Digital Realty Trust Inc

NYSE:DLR

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon, and welcome to the Digital Realty Fourth 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 bottom of 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 of 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'd like to hit the tops of the waves on our fourth quarter results. We delivered high quality quarterly bookings in terms of total volume as well as the product mix, geographic split and the number of new logos landing on PlatformDIGITAL. We extended our global platform entering Greece with the acquisition of the leading colocation and interconnection provider in Southeastern Europe and securing customer growth in existing markets around the world with key land purchases and new builds.

We delivered solid financial results with core FFO per share $0.08 ahead of consensus driven by operational outperformance. Finally, we further strengthened the balance sheet, lowering our weighted average cost of debt with the redemption of high-coupon debt and preferred equity, while extending our weighted average duration with the issuance of attractively priced long-term capital.

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

[William Stein, Chief Executive Officer]

Thanks, John. Good afternoon, and thank you all for joining us. The fourth quarter capped off a transformational year for Digital Realty. We acquired several highly connected assets, including the Westin Building in North America and InterXion in EMEA along with the leading colocation and interconnection providers in Southeastern Europe, significantly expanding our platform in EMEA while trimming non-core assets in North America.

We delivered record bookings for the full-year, an extraordinary performance under any set of circumstances, but particularly amid the headwinds of a global pandemic. Our business is increasingly global. In 2020, we nearly doubled the number of countries where Digital Realty has a presence and EMEA accounted for more than half our fourth quarter bookings. The first time ever a majority of our bookings has been outside the Americas.

We more than doubled our Cross Connect count in 2020, reflecting the growing concentration of network-dense highly connected assets on PlatformDIGITAL. We landed a record number of new logos in 2020, more than twice as many as our previous record, in fact, driving consistent growth in our enterprise colocation and interconnection business.

The Viber communities on our campus environments are attracting a growing set of new customers, diversifying and solidifying our revenue streams. Service providers and enterprises alike are strengthening their partnership with a select number of trusted global data center partners to help meet their growing needs around the world, and Digital Realty is uniquely well-positioned to serve as their partner of choice.

Let's turn to our sustainable growth initiatives here on Page 3. In October, we formally committed to reducing direct and indirect emissions by 68% and indirect emissions in our value chain by area by 24% by 2030 in line with a 1.5 degree climate change scenario. We set our target with science-based targets initiative along with over 1,000 organizations that have committed to reduce emissions. And we also signed the UN Global Compact Business Ambition for 1.5 degree C joining leading companies who have committed to ambitious carbon reduction targets.

In early December, we announced that our operations in France were on target to achieve a carbon-neutral footprint by the end of the year, and are expected to remain carbon-neutral through 2030 for both existing facilities and future expansion based on scope 1 and 2 emissions. In mid-December, we were honored to receive NAREIT’s Leader in the Light award for data center sustainability for the fourth consecutive year.

In early January, we issued our fifth green bond, extending our lead as the largest U.S. REIT issuer bonds committed to sustainable investments. Our green bond framework is aligned with leading global best practices, including GRESB’s green bond principles, as well as the UN Sustainable Development Goals and Sustainalytics has provided an independent second party opinion, including that our green bond program is considered robust, credible and transparent.

We are committed to minimizing our impact on the environment while simultaneously meeting the needs of our customers, our investors, our employees and the broader society. In terms of our social efforts, we recently selected diversity, equity and inclusion as one of four company-wide philanthropic areas of focus in addition to sustainability, disaster relief and STEM education.

As you maybe aware, NAREIT recently instituted a dividends through diversity and inclusion program, which I am honored to be co-chairing along with Tom Baltimore of Park Hotels and Debbie Cafaro of Ventas. Dividends through diversity will promote the recruitment, inclusion and advancement of women, minorities and other under-represented groups and REITs in the broader commercial real estate industry.

We have also joined leaders across 85 industries in signing the CEO Pledge on CEO Action for Diversity & Inclusion, an initiative that aims to rally the business community, to advance diversity and inclusion in the workplace and to cultivate a trusting environment where employees feel empowered to have discussions on these topics.

Participating in these programs and others like them is critical to our industries future because it is the right thing to do and because we serve a broad, diverse community and we believe that to help our customers prepare for the future, we need industry professionals whose insights and perspectives reflect the communities we serve. We are doing our best to play a constructive, proactive role in advancing our broader goal of delivering sustainable growth for all our stakeholders, investors, customers, employees and the communities we serve around the world.

Let's turn now to our investment activity on Page 4. We continue to expand our global platform with the acquisition of the leading colocation and interconnection provider in Southeastern Europe, groundbreakings and existing markets across EMEA and strategic land purchase on the continent and in Asia Pacific. In early November, we acquired Lamda Hellix, the largest carrier-neutral colocation and interconnection provider in Greece led by an accomplished management team who will continue to manage the business.

As leading service providers continue to expand their footprint, we expect Greece and other parts of Southeastern Europe will be major beneficiaries. We are well positioned to capture the key cloud and connectivity deployments that will accelerate the regions digital transformation.

In Denmark, we began construction on our third data center adjacent to the two existing facilities on our Copenhagen campus and offering direct access to leading global cloud providers, numerous networks, Internet exchanges and a transatlantic subsea cable system.

