Digital Realty Trust, Inc.

Good afternoon and welcome to the Digital Realty second 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.

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 second quarter results. We delivered record bookings, more than 50% higher than our previous all-time high. We beat consensus by 7 cents, driven by operational outperformance, and the beat flowed through to upward revisions to guidance for revenue, EBITDA, and core FFO per share. Third, we extended our sustainability leadership with the publication of our second annual ESG report and official recognition as the first data center Energy Star Partner of the Year. Last but not least, we further strengthen the balance sheet with the issuance of $645 million of common equity and 500 million euros of 10 and a half year bonds at one and a quarter percent. With that, I'd like to turn the call over to Bill.

Thanks, John. Good afternoon, and thank you all for joining us. Our formula for long-term value creation is a global connected sustainable framework. Even though we haven't been physically sitting together for the past several months, we've made significant progress strengthening each of these pillars. As John just mentioned, our second quarter bookings were more than 50% better than our previous all-time high, but were also more than double our previous trailing four-quarter average. We've now seen improvement for six consecutive quarters. So we've clearly seen an acceleration in leasing velocity. We are admittedly a bigger organization today, and the bar should be higher following our combination with Interaction and as well as S&T. But our second quarter results would have been a record for standalone digital realty as well. A world of remote everything has accelerated digital transformation initiatives, and data center demand has benefited. But I believe these results also reflect the past several years of hard work putting together a highly attractive, diversified global platform, stability and capable leadership within our broader organization, coupled with solid execution. In particular, I would like to congratulate Corey Dyer and his entire sales team on their exceptional performance. We do expect the second quarter may be the high watermark for the full year. We don't necessarily expect to maintain this velocity every quarter. But 2020 is clearly shaping up to be a banner year. And we continue to capitalize on the acceleration of digital transformation strategies to build business resilience, which should continue to drive strong demand going forward. Our confidence in the forward outlook is reflected in the upward revisions to guidance for revenue, EBITDA and CORE for share. Let's turn to the current environment on page three. The COVID-19 global pandemic has changed all our lives. Our hearts go out to the global communities we serve, especially those that have been most impacted. We stand in solidarity with them. And our focus remains unchanged, keeping our employees, customers and partners safe. We are fortunate to have been as well prepared as we possibly could have been for this pandemic. Our 280 data centers in 45 metropolitan areas across 21 countries on six continents remain fully operational. We are grateful to be in a position where we can help industries, communities, and families around the globe continue to conduct business and stay in contact with each other during these uncertain times. We also want to again extend our gratitude to our employees in critical data center roles who continue to come into work every day at our data centers around the world. They make possible the service and support that we provide our customers. Stepping back, our approach to managing and leading through the COVID-19 pandemic is guided by our ESG strategy depicted on page four. We strive to lead the global data center industry in sustainable environmental performance. 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. We take this work seriously because it matters to our customers and because we think it's the right thing to do. Environmental stewardship is incorporated into almost every aspect of our business. Sustainability is a top priority for us year-round. The industry, governmental organizations, and the press are all taking note. In early April, we were honored to be the first data center provider to receive an EPA Energy Star Partner of the Year Award for Energy Management. In late April, we announced a wind energy agreement to supply approximately 30% of our power needs in the Dallas, Texas area with renewable energy. In early June, InterAction announced that it reduced its cooling system energy consumption by 20% during the first year of an ongoing project with Echosense, a data center optimization specialist. In mid-June, we were recognized as a green lease leader by the U.S. Department of Energy's Better Buildings Alliance. We also published our second annual ESG report in mid-June, providing transparency on our ESG performance for 2019 as well as a comprehensive overview of our clean energy commitment, resource conservation, community engagement and philanthropic commitments, diversity and inclusion efforts, and other sustainable business practices. In terms of our social efforts, since April, we've committed more than $1 million to partnering with charitable organizations globally, combating the COVID-19 pandemic, as well as efforts to fight racial injustice. We've also begun a doubling down on our employee matching gift program, raising an additional $100,000 on top of our corporate efforts. We are doing our best to play a constructive, proactive role in advancing our broader goal of delivering sustainable growth for all of our stakeholders, investors, customers, employees, and the communities that we serve around the world. Let's turn to our investment activity on page five. We continue to expand our global platform with groundbreaking announcements in multiple metros across APAC, the Americas, and EMEA. In early July, we announced that we would be building our second data center in Hong Kong, allowing us to cater to diverse multi-site workloads. The facility is expected to be built out and ready for global and regional customers by mid-2021. In mid-June, we broke ground on the first carrier-neutral facility in Korea with the Sangam Digital Media City in northwest Seoul. We've seen significant pent-up customer demand for a carrier-neutral offering in South Korea, and we expect to be open for business in the fourth quarter of 2021. In early June, we announced that Ascenti, Our Latin American platform and joint venture with Brookfield Infrastructure was entering Mexico with two diverse locations anchored by long-term U.S. dollar-denominated multi-megawatt agreements to support the growth of a leading global cloud provider. In April, InterAction broke ground on InterAction Paris Digital Park, a market expansion project in Paris with up to 85 megawatts of capacity. The first of four new data centers on this site will be InterAction's eighth in Paris, and the first phase is scheduled to open in late 2021. In early July, InterAction announced the opening of the first phase of MRS3, its third data center in Marseille. InterAction'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. Last but not least, in mid-July, we announced that we had acquired the freehold to the land under our N-hour Landa-Strasse campus in Frankfurt. In addition, We are also under contract to acquire the Neckermann site, a separate parcel within a kilometer of our 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. We also made two significant announcements advancing our collaboration with NVIDIA. In early May, we announced the platform digital data hub featuring NVIDIA DGX A100 POD infrastructure, a joint engineered solution that brings the world's first five petaflops AI compute system to the enterprise to tackle high performance computing challenges. Most recently, in late July, we announced the joint development of an AI platform as a service offering on platform digital, combining core scientific Plexus AI workflow orchestrator with the NVIDIA Data Hub solution to address enterprise data lake performance constraints. These announcements validate our strategy of building a portfolio of engineered partner solutions to help enterprises accelerate digital transformation and remove data gravity barriers. Let's turn to interaction on page six. Integration is our top priority for 2020. And despite having to do the hard work of integration virtually during the pandemic, both teams have risen to the occasion. Andy will cover our customer wins in more detail. We are already seeing the benefits of the significant cross-selling opportunities. We said last quarter that we believe our combination with interaction has the potential to change the global data center landscape. And in the interim, we've received meaningful third-party validation of our view. In mid-July, Cloud Scene gave us the top billing in EMEA on their H1 2020 Data Center Ecosystem Leaderboard, which ranks data center operators based on the composition of their facilities, service providers, network fabrics, and cloud on-ramps. The combined organization is well-placed to meet the growing demand from cloud and content platforms IT service providers, and enterprises seeking co-location hybrid cloud and hyperscale data center solutions. These are global, long-term opportunities that we are ideally positioned to address. We've made steady progress on our corporate integration efforts, and by putting customers first, we've been able to seamlessly come together as one company. There will be more work to do over the next several quarters, but we are pleased with our progress to date. Let's turn to the macro environment. As we are all aware, the pandemic has pumped the brakes on the global economy. As you've heard me say many times before, data center demand is not directly correlated to job growth, and we are fortunate to be operating in a business levered to secular demand drivers, both growing faster than global GDP growth and somewhat insulated from economic volatility. The current environment is accelerating enterprises' digital transformation strategies, and data gravity is shaping the way enterprises will deploy, host, and connect their infrastructure globally. According to IDC, by 2025, enterprises will need to manage the integration of 175 zettabytes of data between their private infrastructure and public clouds. 451 Research conducted a global IT leader survey finding 87% of IT leaders need to maintain local copies of critical data at global points of presence to meet regulatory requirements. We see indicators of enterprises solving data gravity globally across our platform in the volume of new logos as well as expansion bookings within our enterprise vertical. Digital Realty was recently named the global leader in GigaOM's market radar for edge colocation, ranking our strategy as the only outperformer in the platform strategy subsegment, a strong validation of our vision. The roadmap for platform digital is positioned to capture the enterprise opportunity. Given the resiliency of the demand drivers underpinning our business and the relevance of our portfolio to meeting these needs, We believe we are well positioned to continue to deliver sustainable growth for customers, stakeholders, 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.

