Q3 2021 Digital Realty Trust Inc Earnings Call
Good afternoon, and welcome to the digital Realty third quarter 2021 earnings call. Please note. This event is being recorded.
During todays presentation, all parties will be in a listen only mode.
Following the presentation, we will conduct a question and answer session.
Callers will be limited to one question plus a follow up and we will conclude promptly at the bottom of the hour.
I would now like to turn the call over to John Stewart Digital Realty's Senior Vice President of Investor Relations. John. Please go ahead.
Thank you operator, the speakers on today's call are CEO, Bill Stein and CFO, Andy Power, Chief Investment Officer, Greg Wright, Chief Technology Officer, Chris Sharp and Chief revenue Officer, Corey Dyer are also on the call and will be available for Q&A.
Management may make forward looking statements, including including guidance and underlying assumptions.
Looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially.
For further discussion of risks related to our business see our 10-K and subsequent filings with the SEC.
This call will contain non-GAAP financial information.
Conciliations to net income are included in the supplemental package furnished to the SEC and available on our website.
Before I turn the call over to Bill I'd like to hit the tops of the waves on our third quarter results.
We further strengthened our connections with customers landing record, new logos and delivering our fourth consecutive quarter with over $100 million of bookings.
We also continued to deliver for our customers around the world. Despite volatility in the global supply chain, leveraging our scale diversification and strategic procurement processes to continue to deliver on time and on budget for our customers.
We continue to enhance our global platform.
By expanding into new markets with tremendous growth potential while continuing to expand capacity in existing markets around the world.
We delivered solid financial results with double digit revenue growth leading to a beat in the current quarter in a race to the outlook for the balance of the year.
Last but not least we further strengthened our balance sheet by raising approximately $600 million of low coupons Swiss green bonds and over $1 billion of common equity to fund our future growth with that I'd like to turn the call over to Bill.
Thank you John and good.
Good afternoon, and thank you all for joining us.
Our formula for long term value creation is a global connected sustainable framework.
And we made further progress on each front during the third quarter.
We continue to globalize, our business with significant bookings and solid performance across regions.
Our bookings were diversified by both region and product type, reflecting our unique full spectrum global product offering.
We also announced our entry into two high potential emerging markets, India, and Nigeria during the third quarter, while expanding our connectivity capabilities by working with zero debt.
The largest open fabric of fabrics.
Interconnect key centers of data exchange.
We are also extending our capabilities for customers to the edge.
The announcement of what will be one of a few strategic partnerships in this arena.
Yes.
Let's discuss our sustainable growth initiatives on page three.
During the third quarter digital Realty was honored to be recognized by Graysby as an overall global sector leader in the technology and science category for exemplary ESG performance, receiving a coveted five star rating from this leading global ESG benchmarking organization.
And reflecting digital realty's commitment to being a global leader in ESG.
We also became a UN global compact signatory in September aligning our ESG goals and commitment to the UN sustainable development goals with a global initiative.
We also advanced our sustainable financing strategy, we're using our first ever Swiss green bonds and publishing the allocation of $440 million of proceeds from our September 2020, Euro Green bond, which funded sustainable data center development projects in four countries across three continents.
Certified in accordance with leading sustainable rating standards.
We are committed to minimizing our impact on the environment, while simultaneously meeting the needs of our customers our investors our employees and broader society.
While advancing our goal of delivering sustainable growth for all of these stakeholders.
While on the topic of energy I'm pleased to report the digital Realty experienced only a small negative impact from the substantial rise in energy cost during the third quarter.
In Europe, where concerns of an energy crisis, where most acute.
Typically contract for energy suppliers, a year or more in advance providing price visibility and certainty for our customers.
Elsewhere around the world energy costs are typically passed through to customers minimizing our direct exposure.
We continue to keep a close eye on energy prices.
But given the resiliency of our business model, we do not expect rising energy costs to impact our reported results by more than a few pennies.
Let's turn to our investment activity on page four.
We continue to invest in our global platform.
As previously announced we entered into a joint venture with Brookfield to expand platform digital into India.
Giant underserved market with the fifth largest GDP in the world.
Like many emerging markets, India presents some unique challenges underscoring the need for local knowledge and experience.
To that end, we were pleased to announce the hiring of Sema Basta as CEO for the India joint venture.
Sema has years of experience in the Indian it sector broadly.
