John J. Stewart - Digital Realty Trust, Inc. William Stein - Digital Realty Trust, Inc. Andrew Power - Digital Realty Trust, Inc. Scott Peterson - Digital Realty Trust, Inc. Jarrett Appleby - Digital Realty Trust, Inc..

Jordan Sadler - KeyBanc Capital Markets, Inc. Jonathan Atkin - RBC Capital Markets LLC Paul Burton Morgan - Canaccord Genuity, Inc. Vincent Chao - Deutsche Bank Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker) Colby Synesael - Cowen and Company Sumit Sharma - Morgan Stanley & Co. LLC Richard Y.

Choe - JPMorgan Securities LLC Frank Garreth Louthan - Raymond James & Associates, Inc..

Hello and welcome to the Digital Realty Third Quarter 2016 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mr.

John Stewart, Senior Vice President of Investor Relations. Mr. Stewart, please go ahead, sir..

Thank you, Ed. The speakers on today's call will be CEO, Bill Stein; and CFO, Andy Power; Chief Investment Officer, Scott Peterson and Chief Operating Officer, Jarrett Appleby; are also on the call and will be available for Q&A. Management may make forward-looking statements related to future results, including guidance and the underlying assumptions.

Forward-looking statements are based on current expectations, that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of the risks related to our business, see our 2015 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. And now, I'd like to turn the call over to Bill Stein..

Thanks, John. Good afternoon and thank you all for joining us. We had another very productive quarter characterized by healthy leasing activity and solid execution against virtually every objective of our strategic plan laid out here on page two of our earnings deck.

As you may have seen, we announced this afternoon that we've appointed Dan Papes as Senior Vice President of Global Sales and Marketing. Dan was most recently President of Unify North America, formerly Siemens Networking Systems, where he had responsibility for managing all aspects of the business with total ownership of the P&L.

Dan is a technology industry veteran with a 27-year career with our largest customer, primarily in the outsourcing and managed services business, including roles as Vice President of Global Cloud Services Sales and Vice President of Global Telecommunications Industry Sales.

He has experienced leading global sales organizations and he has been responsible for driving significant growth in revenues, deal volume and profitability. We are delighted to welcome Dan to the team and we are confident that he is the right choice to help lead our global sales engine to the next level.

I would like to take a moment here to thank Andrew Schaap who ran our scale sales team on an interim basis, along with Tony Rossabi who continues to lead our colocation and interconnection line of business for their leadership and professionalism, while we ran the search for a permanent sales and marketing leader.

They are both key assets to our organization and the solid rebound in bookings during the third quarter is a direct testament to their capabilities and the depth of our talent.

The third quarter capital allocation highlight was closing on the acquisition of a portfolio of eight highly strategic data centers in London, Amsterdam and Frankfurt, as shown here on page three. This transaction was strategic and complementary to our existing business; it was financially accretive, and prudently financed.

In terms of integration, we are underway towards a smooth transition of the acquired business into Digital Realty. In late September, we announced the appointment of Rob Coupland as Managing Director for the region.

Rob, previously served as Chief Operating Officer for Telecity and we are delighted that he accepted our offer to stay on after the acquisition and lead our expanded regional platform. Also in September, we officially opened our Amsterdam data tower.

The 72-meter high tower was designed and built using the latest advanced technologies and has over 5,000 square meters of space and will have fully built out IT load of nine megawatts.

Based on its location at the Amsterdam Science Park, our customers will have the ability to interconnect within a rich ecosystem of telecom organizations, Internet service providers, and cable companies. In addition, we are on track to deliver the first of three phases of our 27 megawatt campus in Frankfurt in the second half of 2017.

We have seen significant demand from several customers, including the major global cloud service providers. We've also recently completed ISO certification of the newly acquired sites. Over the next quarter, we will be stabilizing our operations in the region and executing our business objectives.

We also closed on the sale of our fully leased Saint-Denis data center in Paris during the third quarter, as well as the previously announced sale of a four-property domestic datacenter portfolio.

We do still have three small assets held for sale on the balance sheet but the completion of the portfolio sale substantially concludes the capital recycling program we embarked upon in the second quarter of 2014.

As I've said on several occasions, we've been quite pleased with the execution that Scott Peterson and his team have achieved on the sale of our non-core assets. Let's turn to the expansion of our product offerings on page four. We announced the launch of our Service Exchange at MarketplaceLIVE in September.

Service Exchange is an interconnection platform that facilitates direct, private and secure connections to multiple cloud service providers, including Amazon Web Services, Google Cloud Platform and Microsoft Azure, as well as telecommunications providers and other Digital Realty customers worldwide.

Service Exchange simplifies interconnection and makes access between interconnected services, providers and businesses more flexible, more scalable, and easier to use than ever before.

Upon launching in November, Service Exchange will offer significantly greater performance, reliability and security for cloud services and data center access than the public internet. Service Exchange is powered by Megaport combining our respective core strengths.

