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From SMT Global.
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It's for Shera and for Ambritton Science and P for Koopa.
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Good afternoon, and welcome to the Digital Realty First Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. Please note that this event is being recorded. I would now like to turn the conference over to Jon Stewart, Senior Vice President of Investor Relations. Please go ahead.
Thank you, Andrea. The speakers on today's call are CEO, Bill Stein and CFO, Andy Bauer. Chief Investment Officer, Greg Wright and Chief Technology Officer, Chris Sharp, are also on the call and will be available for Q and A.
Management may make forward looking statements, including guidance
and the underlying assumptions. Forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.
For a further discussion of risks related to
our business, see our 10 ks and subsequent filings with the SEC. This call will contain non GAAP financial information. Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website. Before I turn the call over to our CEO, Bill Stein, I'd like to hit the tops of the waves on our Q1 results. 1st and foremost, we continue to support our customers' global expansion requirements with an agreement to anchor development of a new campus in Santiago, Chile.
Next, we demonstrated our commitment to delivering sustainable growth for all stakeholders with efficient and socially responsible capital raises, renewable energy procurement and corporate governance enhancements. 3rd, we raised the dividend by 7%, our 14th consecutive annual dividend increase. Last but not least, we further strengthened the balance sheet, redeeming high coupon debt and preferred stock, lowering our weighted average coupon by 30 basis points while simultaneously extending our weighted average duration by more than half a year with the opportunistic issuance of $1,600,000,000 of long term capital. Now, I'd like
to turn the call over
to Bill. Thanks, John. Good afternoon and thank you all for joining us. During the Q1 of 2019, the Digital Realty team continued to effectively press our competitive advantages. We capitalized on the strength of our comprehensive multi product offering by capturing healthy enterprise demand across multiple regions.
We've also advanced our private capital initiative by closing our joint venture with Brookfield. We further strengthened our balance sheet by locking in fixed rate, long term capital and attractive new bonds. We continue to build upon our industry leading commitment to sustainability and sound corporate governance, setting the stage for sustainable growth for all stakeholders. We further expanded our global platform with strategic land purchases in Tokyo and Singapore, as shown here on Page 3 of our presentation. And finally, we announced earlier this afternoon that we are entering Chile, Tissot Realty's 14th country with a 6 megawatt facility underway slated for delivery in the Q3 of 2020.
Our strategy for new market entry is to follow our customers and Chile is no exception. We are pleased to be supporting the growth of a leading global cloud provider that will be anchoring the first phase of our campus in Santiago. Chile is one of the most economically and politically stable countries in South America and is considered a high income economy by the World Bank with a clearly codified business friendly investment climate and the highest per capita GDP in Latin America. Our Chilean operations will be conducted by the Ascenty joint venture with Brookfield, our exclusive vehicle for data center investment in South America. It is obviously still early days since we just closed on the acquisition of the 17 December and the joint venture with Brookfield at the tail end of the Q1.
We are encouraged by our partnership with Brookfield, the early execution by the Ascendiante team and the compelling growth opportunity within the region. We also continue to advance our ESG priorities over the past few months highlighted here on Page 4. In January, we issued the first ever data center green Eurobond. Late January, we announced a long term renewable power purchase agreement to secure 80 megawatts of solar power on behalf of Basement to support their renewable energy goals. In late February, our Board of Directors amended our corporate governance guidelines to clarify that director candidate pools must include candidates with diversity of race, ethnicity and gender.
Finally, our Board also approved a proxy access standard for stockholders in late February. We are committed to sustainability and sound corporate governance principles and we are focused on delivering sustainable growth for our customers, shareholders and employees. Let's turn to market fundamentals on Page 5. As most of you are aware, 2018 was a record year for data center data function and the primary metros across North America are still in digestion and restocking mode. To provide some context, North America represents approximately 80% of our total revenue and was responsible for 75% of our 2018 leasing activity, but only half of our current availability is located in North America.
The same dynamic is true in states for Northern Virginia, our largest market at over 20% of total revenue. We accounted for 40% of our 2018 bookings and less than 15% of our current availability. We expect to see a pickup in North American data center absorption in the second half of the year, data center providers restocking their shelves with inventory coincides with the next phase of hyperscale users' incremental growth requirements, taking adjacency next to existing applications and continuous runway for growth on our campuses. In Europe, recent leasing activity has been dominated by global cloud service providers and continue to sign expansions throughout the major metros. Data privacy and sovereignty rules are driving a distributed architecture, forcing cloud providers to establish a presence in all the major metros.
So these expansions generally come in smaller increments than the hyperscale deployments in North America. Last year was likewise a record year for absorption in Europe with leading cloud providers deploying multiple megawatts across major metros. These cloud providers also exhibit a clear preference for expanding adjacent to existing deployments, so landing the initial deployment is key. Our global connected campus strategy is uniquely positioned to capitalize on this consumption pattern. Across the Asia Pacific region, supply remains largely in check.