Thank you, Bill. Let's pick up here on page nine. As you may have seen from our supplemental reporting package, we have included interactions portfolio statistics in the supplemental this quarter. The highlights here on page 9 of the deck give you a sense for the power of the combined platform. We also implemented the changes to our disclosure package we've telegraphed for the past several quarters. As we've said, we see the lines blurring between product types, and we believe the traditional distinctions have become less meaningful. The changes we've made attempt to more closely align our disclosure with our customers' buying behavior and the way we manage the business. We hope these disclosure enhancements are helpful. We aim to continuously improve the utility and transparency of our financial disclosures. And as always, we welcome additional input from analysts and investors. Let's turn to our leasing activity on page 10. We signed total bookings of $144 million, including an $18 million contribution from InterAction. The second quarter also included a $12 million contribution from interconnection, and along with the $22 million of network and enterprise-oriented deals of a megawatt or less, accounted for nearly 25% of total bookings. The weighted average lease term was nearly 11 years. We landed a total of 124 new logos during the second quarter, including 38 sourced by Interaction. Again, demonstrating the power of our global platform. In terms of regions, demand was particularly robust in Northern Virginia, the New York metro area, the Pacific Northwest, and Mexico City in the Americas, as well as Frankfurt, Paris, London, and Marseille in the EMEA. We leased 48 megawatts in Ashburn during the second quarter, bringing our trailing four-quarter total to north of 100 megawatts. This activity has driven lease-up of active development as well as existing inventory. We generated another 70 basis points of positive net absorption within our Northern Virginia in-service portfolio during the second quarter, up from 90% occupied at year-end to 93.8% as of June 30. and our Northern Virginia Active Development Pipeline is now 100% pre-leased. Despite a somewhat crowded playing field in this market, we believe we certainly hit above our weight due to the strength of our global platform in Salesforce, the large and growing installed customer base seeking growth with adjacency on our connected 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. While we have not yet begun to see meaningful improvement in Northern Virginia market rents, the available inventory has been rapidly absorbed, and the pendulum is starting to swing back towards tighter availability and healthy competitive tension. In terms of specific wins during the quarter and around the world, the New York metro area was a standout. not only at the top destination for network and enterprise oriented deployments during the second quarter, but also with the groundbreaking of our newest connected campus in Northern New Jersey, where we will be developing a highly strategic purpose-built new infrastructure solution to help a leading data analytics provider optimize data exchange for their employees, customers, and partners. In Phoenix, a leading PAC-12 university is leveraging our network-dense interconnection hub to optimize their hybrid IT controls. As we announced in mid-May, the Shadow Server Foundation, a nonprofit security organization working to make the Internet secure for everyone, is streamlining its data center network with digital realty in the Bay Area. Our Parish team persuaded Eckertel, a French global IT service provider, to migrate its infrastructure onto our platform by offering flexible commercials and demonstrating their value as a trusted partner. In London, we added Elite, a local fiber and managed service provider, to our carrier community, which will attract other enterprises, particularly in digital media, who will use Elite for their services. In the Netherlands, Digitain, A fast-growing software company targeting the online gaming community chose our Schiphol Rijk campus in Amsterdam as its worldwide hub due to low-latency connections to the rest of Europe and beyond. A leading US semiconductor manufacturing company deployed across multiple metros, demonstrating the diverse product solutions available on platform digital. Leveraging fit-for-purpose interconnection and infrastructure capabilities, across three unique sites on our Dallas Connected Campus, as well as the Amsterdam Business Park. Finally, Hashpower, a leading global content delivery company headquartered in Portugal, harnessed the power of our combination with InterAction to rewire their network in Madrid and San Francisco. Turning to our backlog on page 12. The current backlog of leases signed but not yet commenced stands at a record high 251 million. The step up from 122 million last quarter reflects the 44 million backlog inherited from interaction, as well as the 132 million of combined space and power leases signed, offset by 47 million of combined commencements. The lag between signings and commencements was a bit longer than our historical average, and a little less than seven months. Moving on to renewal leasing activity on page 13. We signed 169 million of renewals during the second quarter in addition to new leases signed. We retained 88% of expiring leases above our long-term trend. The weighted average lease term on renewals signed during the second quarter was a little less than six years, while cash rents on renewals rolled down 2.8% in line with expectations. Aside from a few select supplies-constrained regions and metro areas, we have yet to see broad-based rental rate growth across most markets. However, we are continuing to make significant progress cycling through peak vintage renewals, the lion's share of our portfolio has recently been leased at