And in the data center industry, specifically, where she most recently served as a senior executive leader with the NTT net magic datacenter business across India.
We believe the India datacenter market has the potential to experience significant growth over the next decade, and we're thrilled to have such a strong partner and strong leader in this exciting new venture.
During the third quarter, we continued to expand I Colo, our Kenyan datacenter, operator, acquiring a land parcel in Mozambique to build a facility position to land subsea cables and other connectivity focused customers.
We also acquired a controlling interest in medallion communications, the leading colocation and interconnection provider in Nigeria in partnership with our existing African partner Penn Bonnie rental growth.
As the African Internet economy matures, we expect Nigeria will represent a significant growth opportunity given its large and relatively young population.
Boeing and diversifying economy as well as the maturing regulatory environment.
Given the connectivity of Africa from our existing hub in Marseille, our platform, we now offer the market, leading destinations connecting Africa to Europe and beyond.
We're also investing to organically expand our capacity.
As of September 30, we had 44 projects underway around the world totaling almost 270 megawatts of incremental capacity.
With over 250 megawatts scheduled for delivery before the end of 2022.
We continue to invest most heavily in EMEA, where we now have 27 projects underway and 15 different markets totaling 150 megawatts of incremental capacity.
Most of which is highly connected including significant expansions in Frankfurt, Marseille, Paris and short.
Our investment in organic development is a reflection of the strength of demand across EMEA.
We're being a bit more selective in North America.
We're seeing strong demand in Portland, where we have a 30 megawatt facility under construction that is 100% pre leased.
For delivery in the first quarter of next year.
While we also have a significant projects underway in Northern Virginia, New York and Toronto.
Finally in Asia Pacific, We continue to pursue strong organic development both on our own.
With our joint venture partners.
We're adding capacity in Hong Kong that will open this quarter and expect to open Korea's first carrier neutral facility and sold in early 2022.
We are building a connected campuses so to provide the full spectrum of solutions for our customers.
The larger second facility will accommodate up to 64 megawatts of capacity and will be located within 25 kilometers of our first facility.
Let's turn to the macro environment on page five.
We are fortunate to be operating in a business leverages secular demand drivers and our leadership position provides us with unique vantage point to detect developing trends as they emerge globally on platform digital.
Just over a year ago, we introduced the David gravity index, our market intelligence tool that forecast the growing intensity of the enterprise data creation lifecycle and its gravitational impact on global it infrastructure.
Earlier this year, we published an industry manifesto.
Enabling connected data communities to guide cross industry collaboration tackled data gravity head on and unlock a new era of growth opportunity.
Recent third party research continues to support the growing relevance of data gravity.
According to IDC the amount of digital data created over the next five years will be greater than twice the amount of data created since the advent of digital storage.
This digital data creation is expected to drive exponential growth.
In enterprise user data aggregation storage and exchange.
Providing a powerful tailwind for data center demand.
We continue to see enterprise and service provider customers deploying their own data hubs and using interconnection to securely exchange data in multiple metros on platform digital to accommodate their own data creation growth.
We recently for the second consecutive year digital Realty was ranked as the only outperformer in global leader.
Giga AUM for edge co location.
This ranking reflects our continued innovation and the execution of our platform digital roadmap for delivering global differentiated capabilities and value.
For our customers and partners.
We are honored by the strong validation of our platform and our market leading innovation to capture the growing global demand opportunity from data driven businesses.
With that I'd like to turn the call over to Andy to take you through our financial results.
Thank you Bill, let's turn to our leasing activity on page seven for the second straight quarter, we signed total bookings of $113 million. This time with a $12 million contribution from interconnection.
<unk> mix was consistent with the prior four quarter average.
One megawatt deal plus interconnection represented about 40% of the total.
While larger deals represented around 60%.
Based in power bookings were also well diversified by region with EMEA and APAC contributing 45% of our total about the same as the Americas with interconnection accounting for the remaining 10%.
The weighted average lease term was a little over five five years and we landed a record 140, new logos during the third quarter with strong showings across all regions demonstrating the power of our global platform.
In terms of specific wins during the quarter and around the world.
A leading cloud native cyber security platform is expanding its high performance computing capabilities by leveraging platform digital and four markets across North America, and Europe, connecting with cloud providers, improving performance and driving down cost.