We also broke ground on a new data center in Zürich, where we have seen robust demand from leading global service providers. The expansion of our Zürich campus will provide runway for customer growth at the leading cloud and interconnection hub in Switzerland. We also acquired a land parcel within one kilometer of our highly interconnected campuses in Vienna and halfway around the globe in Sydney, we are under contract to acquire two parcels that will support the development of up to 250 megawatts. These strategic land holdings will provide additional capacity, enabling local and global service providers to seamlessly expand adjacent to their existing deployments.

Let's turn to Page 5 for an update on the InterXion integration. The successful integration of InterXion was our top priority for 2020, and we made excellent progress despite the pandemic. We build a solid foundation for the assimilation of our businesses and we are well on our way to achieving the objectives and synergies we outlined when we first announced the transaction. I am proud of what we've accomplished today and excited about our prospects as we move into the implementation phase in 2021.

When we announced the transaction, we stated that the combined company would have enhanced capabilities to address and so the public and hybrid cloud architecture requirements of our global customer base that would allow us to build upon each company's current relationships with leading global customers, while also enabling us to effectively compete in the broader target markets.

The early results are very promising. We've enjoyed excellent success with global platform providers and early cross-selling wins have surpassed expectations with numerous referrals between the sales teams. The significant embedded growth potential was another key element of the InterXion and investment thesis. We believe the combined organization has already created significant long-term value by executing on the existing development pipeline, acquiring the freehold to the land under key positions in Frankfurt and Paris and securing land in key markets to support future growth.

Let's turn to demand drivers on Page 6. We continue to be fortunate to be operating in a business leverages secular demand drivers. As the leading global data center provider, we have a unique vantage point that enables us to detect secular trends as they emerge. We recently introduced the Data Gravity Index, which measures, quantifies and forecast the growing intensity of the enterprise data-creation life cycle and its gravitational impact on global IT infrastructure. This groundbreaking index is a by-product of our market intelligence analysis as well as our obsessive focus on understanding customers’ deployments and supporting their evolving infrastructure needs.

Recent third-party research continues to support the growing relevance of Data Gravity. According to the market intelligence firm IDC, 80% of the world's data will reside within enterprises by the year 2025. A 451 Research global IT leader survey recently found that 87% of IT leaders will need to maintain local copies of critical data and global points of presence to meet regulatory requirements.

We continue to see these indicators as enterprises expand their private data infrastructure deployments and integrate data exchange with adjacent business and service provider partners across our global platform.

Digital Realty recently received Frost & Sullivan's APAC Data Center Strategy Innovator award, recognizing PlatformDIGITAL for providing an innovative global platform enabling enterprises to scale digital transformation in a consistent modular fashion and addressing the unique infrastructure requirements for integrating private data flows across multiple public platforms. We are honored by the strong validation of our platform and our market-leading innovation to meeting the needs of our global data center customer base.

Given the resiliency of the demand drivers underpinning our business and the relevance of our platform in meeting these needs, we believe that 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'd like to turn the call over to Andy to take you through our financial results.

[Andrew Power, Chief Financial Officer]

Thank you, Bill. Let's turn to our leasing activity on Page 8. We signed total bookings of $130 million in the fourth quarter, including a $12 million contribution from interconnection. Network and enterprise-oriented deals of one megawatt or less totaled $31 million, building upon the consistent momentum throughout the year and demonstrating the growing success of PlatformDIGITAL as we continue to capture a greater share of enterprise demand.

The weighted average lease term was over eight years. We secured 120 new logos during the quarter with more than half of those new logos landing in EMEA, again, demonstrating the power of our global platform. EMEA accounted for more than half of our fourth quarter bookings while Asia Pacific contributed over 15%. As Bill mentioned, this was the first time the majority of our bookings were outside the Americas.

In terms of specific wins during the quarter and around the world, a rapidly growing cloud-based cybersecurity provider selected PlatformDIGITAL for multiple environments in London and Boston to facilitate modernization and embrace high performance compute technology while maintaining an exceptional user experience.

In New York, the Digital Realty’s teams’ deep understanding of a global retailers growth strategy enabled us to tailor a solution for their Americas markets on PlatformDIGITAL. We also overcame lockdowns and international travel restrictions to demonstrate to a digital telecom provider as they can leverage PlatformDIGITAL to meet their current and future growth requirements in existing and targeted markets at their required pace.

A rapidly growing gaming platform experienced their hedge to rewire their network and optimized data exchange with third-party clouds, the growth of their existing footprint with us in Northern Virginia and a new deployment in Chicago. Likewise in Chicago, a global exchange operator leveraged PlatformDIGITAL to extend their access into our highly interconnected community. In Singapore, two leading global financial services firms expanded with Digital Realty due to our platform offering and long history of operational excellence, while a software developer selected PlatformDIGITAL to expand their proprietary cloud offering into the region.

Turning to our backlog on Page 10. The current backlog of leases signed, but not yet commenced reached an all-time high of $269 million. The step up from $229 million last quarter, reflect $78 million of commencements during the fourth quarter offset by roughly $118 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 8.5 months.