The complexity of local regulatory frameworks, the difficulty of procuring power and the limited availability of sites with adequate connectivity all serve to limit new competition. Demand is outpacing supply in several of our key APAC markets, notably Singapore, Tokyo and Osaka. This has translated into solid execution and pipeline targeting our near and medium term available inventory in these markets, setting us up for a direct backdrop as we bring adjacent capacity online at our Singapore and Osaka campuses in addition to our recently announced Tokyo campus development project. At the macro level, the Asia Pacific region is still likely in the very early stages of its communications infrastructure build out, and we see a significant runway for growth for years to come. Finally, our pipeline of existing customer expansion and new customer opportunities is growing in both Brazil and now Chile, where we are the market leading data center provider.
On balance, we believe customers view our global platform and comprehensive space, power and interconnection offerings as key differentiators in the selection of their data center provider. Let me turn to the macro environment on Page 6. Global economic expansion remains intact. The U. S.
Unemployment claims recently dipped below 200,000. Central banks the world over have adopted a dovish chance at the risk of a full blown trade war appears to be receding. As you've heard me say many times before, we are fortunate to be operating in a business levered to secular demand drivers, both growing faster than global GDP growth and somewhat insulated from economic volatility. The hyperscale data center customers who drove outsized demand in 2018 marched to the beat of their own drum. Although they have largely remained in digestion mode in the early days of 2019, we remain highly confident in the longer term trajectory of this demand.
In addition, the resiliency of our business model enables us to capture robust and diverse demand from a broad swath of customer verticals across geographic regions around the world as evidenced by our Q1 results. To put a finer point on the secular demand drivers underpinning our business, I'd like to highlight a couple of the data points on Page 7. According to Synergy Research, the total cloud market ecosystem passed the $250,000,000,000 revenue milestone in 2018, up 32% from the prior year. Equally, according to an IDC global study of 800 enterprise cloud users, 58% of respondents are now employing a hybrid cloud model defined as using private and public resources for the same workload. Finally, an IDC study of 400 users of public cloud compute and storage services found that over 50% have recently moved the workload back on premise.
To effectively address the hybrid multi cloud market, data center providers must offer a global interconnected solution from colocation to hyperscale. These trends obviously play directly to our strengths, help explain the durability of our recent results and bode very well for future demand cycles. Given the resiliency of our industry, our business and our balance sheet, we believe we are well positioned to continue to deliver steady per share growth in earnings, cash flow and dividends whatever the macro environment they 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 begin with
our leasing activity here on Page 9. As Bill indicated, our Q1 results highlighted the durability of the Digital Realty global platform, with balanced performance across regions, product types and customer segments. We signed total bookings of 50,000,000 including $9,000,000 from SMB and a $7,000,000 contribution from Interconnection. We signed new leases for Space and Power totaling $42,000,000 with a weighted average lease term of 10 years, including a $7,000,000 co location contribution. 5 of our top 10 deals in the Q1 were outside in the U.
S, including several top customers who were able to leverage our global platform to enable their growth across regions. For example, this quarter we enabled the expansion of a cloud infrastructure provider that specializes in helping developers launch applications into the cloud, helping them better serve their customers on the West Coast as well as APAC. Within our Global Account segment, we landed 2 sizable deployments north and south of the border with a leading global cloud service provider. Separately, we also landed a network edge node from another leading global cloud service provider, which we expect will enhance the interconnection profile of our campus in Dallas, Texas. We continue to track healthy demand within our Global Accounts segment.
The cloud accounted for just onethree of our 1st quarter bookings as shown on Page 11. While the majority of our new business during the quarter was with existing customers, we added 43 new logos with a particularly strong contribution from our enterprise segment. For example, a well funded software startup leveraging artificial intelligence to develop safe and reliable technology for autonomous vehicles selected a digital realty data center to have their production application and deliver their technology on a global scale. AccuPay is a global fintech provider based in Australia, providing a buy now, pay later payment platform. Their proprietary decision making engine determines creditworthiness of their retail customers in near real time on a global scale.
And we are leveraging service exchange from our Internet gateways in the U. S. And in Europe to simplify, scale and improve the user experience. We continue to see traction from the European digital organizations and the partner of the case and provider able to facilitate the global growth well into the future. A multinational semiconductor and software design company headquartered in Europe selected Digital Realty to provide a global data center strategy to support the transition of their business services as they decommissioned data centers and extend their business reach.
In particular, the partnership will facilitate their ability to extend their presence into Singapore in support of their APAC initiatives. They will now be able to deliver a full global services capability supported by Digital Realty in each region of around the world. In addition, the British satellite telecommunications company is expanding with us in Europe to provide further co location solutions for their London and Amsterdam operations. The solution underpins the infrastructure required to support the launch of their new satellite later this year and will provide high speed broadband services to their customers. Channel Partners continue to contribute to our business and comprise 15% of our 1st private colocation and interconnection companies and accounted for 25% of our new logos.