Digital Realty's high-availability datacenter offerings cover the spectrum from single rack co-location to multiple megawatt deployments around the world to suit our customers' current needs and to enable their future growth.

Megaport, a leading provider of elastic interconnection has developed a platform that will keep pace with innovative cloud technologies and continue to expand to new markets. Service Exchange is critical to our customers.

A recent survey from RightScale reports that 82% of enterprises are adopting a multi-cloud strategy citing security, managing multiple clouds and the lack of resources as the top three challenges of leveraging the cloud effectively.

Service Exchange accelerates adoption of public and hybrid cloud architectures by simplifying private access to multiple clouds. Our Partners and Alliances program continues to grow, with several of our important partner sponsoring and participating in our very successful MarketplaceLIVE event, highlighting the value of our ecosystem to our partners.

During the third quarter, we executed hybrid cloud transactions with one of the best partners that highlights the value of our global Connected Campus strategy. This program is expected to ramp up with our partner in the fourth quarter, as we launch our go-to-market campaign in several markets.

In addition, with the announcement of Service Exchange, we are seeing tremendous enthusiasm from our existing partners as well as several potential new partners seeking to incorporate the capabilities of Service Exchange into their own offerings. We are very excited about the expanded opportunities Service Exchange brings to our partnerships.

Our pipeline via our Partners and Alliances program remains robust at approximately $40 million, and deals executed during the quarter grew our bookings by nearly 20% since the launch of our Partners and Alliances program in early 2015. Let's turn now to market fundamentals on page five.

Construction activity remains elevated across the primary data center markets, but so does net absorption as well as the level of pre-leasing on development pipelines. Demand is outpacing supply, competitors are behaving rationally, new entrants remain few and far between, and we are seeing healthy consolidation.

In addition to our solid leasing volume during the third quarter, our forward funnel is similarly robust. Based on the current sales pipeline, there's a good chance we will be completely sold out of the remaining inventory on our existing campuses in Ashburn, Virginia, as well as Franklin Park in Chicago within the next couple of quarters.

Given the current pace of absorption of the remaining inventory on our major connected campuses, we took steps to secure our supply chain and supply our customers future growth during the third quarter as shown here on page six with the acquisition of land parcels adjacent to our existing campuses in Ashburn and Chicago, as well as the site of a future campus in Garland, Texas once our Richardson campus is fully sold out.

And now let's turn to the macro environment on page seven. The global economic outlook remains uncertain, whereas we appear to be edging closer to an interest rate tightening cycle in the U.S. As I've said many times before, the drivers underpinning data center demand are secular in nature and growing faster than the broader economy.

Similarly, we've built our organization to thrive, regardless of our environment, with irreplaceable global platform, a fortress balance sheet, and a deep bench of incredibly talented, hard-working employees. And now, I'd like to turn the call over to Andy Power to take you through our financial results..

Thank you, Bill. Let's begin with our leasing activity on page nine. Our total bookings for the third quarter were a little over $55 million of annualized GAAP revenue, including a $9 million contribution from interconnection.

We assigned new leases for space and power totaling $46 million of annualized GAAP rent during the third quarter, including an $8 million co-location contribution. Our third quarter signings speak to our ability to leverage our competitive advantages to win robust yet profitable demand from a diverse global customer set.

Third quarter wins included top cloud service providers signing across multiple locations and multiple continents. They also included a smaller, but rapidly growing new customer signing across four different locations within North America alone. In addition, the team delivered an 18% increase in co-location and interconnection signings in the U.S.

with our interconnection bookings representing a record quarterly performance since our acquisition of Telx and one of the top three quarters in Telx's history. I would like to pause here to point out that we have revised our headline total bookings presentation to include the contribution from interconnection.

We will continue to provide precisely the same information and the same level of granularity, but we will now be including the interconnection contribution in our total bookings to more closely align our presentation with our peers. At the market level, there's a lot of excitement in Chicago these days. And I'm not just talking about the Cubbies.

As Bill mentioned, we are nearing delivery and leasing of the last few megawatts on our Franklin Park campus and we have secured the adjacent land parcel to support our continued growth.

Subsequent to quarter end, we took assignment of a bespoke co-location reseller customer's PBB lease for 83,000 rentable square feet at 350 East Cermak in downtown Chicago.

And we also took ownership of data center improvements and infrastructure with a total of nearly six megawatts of capacity, an original cost basis of approximately $85 million and a current fair market value of approximately $35 million.

As part of this transaction, we took assignment of 15 co-location customer leases and entered into a new agreement with a reseller to maintain a smaller footprint in the building.

This transaction did not require us to make any material payment to the reseller and provides us with more than 4.5 megawatts of immediately available IT load and customer-ready space in our flagship Internet gateway which has remained north of 96% leased for the past six years.

Finally, we recently kicked off a marketing and pre-leasing campaign to line up anchor tenants for a potential data center development project at 330 East Cermak on a land parcel adjacent to our existing property at 350 East Cermak.