And market, leading autonomous driving technology developer partnered with digital Realty to tailor, an innovative and unique infrastructure solution for stimulation workloads.
Two major North American energy firms chose digital realty to leverage our geographic reach and re architect their network to interconnect with cloud providers and implement security control as part of their hybrid it strategy.
A public University in the Eastern U S is launching a global research initiative with other universities in EMEA and deploying platform digital network hubs across two continents in three cities to help enable this project.
A maker of high performance computing systems is expanding their footprint by deploying our platform digital across multiple regions to guarantee GDP, our compliance while enhancing their security performance and sustainability.
And finally, a global 500, fintech provider, it's spending their own hybrid it availability zones into multiple new metros using platform digital to support their data intensive and high performance computing requirements.
Turning to our backlog on page nine.
The current backlog of leases signed but not yet commenced rose from 303 million to $330 million.
Third quarter saw these more than offset commencements.
The lag between signings and Commencements was down slightly from last quarter.
Just over seven months.
Moving on to renewal leasing activity on page 10.
We signed $223 million of renewal leases during the third quarter, our largest ever renewal quarter. In addition to new leases signed.
The weighted average lease term on renewals signed during the quarter was a little over three and a half years.
Renewal rates for sub one megawatt deals remained consistently positive.
Greater than a megawatt renewals were skewed by our largest deal of the quarter that combined a sizable 30 megawatt renewal with our largest new deal for the quarter, which will land entirely and existing currently vacant or soon to be vacant capacity across Chicago and ashburn.
Excluding this one transaction our cash mark to market would have been a positive 1%.
This multifaceted transaction was a prime example of what we mean when we talk about our holistic long term approach to customer relationship management.
We believe we have a distinct advantage when we are competing for new business with a customer that 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 first quarter operating performance reported portfolio occupancy ticked down by 50 basis points, largely driven by the sale of fully leased assets during the quarter.
Upon commencement of the large combination renewal and expansion lease I mentioned, a moment ago portfolio occupancy is expected to improve by 70 basis points.
Same capital cash NOI growth was negative five 5% in the third quarter, primarily driven by a spike in property taxes in Chicago, where local assessors have adopted a very aggressive posture.
Along with the impact of the Ashwin churn event in January.
Of the 17 megawatts, we got back on January one approximately 80% has since been released to multiple large and growing customers.
As a reminder, the Westin building in Seattle, the interaction platform in EMEA, Linda Helix in Greece, and Altice in Croatia are not yet included in our same store pool. So these same capital comparisons are less representative of our underlying business today than usual.
And while we're still in the early stages of our budgeting process. We are optimistic in terms of where our same store NOI growth goes for 2022.
Turning to our economic risk mitigation strategies on page 11, the U S dollar strengthened during the third quarter, providing a small FX headwind in the third quarter.
As a reminder, we manage currency risk by issuing locally denominated debt to act as a natural hedge so only our net assets within a given region are exposed to currency risk from an economic perspective.
Our Swiss Green bond offering during the quarter is a good example of this.
In addition to managing credit risk and foreign currency exposure. We also mitigate interest rate risk by proactively terming out short term variable rate debt with longer term fixed rate financing.
Given our strategy of matching the duration of our long lived assets with long term fixed rate debt.
A 100 basis point move in LIBOR would have approximately a 50 basis point impact on full year <unk> 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 third quarter core <unk> per share was up 7% on both a year over year and sequential basis, driven by strong operational execution cost controls and a reduction in financing cost from the debt refinancings and redemption of preferred stock over the past year.
To avoid any confusion our core ethical outperformance excludes the benefit of it nearly $20 million promote fee received in connection with the monetization of our joint venture with Prudential.
Heading into the final quarter of the year, we have solid momentum. So we are raising our full year outlook for revenue adjusted EBITDA and core <unk> per share to reflect the underlying momentum in our business.
Last but certainly not least let's turn to the balance sheet on page 12, we continue to recycle capital by disposing of assets that have limited growth prospects raising over $100 million in the third quarter for our 20% position in the Prudential JV and some land in Arizona, We also.
Raised approximately $95 million of common equity under our ATM program in July as well as well as $950 million of common equity and a September forward equity offering.
Our reported leverage ratio remains at six times, but including committed proceeds from the September forward equity offering the leverage ratio drops to five six times, while our fixed charge coverage improved to six times.
