and whether things are getting more competitive relative to what they have been like in the past? And then just a quick follow-up on enterprise, you talks about record new logo growth and heightened deal velocity at a time when a lot of your peers are actually talking about more growth coming from the embedded base. So, I am just wondering what’s enabling you to win you share, where are these new customers coming from? Thanks.

[Andy Power, Chief Financial Officer]

Hey, thanks, Matt. Maybe I will start off on hyperscale and I will toss it to Corey to speak to what I really thought was a really fantastic quarter when it came to enterprise, in particular. The – I mean, I think the hyperscale arena is something that we have excelled it for several quarters on and year. And I think I got a hunch, the competitor that you were referring to and I think I know it’s a new leadership regime, but I would say that’s, they have been a pretty fierce competitor for some time and aggressive, I have not seen a change in the posture from our day-to-day activities. I think it goes back to Digital, our platform has been able to win more than its fair share by coming to table with many ways to support these global hyperscalers whether it is being across numerous countries and markets, where they want us to grow or they are entering new markets, as Greg mentioned, side by side with them, where there is no truly established player to deliver to our capabilities, whether it is owning the adjacent land holdings that really allows us to future proof that growth and other things like making sure we are delivering the health and safety standards they require and making sure we are operating these facilities to the level that they require as if it was their own building and they have high expectations, I think Digital strives to exceed across the board. And I think you see that paying dividends in our results this last quarter, as I mentioned a second ago, our returns on our development, which are obviously weighted very much to our success within the hyperscale arena, actually went up across a couple of markets. And I think our success in the Ashburn market over the last few quarters, which is a hotly contested market, we have been able to be 100% pre-leased and rather full speaks to our success within that category for sure. So, I think that’s kind of capsulated, I don’t think there is no real dynamic shift in the competitive landscape. I would even say, the customers continue to mature and want to fin down their buying groups with more global partners, trusted infrastructure partners, like the Digital. But Corey maybe you could pick it up and really speak to what you – what we have been doing on the enterprise front.

[Corey Dyer, Executive Vice President, Sales and Marketing]

Yes, thanks, Matt, for the question and Andy for transitioning to me. On the enterprise front, Matt, I think you asked a little bit about where the new logos are coming from and just where the enterprise wins are coming from and I would tell you, Andy referenced earlier record number of new logos. And then we are just excited about the quality of the new logos and what the growth and the future that they can drive as you think through it. Some of the notable wins we talked about were global markets company, there was one of the largest financial derivative exchanges we have signed and convinced during the quarter. We also had a mobile marketing platform that fuels many of the popular mobile gaming that are with [indiscernible] marketing technology and a major participant in the investment industry. So, we just had a really broad base of wins in the enterprise lately. As you think through it, we also kind of keep track of service exchange support. So that went up for us. And then interesting this quarter, more than 50% of our new bookings this quarter, as Andy mentioned, were from deals less than 1 megawatt, which is generally assigned to the enterprises coming to you. And then if you think longer term Matt about where we are going, there is a lot of studies out there that show 80%, 85% of the enterprise, we are thinking about going hybrid cloud strategy. And so as you think about that migrating to hybrid clouds implies that they are going to put some of them in the public cloud, but a majority of it is in their kind of co-location facilities like us. So we don’t see that we see that as an another advantage and something is going to continue to drive more enterprise growth for us. And then there is probably a little bit of COVID, of expediting kind of a transition to a distributed architecture for the enterprises, which again, we are really well positioned to take advantage of. So above and beyond that we are doing a lot with our go to market that we are changing that we did in the last couple of years, that had huge success for us. And then the channel that we have built here in the last couple years has been amazing for us to already normal than 20% of business out of the channel. So feel like we are really just kind of hitting on all cylinders when it comes to the enterprise right now. And I feel really, really happy with what we are doing and where we are progressing the business. Hope that helps, Matt.

[Matt Niknam, Deutsche Bank]

Yes that’s great. Thanks, guys.

[Operator]

Our next question comes from Jon Petersen of Jefferies. Please go ahead.