current market rents, and we are beginning to see tightening fundamentals and barriers to entry emerging in a growing number of markets around the world. As a result, we expect to see continued gradual improvement on cash releasing spreads into 2020 and beyond. In terms of second quarter operating performance, overall portfolio occupancy was down 150 basis points to 85.7%, entirely due to consolidation of the embedded upside within the interaction portfolio in our reported statistics for the first time. Same capital occupancy ticked up 20 basis points for the second quarter, and same capital cash NOI growth was better than expected at negative 1.2%, including a 60 basis point FX headwind. As we indicated last quarter, barring any unforeseen shocks, we are cautiously optimistic that we put the same store low watermark for the cycle behind us. As a reminder, Interaction and the Westin Building are not included in the 2020 same-store pool, but we expect both acquisitions will be accretive to our organic growth going forward. Turning to our economic risk mitigation strategies on page 14. The U.S. dollar began to weaken in late May, but remained elevated relative to prior year average exchange rates for the full quarter. And FX represented roughly an 80 basis point headwind to the year-over-year growth in our reported results, from the top to the bottom line. 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 have limited exposure to the businesses most directly impacted by the COVID-19 pandemic. Rent collections remain in line with our historical average, and the sum total of customers who have reached out to request rent and relief represent approximately 3% of total revenue. In addition to managing credit risk and foreign currency exposure, we also mitigate interest rate risk by proactively terminating out short-term variable rate debt with longer-term fixed-rate financing. Given our strategy of matching the duration of our long-lived assets with long-term fixed-rate debt, a 100 basis point move in LIBOR would have a roughly 30 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 6% year over year. but 7 cents ahead of consensus as well as our internal forecast. Driven by a beat on the top line as well as operating expense savings primarily due to lower property level spending in the COVID-19 environment. A portion of the OpEx savings is likely timing related and represents more of a deferral rather than a permanent savings. But the operational performance is obviously encouraging. In terms of the quarterly run rate, As you can see from the bridge chart on page 15, we still expect to dip back down by 5 to 10 cents in the third quarter before rebounding in the fourth quarter and beyond. In early July, we announced that we intend to redeem 800 million of senior notes due in 2022. We expect to fund the redemption by settling the 1 billion forward equity offering in the third quarter and the higher share count along with the expected catch-up and deferred OPEX are primarily responsible for the step-back down in the third quarter. As you may have seen from the press release, we are raising the low end of the range for revenue, EBITDA, and core FFO per share guidance, reflecting the second quarter outperformance as well as the strength of our bookings and backlog. We don't typically provide explicit AFFO per share guidance, but given the magnitude of the beat, we wanted to offer some additional context. As you may have seen from the earnings release, we are maintaining our full-year guidance for non-cash rent adjustments of $20 to $30 million, as well as our recurring CapEx guidance of $220 to $230 million, although we are admittedly trending towards the low end of the range. The implication here is that we do expect straight-line rental revenue will continue to moderate over the course of the year, narrowing the delta between cash and GAAP, and enhancing the quality of earnings. But we still expect to spend nearly the same recurring CapEx budget for the full year, despite the lower spend year-to-date. The bottom line on the AFFO per share outlook is similar to core FFO per share. The second quarter B does flow through the full year forecast, but similar to the OpEx running through the P&L, a portion of the recurring CapEx savings is likely timing-related, and represents more of a deferral rather than permanent savings, and we expect the quarterly run rate to dip back down in the second half. Last, but certainly not least, let's turn to the balance sheet on page 16. Fixed charge coverage remains healthy at 4.6 times, while net debt adjusted EBITDA stood at 5.7 times as of the end of the second quarter. Proforma for the settlement of the $1 billion forward equity offering net debt to adjusted EBITDA remains in line with our targeted range at just over five times, while fixed charge coverage is just under five times. As a result of our proactive balance sheet management, prior to the redemption of our bonds due in 2022, we have over $4 billion of liquidity to fund our capital spending, including over $500 million of cash on the balance sheet as of June 30th, another $1 billion of equity coming in upon settlement of the forward equity offering, and $2.5 billion of availability on our global revolving credit facilities. The successful execution against our financing 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, and enables us to prudently fund our growth. As you can see from the chart, our weighted average debt maturity is over six years, and our weighted average coupon is 3%. A little over 60% of our debt is non-U.S. dollar denominated, acting as a natural FX hedge for our investments outside the U.S. Over 95% 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 17, 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 would be pleased to take your questions. Andrea, would you please begin the Q&A session?