1 of our top channel partners brought us an opportunity to support a digital healthcare company that is redefining the way cardiac arrhythmias are clinically diagnosed by combining their wearable biosensing technology with cloud based data analytics and machine learning capabilities. Their primary business model requires extensive data mining to help doctors predict and respond to cardiovascular events. The customers prepared to proprietary cloud solution within Digital Realty required access to Azure, AWS and Salesforce Cloud Services. Digital Realty won the payments by providing a secure, low latency and HIPAA compliant solution with the ability to connect multiple cloud providers through our interconnection services, including service exchange. We're also seeing traction with the strategic relationships we have forged with leading cloud and managed service providers.
For example, we are engaged with 1 of our global cloud hyperscale customers to provide best in class ultra low latency hybrid services to end customers with specific performance requirements. We're also teaming up with a major storage solution provider to offer services to end customers who wants to deploy private infrastructure in close proximity to the public cloud. Alliances like these greatly expand Digital Realty's addressable market and demonstrate our unique capabilities in terms of ubiquitous cloud interconnection and near field proximity to underlying cloud infrastructure around the globe. Turning to our backlog on Page 12. Current backlog of leases signed and not yet commenced stood at $144,000,000 at the end of the first quarter.
I'd like to point out here that the current backlog shown on Page 12 reflects the full contribution from Ascenty, whereas the Ascenty contribution will be shown at our 49% pro rata share going forward. Weighted average lives between the Q1 signings and commencements remain tighter than our long term average in a little over 2 months. Moving on to our new leasing activity on Page 13, we signed $1,000,000 of renewals during the Q1, in addition to new leases signed. This is the 2nd highest quarterly renewal leasing volume in our history, right on the heels of the all time high of $138,000,000 in 4Q 'eighteen. Weighted average lease term on renewals was nearly 13 years, while cash rents on renewals were down 6.9%, driven primarily by strategic portfolio transaction with a single customer deployed multiple power piece filling shelves as well as fully built out turnkey capacity in 15 sites across our global platform.
We renewed their footprint for 15 years on triple net lease terms, locking in these cash flows for years to come and maximizing the value from these facilities. We also effectively tied this strategic renewal to a multi region expansion opportunity with the same customer. Excluding global relationships that have signed an incremental $15,000,000 of annualized GAAP revenue over the past 6 months, mark to market on Q1 renewals would have been essentially flat on a cash basis, as you can see from the data points on the bottom of Page 13. This incremental leasing activity is a prime example of what we mean when we talk about our holistic long term approach to customer relationship management. We believe we have extended advantage when we are competing for new business with a customer we are already supporting elsewhere within our global portfolio.
And whenever we can, we try to provide a comprehensive financial package across multiple locations and offerings, including both new business as well as renewals. In terms of Q1 operating performance, overall portfolio occupancy slipped 40 basis points to 88.6%, half due to development deliveries of agent service in Amsterdam and Chicago and half due to customer move outs in Silicon Valley and Dallas. The U. S. Dollar continued to strengthen over the past 90 days and FX represented roughly 100 basis points headwind to the year over year growth in our reported results from the top to the bottom line as shown on Page 14.
Turning to our economic risk mitigation strategies on Page 15. We manage currency risk by issuing a locally denominated debt to act as a natural hedge. Only our net assets within a given reason are exposed to currency risk from an economic perspective. In addition to managing foreign currency exposure, we also mitigate interest rate risk by proactively terming up short term variable rate debt, 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 less than 1% impact to full year FFO per share.
Our near term funding and refinancing risk is very well managed and our capital plan is fully funded. In terms of earnings growth, core FFO per share was up 6% year over year or 7% on a constant currency basis and came in $0.10 above consensus. Delta relative to prior expectations was primarily due to interest income on the Brookfield joint venture funding as well as tax benefit due to a reduction in the corporate tax rate in the UK, which came into effect during the Q1. In terms of the quarterly run rate, we expect to get back down in the second quarter due to the deconsolidation of the Ascenty joint venture going forward, the absence of the tax benefit in future periods and the forward equity drawdown as you can see from the bridge on Page 16 are rebounding in the second half of the year as several large leases commence. You may have seen from the press release, we are reiterating 2019 core FFO per share guidance.
Those drivers are unchanged with the exception of updated financing activity and a reduction to our same store growth outlook. In addition to continued FX headwinds, primary change from our prior forecast includes the blending expense component of the strategic portfolio transaction executed during the Q1 and bad debt expense related to a sub scale private co location reseller. We also faced a particularly tough comparison in the Q2 due to a sizable property tax refund we collected in the Q2 of last year, which also weighs on the full year same store growth comparison. Last but certainly not least, let's turn to the balance sheet on Page 17. Net debt to EBITDA remains in line at 5.5x as of the end of the Q1, while its charge coverage remained healthy at 3.6x.
Pro form a for the ins and outs of Brookfield's funding of the Ascenty joint venture and the forward equity drawdown, net debt EBITDA is just over 5x and fixed charge coverage is just over 4 times. Over the past several months, the digital team capitalized on favorable market conditions to advance our financing strategy of maximizing the menu of available capital options while minimizing the related cost. In early January, we gained all $500,000,000 of our 5.7.8 percent senior notes in 2020. We also executed against our strategy on locking in long term fixed rate financing and tracking coupons across the currencies that support our assets with a green euro bond offering in early January. This was our 2nd euro bond offering and also our 2nd green bond, following the US500 $1,000,000 green bond we raised in 2015.