Turning to our backlog on page 10, the current backlog of leases signed but not yet commenced stands at $84 million, up $14 million from the prior quarter. The weighted-average lag between third quarter signings and commencements remain healthy at four months below the historical average of roughly six months.

Turning to renewal leasing activity on page 11, we retained 82% of the third quarter lease expirations and we signed $44 million of renewals in addition to new leases signed. The average cash re-leasing spread was slightly positive with healthy cash mark-to-market on PBB, colo and non-technical space offset by a roll down on turnkey renewals.

As expected, we did execute renewals on the above market leases in Phoenix that we've called out for the last couple of quarters, which drove the roll down on the third quarter turnkey renewals. We do still have several above-market leases remaining now primarily in the Northeast region.

So, we may see a modest negative cash mark-to-market in any given quarter. On balance, however, we still expect re-leasing spreads will be slightly positive on a cash basis for full year 2016. In addition, we expect cash re-leasing spreads will also be positive for the full year in 2017.

We continue to see gradual improvement in the mark-to-market across our portfolio, driven by modest market rent growth and steady progress on cycling through peak vintage lease expirations. In terms of our third quarter operating performance, overall portfolio occupancy is down 50 basis points sequentially to 89.9%.

As you can see from the occupancy bridge we provided here on page 12, the primary driver of the dip in portfolio occupancy was the acquisition of the sub-70% lease portfolio in Europe along with recent completions in space previously held for development that was placed in service during the third quarter.

It's important to note that portfolio occupancy is measured on the basis of square footage, which does not always directly correspond it to invested capital.

If you turn to the next slide on page 13, you'll see that the balance of available fully built-out inventory relative to total inventory as measured on the y-axis has been reduced more than half.

This dramatic reduction in our finished inventory has been directly responsible for the 140-basis-point improvement we have achieved in our return on invested capital over the same period, which we believe is truly a remarkable achievement for a portfolio of our size. Let's turn to Telx here on page 14.

The colocation and interconnection line of business generated $97 million of revenue during the third quarter. Although revenues remain split roughly 50-50, interconnection outpaced colocation with the year-over-year revenue growth in excess of 10%.

From the legacy 20 locations and prior two expense synergies, Telx generated $39 million of cash EBITDA during the third quarter.

While the quarterly increase in revenue continued to accelerate, EBITDA remained relatively flat due to timing of spend related to marketing activities around MarketplaceLIVE and other initiatives as well as some costs associated with the final stages of our integration.

We do expect enhanced revenue flow through going forward and incremental growth in EBITDA during the fourth quarter and on into next year. Key initiatives during the quarter included the launch of colocation at our Ashburn campus, expansion underway at multiple new locations in North America as well as MarketplaceLIVE.

The strategy of the colocation and interconnection product line continues to be in focus on key facilities both interconnection hubs and connected campuses to drive growth and nurture awareness and understanding of the identified ecosystems.

Many colocation customers may not be aware of key customers, vendors or partners that maybe easily accessed within the same building or Connected Campus. Identifying these natural magnets and leveraging their position within the connectivity ecosystem attracts and breeds growth.

With respect to expanding our customer base, we have emphasized the continued development of target verticals and communities. During the third quarter, the colocation and interconnection team added 34 new customers across a variety of market segments. Year-to-date through September, 113 new customers have been added.

In terms of market expansions, our colocation and interconnection team is in the process of expanding its footprint across eight markets in North America, representing more than 5 megawatts of incremental capacity, not including the full transfer of 365 Main in San Francisco completed earlier this year.

We launched colocation services on our campus in Ashburn, Virginia, during the third quarter. Funnel activity has met expectations, and new sales bookings have been positive.

Capacity expansion is also underway in Atlanta and will leverage the existing (20:52) and connected customer base at 56 Marietta, allowing customers to reach a robust community of connectivity from the launch date through the use of diverse fiber extensions.

Available capacity at 56 Marietta will be sufficient in the interim or customers may pre-purchase space and power as needed. Finally, MarketplaceLIVE 2016 was an overwhelming success with attendance at record levels.

The enhanced format and expanded venue were well received by customers and provided excellent backdrop for the announcement of the launch of our new Service Exchange in partnership with Megaport.

In summary, we are pleased with the performance of the colocation and interconnection product line and look forward to a continued progress, as we refine our go to market strategy to incorporate the ecosystem model, expand capacity and extend our colocation reach in North America and globally.

At the one-year mark post-closing, we are on track to meet or exceed our underlying (21:53) targets and conclude the integration process. The volatility in currencies during the quarter and in recent weeks continues to create a headwind with regard to growth.

FX represented a 100-basis-piont to 200-basis-piont drag on the year-over-year growth in our reported results from the top to the bottom line, as shown on page 15. I would like to remind everyone that 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.

Given our recently expanded presence in Europe, we will look to continue this FX hedging strategy by issuing sterling-denominated debt over the next several months as part of our corporate funding plan to term out our balance outstanding under our revolver at that time.