We will now begin the question and answer session. As a reminder, participants will be limited to one question and one follow-up. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster.

And our first question comes from John Atkins of RBC Capital Markets. Please go ahead.

Yes, good afternoon. My first question is on kind of leasing. I wondered, given the strong performance, if there's any kind of credence to the notion that this is sort of a pull forward and kind of your views on that topic and what we might kind of think about in terms of timing, first half versus second half. on demand, and related to that, you did indicate, Bill, a little bit about pricing, but I wondered, are you within kind of the midpoint, low point, high point of your targeted yield range on the larger deals you signed in Northern Virginia and other markets? And then I've got a follow-up.

Hey, thanks, John. This is Andy. Maybe I'll start this one off and then hand it over to Corey to talk about 2Q and also kind of more forward-looking in the back half of the year. I can tell you we're always trying to pull forward deals as fast as possible at the end of every month and every quarter. So I don't think there's anything particularly unusual about this quarter's results, which we're certainly quite pleased with. I'd characterize it broadly back to something Bill had kind of mentioned in the prepared remarks. Really, we've worked pretty hard for several years now putting together a highly attractive highly connected, diverse, and truly global portfolio and platform, and that along with consistent, stable, and productive, broad organizational talents and leadership, and just solid execution is really kind of what contributed to numerous wins across the board, whether it's the leasing signings, volume, as well as mix. But I'll let Corey speak to a little bit more of what he saw in the quarter, and then we can come back and talk about returns on the larger deals.

Yeah, thanks, Andy. Yeah, I would say that it really was not a pull forward on COVID. I would tell you that we really had a great quarter that we've been building into, and Andy, you mentioned it. five or six consecutive quarters of growth, a lot of work that the team's been doing to build our platform, position us the correct way, and really build trust with all of our customers. So I wouldn't view this as a pull forward, even though we pull deals forward all the time. This is really just the fruits of our labor playing out for us. But then you think about the segments that we actually had a ton of success with. So really good success across the hyperscalers. Again, they value our global platform, the geography. all of the work that we've done for them with our trusted set of hands and our ops team that continues to provide and support for them, and then really just a heritage of success and relationships that we've got going with them. From an enterprise and a network perspective, investing in the team, our sales team, our go-to-market, our global capabilities, and then we improved our messaging and our positioning around the value. When we launched Platform Digital back in November, I think you're starting to see the fruits of that. Customers, media, analysts, really just a broad base of people that picked up on that. And then we've had a lot more success with our reps quarter over quarter, so a lot more contribution from the reps. And then finally, I would just say that as we look ahead, we think that we're going to really focus on the makeup of our quarter. How do we continue to grow new logos, enterprise wins, our communities of interest, interconnection, co-location? And then finally, I think you're also going to see that some of the messaging we've brought out has been really picked up in some of the trends that we're driving, are starting to drive the industry and how they're thinking and the thinking in the industry around the importance of centers of data and around the importance of data gravity, which requires some architecture reconsiderations. And so we expect to see more and more of the industry following our lead in these areas as well. I think I hit most of it, Andy, but go ahead if there's something else. John, anything else?

Yeah. Yeah, that's good. And then maybe the follow-up on interaction and maybe the two of you again on the kind of on the integration side, whether it's systems or IT integration, Andy, if there's any kind of future milestones to call out. And then for Corey, you know, as you have worked for global organizations in the past and picking up, you know, a very valuable kind of European operation, anything you see going forward in ways that you can maybe optimize? One obvious example is cross-connect pricing, which has seen some nice lift over the last couple of years on the part of one of your major peers.

Maybe Bill can start off on the integration front.

Yeah, John, happy to take part of that, and I'll hand off to Andy. First of all, as you know, we closed the transaction on March 12th, so just about the end of the last quarter. And I've said it on several occasions, but the integration of interaction is our top priority for 2020. And I will tell you that we are absolutely pleased with the progress made to date, particularly given the impediments created by the pandemic. And I think we've done a good job of identifying synergies, expense synergies, and we're seeing potential revenue synergies as well, which is what we'd hoped but didn't underwrite. As I mentioned last quarter, I'm very, very happy with the collaboration that's occurred within the two firms. David Rueberg and I speak several times a week. I have the utmost respect for what he brings to the data center business, and I do believe that providing essential services during a global health crisis has had a unifying effect on both teams. And I'll turn it over to you.