We continued to execute our financial strategy of maximizing the menu of available capital options.
While minimizing the related cost and extending the duration of our liabilities to match our long lived assets.
Our two capital market transactions. This quarter are examples of our prudent approach to balance sheet management.
This successful execution against our financing strategy reflects the strength of our global platform, which.
Which provides access to the full menu of public as well as private capital sets us apart from our peers and enables us to prudently fund our growth.
As you can see from the chart on page 13, our weighted average debt maturity is over six years and a weighted average coupon is down to two 2%.
Three quarters of our debt is non U S dollar denominated reflecting the growth of our global platform. While also acting as a natural FX hedge for our investments outside the U S over 90% of our debt is fixed rate guarding against a rising rate environment and 98% of our debt is unsecured providing the greatest <unk>.
<unk> ability for capital recycling.
Finally, as you can see from the left side of page 14.
We have a clear runway with nominal near term debt maturities and no bar too tall in the out years.
Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe.
<unk> with our long term financing strategy.
This concludes our prepared remarks and now we will be pleased to take your questions. Operator would you. Please begin the Q&A session.
We will now begin the question and answer session.
As a reminder, participants will be limited to one question and one follow up.
To ask a question you May press Star then one on your telephone keypad.
We're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from Jon Atkin of RBC. Please go ahead.
Thanks, very much I think I'll ask both of mine upfront I wondered first of all if you could talk about the factors that are affecting your capex to develop.
Incremental capacity.
Jon Stewart I guess in the prepared remarks talked about on time and on budget, but going forward.
Given what's happening with our materials costs.
Wondered whether you see an opportunity to adjust your pricing on new leases accordingly.
And then the second question is just earlier. This month you acknowledge that you are exploring the potential creation of a Singapore reach.
Poor REIT and I Wonder if you can just provide an update on that around the timing and scale and the rationale of that project.
Thanks, John I'll take your first question and I'll hand, it over to Andy to adjust the.
So to answer the Singapore region.
First of all I think youre right.
Inflation in terms of the opportunity that it presents.
I think theres no doubt that it.
It disproportionately Ah adversely affects our smaller competitors.
Widens our competitive moat.
Over time I.
I would expect that rental rate increases.
Disproportionately accrue to the larger incumbent providers.
Here's the basically two pieces to the inflation issue. The first is it.
Development of second is operations.
On the development side.
We are our pipeline is on time and so on budget.
And kudos to Eric <unk>, who leads our operations and procurement team for the vendor management programs that he has put in place.
Providing us a fixed pricing for several years out.
We're diversifying our vendor mix.
And for allowing our locking in our general contractors.
We have a lot of construction sites around.
Around the world and we're able to move that move our gcs around and keep them fully occupied.
So I think our global scale as well as our maturity as a builder gives us a substantial competitive advantage here.
But again I don't think theres any doubt that the market rents will eventually need to move up to maintain risk adjusted returns.
<unk>.
I think that's both because of the.
The increase in construction costs that show up in the denominator, but I think for our private.
Competitors.
We're operating with more leverage I think you can see that show up in a higher interest rates.
So too.
They're going to have to raise their cost for that reason as well.
And I think the read through here is actually really positive for our renewals.
Because as our rates on new product increase our rates will also I expect increase for renewals. So.
But the bottom line there is that modest inflation, we think is quite healthy for the business.
In terms of our customers like this shouldnt come as a surprise to them because.
To the extent that Theyre doing it themselves, we're seeing this development and their own supply chains.
Relative to the operations of the P&L.
I think as you probably know our leases.
Provide for significant pass throughs. So for example over 90% of our utility costs. This last quarter were passed through to customers.
Rent bumps.
Generally between 2% and 3%.
And then we have I think the highest.
Operating are the best operating leverage the highest margins in the business. So what that means is that labor or labor costs, which.
I think what's most susceptible to inflationary pressure is a relatively low percentage of the of the revenue component to the income statement.
And so with that I'll hand, it over to Andy to talk about the <unk>.
Thanks, Bill so.
Johnny picked up obviously in the 8-K, we put out there a few weeks ago.
We are kind of heading down the path of exploring.
Essentially an IPO of our portfolio on the Singapore market.
This is not.
Our APAC business, which has significant amounts of capacity under construction and land and the like.
This is essentially be more analogous to <unk>.