This was the first ever data center euro green bond. The offering was well received, successfully raising gross proceeds of approximately 1,000,000,000 of 7 year paper at 2.5 percent, while underscoring Digital Realty's industry leading sustainability commitment. Marketing conditions continue to improve over the quarter and in late February on the basis of reverse increase from investors, we reopened both the 2.5% eurogreenbond offering in 2026 as well as our recently issued 3.75% sterling bonds through 2,030. And we raised another $450,000,000 of long term debt at attractive coupons. We saw the same playbook a perpetual preferred equity portion of our capital stack during the Q1.
We announced the redemption of all 365,000,000 dollars of our 7.3eight Series H preferred stock and we raised $210,000,000 of permanent capital under our new Series K professional preferred at 5.85%. Finally, we advanced our private capital initiative, closing on a $700,000,000 Ascenty joint venture with Brookfield, a leading global asset manager. Successful execution against our financial strategy is a reflection of our best in class global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers, enables us to prudently fund our growth. As you can see from the debt maturity schedule in 2018, the recent expenses have extended our weighted average debt maturity by more than half a year and lowered our weighted average coupon by 30 basis points. A little over half our debt is non U.
S. Dollar denominated acting as a natural FX hedge for our investments outside the U. S. Nearly 90% of our debt is fixed rate, regard against a rising rate environment and 99% of our debt is unsecured providing the greatest flexibility for capital recycling. Finally, as you can see from the left side of Page 18, we have a clear runway with nominal near term debt maturities and no bar too tall in the out years.
Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long term financing strategy. This concludes our prepared remarks. Now we'll be pleased to take your questions. Andrea, would you please begin the Q and A session?
And our first question comes from John Atkins of RBC Capital Markets. Please go ahead.
Good afternoon. So two questions. 1 on the sales pipeline, I was wondering if it looks basically different than earlier this year and late last year? Or do you see a greater mix potentially of double digit megawatt opportunities as the company brings on more inventory? And are there any notable changes by region, Asia Pac, Brazil, Europe and North America as you sort of think about the pipeline for the year versus earlier?
And then I have a kind of a margin question more conceptually. Do you see an opportunity to get sustainably past 50% EBITDA margin level? Or is all activities appropriate in your anticipated development, decline or for other in the future making in the business? Thanks, John. This is Andy.
There's a handful of questions in there, so let me try to unpack them. Overall pipeline, obviously, we don't really speak to a specific pipeline number. I think if you look at the composition of our signings in the Q1, it was quite healthy across regions in terms of composition, size of deals, across industries, great 43 new logos. So, fairly healthy. And I think I'd characterize the pipeline going forward consistent with that strength.
Your question on the, I guess, more seeing more double digit megawatt opportunities, say, on the whole, we've seen an increase in double digit megawatt opportunities really with additional inventory coming online. While that's been the case for in Ashburn or Dallas, Chicago where we've been building off campuses for quite some time, It's been a little bit of a newer phenomenon in Frankfurt, Amsterdam, Melunza, or even in Toronto. And certainly, Osaka, where examples where now these larger customers could see immediate inventory meets their needs and to continue that one way to growth. So, I do think you're going to continue to see that mix of more double digit Hydrolot deals continue. I think the next question was a little bit of kind of compare and contrast some of the markets.
I'll try to do that efficiently. Maybe starting in Asia, I think we've seen great strength, Bill mentioned, firstly, in Singapore and Tokyo markets where we're literally trying to find extra capacity in the room closet for some of our customers as it relates to the next leg of our campuses in 10 12 or new inside to come online. The software is another high-tech area where we are bringing on capacity in a series of decent capabilities where our customers are going with us in a nice smooth runway. Hopping over to Europe, Frankfurt has been a highlight. We had a great 3 megawatt signing to an IT service customer that had an enterprise customer that they exported from the U.
S. Into that market. And we've seen some robustness there at a time when supply isn't quite limited. Back in the Americas, as I think I mentioned in my prepared remarks, the composition was really Toronto. We're building upon our success there.
And I think we've
seen some incremental inbounds most recently there. And some also some other wins in Dallas and Santa Clara. A little lighter in Ashburn, but that was very much subject to our inventory. And then Bill kind of gives you a little preview of our entry to Chile and success of Centene. I think the second question,
just so I have
it right, John, was about EBITDA margins and where do we get to see that going from here. So I guess the midpoint of our guidance is we had about 58% adjusted EBITDA margin. As a reminder, that's down over 100 basis points year over year from ASC 842 accounting change for the expensive non success based leasing compensation. Right now, I can tell you we're much more focused on expanding or stream, I should say, we're less focused on expanding our industry leading EBITDA margin and more focused on growth. Over the longer term, I think it's pretty intuitive as we continue to scale our platform globally, particularly in new markets, I mentioned with more budding campuses and we've better times the scale.
I do see a longer term trajectory to further EBITDA expansion pushing up closer to the 60% area that you mentioned. But right now, again, the focus is more prioritizing growth, given we feel like we have a quite healthy EBITDA margin.