[Jon Petersen, Jefferies]

Okay, thanks. So on Europe, I am wondering if you could break out the how much of the leasing was legacy Interxion versus legacy Digital, so we can get an idea of like apples-to-apples versus prior years, if that is possible. I know it gets more difficult every quarter we get away from that merger? And then also, I didn’t go back to look at all your supplements. I think this is only the second time that wholesale leasing in Europe was greater than North America Just curious how long you think this trend of kind of strong wholesale/hyperscale demand in Europe will last and when we start to see, if we start to see a shift back to Americas in the coming quarters?

[Bill Stein, Chief Executive Officer]

Hey, thanks, Jon. So to answer both of those questions, the lion’s share of the activity landed within legacy Interxion sites within EMEA. We did have a very strong contribution from the legacy Digital co-lo sites, but overall GAAP wise, it was call it less than 10% of the EMEA contribution. So, as and which should be expected, obviously, the legacy footprints are weighted, their legacy footprint in the EMEA was a fair bit larger than our legacy footprint in EMEA. And then on your question in North America versus EMEA, I mean, I think this kind of goes back to the first question Michael Rollins today asked about, we are certainly seeing outsized growth relative to our installed base in these non-U.S. markets, although I do at the same time, you have to put it in the context. We are coming off a quarter in North America where we absorbed a tremendous amount of capacity in North America, including Ashburn. So, I am not sure I had pointed in the direction that EMEA overall was going to be larger, especially in the plus megawatt category for some extended duration. But we are definitely pleased with the success of our combined EMEA platform. And I think for what I am seeing, we are not done for the year in that category yet as well. I know, another way we are differentiating ourselves with some of these hyperscalars is kind of continue to support them in more and more EMEA markets, not just the traditional flat markets, so some growth leading the flaps has been a great place to where we have had success in EMEA as well.

[Jon Petersen, Jefferies]

Okay, great. That’s helpful. Thank you.

[Operator]

Our next question comes from Sami Badri of Credit Suisse. Please go ahead.

[Sami Badri, Credit Suisse]

Hi, thank you for the question. I just wanted to touch up a little bit on Slide #13 regarding the releasing spreads and this clearly shows a material improvement versus the last couple of quarters. And I just wanted to round out to see if this is essentially, your cleared runway, out of all the releasing spreads at least the majority of the vintages that you guys are trying to process through last couple quarters from prior acquisitions is it safe to say now that this is kind of the new range in this, plus 1%, plus or minus 1% range on releasing spreads for rental changes on a cash basis?

[Bill Stein, Chief Executive Officer]

Thanks, Sami. So, congratulations as yours are in order and some of the IR rankings, so good work there and we are glad to see that recognized. But to answer your question obviously, that those data points are pointing in our favor a bit in terms of our cash mark-to-markets. You saw that in the quarter basically flat to low 20 basis points negative in the less than megawatt category, but basically flat across both and flat overall and what we have put up in terms of renewals in the third quarter. We also improved our characterization of our mark-to-market in our guidance from a beginning we are down low single-digits in terms of our expectations for our cash mark-to-markets. And now we have, in the words of John Stewart, are slightly negative. So, moving in the right direction for sure there, I would put an asterisk or caveat just to be more transparent that you can see in the document here, the readings this particular quarter were overall much more in the call it most highly connected, network oriented megawatt or less type category. So that obviously blends in our favor. Those are locations, both legacy Digital and legacy Interxion with some of our strongest pricing power. And the overall sample set in the greater than megawatt category was certainly on the smaller side. So, I don’t think we are ready to put the victory flag up behind us on this topic, but I do – I am taking some conviction that we are moving in a better direction here, which is the product in some regards of not only the market fundamentals, but also the REIT characterization or complexion of our portfolio that is much more diversified across both the U.S. and non-U.S. markets, more connected and highly connected and now we are going into destinations. So, I do think those things, in addition to the market fundamentals, are helping us on the cash mark-to-markets.

[Sami Badri, Credit Suisse]

Got it. Thank you and thanks for the note. Just one other follow-up regarding channel that came up earlier, I think if someone said at 20% of bookings are coming from the channel, and I just wanted to check on one additional detail there. Has this percentage of contribution from the channel gone up with Interxion or was it always essentially in the 20% range every quarter and with Interxion under the hood? Does that mean that this mix could potentially increase over time?

[Bill Stein, Chief Executive Officer]

Corey, you want to pick on that – pick up on that and I can fill on with some details as well.