This financing will further reduce our exposure to currency fluctuation, as we head into 2017.

I would like to remind everyone that while our global footprint exposes our reported earnings to currency translation exposure, it also enables us to satisfy the data center requirements of strategic customers around the world, which we believe is a key competitive advantage.

Same capital cash NOI was up a little less than 1% on a reported basis and up a little more than 2% on a constant currency basis. Year-to-date, same capital cash NOI growth is positive 3.6% on a reported basis. And we still expect to be well within the guidance range of 2.5% to 4% for the full year.

As you may have seen from the press release, we reported core FFO per share of $1.44 for the third quarter, an increase of 9% on a reported basis and up 11% on a constant currency basis.

For the full year, we reiterated core FFO per share guidance of $5.65 to $5.75 on a reported basis and constant currency guidance of $5.70 to $5.90, representing 8% and 10% growth respectively.

Turning to the longer-term outlook on page 16 that we introduced on our Investor Day last October, you may recall that we got into a mid-to-high single digit FFO per share growth and double-digit AFFO per share growth in 2016.

We're certainly tracking ahead of plan on both fronts, but notably, AFFO per share growth that has been driven by year-to-date operating outperformance, accretion from Telx, the continued reduction in straight-line rental revenue and lower than expected recurring CapEx spend. For the full year, we now expect to deliver 20% growth in AFFO per share.

Longer-term, we do expect both FFO and AFFO per share growth to converge in the mid-to-high single digits, and we plan to give formal guidance for 2017, early next year.

By way of preview, we do expect continued headwinds from the strong dollar and tougher comps due to a full year contribution from Telx, as well as the burn-off of the one-time benefits to AFFO in 2016.

Absent external growth from acquisitions, which are inherently difficult to predict, we would expect to see somewhat slower growth in 2017 than 2016 in both earnings and cash flow per share.

That being said, we have delivered positive year-over-year growth in core FFO per share and dividends per share each and every year as a public company and we do not expect 2017 will be any exception. Let's turn to the balance sheet beginning on page 17.

As anticipated on our last call in July, we settled the bulk of our forward sale agreements during the third quarter, issuing 12 million shares and generating net proceeds of approximately $1.1 billion, a portion of the net proceeds was used to permanently finance the European acquisition portfolio for approximately $874 million.

We also generated net proceeds of approximately $320 million from the asset sales Bill described earlier and we recognized a gain on sale of $169 million during the third quarter. We also redeemed our 7% Series E Preferred Stock during the third quarter for approximately $290 million.

We recognized a $10 million non-cash Topic D-42 charge for the write-off of the original issuance cost, which is an add-back to core FFO. We also prepaid $136 million of mortgage debt at a 5.9% weighted average interest rate during the third quarter.

We expect to retire an additional $108 million at an average coupon a little north of 6% during the fourth quarter. We expect to fund this pay down by settling the remaining 2.4 million shares subject to the forward sale agreements we entered into this past May.

Upon retirement of the mortgage debt pre-payable during the fourth quarter, we will have just $3 million of secured debt remaining, or well under 1% of total debt outstanding.

We have also proactively termed out short-term variable rate debt with longer term fixed rate financing, and as shown on page 18, floating rate debt now represents less than 10% of total debt outstanding. Even in a rising rate environment, a 100-basis-point move in LIBOR would impact full year FFO per share by roughly $0.03 or less than 1%.

Our leverage is likewise on target with net debt-to-EBITDA at 5.1 times at September 30. Pro forma for the settlement of the remaining 2.4 million shares subject to the forward sale agreements, debt-to-EBIDTA will be less than 5 times. Our balance sheet is poised for new investment opportunities consistent with our long-term financing strategy.

This concludes our prepared remarks. And now we will be pleased to take your questions.

Ed, would you please begin the Q&A session?.

We will now begin the question-and-answer session. Our first question comes from Jordan Sadler of KeyBanc. Please go ahead..

Thank you and good afternoon. First question comes down to guidance. Some of the assumptions moved around slightly; the one that you touched on was occupancy, and I was hoping maybe you can shed a little bit more light.

You may have mentioned this in the prepared remarks, but on the overall reduction there in the assumption? And then, on the other side of things, it seems like you were ahead on a number of metrics and I would have thought ultimately that that would have contributed to better FFO growth on the year on a core basis, at least.

Can you maybe just speak to those two points?.

Sure. Thanks, Jordan. So, maybe turning to the guidance first. We reiterated the same guidance as the previous quarter of $5.65 to $5.75 core FFO per share. There were some slight adjustments to some of the assumptions. We increased the EBITDA margin, I think, 50 basis points on the low end, a 30 basis point tweak on the G&A.

The change to the year-end portfolio occupancy to being down was really a product of a few things. One, we're absorbing obviously the European portfolio assets into the total portfolio occupancy, and that number includes existing vacancy. That portfolio is roughly 66% leased as of the third quarter.