Just to add a little bit more and then make sure we get to the last part of your question about cross-connects. Obviously, we're continuing to progress it despite the technology. We're not being able to do it in person. We hit some key milestones in the last several months of organizational announcements and certainly tiebacks to our global organization. Now working on some specific work streams such as our technology and how we bring together our IT systems and business processes, and in addition, kind of just the people front. So a lot of great wins there in terms of customer referrals, cross-selling, multi-site bidding, and great progress. I think the piece you mentioned on the cross-connection, obviously, The commercial model for cross-connects has been different in Europe. Overall, interaction of the last several years moved to a model where there was better commercialization of the cross-connect opportunity. That being said, I look at the combined global portfolio and call it roughly half of our cross-connects, yet probably only closer to 20% of our interconnection revenue originates from that part of the world, which I think speaks to opportunity to really make sure our customers are getting value from our services overall, and there's an equitable commercial relationship for that value we deliver. Corey, I'll hand it over to you to wrap up John's points. Do you have anything else to add?

No, I think you guys covered it well across the board, and if there's something, Jonathan, that you'd like,

Our next question comes to Jordan Sandler of KeyBank Capital Markets. Please go ahead.

Thanks, and good afternoon. So, first I just wanted to speak to pricing a little bit. You know, it seems, you know, this volume pretty significant. I noticed sequentially, domestically, or at least in the Americas, Pricing seemed somewhat stable, maybe even better despite the increased volume. But in Europe, it looks like pricing came down, you know, quite a bit. I know maybe not a perfect comp, but I'm curious to what degree was the success achieved in the quarter, you know, a function of maybe more aggressive pricing? And maybe, you know, in that context, can you talk about what you're doing in terms of thinking in terms of returns and underwriting these days?

Sure, Jordan. So, by and large, I would say we did not see much of a change in the pricing dynamic during the second quarter. And I think what's evident of that is you can look at our returns on our development table, which I think – barely moved in North America. I think it's a little bit tough quarter to quarter comparisons overall region by region because the mix within a region can certainly sway that outcome. But when we stack it up internally and go market by market, deal size by deal size, we did not see a degradation in pricing. I think further evidence of that dynamic that you may have seen in Ashburn We're essentially at another 70 bps of net absorption after close to 300 prior quarter. And our development pipeline is 100% pre-leased for north of 50 megawatts in Ashburn. So when you have a dynamic when you're literally selling the last kilowatt or megawatt or project underway, you're certainly not trading price and you're certainly not doing it in a quarter that had this robustness of overall volume. In Europe, I think really just a mix. The prior quarter, we reported signings was just legacy digital. It didn't have a lot of larger scale deals. This quarter, we had the contribution of interaction, which had two good components. It had consistent, more enterprise or network oriented smaller deals, call it 10 plus million of that. And then it had some cloud compute nodes in a few markets, which are obviously multiple megawatt deals that if you compare EMEA quarter over quarter, you would just see a mixed shift that would change the pricing. So net-net still sees pretty good stability in the pricing for what we saw in 2Q.

Okay, and then sticking with pricing, The releasing spread, you know, I think in your prepared remarks, you mentioned that you could see some gradual improvements in cash releasing spreads in the second half of 2020, and that dynamic seems to be tightening. But no change in the guidance, and along the same lines, you know, you had a lot of success on the leasing front this quarter. And I would think that that might translate into increased capital spend or development spend. And that also kind of remained the same. Any sort of commentary on those pieces?

Sure. So a few things. Maybe I'll take these in reverse order. The capital spend, just to remind everyone, we put out our guidance with the first quarter call, so that number really wasn't stale all the way back to the beginning of the year or the end of last year. So I'd say our progress was somewhat anticipated. And, quite frankly, it's the range of that number is in the hundreds of million dollars type of range, so it's relatively bigger dollars. With regard to releasing, I would say – In the broader sense, as a reminder, four of the past five prior years, we've had positive cash releasing spreads. This year, we guided to slightly negative, and we saw that in the second quarter. I would say the preponderance of the actual releasing was in the positive territory, but there was always an exception or two. The two exceptions here, which had good customer and commercial reasoning, one, we did a multi-site, multi-geo network node for one of our large global account platform customers. They're very strategic to being part of our community type customer at an advantageous rate, given the attractiveness of that customer that you see kind of muting what typically is, I call it, two plus percent increase on those zero to one megawatt type deployments. And then on the little bit larger, I think just over a megawatt, we had an enterprise customer who did a simultaneous new signing with us in Europe in addition to a renewal with us in our southeast region. So when you parse those stats, you obviously see the negative on one piece, but it contributes to the positive elsewhere. We still think it's a strategic advantage to come to the table with that relationship and those incremental arrows in our quiver. But those are some things that contributed to it. And I don't think we didn't change the guidance on that, quite frankly, because it's probably one of the toughest to protect because it depends when the customer wants to end the renewal of its contract, which can be early or can be very much down to the wire. So you're handicapping not only the outcome or what period it actually happens.

Our next question comes from Matt Nicknam of Deutsche Bank. Please go ahead.

Hey, guys. Thank you for taking the questions. Just one and one follow-up. First on enterprise, if you can share any sort of updates on your discussions with enterprises, how demand is trending, and I guess the ability of platform digital to sustain this type of new logo growth. I think it's been about 120 plus new logos the last two quarters. And then secondly, follow-up maybe for Andy. I think you've got about $3.07 to share in core FFO first half of the year. I think the midpoint's about $6.05. And so I'm just wondering, can you talk about the flips and takes around incremental headwinds embedded in the outlook? And I guess more specifically, the COVID-19 deferred effects that's driving about half of that drop you expect in 3Q. Thanks.