[Corey Dyer, Executive Vice President, Sales and Marketing]

Yes, so, Sam thanks for the question. What I would tell you is that our percentage of our sales from a legacy Digital perspective has continued to grow are well over 20%. With the Interxion that might moderate it a little bit, but I think it gives to your point, a huge opportunity for us as we build out the channel globally and we continue to take the same learnings we have had across North America throughout the globe. So, I think there is a huge opportunity for us. I think that was your question. Sorry, if I didn’t answer it.

[Sami Badri, Credit Suisse]

Thank you.

[Bill Stein, Chief Executive Officer]

Okay.

[Operator]

Our next question comes from Brendan Lynch of Barclays. Please go ahead.

[Brendan Lynch, Barclays]

Hi, good afternoon. Thanks for taking the question. I have seen a number of press releases recently, where you are referencing your Data Gravity Index. I am wondering how this has changed your communication with clients, does it lead to them or is it something that they already understand and does it lead to any different type of deployments than the clients otherwise would have?

[Bill Stein, Chief Executive Officer]

Chris, why don’t you share a little bit about what we are doing around Data Gravity and what that means for customers and also Corey, please chime in as well.

[Chris Sharp, Chief Technology Officer]

Absolutely. Thanks, Brendan for the question. No, it’s a very unique formula that’s been evolving over 10 years. And what it really does is it identifies key challenges facing enterprises today around the power requirements and the growth of data, so that we can design solutions to alleviate it. And so I think it’s something that’s unique to – Digital has unique assets to really solve for this kind of ever evolving problem that’s being generated around the massive amounts of data being created. And so what’s unique in the fact that Digital can allow customers to be in proximity to these data ocean that already exists within Digital Realty. And so they have the efficiencies of proximity to those data oceans and then we also provide, most recently, we just did a press release with path AI, where they can now be placed in a space where they can do analytics against that. And so the artificial intelligence trend that’s happening in the industry is another underpinning element of what the Data Gravity Index represents is how customers can get in proximity to existing data, and then also do analytics through AI, with our unique asset class and product portfolio. And so, it’s, a bit of a educational basis, that we really just want customers to be aware of the buyers dynamic and helps them solve for the burgeoning underpinning of data and the amount of data that’s being grown. And I think, there is some great statistics out there where enterprises are going to be creating more and more of their own data in a very distributed manner. And so that is where, you see us being able to solve for not only in our traditional types of offering for these data, gravity problems and the burgeoning sets of data, but also some of the emerging edge workloads as well. And being able to tie all that together in our comprehensive set of product offerings and interconnection capabilities that is really what is underpinning that data, gravity kind of formulas, and just educating our customers of that, and I don’t know Corey if you had anything else you wanted to touch upon?

[Corey Dyer, Executive Vice President, Sales and Marketing]

No, Chris, you did a great job on framing up what it is, what I would also add to that maybe is, it really helps us have a point of view, and, some perspective for customers, as they think through the changing architecture what they are going to need is to go through COVID and get going into much more distributed world. And so you are going to have to start thinking about how you handle data, not just interconnection, alright, and the data that is going to matter to all of us. It’s what really drives all of our businesses. So if you have got some customers that are curious about it we have got a whole bunch of people and team members here that are more than happy to get engaged with to talk about how you can make take advantage of it.

[Brendan Lynch, Barclays]

Great. Thanks for the color.

[Corey Dyer, Executive Vice President, Sales and Marketing]

Thanks.

[Operator]

Our next question comes from Colby Synesael of Cowen. Please go ahead.

[Colby Synesael, Cowen]

Great. Thank you for taking my questions. Just wanted to get an update on the European assets sales that you guys have talked about from a timing and size perspective I have seen some reports where that might be moving forward? And then secondly I appreciate the color you gave on 2021 core assets per share growth of mid single digits I was wondering if you can give us a little more color in terms of what is assumed in there as relates acuity needs leverage CapEx those types of things that obviously have a pretty big impact as well? Thank you.

[Bill Stein, Chief Executive Officer]

Greg, why don’t you start with the overall dispositions of philosophy there and then I will pick up on the second question?

[Greg Wright, Chief Investment Officer]

Hey Colby. How are you?

[Colby Synesael, Cowen]

I am doing good, Greg.