Almost like a private capital partner to digital Realty for stabilized fully well leased high.
High quality core long term hold data centers to digital.
And our strategy.
Somewhat analogous to one of our joint ventures that we've done in the past couple of years.
One of which was with Singapore REIT.
We're still.
Still working through this it's a long IPO process Theres node.
Certainty on the outcome or completion.
Sizing would be obviously a modest.
IPO size to begin with but we do think this option has the merits have been attractive long term partner vehicle to digital Realty.
Thanks very much.
The next question comes from Jordan Sadler of Keybanc capital markets. Please go ahead.
Thanks, guys. So first I wanted to follow up bill on sort.
The price increase opportunity I'm interested specifically in the greater than one megawatt rents achieved in the Americas this quarter they seem.
Quite the opposite I wonder at.
At $80 per kg.
It seem like a low point relative to recent trend.
I'm wondering what.
A portion of that is a function of.
Geography mix et cetera.
And then.
Any color you can provide the ability to push rate there.
Yes.
Jordan, it's definitely a function of geographic mix. It's also a function of.
And extension that we were doing with existing customers.
Where.
We are providing some multiple concession as well.
And do you want to add anything to that yes, just maybe just a little more color I mean.
Overall signings was a strong quarter and well north of 100.
In North America, as you pointed out and was in our prepared remarks.
We had a sizable signing where we essentially came to the table with a holistic relationship oriented solutions for our customer.
Combining a renewal that impacted our mark to markets as well as the new signing on the renewal if you pulled that out of our mark to markets were positive 1%.
But it was a 30 megawatt signings so large contributor to that.
And on the new signing I think goes into four or so different data hauls and was spread across both ashburn and Chicago. It was a 100% into existing vacant or to be vacated capacity. So a direct flow through to the bottom line not call it future re leasing.
And so we think it was an attractive combination of helping a customer grow with us on our campus.
And this is a customer we see future growth in years to come so happy to support them.
Okay and then.
Coming back to the supply chain is a little bit of a two part of which is one how much urgency or are you seeing from your larger customers that are looking to secure available inventory and just have line of sight.
The future product and infrastructure and then second how far forward have you pre bought critical construction materials like generators PD use cracking units EPS.
Yes.
So maybe ill Jordan. This is Andy again, let me I'll try to take them backwards order. So we have call. It two approaching $302 70 something of megawatts.
Shovels and ground all the way to opening doors as we speak and.
And we are insulated in terms of our cost and our procurement, whether it's through our BMI programs.
Or through just supplier contracts and other things we do haven't been focused on building new capacity for so many years consistently.
We on that.
We are not fully insulated, but those BMI as I just mentioned do extend they're primarily focused in North America. They extended 2023. So we do have a fair bit of installation.
We're not with some by the graveyard on this topic, obviously inflation is here and will impact.
Anyone that's call it in the development.
Arena, but we do believe.
Given our size scale as the largest developer and.
And track record that we're going to fare better than the competitor set and especially any newer incumbents.
Development in terms of urgency.
Our customers are always urgent.
Despite making massive financial decisions, maybe I'll have quarterly jump in a little bit to give you a little bit of flavor on the customer front, yes, sure I can do that Jordan on the questions around around this with.
The demand from from the shortages and chips, we havent seen it negatively affect any of our pipeline across the regions, which we've actually seen it grow.
And then also we've got some sophisticated customers that bought forward about what was going to happen with the chip shortages and planned accordingly, and therefore have accelerated some of our opportunities across the globe. So at a net perspective, we kind of see it as a positive and people are thinking through it our customers are thinking through it and in oriented has really helped us kind of grow our pipeline at this <unk>.
Yeah.
Thank you.
The next question.
<unk> comes from David Barden of Bank of America. Please go ahead.
Hey, guys. Thanks for taking the questions I'll ask my two upfront two if I could.
I guess first one would be bill investors.
Investors have been waiting a long time to kind of see how the big data center companies evolve their edge strategies.
We struck a partnership a week or two ago.
And it sounds like you're planning on doing some more I was wondering if you could kind of elaborate a little bit now on what youre looking for and how you settled on this path.
With the Atlas to begin with and then maybe Andy just I want to kind of go back to the to the power thing.
90%.
Pass through that leaves about $20 million on the income statement a few pennies.