Our next question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.
Thank you. Good afternoon. So first question is on guidance versus sort of the beat in the quarter. Andy, you touched on it and went through Slide 16, which is always helpful. But I guess just running the numbers as opposed to looking at the bars, if I back the $1.73 in the quarter out of the $6.65 it implies that you're going to do a $1.64 per quarter in order to get to the full year or that's what you need to do at least, which seems like a pretty sizable step down.
I know you touched on some of the puts and takes, you feel JV funding obviously is a little bit of drag. Tax benefit, I guess, I
could use a little bit
of a better explanation for. And then separately, can you maybe elucidate what we should expect to happen on the forward equity
a little bit better? This at
least in this illustration shows you taking down all the forward equity prior to 2Q or before the 2Q bar? And then I'll
have a follow-up. Sure. Thanks, Jordan. So I guess the components again. So Brookfield closed on its 49 percent of the joint venture the very last day of the quarter.
So, we had not anticipated that to take so long in terms of regulatory approvals and tax and legal structuring, but we did prepare for just in case and they compensated us preparing their share in the investment with a current return and that's obviously going to go away. So, it's a bit of a one time benefit to have to fill during the quarter. To a lesser extent, the UK corporate tax rates revised from 21% down to something slightly lower than that, I think 17%. And obviously, we have non U. S.
Dollar investments in London that we have to adjust our tax rate for deferred tax assets or liabilities in this case. So having the benefit to our core FFO that appears in the quarter as well. So those are the 2nd, I'd say, that contributed to the several pending outperformance in the Q1 relative to our original guidance. In terms of headwinds that counteracted us in the quarter and also will counteract us in the full year, we had some bad debt expense. We have a more troubled private cola reseller customer, which is relatively small percentage of our total portfolio, but does provide some headwinds during the quarter.
It certainly and our same store NOI pool year over year growth and also will provide a headwind to core FFO per share growth on a full year basis. So, I'd say right now, consistent with prior practice, which is really a philosophy of not sending starters in the block room after 1 of 4 quarters, We did keep our dimes constant. And going to your question on the a drawdown on the equity forward. So there's about $1,100,000,000 gross equity. We've not drawn down on any of it.
As you can see from the balance sheet at 3 $31,000,000 we have over $800,000,000 of revolver balance on a $2,600,000,000 revolver. We had about $130,000,000 almost
cash on
hand, Booked a literally came in the last day, so we couldn't even pay down the revolver with a portion of that to all pay later. And I would say we're going to be drawing down a portion of it before the end of the second quarter. We took a little bit of poetic license on the chart for putting that bar just to the left of the Q2 bar. But I'd say the bulk of it will be bulk, if not all of it, will certainly be done by the end of Q3.
The book just to clarify, the Brookfield cash doesn't didn't show up on the balance sheet at all? Is it because that's I'm
just saying we have $127,000,000 or so of cash on the balance sheet at threethirty one because that money literally came in that single day and we couldn't send a wire to pay down more revolver balance for that piece.
Okay. My follow-up was more on sort of funding longer term. You've recently and maybe this is a good question for Mr. Wright. You've recently talked about self funding model potentially.
And I'm just curious if we could get an update, maybe a few months into the year, what it looks like as you've sort of gone out to the market or taken an assessment of the portfolio of how we should be thinking about digital's funding and sort of harvesting of assets
this year?
Yes. Hey, Jordan. Thanks for the question. Look, I think consistently we've said previously, although our 2019 guidance does not include any of the disposition assumptions, we continue to remain focused on recycling and capital and portfolio optimization. The company has a heritage of that.
Bill was doing that 6, 7 years ago, and we continue to focus on those opportunities when they make sense. We're certainly continuing to evaluate the private market as a source of capital and clearly, we'll let everyone know when we have anything to report. That said, you can reasonably expect us to periodically sell assets, particularly non data center properties or assets in markets that no longer fit our strategy. Specifically, you discussed selling certain triple net lease assets potentially, as well as potentially joint venturing stabilized assets where we can pull out some of that capital. We would joint venture it and redeploy that capital into higher yielding development assets, which we think is a prudent capital allocation strategy.
And look, I think, again, we haven't committed to any specific amounts and timing since, as Andy would touch on, we're fully funded through 2020. Other than to say that it could be as high as a couple of $1,000,000,000 over multiple years. Again, no specific timing or amounts.
Thank
you.
Our next question comes from Michael Funk of Bank of America Merrill Lynch. Please go ahead.
Yes. Thank you very much. Just a couple guys. I mean, first, Bill, during the call, you made some comments on expectation for maybe a pickup or an absorption in the second half of twenty nineteen for the large hydro scale guys. Hope you can expect that back to some of the comments we've heard in the last week or so from Intel, for example, maybe a little bit of your unit weakness there.
MTSI talking about inventory oversupply, you contrast with Microsoft talking about building out their global data center regions. Can you help us pull that together and talk about your own view on the second half pickup and absorption?