Moving on to renewal leasing activity on Page 11. We signed $156 million of renewals during the fourth quarter in addition to new leases signed. The weighted average term loan renewals signed during the fourth quarter was a little over three years, reflecting a roughly even split in the mix between deals above and below one megawatt. Cash re-leasing spreads on renewals were plus 1% and cash rents were positive on renewals above and below one megawatt, an encouraging sign for pricing. We retained 79% of expiring leases in line with our long-term historical average.

In terms of fourth quarter operating performance, overall portfolio occupancy improved 40 basis points, driven primarily by leases commencing on recent deliveries in Ashburn and the sale of a vacant building in Amsterdam. Same capital occupancy was down 40 basis points from the third quarter due to no move-outs, partially offset by positive absorption in Silicon Valley and Chicago.

Same capital cash NOI growth has continued to improve since bottoming in 2019 and ticked up slightly to negative 1.6% in the fourth quarter. For the full-year, same capital cash NOI growth was negative 1.9% or a little over 100 basis points better than initially expected. As a reminder, the Westin Building, InterXion, Lamda Hellix and Altus IT are not yet included in the same store pool, but we expect each of these acquisitions will be accretive to our organic growth going forward.

Turning to our economic risk mitigation strategies on Page 12. The U.S. dollar softened in the second half of the year, providing a bit of an FX tailwind in the fourth quarter, relative to the prior year average. Overall, FX represented roughly a 50 basis point tailwind to the year-over-year growth in our reported results. 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 the 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 our 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, the fourth quarter core FFO per share was down 0.6% year-over-year, but $0.08 ahead of consensus driven primarily by operational outperformance. For the full-year, core FFO per share came in $0.22 or nearly 4% ahead of our initial guidance. As previewed on our third quarter call, we expect to deliver double-digit revenue growth driven by a full-year contribution from InterXion and the record colocation in interconnection and overall bookings in 2020. We expect that EBITDA margin will remain in line with the fourth quarter throughout 2021.

As Bill mentioned, we remain on track to achieve the synergies we underwrote on the InterXion transaction. Although the rationale for the deal has always been accelerating revenue growth rather than realizing expense synergies. We've already made great strides on our financing plans for the year with a highly successful 1 billion green euro bond offering in early January at five eights in addition to solid progress on the capital recycling front.

As always, we expect to remain nimble for the rest of the year and we may look to capitalize on favorable market conditions to lock in long-term fixed rate financing at attractive coupons across the currencies that support our assets to proactively manage future liabilities.

In terms of FFO per share guidance, our forecast is largely unchanged from the preliminary outlook we previewed on the third quarter call, although the year-over-year bar has been raised in the interim given the outperformance in the fourth quarter. At the midpoint, our 2021 guidance represents growth of approximately 4%, which includes near-term dilution from capital recycling.

In terms of the quarterly run rate, we expect the split between the first half of the year and the second half of the year to be approximately 49/51. In other words, as you can see from the bridge chart on Page 13, we expect to dip down by about a nickel in the first quarter, then to ramp up fairly steadily over the rest of the year.

In terms of the quarterly dividend, the distribution policy is ultimately a Board level decision. Given the continued growth in our cash flows and taxable income, we would expect to see continued growth in the per share dividend just as we have each and every year since our IPO in 2004.

Last, but certainly not least, let's turn to the balance sheet on Page 14. During the fourth quarter, we continued to execute on our financial strategy of maximizing the menu of available capital options or minimizing the related costs and extending the duration of our liabilities to match our long-lived assets.

Fixed charge coverage reached 5.1x, reflecting the results of our proactive liability management. Net debt-to-adjusted EBITDA was slightly elevated to 6.1x as of year-end, but is expected to come back down in line with our long-term range over the course of the year through the combination of proceeds from asset sales and growth in cash flows as leases commenced from the record leasing activity in 2020.

In mid-October, we redeemed £300 million or 4.75% sterling bonds due in 2023. We also redeemed $250 million of high-coupon series G preferred at [5.78%]. In early January, we raised a 1 billion of 10.5-year green euro bonds at an all time low-coupon for Digital Realty of 0.625%. We also retired $350 million of 2.75% bonds due in 2023. And we paid all $530 million outstanding on the term loan due in 2023. This successful execution against our financial strategy reflects the strength of our global platform, which provides the 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 chart on Page 14, we've extended our weighted average debt maturity out nearly seven years or ratcheting our weighted average coupon down to 2.3%, and little over half our debt is euro denominated reflecting the growth of our global platform post-InterXion and acting as a natural FX hedge for our investments outside the U.S. 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 14, 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 would be pleased to take your questions. Andrea, would you please begin the Q&A session?

[Operator]

We will now open up the call for questions. [Operator Instructions] And our first question comes from Jon Atkin of RBC. Please go ahead.

[Jonathan Atkin, RBC Capital Markets]

Thank you. So the first question is regarding leasing and you talked about logo capture, but I wondered of your largest kind of multi-megawatt deals, any kind of highlights by geography or type of company. And then the second question kind of gets to M&A and divestitures and new market entry and kind of any – any kind of a highlights to call out in terms of your appetite for any of those types of projects heading into 2021?