Still about $15 million of exposure is that kind of what youre budgeting too.
To potentially happen in 2022.
Yes, I'm going to turn it over to Chris to handle the edge questions.
Spends a fair bit of his days on that particular initiative.
And thanks for the question David Yes.
We've talked about and watching the edge for some time now with U C.
Still in its early stages of being a.
Aerial opportunity, but one of the things that we've done is partner with <unk>.
<unk> adds that we think they can provide a significant value in extending our platform deeper into the metro and so thats something that were looking at learning and understanding how to gain more intelligence in their new types of infrastructure, they are bringing to market and quite frankly, if it expands and enhances our core to edge strategy, so that our partners and our customers can get.
The benefit of extending their existing infrastructure out to the edge when it matures overtime I would also say that a critical piece of it I think you picked up on David which is great is that digital we're open right. This is one of many partners and relationships that we're going to continue to prosecute.
Because we see that theres many types of avenues out in to accessing this edge infrastructure, but youre going to see a lot of partnerships over the course of the next couple of quarters, where we will further invest and refine exactly how we're going to prosecute that edge opportunity.
And then David on the second question. So just review a few facts.
So 90% if you look at our P&L at 90% of the powers is reimbursed overall.
We do pursue a hedging strategy.
Primarily on our deregulated markets.
Where do you see potential greater volatility.
About 85% hedged with contract durations, ranging from one to three years.
We also as you know are incredibly focused on sustainability green power procurement is a massive.
Part of that playbook.
And we pride ourselves in what we've done on that efforts too.
Green our portfolio, including power purchase agreements some of those have a essentially offsetting the impact if in the event. The power prices are to surge that provides an incremental hedge to power costs.
So we see it in the event that this elevated power scenario plays out for the duration of 2022.
We've looked at it adds just a couple of cents.
What's called every Penny just.
$3 million.
Not not I wouldn't say a material headwind at this time.
Perfect. Thanks, Andy.
The next question comes from Simon Flannery of Morgan Stanley. Please go ahead.
Great. Thank you very much good afternoon, Andy I just wanted to clarify you made a comment that you were optimistic on 2022 same store NOI growth does that mean, you can you think it's going to be positive or better than this year any clarity you have fair and then just more broadly bill and Tim maybe just talk about leasing has been consistently strong this year.
How does the pipeline look and how does the competitive environment look going forward.
Thanks, Simon so listen up.
We are in the middle of budget season, and I got my head of <unk> to my right in the hills step on my foot really painfully if I get out of my skis here, but that being said.
Listen we got our same store pool, thats going to materially grow and I think thats in a positive direction with the addition of interaction the Westin building <unk>.
Our business in Athens, we acquired Hi.
Higher pricing power components added to the mix.
We're also making great progress on re leasing the capacity that was vacated at the beginning of this year.
Huge portion.
Of signings.
I mentioned, we did this quarter has been falling into vacant or vacated capacity, so quicker resumption of cash flow from that space that set.
Idled for a portion of 2021.
So net net I think theres, a few things that kind of point to this.
It's kind of more positive trajectory in the same store pool.
Hence my comment about optimistic of where we're going for 2022.
And then Q4 is best situated to address the pipeline.
Yeah, and then also from a pipeline perspective, Simon I would just tell you the platform digital and just our thought leadership around data gravity is really taking hold and our enterprise pipeline.
<unk> growing across all regions, so really happy with that Gartner was forecasting solid growth in enterprise. It spend just feels like were in kind of the early innings of the transformation for the enterprises.
As mentioned in the opening remarks.
This quarter represented a new high for us new logos at a 140, new logos. So think about that as a proxy for enterprises continuing to decide to buy and partner with us. So we feel good about the demand signals in our pipeline going forward hopefully that answers your question Simon.
Great. Thank you.
The next question comes from Matt <unk> of Deutsche Bank. Please go ahead.
Hey, thanks for taking the questions.
Both of these are maybe piggybacking a little bit on the back of Simon's questions, but first on the.
Competitive landscape I'm, just wondering you mentioned upfront being a little bit more selective.
As it relates to investments in the U S. Just wondering if you can update us on the competitive landscape, you're seeing from both public and private peers, whether that has changed much at all in the last three months and then secondly, as we think about.