So keep in mind, the first half, we really didn't have any inventory in Northern Virginia, which is our strongest and cheapest market. That's going
to be coming on in
the second half. So that at least will give us some product to sell. I can tell you that just based on conversations that we're having, well, back to you, the purchasing cycle of these CSPs tends to be
spiked.
It has been volatile and not all disputes buy on the same schedule. And some buy in far greater quantity than others. And in some regions, we see greater orders than others. In general, Virginia is the highest and we see smaller orders. Historically, we've seen smaller orders in Europe versus North America.
So, there certainly was a low in the Q1. And I think despite that, we did $60,000,000 of bookings. So, we're happy with that. And in some ways, we feel that quality
of bookings is better in the
Q1 because it's we're less dependent on large spiky CSP orders. But I have no doubt that those orders will resume in the back half of the year.
Okay.
And then you also announced the we talked about earlier in Chile, the deal in the first phase. I think you announced the size of the deal. Any additional commentary on future phases, what that could look like, timing, any kind of underwriting commentary you can give us as well as kind of rate to underwriting that?
Sure, Michael. I'd like to fill in some of the details here. So this is very consistent with our digital realty new market entry expansion, purely customer led. And this one in particular derisked by simultaneous customer signing and our control of land and ultimately start of construction. This is a initially we have a little over 6, 6.3 megawatts basin a hole in Santiago, but has a runway for growth to be another 20 plus megawatts with adjacency.
So and I think on the heels of this, I think we'll likely see additional other customers looking to expand in this market as well. And then Mike, one second. I'm sorry, I was trying to probably notice it
was initially structured as a leasehold And that was really a function of time to market. Our expectation is that we will purchase that asset.
Okay. And then one quick clarification, Andy, if
I could. So the adjusted EBITDA guidance, is that
apples to apples? That's what you gave us at 4Q.
I did notice some adjustments for Ascenty. So just to clarify, is that the same guidance? Or was there a change there?
Sure. The I think we did adjusted EBITDA margin guidance, not necessarily EBITDA. But I'd say, as you look across the guidance table for each of the assumptions and ultimately the output row at the very bottom, We've kept that on an apples to apples basis throughout without no change. I think if you go back to our initial guidance back in the 1st weeks of January, we did try to give you what 'eighteen would look like under the change in accounting for ASC 842.
So no change even though the capitalization EBITDA at the back of your supplemental, there is the difference with the consolidated JV and then the non controlling interest now contributing to that?
No, Sam's counting for the table and the from left to right on there. I mean, the only difference is Senti. We owned 100% of Senti from December 21 on through all but the last very last day of the Q1. So we recognized consolidated or almost 99%, I should say, of that venture since management does own 1% interest through our P and L. On the last day, when Brookfield closed on its 49% it's linked to an unconsolidated joint venture at the and ultimately, given there was literally one day, it wasn't a material amount for disclosure in the back of our future.
There will be next quarter when we own 29% for a full 90 days. And we did provide a reconciliation on our leverage stats for both net debt to EBITDA and fixed charge coverage to make sure your apples to apples in numerator and denominator for our provider share of ownership on those counts.
Okay, great. Thank you so much, Eze.
Our next question comes from Colby Synesael of Cowen and Co. Please go ahead.
Great. I guess, two high level questions. Your Bill, I think in that last comment or question, you mentioned you have no doubt that you'll see a resumption to the larger deals in the second half of twenty nineteen. And I'm just curious, is that based on recent trends in the last few weeks, the last month or would you
have just as confident,
call it on January 1? And then secondly, M and A. Obviously, it's been a key aspect of your strategy the last several years. I know there's been some pushback on valuations, perhaps more recently over the last few quarters, if not year. Are you seeing those change?
And are you seeing potentially more opportunities for you guys to do something than maybe you would have thought of just a few months ago? Thanks.
Sure. Colby, let me handle the first one and then Greg can pick up on the second one. I wouldn't say that there's been any change since January that causes that. It's just a function of looking back over history and seeing what the buying pattern has been. Obviously, some of these CSPs have taken them very large blocks of space in the relatively recent past, which has taken some time for them to absorb.
For example, if you've listened to the Microsoft earnings report today, cloud business is clearly very robust. And I would assume that other firms will report in a similar range. And at the end of the day, they need to procure space to house these operations. And that's why we feel
as we do. Yes. And to provide a little bit more color on that, Bill, a couple of elements that we've been looking at in the market is particularly around some of the services that we all see all of these cloud providers launching. These services are becoming more complex and require a different type of infrastructure to meet their requirements. And so it's all about huge data lakes and about the ability to be in cab space or multi megawatt deployments across our entire connected campus, which is where we still see every major provider out there launching a handful of new services every quarter.
So there's all of that requires infrastructure to continue to meet the market demands of all the consumers globally.
Hi, this is Craig responding to the M and A question. Look, I think when we take a look at the landscape right now, and so we've mentioned before, we constantly monitor all opportunities, whether in the public market, the private markets, whatever they'd be. At this time, I think your point is right. We're seeing a lot of potential M and A opportunities in the private market especially. And you can imagine given our position, we see everything.