Plus in addition to that, as you may have saw, we recently opened up our data tower in Amsterdam at the Science Park, which is a brand new, up to nine megawatts asset, which is part of this transaction that will also bring some vacancy into the quarter.

And then the other major driver I'd say is, in connection with the transaction in Chicago in our 350 Cermak building where we took the assignment of a PBB lease, obviously that will go from a 100% occupied 83,000 square feet to a much lower occupied amount with the existing colocation customers in the suite.

Net-net, we think that was a great transaction for not only for the exiting customer but really for Digital in terms of getting our hands on very valuable market-ready space in an incredibly hot market. That asset's been north of 96% for numerous years now.

And then going to your second question, overall the quarter, I think depending on whose metrics, we either beat by a penny or met consensus estimates, but it was pretty much in line with our forecast. I think there was a handful of positive things that you probably were highlighting.

The one thing I would say not negative but something that maybe put a little bit of drag on our third quarter growth was the increase in the G&A, which was probably related to onboarding the European portfolio, which was expected.

I think an unexpected growth component of the G&A was some of the overall integration-related work on the onboarding from that acquisition which closed in early July and travel and work to bring that team into the fold, and probably some other activity around the or seasonally-related activity around our Marketplace Live initiative and other events.

And the last thing I can think of off the top of my head, we did bring on two new board member during the quarter which has a little bit of incremental cost to the company, but I think they will be well worth it in the long run..

Okay. Thank you..

Our next question comes from Jonathan Atkin of RBC Capital Markets. Please go ahead..

So, the question I had was around interconnection revenues, and I was interested in both the legacy Digital Realty properties as well as legacy Telecity over in Europe, and what are your plans or what's the progress towards phasing in the interconnects towards more of a recurring revenue stream? And then the follow-up is just looking at slide six, the land parcel slide made me wonder a little bit about Santa Clara, and how you view some of the opportunities there including maybe inorganic growth.

And then any kind of update on Frankfurt's given that you have a building there and then you also have a new build that you've entered into, and so what are some of the plans that you have in that market? Thanks very much..

So, interconnection, Santa Clara, Frankfurt, I'll do the first one and then I'll toss the last two to Scott. On interconnection, we are obviously integrating and bringing on board not only eight great assets in the Dockland, (34:17) the Science Park and also in Frankfurt, but a really tremendous team and also a new leader to lead our EMEA region.

Their interconnection model had a very significant portion of reoccurring revenue spend, or not exact type of productization, but similar recurring revenue model. There will be further alignment across the global portfolio in terms of our interconnection services as we move forward.

We've experienced, as you saw, a very strong quarter for interconnection signings quarter-over-quarter.

And I think that is hopefully going to continue, and I think you are going to find us continue on those eight parts of the portfolio we're expanding our colocation, interconnection footprint be it in existing Internet gateways where Telx has historical resided, or on our connected campuses like in Ashburn or Richardson or other pockets of the portfolio.

And I'll turn the Silicon Valley question over to Scott Peterson..

On Santa Clara, we all know that there is discussion about a portfolio that's available on the market there. And we look at every opportunity in the marketplace, as we all know.

We'll always keep an eye on that to see whether we view it as being strategic and how well it integrates into our portfolio and if it represents a good economic value and a good investment for our shareholders. We have a couple of land sites, smaller land sites available for future development in Santa Clara.

We continue to look for additional capacity in that market since it's a good market. I think anybody familiar with that would know it's a tough market from a land perspective, so we need to be very creative in terms of acquiring more inventory there. As far as Frankfurt goes, we're very pleased with the level of activity. We're getting in that market.

I think it started off very strong, and we'll continue to propose that to a number of customers on that, and so we've been very happy with the progress there so far..

Our next question comes from Paul Morgan of Canaccord. Please go ahead..

Hi, it's Paul Morgan.

Just on the Service Exchange rollout and your interconnection, your volumes, how should we think about the timing of the rollout into additional markets? It looks like you've got kind of about half the ones you planned through 2017? Is that a near-term in Europe and the rest of the U.S.? And then that $9 million, 16% of your bookings in the quarter that's a good number.

How are you guys thinking about that as a share and as a potential growth rate going forward, especially after the Service Exchange roll out?.

Thanks, Paul. This is Jarrett. In terms of the Service Exchange, we're committed to an open environment. We've traditionally won business in the network-to-network, network-to-content, and network-to-enterprise verticals. This really gives us an opportunity to participate in the cloud ecosystem, which requires a new product offering and capability.

So day one, we're announcing primarily our North America platform, but we're phasing it where we actually control the portal, we control the customer experience, and this allows our customers to essentially order virtual cross connects. So the phasing is largely deployed.

We wanted to have colocation, interconnection, and our scale offerings, and now with the European assets we'll accelerate that as our second phase. So ultimately we'll have 15 markets, 24 data centers by second quarter of next year..

Great. And then my other question....

Maybe I'll....

Go ahead. Sorry, go ahead..

No, no, please, go ahead. If you want to say it again just to make sure we address it appropriately..