[Andrew Power, Chief Financial Officer]

Hey. Thanks, Jon. I can probably kick it off on the question on the multi-megawatt side, and then I'll probably hand it over to Greg to speak to M&A. So I'm very pleased with the results overall in terms of 4Q. I think the diversity of the platform really shine through in both categories, not only the less than a megawatt in interconnection, but also on the scale or hyperscale plus. If you do a quick kind of run through the regions, EMEA, first time more than 50% of the signings, it was very diverse. There were six different markets across the EMEA that did a north of a megawatt deal each.

So it was London, Paris, Marseille and two others [indiscernible] escaping my mind. And then over in the Americas, we had both in Ashburn and also in Hillsborough, and the cast of characters for all these are the combination of the major CSPs, SaaS providers and call it, B2C hyperscalers as well.

And then last but not least, I'm pleased with the results in both Brazil and we signed our second customer in Santiago, Chile, in the hyperscale arena, another top CSP. And then last but not least, had a project with a top three CSP down in Sydney. So really diverse contribution from numerous major metros. And I'll turn it over to Greg to pick up on the M&A piece.

[Jonathan Atkin, RBC Capital Markets]

Actually just continuing on that, as you look at the pipeline into 2021 whether you, Andy or Corey would want to comment, but is there any kind of change in procurement activity or just dialogue with your customers that gives you particular confidence around repeating some of this recent momentum?

[Corey Dyer]

Hey, Jonathan. This is Corey. I appreciate it. Just broadly on the sales funnel, I'll just tell you that we're happy with the momentum and the success we had in 2020. We see that continuing. I think Andy mentioned to you the regional variances that we've had, meaning first time that EMEA is our largest region for sales and for bookings there. So that was really good and positive. So we feel good about it. And then regarding the industries, I think you might ask about those that are work that are taking advantage of the current work from home are doing more and more quickly with us. And so we're happy about that and how we're supporting them.

And then also we're seeing strength from those industries that were strong prior to the pandemic, cloud, digital media, et cetera. And then those that are being kind of suffering a little bit from it, we're seeing them maintain their IT services and they still got to continue to have our support to go after their mission-critical needs. So we're happy about it. And as we mentioned earlier, year-on-year record growth from new logos, standalone, really good success from digital and InterXion as we combine the two groups. So real happy with the funnel. Hand it back to you – over to Greg, sorry. Go ahead, Greg.

[Greg Wright]

Why don't I take it? Okay. Thanks Corey. Hey Jon. Hope you're well. Let me – I guess in the order, let's go with M&A first and we can talk about the divestures, which are somewhat related. Like I think with respect to M&A, as we've said before, like we remain focused on integrating InterXion, while doing a few tuck-in acquisitions as we would call them like Altus IT in Croatia and Lamda Hellix in Greece. Look, we think the M&A is likely to be more episodic than annual. I think we've already said that. And look, as we look at the M&A environment right now, we would say it's probably gotten more competitive over the past year as additional capital is coming to the space. But we also think this could serve to benefit us as we seek to dispose of assets in our capital recycling program.

Look, with respect to our divestitures or capital recycling, our criteria for asset sales remains consistent with our prior commentary. We're seeking to sell non-core assets and select non-core markets. Today, we follow these criteria and dispose of various PBB assets and other quality standalone assets. That really just are not part of our Connected Campus strategy. We're about $1.5 billion through the multi-year guidance we gave, which was to sell a few billion of assets over a few years.

The good news for us is we don't need to sell these assets. So we have the ability to be strategic and only offer these assets [indiscernible] that we are going to receive a fair market value for the assets. And we do expect that these assets sales that will recycle their capital will provide some of the capital needed for our development program this year and going forward. Again, that's really the state of play. Again, tuck-in acquisitions are going to be more focused deals that are strategic, but as both Croatia and Greece where there are highly connected assets in the regions. The assets combined with the management teams provide a strong launching pad for further activity in the region. And that's really the way we look at it and we'll continue to try to find similar deals like these two to the extent we can.

[Operator]

The next question comes from Michael Funk of Bank of America. Please go ahead.

[Michael Funk, Bank of America Merrill Lynch]

Yes. Thank you all for the questions. Two if I could. First, I noticed the GAAP base rent per square foot step down across the regions quarter-over-quarter. Can you comments on that?

[William Stein, Chief Executive Officer]

Hey, Michael. So I think there's a two items to note in there in particular. And I think you're mostly talking about the greater than megawatt because I thought we had pretty strong pricing power on a less than a megawatt category, more enterprise network workloads landing in those sites. On greater than a megawatt piece, it's a little bit of apples and oranges – and comparing each market quarter-over-quarter, you’re probably better off going back to the second quarter in terms of more of an apples-to-apples comparison in volume. And then in the fourth quarter we had a particular deal structure that – SKU that stat lower in terms of reported results.

You may recall a year or two ago in the Ashburn market, we did a almost build a suite type project where we built a rather large 36 megawatts Shell for a customer that was paying us for that Shell on a long-term lease. And then we dropped down and built out suites in six megawatt or still increments over time. So the takedowns of those suites happen, you're only getting a fraction of the entire economic cost for that customer flowing through our leasing stats because we already recognized the signing and already realizing the return on the Shell. And that phenomenon happened actually in North America and also in Asia Pacific, this particular market.