[Greg Wright, Chief Investment Officer]

Good. Well, I am not sure we have ever talked about a specific when we have we know we sold our one asset here in Europe here as we mentioned in the quarter in the Netherlands and we thought it was attractive capital for the asset so look I think when you think about our philosophy or approach when it comes to portfolio optimization I mean look we have talked and we remained focused on capital recycling and portfolio optimization, as I mentioned earlier we think it’s a strong market right now to sell assets and once we sell those assets out of what for us again there are still good assets, these are just not core to Digital, our ability to then turn around and recycle those proceeds and deploy capital and other assets that further align with our strategy. Again, we want to do smart deals that maximize shareholder value. And that is where we are focused. So look, I think, over time, the guidance we gave, I guess it’s been, it was an official guidance. But when we talked in the market, I guess it’s been close to two years ago we said a few billion over a few years. We are about halfway through that now. And, but we have been pleased with the results so far. But again, the good news is, we do that we don’t have to do this, we only do this when we think we are going to get fair pricing, and it makes strategic sense for us. Luckily, Andy and John in the team have the balance sheet with a change so that we are never forced to have to do asset sales, but we do them again, when it’s a fair price and make strategic sense to Digital.

[Colby Synesael, Cowen]

Thanks. I have just one quick follow-up to that, which is your own valuation has gone up since the last asset sale you did with Maple – with the Mapletree. And I am just wondering if that factors into your decision-making when you think about the accretion dilution aspect to these potential sales in the cap rates you can get?

[Greg Wright, Chief Investment Officer]

It does 100%. I mean, we look at – we look and see what we are trading, a lot of times for these assets will run marketed processes. So, we get a true market check, but yes, it definitely factors into our thinking, where our stock is trading and what our redeployment strategy will be. Yes, you can be best believed it factors into our thought and approach.

[Bill Stein, Chief Executive Officer]

And then Colby, just real quick on your second question, obviously, we are not pulling forward on call with our guidance for next year, call it 180 days or whatever it is. But I think the point – that point most relevant to the heart of your question was funding sources and thoughts. Greg touched it little bit, but I think I would kind of capsulate in the following snapshot, obviously, where it stand today at our targeted leverage levels and that’s with a substantial backlog of non-income producing assets that are going to be coming online and producing the EBITDA here shortly to kind of grow our EBITDA without much capital requirements to finish those projects. Two, as you saw, we have got about little more about – little over $300 million of cash sitting on the balance sheet, which is just the net of the capital raise relative to the data preferred redeemed. So, there is kind of cash sitting there, not earning anything as we speak, but obviously we will go towards our funding sources for the next 12 plus months. We have redeemed about $500 million of professional preferred in the last 2 months. So, we do have professional referred capacity and those coupons we have been quoted are close to 4%. Greg touched on potential dispositions in the call it – if we get to the high end of our guidance, let’s call it another $500ish million of size. So also those are un-levered, also contributing equity sources. And then longer term, I think we are going back to that question you just had raised of always continuing to expand our capital partners with sources of private capital where we can put in fully valued, maximized, fully leased long-term assets and retained management control. And we have also not been shy of prudently using the ATM on the margins here. So I think we have got a lot of arrows in our quiver here in terms of capital sources to fund some pretty attractive opportunities we see in the front view mirror here. Thanks, Colby.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Bill Stein for his closing remarks. Bill, please go ahead.

[Bill Stein, Chief Executive Officer]

Thank you, Andrew. I would like to wrap our call today by recapping our highlights for the third quarter as outlined here on the last page of our presentation. First, we further strengthened our connections with our customers, landing a record number of new logos in the quarter with a book of new business remarkably well balanced across customer type and geographic region. We also delivered solid current period financial results, feeding consensus and raising guidance for the second time this year. We further extended our global platform, providing customers a gateway into Southeastern Europe and our runway for growth across the continent, with strategic land acquisitions and new development starts.

Last but not least, we further strengthened our balance sheet, with exceptional execution on $2.5 billion of long-term capital raises and we use the proceeds to retire $2 billion of high coupon debt and preferred equity. I would like to conclude today by saying thank you to the entire Digital Realty family and particularly our frontline team members in critical data center facility roles, who have kept the digital world turning in the midst of a global pandemic. I hope all of you stay safe and healthy and we hope to see many of you in person again soon. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.