I think you also alluded to the fact that pricing remains fairly robust and that's true. With that said, I think we've shown our discipline and commitment in the past to only do deals that make strategic sense and meet what we believe is the appropriate risk adjusted return. And that's the way we're going to continue to pursue our M and A strategies. With that said, also another leg of that stool, not necessarily M and A, but we're looking at land purchases as well to continue to fund the company's growth. The reality is we look at 3 different prongs really.
M and A, whether it's public or private, we look at both private portfolio and one off acquisitions as well as land acquisitions. And again, this may change by market. If you go back and we monitor each market, determine what we think appropriate returns are and what our strategy is and where our customers are driving us in that market and weigh all those factors before we embark upon any of that activity.
Our next question comes from Erik Rasmussen of Stifel.
Maybe just circling back in Northern Virginia, obviously, there's a a slowdown we're seeing, a slower absorption in this market, hearing a lot of inventory in the market and putting pressure on pricing. But can you just kind of talk to some of those sort of dynamics in that market? I know from what we're hearing and some of the things that we've seen so far reported, kind of all jives with maybe
a second half pickup. But can
you just give a little bit more color on what you're hearing from customers there and just some clarity?
Hey, Eric. This is Andy. I may all try to tackle it. So, we've obviously been monitoring this market quite closely. It's certainly the most competitive market in the arena.
I would also say it's historically been the largest and had the largest amount of demand and most robust and diverse demand across all cloud service providers and enterprise customers. We, as Paul mentioned, have had a pretty great phenomenal success over the last 12 plus months, call it 99 Megawatts to the point where pretty much all of our existing inventory that had been leased. So came up a little short. Now we did not anticipate that was going to happen a year prior when we would have gone incremental inventory. I think the way we think about tackling that market, we are closely monitoring relative competitiveness.
We are very pleased in the fact that we are selling to a very large and growing installed customer base. Many customers want to grow with that adjacency, adjacent suites, adjacent buildings, literally a short walk across the road or condos for the fiber to be cooled. And many of these customers who have already landed with us have that game plan already crowded out incremental capacity they're going to take once they're fully utilizing their existing suites. So having that installed is certainly a competitive advantage to date And I think that will put fruit as our newer inventory, our latest inventory comes online in the back half of 2019. The other thing I would say, which is a tool we utilize and pretty much defending rate returns and profitability in any more competitive market is really flexing the muscle of the global multi product portfolio and bringing together opportunities for our customer to grow in very supply constrained, more rare and unique opportunities in Tokyo or Singapore or Osaka or Frankfurt or South America, kind of packaging opportunities for these customers and not beholding necessarily to that private one off competitor that it only has anything to sell as freight.
So obviously, more to come. We'll be even more close to the front lines as we've been able to sell against in that market. But I think we've got a tremendous value proposition and some pretty good tools in our toolkit to make sure we maximize value for that market and for the company.
Great. And so what I'm hearing is that even though you may have lost out or you could be losing out on deals, it's not like because of your competitive advantage in this installed base, if you lost or out on this side of the first go around, that business will come back or maybe even customers are kind of waiting for that incremental capacity to come online. And again, it's not just a pricing game or if you had because there is a lot of capacity that's in that market and a lot of inventory. So is that a
fair way to capture that?
Honestly, I would say that the timing of inventory tightness and demand taking a bit of a pause kind of coincided for us in that market. So I'm not sure we really locked out based on our look at the market in the Q1. There weren't a tremendous amount of deals we locked out on even if they were at more competitive rates due to our lack of inventory. And I think that goes back to some of the growth commentary of there we've landed large consumers of our product in the past 12 months that often take kind of several months to digest in the restocking mode and then come back and want to grow at that capacity with adjacency. So today, I don't think there's really any regrettable losses in that market of any substance, even with a pricing opportunities out there from certainly many competitors that do not have other value add for their customers beyond just offering them price.
Great. That's all I have. Thank you.
Next question comes from Michael Rollins from Citi. Please go
ahead. Hi.
Thanks for taking the question.
I was curious if you can un unpack more of the same store NOI guidance update for 2019. And then as you
look into 2020, how should we think about
change in same store NOI based on the mix of business that you'll
have in renewals for the next year? Michael, why don't I maybe I'll start with actuals and kind of bridge to guidance table just to kind of put the make it more clear. So our same store NOI came in at negative 2.5%. That's cash NOI year over year for the quarter. I would splice it into there were normal course business that would have had that number come in closer to 1% positive or at least 70 basis points positive for sure.
And we had 3 more episodic, 2 or 3 more episodic headwinds that hit us during the quarter. I mentioned there's bad debt expense that is net against revenue and obviously cash NOI from the coal project, coal reseller that is a customer of downstream store coal. We also had that global relationship, multi market, 15 year renewal, which had a, call it, blend and extend component. The customer had like 2.5 years left and we pushed them up 15 years. And while they lowered the rate, which you've seen in our PDP renewal and some of our QPF renewals, those leases will now clip on in 2.5 plus rate for now 15 years, which includes the value maximization path there.