Core at that full or maybe even <unk> <unk> per share growth next year I don't want to jump the gun and I know, we may get an outlook in three months time, but Andy if theres any updates in terms of how youre thinking about that bottom line growth into 'twenty, two that would be great. Thanks.
Sure Matt.
Maybe I'll do in reverse order here for just.
In order of efficiency here and make sure everyone gets question so <unk>.
Not we didnt pull forward, our 2022 guidance.
Dramatically.
But I think we're definitely pleased with how we're putting up results this year.
That has got call it double digits topline.
7% year over year performance at the bottom line, we have now.
As our guidance. So we are just over 5% call it year over year for 2021.
And you heard from Corey and Bill the others were confident in the pipeline. So we think.
We're looking to kind of grow the bottom line higher next year than this year. So.
That's a continuation of things I've been saying for pretty much every quarter of 'twenty one.
Sorry, no no sneak preview on 'twenty two guidance just yet on competitive landscape I think that refers to leasing competitive landscape and has there been any changes on the backs of M&A or whatever in our space.
Okay.
Korea should chime in here, but by and large I don't think I've seen any dramatic change.
I think the trend has been our friend for now several quarters of <unk>.
More and more customers attracted to a global platform across 25 countries 50 metropolitan areas spanning the full customer spectrum.
Supporting those most of those 4000 customers in the retail oriented environments. All the way up to the dedicated data holds for Hyperscale or who we have in call. It north of 45 different locations and I have not seen any dramatic change in that and I think you can see that now in several quarters of consistent call resolve the core on a few different Abba.
<unk>.
No I would just add to it yes, we've had consistent results for a long time to your point on our scale, we see all the competition out there our win rates and our cap rates are improving so so yes I would just.
Pile on to what you said and the success, we're having and what we're seeing in the pipeline the demand.
Great. Thank you.
The next question comes from Michael Rollins of Citi. Please go ahead.
Thanks, and good afternoon, two questions if I could first.
Just a little bit more on the edge strategy, just curious how you're contemplating the edge in the North America market.
Is that something that youre looking to.
Create some further progression on in the near term or is that more of a longer term ambition and then just going back on some of the portfolio and pricing commentary just curious when you have these large multi megawatt deals where you're discounting to get new disease or you haven't.
Repricing race is it because some of the needs of the customers are changing is it just market rents like what are some of the factors that are driving that and how should investors think about what might be left in the portfolio to get through on that basis.
Thanks, Mike maybe I'll take the second question and then Chris just talk about what's next on the edge.
So I mean.
We're.
We're always in active relationship oriented dialogues with our customers, but especially our largest customers who were supporting with so many different markets and really the full suite of products from network oriented deployment employments hybrid it all the way out to their true massive.
Massive cloud compute.
And we just want it we try to.
Come to the table with holistic solutions, if they ever renewal that's coming in the coming years.
Make sure Thats part of the conversation right.
It often leads to situations like.
Which recently transpired in the last quarter, where they may not take some of the new business out to a full search of the market or say you know what I've already deployed on your campus in growing these adjacent data holds.
The right move so it's really a.
Holistic relationship oriented approach.
As it relates to I think the heart of your question.
Yes, we don't we don't like having any mark to market go down.
And also a negative 5% quarter is not great, but in the scheme of things.
We're still holding our guidance for the full year, we had a positive zero point.
Very modest positive last quarter.
And we're seeing strength in the fourth quarter and we've been saying for some time, we think the.
Front reviewer of these explorations are getting better in terms of the mix more higher pricing power footprint as.
As well as more international footprints, where we have a greater pricing power on these renewals and thats putting aside.
Incremental uplift potential from this inflation related impacted built kind of highlighted that should manifest itself overtime, Chris you want to tackle the edge no absolutely. Thanks, Michael for the question. It gives me an opportunity I just wanted to also commend Giuliano as getting the role of CEO over at Atlas ads.
It's a great opportunity for him and we will continue to work closely with him. So I. Appreciate the question, Michael but gone one step further and I think you're spot on and that we often talk about the edge evolving from the core out deeper into the Metro and I think one aspect of that is no two markets are equal so theres definitely varying degrees.
Capabilities in each of the markets globally. So Europe is one in a general sense North America and APAC, we absolutely are pursuing different types of partnerships with and all of these markets because quite frankly, our largest customers are looking for a global solution and so we're always looking at what is the best path to enable our customers in the most efficient way possible.