Hey, Corey, maybe you could hit the first question. We'll turn it back over to Andy.

Yeah, sure. I'll take the first question on enterprise demand and what we're seeing and really what's driving it. And I would tell you that, Amit, thanks for the question. There's really been no silver bullet to it. We've had a great team supporting customers, selling the platform, and really building out a platform for us. I would tell you it's a confluence of all these things coming together. We also had a great message that I mentioned earlier with platform digital and how that's being taken up by the industry and by customers. Our enhanced go-to-market approach has helped us. So it's a lot of things we did, but we're also encouraged by our rep tenure. We've got better relationships. We've got customers having better relationships with our employees that longer. We've increased the number of reps making quota. We've got a ton more sites that are happening, multi-site deals, multinational deals, average deal sizes up. So from a demand perspective on enterprises, I really believe that the work we've been doing for the last five years and longer, as well as the improved messaging and go-to-market, puts us in a position where we're sustained for it. And then you add on to that the interaction adjustment for us and what we've got, from an interconnection and a networking capability and platform that really puts us in a really well-positioned spot to go and help enterprises as they navigate hybrid IT and they navigate through COVID. And I really feel like the breadth of customers, the breadth of our geography, There's going to be some customers in the enterprise world right now that are going to maybe slow down, and I've heard that other places. I think because of how many we're helping and the solutions we're bringing to them to help them take advantage of hybrid IT or manage through COVID has really helped us kind of be a little bit insulated from that. I hope that helps, Sandy, if you've got something else to add.

No, I think you nailed it. But going to your second question, Matt, and welcome back. It's great to have you back covering digital. The question on the 307, why can't you just times that by two? I don't know if you're colluding with our CEO because he asked me that same question as well. I did have to remind him two things, one of which you highlighted. One, we have been doing some strategic capital management, matching our sources and uses, and we are redeeming some notes. But all along, to fund our capital spend, we were planning to draw down on that $1.1 billion equity forward. So those shares from the equity forward are not in our share count for the first half of the year. They're going to come into the second half of the year as we close out that in the third quarter. The other piece, COVID-19, maybe I'll take a quick second to really give another tremendous thank you to our operations team globally who have just gone above and beyond We obviously, with this crisis, stayed fully operational, but we did scale down our staffing to make sure we put the safety of our customers, employees, and partners first and foremost. So we delayed any type of maintenance spend or repairs and maintenance that could be delayed. And that spend we don't think is going to be delayed forever. We're working in a safe manner to continue to maintain the equipment and we expect some of that spend that was thought to be planned and happening in the first half of the year to resume in the second half of the year. Got it.

Thanks, Andy, and it's good to be back.

Our next question comes from Sammy Badry of Credit Suites. Please go ahead.

Hi. Thank you very much for that question. My question is mainly to do with the releasing spreads on page 13 of your slide deck. And I know you've touched on elements of this already over the call, but I was just looking at the releasing spreads for leases size between 0 and 1 megawatts. And I saw that the releasing spread is a little bit negative. And just given the dynamics we're seeing with such a big surge in demand coming specifically from enterprises and really the whole spectrum of constituents within the data center ecosystem as far as customers, I guess the perception would be that that would be a little bit more positive than it would be negative. Is the reason why it's negative potentially because it's maybe a very large customer that's distributed into multiple locations in an aggregate? They got a discount for releasing? Or maybe you could just give us the puts and takes for customers in that specific size band. What exactly is the take?

Sure. Thanks, Sammy. You are correct. I mean, if you look historically, that category would be closer to 2 plus percent positive. And if you look through what's happening in there, there's numerous renewals happening in there on a very granular basis. The ponderance of those renewals are in the positive territory. And you hit the nail on the head with there was a specific customer that renewed across three or four sites globally with network deployments So small deployments that add up to a larger sizable deployment. And that customer is not only incredibly important to our platform based on its size and scale, but also the value it brings to the other community participants and customers here at Digital. So we wanted to make sure that we found the most fair potential outcome for that renewal to secure their future here with Digital. It was a little bit on the longer side for that size of deployment in terms of renewal, which always the rates are a little bit lower if rates are longer, but really more of a strategic renewal within that category that brought that into the slightly negative cash market market.

Great. Thank you for that, Collar. My other question has to do... with the interconnection commentary that you gave earlier with EMEA representing about 50% of the portfolios cross-connects but only making up about 20% of revenues, I was hoping that you could give us maybe like a timeframe or a trajectory, some kind of like time lapse on when you think you would be able to get that 20% of revenue mix maybe even closer to the 50% of revenues of 50% of cross-connects in Europe just so we can understand like the pace or the cadence of transition you're having with your customers in demand.

You know, Sammy, I'm going to hand this over to Chris to give you a little bit more color on the history and the trajectory of what we're doing. I'm not going to, unfortunately, I won't sign up for a raising of the cross-connect prices timeline on this call. I don't think David Ruber will be too pleased with me if I did that. But I can tell you we're all about bringing value to our global customers now that total 4,000 customers. and making sure that we are commercially treated in a fair and equitable way for that value. But, Chris, maybe chime in a little bit about on the cross-stack pricing and trajectory.