Strategically, I mean, it's great tool in our toolkit that I would say not all competitors can really have, really given a customer the runway that they desire and the timing flexibility and digital with it scale and breadth of portfolio and as well as our land banks are able to kind of structure those types of transactions that I think is a strategic advantage for those types of customers.

[Michael Funk, Bank of America Merrill Lynch]

And then Andy, on the FFO growth bridge you provided, maybe how it actually quantify the impact from the potential sales, the $600 million to $1 billion. Can you quantify that for us?

[Andrew Power, Chief Financial Officer]

Yes. So we reiterated really the same quantity of capital cycle for this year as last year. We feel good near-term on the lower end of that range. It's a contributor to the, call it, 4Q to 1Q, bridging the quarterly rhythm of core FFO. Just kind of rough math. If we kind of just hit the low end of that range, $600 million, use the same type of cap rate we are using for the last outright sale. We did call it a mid to low-six cap. You call it about $40 million of NOI and our share count could be as high as 2%. Now that's assuming you sold the entirety of those assets the first day of the year, and you didn't have any redeployment of proceeds. So when you kind of use the appropriate calendarization based on our expectations and also redeploy those proceeds, either paying down debt near-term or in lieu of really equity, I would call it a ballpark in 50 to 100-ish type basis point headwind to our year-over-year growth that is.

[Operator]

The next question comes from Matt Niknam of Deutsche Bank. Please go ahead.

[Matthew Niknam, Deutsche Bank]

Hey guys. Thank you. [Technical Difficulties] but has not happened yet. I just want to clarify. And then secondly, more related to hyperscale in the U.S., if someone could just give an update on the pricing competitive backdrop you're seeing within hyperscale and whether deals are getting any more or less competitive than they've been in the past? Thanks.

[Andrew Power, Chief Financial Officer]

Sure. So two elements. First on your base. We definitely had some outperformance in the fourth quarter that we highlighted in the prepared remarks. Some of that was, call it, operational-related just commencing revenue faster, but some of it was out of our control and FX was a tailwind. As you saw the U.S. dollar kind of plummet and then retrench into 2021. So that makes a little bit of an apples to oranges comparison between 4Q and the run rate for 2021.

The answer to your question on the dispositions, other than a small one-off asset for, I think, $6 million, we have not executed on any of the next leg of capital recycling yet that we framed as a – at a low range of $600 million to high range of $1 billion, and we expect the low end of that range to be executed upon in the pretty near-term future here. Hence, when you sell that quantity of assets even at a 6, 6.5 cap rate, you have immediate loss of that income.

Just to remind you Matt and then the broader audience, the dilution or near-term, we think, a) is offset by longer-term accretion. We're selling non-core slower growing parts of our portfolio and using that capital often in lieu of equity to fund our growth. And two, that dilution is baked within the approximate 4% year-over-year growth. So we're arriving at that year-over-year growth comparison off outperformance at the last and back half of this year and absorbing that dilution. So it's not incremental to the guidance that we've already laid out.

[Matthew Niknam, Deutsche Bank]

Got it. And on the hyperscale?

[Andrew Power, Chief Financial Officer]

Thank you for reminding me the first question. Matt, your question was about hyperscale pricing and the like.

[Matthew Niknam, Deutsche Bank]

Yes. Pricing and competitive nature because we've heard maybe some anecdote thing, it was maybe on the margin. Things were beginning to get a little bit better. But I'm just curious to get your take in terms of what you've seen.

[Andrew Power, Chief Financial Officer]

Yes. I think the – a couple of data points that I would say point to our continued confidence in the opportunity set and really differentiated offering that I think allows us to outshine our competitors, especially any fledging, we're newer competitors. One, you've seen now a string of quarters in a row where we have a global platform offering for the hyperscalers and to address their pain points, future-proof their growth and deliver operational excellence across now, 49 metros, six continents, 24 countries.

So the trend has been our friend in terms of success there. I think if you look to our development pipeline that stepped up about 13% quarter-over-quarter, now 220 megawatts or so under development, still about 55-ish percent pre-leased. You've got to imagine there's a lot of hyperscale business in that. I think the returns have been pretty steady in that category, if not stepped up in certain regions. I'm not saying or blushing off that there is – some of this business is competitive. I think our most competitive market is certainly the U.S. In that market, I think our value proposition has allowed us to – even in a challenged market like Ashburn do particularly well with all of our customers, but hyperscalers in particular.

And I think if you then look where the pipeline is going and where the growth for our business is going, we're seeing more and more opportunities to generate higher returns from both our colocation and interconnection offering, but also serving those hyperscalers in places where we have a really differentiated value proposition. Certainly tighter markets like Santa Clara in the U.S., but international markets like Frankfort, Marseille, Brazil and Singapore as well. So listen, not saying that hyperscale became an easy business overnight, but feel very good about what we're delivering to those customers.

[Operator]

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

[Jordan Sadler, KeyBanc Capital Markets Inc.]

Thank you. Good afternoon. Andy could you just elaborate on the downtime on vacancy a little bit that sort of baked into the sequential nickel decline you're pointing to on Page 13. I'm not sure if that factored into the 1.3% churn you saw in the fourth quarter, or if that's sort of hitting elsewhere?