No, I was going on to my follow-ups. If you have something more to say on interconnects, that's great..

I was just going to address I think to your question on the $9 million. So that's $9 million of total interconnection signings this quarter, we were $8 million or around $8 million last quarter. I am not sure we're going to continue that pace of quarter-over-quarter acceleration; it's quite rapid.

But I think the key is continuing to bring on space at these very interconnection-dense locations as one part to spur additional interconnection revenue, and I think we're doing that by expanding in the likes of 56 Marietta, getting additional inventory in Cermak and other locations.

And then I think the next leg of it will be leveraging the interconnection revenue that will come from the enterprise, the cloud, coming off the Service Exchange. But I think that second part will be more of a (39:27) later in the 2017 revenue generation..

Okay. That's helpful color. Thanks. And then just in terms of a couple of markets where you're committing capital for expansion, can you maybe comment on Northern Virginia and Chicago and the competitive environment there? You have some of your peers also doing the same. And I know what you've said about the demand-supply equilibrium now.

But if you look into 2017 and 2018, how are you thinking about – give us an update how you're thinking about your preleasing and the future demand-supply balance?.

Those were two particular markets, and we have a little bit of a – a little map in the deck of our campuses in Franklin Park in Chicago and obviously in Ashburn, Virginia.

And based on pipeline signings we've completed to-date or through the end of the quarter, I should say, plus pipeline, there is a decent potential that we could be finishing out our existing (40:35) campus, the last 9377 building of Franklin Park and the last buildings on our Ashburn campus in the next several quarters, which should dovetail very well with the timing of deliveries of those parcels that are literally adjacent to the campus coming online.

So those markets obviously are not without competition, but we seem to win our fair share and having a fairly robust pipeline in those two particular markets..

Our next question comes from Vincent Chao of Deutsche Bank. Please go ahead..

Hey, guys. Just maybe sticking with the Chicago market, you've got some land now in Franklin Park, you've got potential build-out next to the E Cermak and you took back some availability from the PBB tenant.

Just curious based on your pipeline demand funnel, where are you seeing I guess more demand? Is it more downtown or is it in the Franklin Park area?.

Hey, Vin. It's Andy again. We're seeing the demand in both locations. It's just different types of demand and at obviously different price points.

As I just mentioned – on Franklin Park you're typically catering to a customer that is looking for more affordable total cost of ownership, seeking large amounts of space and power, and likely seeking an economic model that's in the low $100s per kilowatts.

If you're going down to Cermak, we're signing and filling up space, including the space we just took possession of, at rates that could be more than double that. And that customer is obviously not taking – likely taking one megawatts to two megawatts at a time, is taking smaller quantums.

They could be around 300 kilowatts, 400 kilowatts, but they're really taking those small amounts of space and willing to pay those higher prices in order to have the connectivity that our Cermak building offers. So we're seeing I'd say different demand sets in both locations but both seem fairly strong..

Okay. Thanks for that. And then just maybe a question on the bookings trends. Last quarter there was concerns about the slowdown in bookings and then you had also announced some activity in early 3Q and it was discussed as a timing issue.

So you take the two quarters together, you're at the $40 million-ish mark, which is relatively close to what it was in the prior couple quarters.

Given the fact that you now have additional availability here in Chicago, you've got a new head of sales in place, some other development availability on the European portfolio as well, I guess, should we expect some steady increases in those bookings numbers, or is there any reason to think that we wouldn't see that in the next several quarters?.

Yeah. I think that's fair to say. There's no surprises on this end that we were not pleased with the second quarter, but if you look at the third quarter, which was a quarter that quite frankly we were without a global head of sales for two-thirds of it and had a tremendous effort by both Andrew Schaap and Tony Rossabi stepping up to deliver for us.

Net-net, I was pretty happy where the third quarter came out. I think there are some key takeaways that when I look through it, it was somewhat in our script. The demand was robust and diverse. We weren't counting on one single customer to do a single 10-meg deal.

We had numerous customers, we had cloud service providers, other parts of SMACC, IT service. The demand was in North America but also in Europe. It was probably one of our best signings quarter in Europe for several quarters now.

A good chunk of those signings were actually in the London market post the Brexit vote, and those signings came not only from cloud service providers; they came from a disaster recovery firm, they came from an IT service firm. So lots of different demand drivers filling our existing signings in our funnel going into the fourth quarter.

I wouldn't tell you I could bank on $55 million again in the fourth quarter, but I think when we have that pretty steady-eddie run rate trend – if you look back, and I think we have on our slide deck like a rolling LTM number that kind of looks how our trends are fairly smooth if you look over a long time period..

Yeah. I think that's – it's Scott here – that's page 21, I believe of the appendix. If you look at that, it does quarter-by-quarter on a trailing 12 months and you'll see that there's a much smoother line there, if you will. We always talk about the business being lumpy.

So if you compare that with the signings in the main deck, you'll see how that smoothes out the lumpiness a little bit.