Absolutely. Happy to do it, Andy. Thank you. And thanks for the question, Sammy. So, you're absolutely correct. And I'll echo the sentiments throughout the call is that, you know, we're very happy with the addition of interaction into our broader portfolio. And I think what that represents is to our customer base is these are major epicenters of value for kind of current and future customers. And so really what's represented within that is these communities of interest and the amount of interconnection that's been generated over the years, that exists and that continues to grow. And I think one of the things that's very important to us and it's a shared vision within the interaction team as well is that there has to be a very balanced approach where We want to ensure that we don't stifle our customers' ability to grow and to continue to derive unique value out of this overall platform digital. And so I do think that you'll see a lot of our other existing customer base coming into Europe, so that platform effect will start to build that up. So I think over a period of time, you'll definitely see that grow. But we're really conscientious of taking a balanced approach and having a very open platform so that we can allow customers to grow and continually expand. And I think a critical element of a lot of this is not only the interconnection element, but the multi-market and the unique advantage of our fit-for-purpose product where you can do both smaller colo and larger scale deployments. So the value of all of that coming together is the unique position that platform digital equips our customers with.

Our next question comes from Eric Rasmussen of Stifel. Please go ahead.

Yeah, thanks for taking the questions. I just wanted to get some high-level thoughts. You know, we've obviously had a very strong first half of the year. We saw data before the quarter increase. results started to come out for yourself and peers that Northern Virginia was in some of the U.S. markets had a pretty good, you know, absorption number so far. We're now seeing it with you guys as well. But what are your thoughts about, you know, what sort of could be creeping in and that's, you know, digestion and, you know, maybe us having sort of a repeat performance of what we saw in 2018 and maybe what's different this time around based on what you see today? Thanks, Eric.

So maybe I'll start off and hand it to Corey to kind of think more forward-looking here. So I think a few things to your question. I think we had a really strong quarter in Ashburn, but I think we also had a really strong quarter in North America as well. Just a quick highlight, New York City metro area, top enterprise network-oriented smaller footprint deployments. connectivity, as well as a very strategic build-to-shoot project on our Jersey Connected campus. Out in the Pacific Northwest, continued support of a hyperscaler on a highly strategic project. In the Hillsborough market, continued great wins in Chicago, both on the connectivity side within the financial services vertical. as well as a different hyperscaler growing on one of our campuses in the Chicago area. And I think that theme speaks to a little bit about your question. If you do rewind the clock back for a second, with the digestion of the last go-around, I think our business did quite well, which I think goes back to serving our customers across six continents, 20-plus countries, 44-plus metropolitan areas, and having that globally diverse 4,000-plus customer base has allowed us to not be wed to a specific market or the ups and downs of one specific customer. And lastly, I would say I don't think each of these customers are on the exact same pacing. They're all at different places in their race or different points of their build-outs of their infrastructure, which allows us to kind of help them when one customer is maybe taking a pause or looking to grow in a different market. But, Corey, please share your thoughts as well.

Yeah, I'll add to it, Andy, from an enterprise demand perspective. And I feel like you touched on a good bit of it. If you think about the power of our comprehensive global platform and where we're across, you know, 4,000 global customers, 20 countries, 33 markets, 44 metros, and then you think through, the new ideas and solutions we're bringing to our customers at the same time with this combined interaction and digital merger that we've done here. It puts us in a really good place to be able to address customers that need and want to continue buying those services. And it really moderates us from any kind of an exposure on an individual or an industry or a geo that's a little bit different. So we're pretty excited about where we are. I also feel like we've got the right kind of funnel and demand going, so we're going to be fine with growing through the cloud and continuing to drive the demand that we're seeing and making investments in the data centers, right? And so I think that, you know, it might be possible that some people see some new logo stiflement or maybe a little slowdown there because you're trying to get into new sites that you're not familiar with, but like I said, I think we've got enough customers, we've got enough breadth of our platform and our geography that I think we're insulated from it a good bit. And then when I just look at our pipeline going forward, it definitely supports the numbers that Andy's put forward to everybody. So I think we're in a good place. Hope that helps.

Since 2018, we've added the Ascenti platform in Latin America. We've expanded materially in Europe with the acquisition of InterAction. We've added new markets in Asia. specifically, you know, new development sites in Tokyo and Seoul. And I would expect that in the second half of the year, you're going to see additional contributions out of LATAM, EMEA, and AsiaPAC.

Yeah, really good point. Thanks, Bill.

Great. That's helpful. And then maybe just my follow-up. You know, you'd mentioned in, I think, in the press release, there was some marginal construction delays. You know, what sort of impacts has that had on the business? And maybe can you comment on which regions that might stand out for that and how you're going to resolve those? Thank you.

Sure, Eric. So also another big thank you and kudos to our global construction team working day and night and weekends for sure in really crazy times. Well, I can't say we're able to make up time we've had from some delays from specific jurisdictions like Toronto or Hillsboro from pulling labor off sites. I can say globally we are in a really great spot going forward in terms of getting our teams back to work and delivering on our delivery times. The one exception, I'd say, or not exception, but potential spot that we're keeping an eye on and we're not at full staffing is Singapore. Given the labor situation in that country, we are not at 100% capacity, but we are continuing to make progress, that being said. So I think we're in a much better place today than we were when we reported on that topic a few months ago.

Our next question comes from Eric Lubchow of Wells Fargo. Please go ahead.

Thanks for squeezing me in. So I know, Bill, you kind of said that any meaningful M&A is likely kind of off the table for the remaining end of the year, but I just wanted to confirm kind of, you know, the plan is obviously integrating interaction and kind of no near-term plans for any additional acquisitions. And, you know, to that degree, if any opportunities did arise, are there any kind of geographic reasons that, you know, would be eventual?