[Andrew Power, Chief Financial Officer]

Yes. I would say that the fourth quarter actually – and then I'll get to the first part of your question, Jordan. The fourth quarter actually was pretty pleased with the customer retention and pricing dynamic in both categories in terms of pricing, in both categories in terms of retention and potentially called in the 80s and positive mark-to-markets for both above and less than a megawatt.

The impact that we see hitting 2021, but certainly the first quarter of 2021 really goes back to what I mentioned in our call a quarter ago. We ended the year with our largest amount of non-retained capacity in any given market, just under 17 megawatts coming back to us. It literally came back to us the first of the year. The customer had both physical and economic occupancy of the suite until the year changed. It's across multiple suites, across numerous campuses in Ashburn. We're going to – we're refurbing that capacity and getting it back out to the market. Of that 17 megawatts, I can tell you, we've already released to a new customer. They haven't commenced yet, but they've signed for it, 2.3 megawatts, we're likely to take another 2.3 megawatts suite and convert that to productized colocation given the success of our offering in the market.

And then we've got a pretty strong pipeline for those other opportunities of vacancy. And it is a bit serendipitous in our favor that we've had such success in Ashburn. Despite the broader market challenges is that we're being able to focus all our efforts in re-leasing that capacity because our newest building doesn't come online until roughly the July 1. So really it's that downtime until we get the new customers and new shapes and forms, certainly taking a temporal hit to 2021 in the first quarter.

[Jordan Sadler, KeyBanc Capital Markets Inc.]

And what's the biggest chunk of the 17-meg. You mentioned 2.3 is already been re-leased. They're not contiguous, but biggest contiguous chunk. And then just back to the $0.05. Is that – the bulk of that coming from this departure? And how will this hit 1Q, maybe you talk about 1Q and 2021 churn guidance overall?

[Andrew Power, Chief Financial Officer]

So let me try to unpack a few there. So the biggest hall is the 2.3 megawatts, but there's numerous contiguous halls. So if we wanted to – if a customer wanted to have numerous contiguous halls, which certain customers value that. I think we can string six or so of those together. I'm sorry that can't be right. I'm looking at the wrong schedule here. We're going to – we can string, I think, three of those together of contiguous data halls, but each POD is roughly a 2.3 POD. That is the largest driver to the $0.05, in terms of quarter-over-quarter step down. And then Jordan could you just remind me the second part or the third part of your question there.

[Jordan Sadler, KeyBanc Capital Markets Inc.]

Just churn. So what do you think if churn was 1.3 in 4Q, what would it be in 1Q and then just maybe full-year expectation while we're at it?

[Andrew Power, Chief Financial Officer]

So that's a greater than a megawatt capacity churn, or less than a megawatt capacity churn looks like it's going to be basically in line. And I don't have the implied first quarter churn. I think the 80s steps down on a full-year basis to call it like 69% for the full portfolio in the greater than a megawatt territory. But you can use 17 megawatts as a proxy, and you can see our quantities of expirations. I don't have all the ingredients to give you the exact math on the first quarter measurement right here.

[Operator]

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

[Jonathan Petersen, Jefferies LLC]

Great, thanks. Just a couple from me. So the recurring CapEx and the fourth quarter looks a little elevated. I wonder if there's just anything that we should be thinking about there and how it will trend in the next year on a quarterly basis.

[Andrew Power, Chief Financial Officer]

Yes. Not just for recurring CapEx, but I would say some of the OpEx as well. You're seeing some of the COVID fluctuations. If you look at the – I think it's scheduled $28 million recurring CapEx step down to – as low as $34 million in the first quarter of 2020, $38 million in the second quarter of 2020, then $53 million and $83 million. So we did have a little bit of a catch-up period in terms of call it timing. As you can see, Jon, our guidance for the current CapEx for all of 2020 is roughly the same numbers as prior year. So $220 million, I believe, or $230-ish million.

So we have a little bit of fourth quarter catch-up in there. Just the only major items we had – we had some refresh capital and some second generation space and I think we’re converting to colocation, when a [PEB or TKM] customer had exited. So that kind of hits – that's not first-generation so it hits through the recurring CapEx. I think that's a product of, call it, maturation of our portfolio and customer to new types of customers in different shapes and forms. But I wouldn't – you can't just analyze that as next year. You've got look to our guidance table for more appropriate view for the full-year 2021.

[Jonathan Petersen, Jefferies LLC]

Okay. All right. And then I kind of ask about market rents. I mean, do you guys have a sense maybe if we just think about your greater than one megawatt tenant. Do you have a sense of where the mark-to-market is on in place rents versus market rents? And then, I know you talked about your leasing spreads being relatively flat this year. But I mean, based off the market dynamics that you're seeing, what are your expectations for rent growth over this year and over the next few years? Are we to a point where we can start to see rents start to grow again?

[Andrew Power, Chief Financial Officer]

I think, there's a couple relevant data points to look at that. Obviously the activity we are seeing coming through our renewal activity both in the fourth quarter as a trajectory throughout the year. And we had consistent progress to the point where we had positive plus one megawatt cash renewal spreads in 4Q. Some of the stronger markets were renewed and shining through there. Santa Clara was a standout in that renewal. We have not – our guidance includes a slightly negative outlook for the cash mark-to-markets, but, I know we used the language there instead of exact numbers. I think our language is less conservative than it was last year. So I think we're moving into better territory.