The only one to take a look at is you'll see a little bump in early 2014, which is we had – kind of, we had very high signings when we were clearing through that excess inventory that had been built over the prior year-and-a-half or so. So that's a good illustration of how the – if you look over longer timeframes, the lumpiness gets smoothed out..

Our next question comes from Manny Korchman of Citi. Please go ahead..

Hey, guys. Good afternoon.

If we think about the situation in Cermak where you took out that PBB customer, how many of those types of scenarios are you looking at across your portfolio where you might step in and do something like that?.

Manny, they are always kind of few and far between. It's a product of the expiration schedules of various customers, our demand in those locations. I would say they're somewhat of events where the stars and moon and sun have to align.

In Cermak we had a very highly leased, high-demand building with a customer, due to some regulatory constraints was looking to exit that building. Their lease I think only had like a year-and-a-half or so to run on it, so there was a path to a transaction that was beneficial to them and obviously beneficial to us.

There is a handful of other pockets in the portfolio where that may apply, but I wouldn't say that is something that we can necessarily count on in any regards..

Okay.

And then going back to the occupancy guidance, just to make sure that I and other people on the call understand this correctl, when you say down 150 basis points to 200 basis points, that's versus December 31 of last year, correct?.

Correct..

And so right now you're roughly 150 basis points down already. So you're saying that you could go down another 50 basis points from here through year-end.

Is that right?.

We are saying we'll go down another....

91.4%....

Manny, this is John Stewart. We expect to be flat from here..

Okay.

So the 89.9% where you ended is already at that guidance point?.

Correct..

All right. Thank you..

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

Great, thank you. I want to talk about the color commentary you gave on 2017 growth and how you anticipate it I think moderately slowing down.

And I am just curious, is that based on just the trajectory of bookings and what's happened so far in 2016 and how you see that getting installed over the next few months and how that might make it more difficult to achieve the same growth in 2017 already at this point.

Is it more a change in your expectation around market dynamics, whether it's in demand or pricing or is it perhaps even just a mix shift in terms of the assets you have now versus what you may have had going into 2016.

And then I guess as a part of that, I was wondering if you can give some color on how the eight facilities that you acquired from Equinix/Telecity have been performing in terms of growth maybe over the last year, or any other color you can provide so we get a sense of what those assets look like in terms of their trajectory? Thank you..

Sure, Colby. The answer to your first question, those are some good ideas, but really, foreign currency is the biggest headwind. And as I mentioned in my prepared remarks, we obviously look to hedge that with issuing sterling bonds, euro bonds, multi-currency revolver, and term loan.

But there is obviously a spread between the yields on our assets and the cost of that debt. And that's – again, it's earnings translation risk, not economic risk. We're not repatriating capital in a meaningful way that we are having losses, but the FX I would say is the largest driver to that, I would say, sentiment preview.

And then on the eight or so – on the eight European assets, five in London, two in Amsterdam, one in Frankfurt, maybe I will let – give Scott a chance to jump in on performance with the underwriting?.

Hi, Colby. Thanks. Yeah, so the performance since acquisition, it's only been a short time and so we've been very pleased with that performance. We're on track. If you looked at the performance prior to the acquisition, you saw – I think, your question was performance and specifically vacancy.

You saw the vacancy there tick up a little bit and that was primarily the result of two large tenants migrating – customers migrating out of the portfolio, one of which came to us in our portfolio and the other one actually left and went to a – it was a gaming company that went closer to their corporate headquarters, geographically far away.

But other than that the stickiness there has been pretty good and the velocity has been good too..

And are those facilities growing at a rate similar, for example, to the Telx portfolio or is it more in line with the traditional DLRs, any color on that?.

From a utilization standpoint, probably a little closer to the Telx portfolio, if that's what you are....

I was talking about revenue growth..

Oh, revenue growth, it was – kind of – it's in between where we are and Telx..

Okay. Thank you..

Our next question comes from Sumit Sharma of Morgan Stanley. Please go ahead..

Hi, everybody. Thank you for the transparency and the detail in the supplement and everything. Sort of a basic question in terms of, I guess, one of the things that we are wondering was the pricing per square foot or the GAAP rent per square foot for the new signings was kind of lower, down to $126 a square foot.

I am struggling to figure out whether this is just regular way lumpiness and a function of product and geographic mix, or was there some pricing pressure that you saw?.

I would say it's more of a mix contribution. We had a significant amount of signings from several customers and I'd say one of our lower price point markets, be it Northern Virginia or Chicago versus prior periods where we might have had more signings in the Silicon Valley or other higher priced markets.

Now, the – I wouldn't – it's tough to take the signings from the second quarter as a great comparable data point. That was obviously a very small sample set in terms of signings, but on apples-to-apples basis, I wouldn't say we're seeing tremendous pricing pressure.

The rates are held in relatively flat and the $120s due to concentration in North America in those lower price point markets. And at those rates those signings are still as you can see from our active development pipeline generating returns on our invested capital, unlevered returns right in our target thresholds of 10.5% to 12.5%..