Eric, I'll reiterate and reaffirm that interaction remains our highest priority, the integration of interaction. We certainly are acquiring land parcels around the world for development, and there may be very, very small tuck-in acquisitions, but that's really for the purposes of new market expansion and or maybe product enhancement, or growing markets? Greg, you might want to add to that.

No, Bill. Look, I think you've covered it. As Bill said, you know, we understand that integration is our top priority, and we really have become more risk-averse in this environment. But as Bill said, you know, we're procuring land where our customers need to be and with facilities that really adhere to our platform digital and community of interest strategy. And as Bill said, we you know, we're selectively monitoring opportunities in the market where if an asset is strategic, you know, be smaller, we can create value and get the right return, we'd probably do it. You know, I think a lot of people are speculating in terms of acquisitions in this environment where we are with respect to distressed opportunities. And quite frankly, we haven't seen any distressed opportunities in this market yet. But we're actively monitoring things now longer term. you know, we may see some distressed opportunities for smaller, more thinly capitalized companies that may have debt coming due. But a couple of things. Look, we originally thought that as assets outside of the data center space got hit harder than data centers and became relatively less expensive, that we'd see private capital migrate towards those opportunities and decrease competition for data centers. However, what we're starting to see is that you know, the private investment community have come to appreciate really the strong underlying secular trends in our space, as well as the creditworthiness of our customers and the growth potential of the sector. And they're becoming more educated and looking to invest. So, look, as Bill said, you know, we have, you know, we're going to continue with that strategy, and that's where we're focused right now.

Great. Thanks.

Our final question comes from Colby Sinasol of Cowen. Please go ahead. Great.

Thanks for fitting me in. Two questions, if I might. Maybe, Greg, just to stick with you, I was wondering if you could give us an update on potential asset sales, if that's something that has been put more on the back burner because of COVID-19, if you're still moving forward and if there's still a possibility we could see something maybe this year. And then secondly, with the U.S. government threatening to close down specific Chinese social media applications and websites. I believe that they've been a big purchaser of data center services over the last few quarters. I'm just curious how you guys get comfortable underwriting the risk of taking on a customer like that in light of all the geopolitical uncertainty that could be impacting them. Thank you.

Greg, do you want to hit the first one and I can hit the second?

Yeah, sure. Hi, Colby. How are you? Good, thank you. Look, I think with respect to asset sales, I think it's fair to say that the level of chatter and activity has picked up quite a bit. But what the exact impact will be on pricing for larger deals is still hard to say. You know, it's important to, again, note everything we were saying about investors, how they're viewing the sector in terms of the secular trends, the creditworthiness, and the growth potential, which, you know, clearly, you know, I think you're starting to see the data center space migrate to more of a – you know, core asset class that investors, particularly through this pandemic, are starting to appreciate. As you know, we just sold the asset in the middle of a pandemic in Europe and we got the pricing we expected. You know, we continue to believe that our multi-year guidance of a few billion dollars over the few years of non-core assets or non-core markets, you know, we still think that's the right guidance. We've already done about a billion for that. It's important to note that we're fully funded, and we'll continue to recycle capital opportunistically when it makes sense and the price is right. But it's always good to be in a position where you have no sense of urgency if you can't get fair value. And I think you probably also noted we gave guidance of $600 million to $1 billion earlier in the year. And with the maple tree transaction itself, we've already achieved the bottom end of that range. Again, so while we're not expecting, you know, we weren't expecting COVID-19, but we are comfortable and confident where we are with respect to our capital recycling activities. So, but look, you know, it's going to continue to change daily, and we'll continue to monitor it, but we feel like we're in a good position.

And then, Colby, on your second one, Obviously, it doesn't have to be specific to a headline in the news. We obviously look at various risks, and that's part of our job and our business, evaluating risk and return. When it comes to Asia Pacific in general, I mean, I think what we go back to is, one, we're a global company across 20-plus countries, six continents, and numerous markets. and we have a global customer base, 4,000 plus customers, and rapidly expanding that 124 outages this quarter. I think the diversity of our offering and diversity of our revenue streams give us a lot of comfort in evaluating risk. If you look at our top customer list, our top 20 customers total just under 48% of our annualized recurring revenue, and if you go down that list, You've got to go past number 19 to find a non-U.S. company just given the size and scale of some of the top cloud service providers and hyperscalers that we're doing business with or the number of locations we're doing business with some of the network providers. So you kind of get to like the 1% or less territory when you might run into a customer. So that's a long-winded way of saying we – We want to welcome all the right customers into our fold, and I think we do the right things in valuing the right risk, but I think that diversity is what insulates us or protects us to any type of exogenous shocks.

Great. Thank you, and congrats on the strong recent. Thank you. Thank you.

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

Thank you, Andrea. I'd like to wrap up our call today by recapping our highlights for the second quarter as outlined here on the last page of our presentation. First, we further strengthened our connections with our customers, prioritizing health and safety while maintaining service levels and reaching record highs in our bookings and backlog. Two, we delivered solid current period financial results, beating consensus, beating our internal forecasts, and raising guidance. Third, we also underscored our commitment to delivering sustainable growth for all stakeholders with the publication of our second annual ESG report and our official recognition as the first data center Energy Star Partner of the Year. And last but not least, we further strengthened our balance sheet with excellent execution on the raising of $1.2 billion of long-term capital. I'd 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. We hope to see many of you in person again soon. Thank you.

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