We also had some FX headwinds from strengthening the dollar that doesn't have any hedge on an unlevered basis through the same store NOI pool. So negative 2.5% as reported cash NOI, if you were to back up the bad debt, the FX and our strategic renewal, that would have been about 0.7% positive. I would say, if we kind of then translate actuals for 1 quarter into guidance table for a full year, I would say about half of the decrease in the NOI is due to the bad debt expense and the plan to extend renewal. Again, that's not something we do every quarter or every year. We don't have that many customers with have that much capacity with that shorter duration available to renew all at once.
And you do renew it once and it resets. And I'd say the other half, just overall, the FX, I would say the other half and just where I'd say we're seeing kind of outcomes on potential exploration, potential downtime for re leasing. So nothing tremendously new, just maybe a little more cautious on our outlook at the same store pool. Before I let you get to your second question, I would remind you and others on the call, the same store core is one piece of the puzzle, just like our cash mark to markets. We've seen tremendous amount of business and have new leasing tied to existing renewals.
We called out that on one of the slides in the deck that our mark to markets have actually been flat on a cash basis and positive on a debt basis, about 3%. And the subset of those customers did $15,000,000 of GAAP with us. So on a relationship return versus same store versus leased and unique capacity splicing, it's actually accretive to our cash flows and to our revenue.
And then how do you think about that for next year?
Next year, we're really finding our way through the major renewals this year. So we've talked about the big team sites strategic portfolio of customer that was not a CSP. We are just at the very beginning of the second quarter executed with an OP CSP, a long term legacy digital customer for about 250,000 square feet, 20 plus megawatts at a pretty attractive renewal, call it, 5 years in term. And I'd say that one's kind of through now. And I'd say, other than one legacy renewal from a company required 3 years ago, we're really getting to, I think, finer waters here in terms of these renewal headwinds.
And I think we talk a lot less about them in 2020 and certainly 2021.
Our next question comes from Jon Petersen of Jefferies.
Great. Thank you. Just very quickly, I just want to sneak in on the guidance that people keep talking about. I just wanted to clarify. So the one time payment you got from Brookfield in the U.
K. Tax benefit, was that contemplated in the initial guidance? Or was that not expected?
John, we did not expect Brookfield to close 90 days in the Q1. We thought that transaction would then close very early in the year, if not prior to the end of the year, quite honestly. And now we didn't expect that in the guidance, but we plan for that transactions transaction with Brookfield in exchange for us to assure them a 49% share of Newsemi's business as they've navigated their regulatory and legal approvals. They were to compensate us for fronting their capital for what ended up being called just over 90 days. So that was not contemplated and we cannot contemplate the change in UK tax corporate tax rates in our guidance.
Our next question comes from Richard Choe of JPMorgan.
Hi. In terms of the commentary you made about focusing on growth, especially with the development coming on at the end of the year, Does it make sense that if you look at the dividend growth kind of slowing to help fund the growth aspect? Or is that just kind of overall large numbers? And if we can get a follow-up on how you think about the dividend growth rate, that would be great. Thanks, Richard.
So I don't think this is a zero sum game from dividend growth and investing in the platform for future top line growth. Really, the dividend growth is predicated on really the growth in taxable income as a REIT and ultimately our cash flows. We're now called a 70% AF to 4 payout ratio. That's on the heels of our dividend increase of just under 7% last quarter. And as we continue to see the cash flows grow on the 'nineteen and beyond, I think you'll see the dividend kind of move walk step.
Always looking to say a lean towards not over distributing and retaining a good portion of our capital in order to prevent reliance on external markets for funding our development and our growth opportunities. At the same time, we are certainly investing and focusing on accelerating our growth. I think that's a few points across the board. It's obviously, I think, top of mind for our new Global Head of Sales and Marketing, Corey Dyer. We've made some changes to kind of accelerate the growth and kind of further emphasize our focus on the enterprise customer seeking colocation and interconnection on a global platform.
But again, I don't think this is one thing or another. These are both missions that we can deliver simultaneously.
This concludes our question and answer session. I'd like to turn the conference back over to Bill Stein for any closing remarks.
Thank you, Andrea. I'd like to wrap up our call today by recapping our highlights for the Q1 as outlined here on the last page of our presentation. 1st, we further expanded our global platform, closing the Ascenty joint venture with Brookfield, securing strategic land holdings in key global metros and announcing our entry into Chile in support of a strategic customer's global growth aspirations. 2nd, we also underscored our commitment to delivering sustainable growth for all stakeholders with efficient and socially responsible capital raises, renewable energy contracts and corporate governance enhancements. 3rd, we raised the dividend by 7%, the 14th consecutive year we've raised the dividend getting all the way back to our inception in 2004.
Last but not least, we further strengthened our balance sheet with redemption of high coupon debt and preferred equity and the opportunistic issuance of over $1,600,000,000 of long term capital. As I do every quarter, I'd like to conclude today by saying thank you to the entire Digital Realty family whose hard work and dedication is directly responsible for this consistent execution. Thank you all for joining us and we look forward to seeing many of you at NAREIT in June.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.