If you look at just the lease expiration schedule in 2021, I think we're getting into a better place both in volume mix and mark-to-market relative to leasing history. You called out particularly the greater the megawatt category, which is called 7.5-ish percent of our expirations down from a high, call it over 10% at one point. It's pretty diverse with no market other than Ashburn being even greater than 1%.

And the mix and geographically, you're seeing a sizeable part component from not only Santa Clara, our titers U.S. market, but also our international markets in the coming contracts. And then last but not least just looking at the new signings because more of a forward indicator of what to come, by and large in the greater than megawatt category I saw – we saw pretty good firmness in the pricing. And I would – as I say strengths in Americas were, call it New York, Chicago, excuse me, I’m looking at the wrong schedule. In the greater than a megawatt, you had pretty much stability in both Northern Virginia and Portland.

Again, it goes back to that structure I mentioned previously where the customers taking down shells at pre-committed rates at their discretion. So really not room for negotiation there and a desire for them to grow with adjacency. And then EMEA, we saw strength in the greater than megawatt plus category for Zurich, and Marseille were particular standout markets. And then last but not least, Singapore, that market has been a star. And I think you're going to see that continue into 2021. And that is certainly a market where we're doing a sizeable amount of megawatt plus activity as well.

[Operator]

The next question comes from Michael Rollins of Citi. Please go ahead.

[Michael Rollins, Citigroup Inc.]

Thanks, and good afternoon. Curious, probably two things if I could. The first is if we turn to Page 25 of the supplemental, you provide the development yield by region that you're expecting. And just curious for your take on the movement over the last few quarters where it seems like North America has moved up a little bit. EMEA is down a little bit. Asia-Pac near the level on this page. And where do you see that going over the next couple of years based on the activity and the demand in the pipeline?

And just separately, curious to go back to one of the comments, I think Bill made it at the beginning of the call, describing that some of the larger customers are choosing a select number of global data center partners. And curious just on that theme, are you seeing a greater percentage of your large customers embraced multiple providers? Or are you seeing more of a winner-take-all evolution where one data center provider could take the disproportionate share of business from some of these customers? Thanks.

[Andrew Power, Chief Financial Officer]

I’m going to give Bill the honors to answer the second part of the question first, and then I'll come back and do the numbers questions on development cycle on Page 26.

[William Stein, Chief Executive Officer]

Yes. Thanks for the question. We're definitely seeing a shrinking of the number of participants in the business. I think that clearly plays to our strengths, but I think that COVID in particular has demonstrated the importance of having a very credible counterparty on the other end of these partnerships and we’ve received excellent feedback from our partners, particularly among the hyperscalers about our procedures around not just COVID, but some of the other social unrest that has occurred in the last several quarters.

[Andrew Power, Chief Financial Officer]

And then Michael on your second question, I mean, I think there's a few observations and some of this is repetitive. The development pipeline, one, you're missing it from here because it's a unconsolidated self-managed joint venture is not on the schedule. But we've seen tremendous activity in Latin America, including a continued growth in Brazil. Not only our first, but second customer in San Diego, Chile and probably expect us to experience the same in terms of our second customers landing into New Mexico City.

On this schedule, the volume has stepped up about 13% to 221.5 megawatts. The pre-leasing has remained roughly intact at 55%. If you go market-by-market, I think you're accurate in seeing this trend of a larger and larger share of our new capacity capital going outside the United States. The Americas region is a little muted because we delivered capacity. That was 100% pre-leased in Ashburn and the shell which will show up with megawatts on the schedule. I think in a quarter or so, just hasn't popped in here, but I still think the thesis is constant. And you're seeing also a year-over-year improvement on the yields in the Americas.

And I think another relevant data point is the non-U.S. markets are also becoming more diverse. In EMEA, as I rattle off at the very beginning of the call, rather ineloquently was across six different EMEA markets with north of a megawatt signings. You can see on the schedule from Amsterdam to Zurich, numerous markets with capacity coming online. And I think the same phenomenon is going to happen. Ours continue to happen in the APAC region as well.

[Michael Rollins, Citigroup Inc.]

Thanks.

[Operator]

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

[Sami Badri, Credit Suisse AG]

Hi, thank you. The first question is on interconnection. You reported the interconnection and the backlog. But can you just give us some color in terms of how that backlog is mapping the respective region? That's the first one. And then the second one is, may Bill, Andy, anyone can really address this. Has digital adopted maybe a different philosophy on speculative construction versus only building with pre-leases in hand? Has kind of the playbook changed a little bit just given the very rapid and high volume leasing that tends to come pretty big cycles that we've seen as the strategy kind of changed a little bit? And I'll leave it at that.

[Andrew Power, Chief Financial Officer]

Bill, do you want to – again, we'll try to do the same format. You take the second question first on strategy and then I can go back to the interconnection details.

[William Stein, Chief Executive Officer]

Sure. So I would say that the strategy today is we don't really go into any of these new markets without a pre-lease in hand, without an anchor. So that's what we've done in Chile. That's what we've done in Mexico. Now we did buy existing businesses, obviously in Croatia and Greece, so that's different. But in general, I think we're looking for one of our good customers that it may – and probably more than one to tell, so they really want us to, to go into that market, and then [indiscernible] an anchor lease with us.