Thank you. That's superb. If I could ask one more question. I guess in terms of your business mix which, roughly estimating the retail or the colo portion of the business is now or at least over 1Q and 2Q a little less than 30%.

I guess, is there some kind of composition level that you foresee into 2017 or 2018? Do you see that go up to one-third or 35% or 40% in terms of just revenues?.

You know, it's – I would say there is no specific targeted mix that we have on the board that we're shooting for. And you are seeing very strong growth on both fronts.

Obviously a substantial amount of our external growth had been acquisition of colocation-oriented, interconnection-oriented facilities over the last few years, which obviously moved that needle in addition to the organic growth associated with those acquisitions.

But at the same time, a large chunk of our active development pipeline is developing scale projects, be it on our campus in North America and Asia, Australia or in Europe. And that is still a significant component to the growth. So I am not sure I could tell you the percentages are going to diverge one way or another.

We're very focused on having the right assets and the right capabilities across all four continents to capture robust and profitable demand..

Very good. Thank you so much..

Our next question comes from Richard Choe of JPMorgan. Please go ahead..

Great. Thank you. Following up on that a little bit, it seemed like – with Q2 being light and 1Q was strong in terms of signings, but 3Q is very strong, it seems like the turnkey flex signings were of a bigger scale, a lot more square footage and I guess the average rent per square foot was a little bit lower.

But on the colocation side, it seemed like the pricing was better and it seemed like there is some strength there.

So kind of taking all this in, how would you characterize the environment for colocation and, I guess, the turnkey flex products? What are you seeing – where are you seeing strength or weakness?.

Sure. So, the turnkey flex product is what we call scale or previously called wholesale. The bulk of the activity in North America or Northern Virginia, Chicago and Dallas was soft obviously with Silicon Valley kind of falling after that in terms of demand.

And it's been – it was a robust quarter, and the pipeline for the fourth quarter remains robust as well. It's a significant amount of repeat business. It's a significant amount of multi-site business. It's a business where the customer is signing one-time on multiple continents with us.

The size of the deals most recently kind of ranged from, call it, almost 1 meg to almost 4 megs in terms of size of scale deal. So there is some variability in that. Some of the bigger customers are taking bigger deployments. I already touched on some of the pricing trends there.

On the colocation and interconnection side, you're really seeing, I think, the combinations of success really strategic internet gateway assets, a talented sales and marketing organization around them, executing on filling those assets up and these assets command higher prices given what they offer to the customers that decide to deploy in these locations.

We, again, – we're in – we have a fairly targeted approach to our colocation interconnection efforts. We are not in all 50 states or 100 countries. We picked our spots to be in the internet gateway, the internet hubs or in select connected campuses which have connectivity to the cloud service providers for the enterprise.

So, I think, where we picked our spots and how we tackled it, it's been able to generate pretty strong volumes at attractive rates have increase in the last quarter on the colo front..

Great. And one quick follow-up, the European signings are strong. Was that legacy digital or was there any significant contribution from the Telecity-Equinix assets..

The given – most of it is legacy digital. The colocation piece was contributed from the assets and the new team that joined the company. So, the 4 megs and $6.6 million of annualized revenue was legacy digital assets..

And our last question for the call will be from Frank Louthan of Raymond James. Please go ahead..

Great. Thank you. So I guess, just my question is more around expectations for Dan.

Give us an idea of what do you expect to see change on the sales force and what are sort of his mandate kind of out of the box?.

This is Bill. His initial mandate is going to be to fully integrate the Telx Equicity (59:14) and Digital sales teams and create the appropriate efficiencies there, and then develop the right go-to-market, working off of what the team has developed, and then further to push on the partners and alliances front..

So with that, if we were to see better growth than sort of what the Street has modeled next year, would that entail hiring more sales people, and what would have to – what would change to see better than Street growth next year?.

So Dan hasn't come on board yet, so I'm not going to give him his budget whether it's a lower head count or a higher head count, and we haven't talked revenues yet either. So he starts next week. So, I think, we're premature there..

Got it. Okay. Thank you..

And this concludes our question-and-answer session. I would like to turn the conference back over to Bill Stein, CEO for any closing remarks..

Thanks, Ed. I would like to wrap up our call today by recapping our third quarter highlights, as outlined here on page 19. We had another very productive quarter characterized by solid execution, against our strategic plan. We continue to extend our global footprint with the closing of the European portfolio acquisition.

We further enhanced our product offerings with the announcement of the launch of our service exchange. We're also continuing to deliver outsized growth in AFFO per share.

And finally, we further strengthened our balance sheet with the proceeds from asset sales and a successful forward equity offering used to redeem high coupon preferred equity and secured debt.

In conclusion, I'd like to say thank you to the entire Digital Realty team, whose hard work and dedication is directly responsible for this consistent execution against our strategic plan. Thank you all for joining us. And we look forward to seeing many of you at Madrid in a few weeks..

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