As far as existing markets are concerned, those are used. Those are almost always expansions with existing customers. And that business to be quite Candace is a fast and furious. In some instances I would say the challenge is just keeping up with the demand in existing markets with particularly the hyperscalers.

[Andrew Power, Chief Financial Officer]

And then Sami on your question on interconnection. So quite pleased with the interconnection signing contribution. Yes, it's stepped down quarter-over-quarter, but it was up 4% from the prior quarter and 3Q was quite outsized winter in terms of interconnection signings. The cast of characters are similar in terms of the type of verticals industry-wise that we experienced in the past. Regionally some of the start, I would say the EMEA region, it was definitely a standout in this category not just in the fourth quarter, but on the full-year basis. I believe their interconnection revenue was called up into the double-digits type growth trajectory.

I also – I know you quite asked this question, I also really look at these things part and parcel with the less than a megawatt signings because they also often go hand-in-hand in terms of our most interconnection rich type customers, day one and certainly post-landing with digital. I would say we put up the third quarter or fourth quarter in a row of consecutive growth in that category of a really strong 3Q. We put a record [indiscernible] the interconnection and less than a megawatt or colocation type signings category.

Those are also led by EMEA, but APAC played a great role. We've launched now our colocation offering in Osaka and Singapore and Hong Kong and our first carrier-neutral offering in Seoul, South Korea are right around the corner. So great early days in that category as well regionally. So we're definitely expanding the breadth of the product offering across more and more markets and pleased with the success we're seeing in both the interconnection and the, call it, enterprise and network-oriented less than a megawatt category.

[Sami Badri, Credit Suisse AG]

All right. Thank you, Bill and Andy. And actually just one quick follow-up and this is pertaining mainly to Europe. And since you guys have now kind of integrated InterXion and you've looked at some of the pricing in each of the respective market. Do you expect the cadence or at least the stabilization of pricing or I mean, maybe that's the wrong way to phrase it. The right way to phrase it is marking it up slightly, right, to reflect pricing that looks more comparable to U.S. market.

You guys see – the rate at which you guys are increasing, is that starting to moderate or is pricing relatively flat and consistent and not really changing or evolving much in Europe? I just want to understand kind of like what's going on from a local type of pricing perspective. And I think I'm mainly referring to the zero to one megawatt type leases specifically.

[Andrew Power, Chief Financial Officer]

Thanks, Sami. That was a very elegant way of asking, if you're going to increase cross-sell prices in Europe, I think. But I'm going to pass this over to Chris in a second. But I think we're very focused on delivering as much value to our customers in terms of increased performance, increased security, increased efficiency, and do that in a global platform offering here in PlatformDIGITAL. So it's not a episodic one market, has to match another market. We're very attuned to the customer needs and also supply demand nature in each market. But maybe Chris, do you want to talk to – touch a little bit about our product roadmap and how pricing relates to that?

[Christopher Sharp, Chief Technology Officer]

Absolutely. I appreciate it, Sami. Definitely we look at driving value to our customers through our global interconnected platform, which Bill stated in his prepared remarks, but double our Cross Connect count in 2020 is pretty impressive. And particularly to EMEA, we’re constantly watching exactly how our communities of interest have really grown there with network dense highly connected assets as a part of PlatformDIGITAL, but we absolutely align our Cross Connect pricing based on the market dynamics within EMEA. And we'll continually evolve our platform to ensure that pricing is aligned with the value that we see these communities of interest continually getting out of the platform.

But one of the things that we're very happy about is we continually see the attach rate within each of these markets continually increasing and it's core to our platform going forward, that we removed complexity from the customers so they can get access to that value in a more simplistic fashion. So you'll see that play out over the coming year and exactly how we achieved that. But it's something that we're constantly watching and making sure that the customers are getting the true value that they need in a very simplistic fashion.

[Operator]

That concludes the question-and-answer portion of today's call. I'd like to turn the call back over to CEO, Bill Stein for his closing remarks. Bill, please go ahead.

[William Stein, Chief Executive Officer]

Thank you, Andrea. I'd like to wrap up our call today by recapping our highlights for the fourth quarter as outlined here on the last page of our presentation. First, we've further strengthened our connections with our customers, meeting more of their needs beyond the U.S. and reaching a much broader set of enterprise customers with our enhanced colocation and interconnection product offerings.

We delivered extremely solid current period financial results, delivering full-year FFO per share that was nearly 4% above our initial guidance. We extended our global platform, providing customers with a gateway into Southeastern Europe and runway for growth around the world with strategic land purchases and new development starts.

And last but not least, we further strengthened our balance sheet, extending our average duration while further ratcheting down our average cost of debt by locking in attractive pricing on long-term capital and retiring high-coupon debt and preferred equity.

I'd like to conclude today's call by saying thank you to the entire Digital Realty family, but particularly our frontline team members in critical data center facility rules who have kept the digital world turning in the midst of this global pandemic. I hope all of you stay safe and healthy, and we hope to see many of you in person again later this year. Thank you.

[Operator]

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