That's at the core of what is our edge thesis that we continually refine and that's what we referenced even in the prepared remarks, I think and Bill section about Youll see other partnerships and different markets just to really helping us prosecute that opportunity when it matures over time.
The next question comes from Frank Louthan of Raymond James. Please go ahead.
Alright, great. Thank you what is sort of the development yields that you're targeting on that re leasing, particularly the new customer that kind of dragged down with greater than a megawatt leasing.
And then I've got a follow up.
Honestly, Frank there are back filling vacant capacity. So it wasn't like we respectfully building out a new building I think.
A good chunk of that is legacy DFT capacity, which we did a stock for stock deal and hence.
A currency exchange, so I don't think that development.
I don't think development yield would be the right way to look at it.
You can look at the given its size. It was the preponderance of the North America signings in the plus the megawatt category.
Which.
We always want rates to be higher but.
Those are two markets where.
I would say that I think we've.
<unk> a fair economic rate.
For that capacity and we're refilling something that's already built and recapitalization, we're paying taxes real estate taxes on it with operating the capacity so it's going to flow through to our bottom line.
And we have not change outs.
Development target returns on these call. It 270 megawatts that we have under construction.
It actually inched up a smidge this last quarter.
Alright, great.
Paul.
You mentioned that you could see inflation work in your favor in the re leasing when should we expect that I guess it didnt help us much this quarter or is that is that going to help more broadly for colo and smaller deals as opposed to more hyperscale deals.
Yes, Frank I mean, Thats I don't think thats going to be talking to show up next quarter over quarter. After I think.
But I do think if you see inflows.
Inflation, it's going to start flowing through.
To our competitors' construction costs as I said I think it will show up in higher interest rates and.
I think it will.
Put upward pressure on rents across the board, which.
Will.
Affect not just our our new leasing but.
Renewal leasing.
It's hard to put a specific time on it certainly not going to be in the next quarter or two of them.
Yeah.
The next question comes from Eric <unk> of Wells Fargo. Please go ahead.
Hey, Thanks for taking the question.
Yeah.
And the enterprise funnel, we've heard there are some larger deals come into the market, particularly in the financial services Arena.
How do you think youll requirements across enterprise picking up in size and do you think.
And acceleration in deal flow could give you the opportunity to do even better in that arena as we go forward and then just one more question.
You've said in the past capital recycling may start to moderate in the coming years, but given that the cap rate on the Prudential joint venture sale sub 5% are there opportunities to maybe some more non core markets or asset in the coming years. Thanks.
Or once you hit the first one and Greg and I can tag team. This.
Yes, so Eric Thanks. The question I think was on was on enterprise demand and continuing that as well as possible deals we have for the quarter.
I'm not going to talk through specific deals, but we do see an uptick and requirements as well as uptick in and the size of the requirements, which is what you were specifically asking when you think through.
Our full spectrum of offer offerings and opportunity that we have for the enterprises.
<unk> positions us around platform digital and how youre going to handle the data gravity and the opportunities around that so yeah. We're seeing some larger footprints go in <unk>.
<unk> call at our 300 kw ban in 600 kw band it speaks to people thinking through data.
Outperformance hubs for us and data hubs out there for us to improve in their enterprise.
<unk> solutions. So yes, we're seeing that we're seeing that across the board.
Did I get you your answer Eric Yes, yes, that's great. Thank you. Thanks Craig.
Eric with respect to capital recycling.
I guess, what I would say yes.
Things are still consistent what we set up two years ago. A few years ago. We said we were going to sell a few billion dollars of assets over a few years and again the reasons that we were recycling out of those assets and redeploying that capital into more core strategic assets remains.
Whether they were assets that werent quarter, our business in certain markets that weren't core to our business. That's why we're selling assets were not just selling assets because there's strong cap rate activity in the market and that obviously helps.
But again, if an asset is core to us we're not going to solid just because cap rates are getting better but again. It does it does put a little wind at our back to the extent we are selling assets now given the improved pricing, we're seeing in the market and you're right. We saw strong pricing in our portfolio disposition in Europe. This past year and now on the <unk>.
<unk> deal we saw very strong pricing you said on the stabilized assets it was mid fours.
We were fortunate to recognize almost $20 million of promote out of that transaction as well. So look your point's right pricing is strong and we think that bodes well for the sector and for big owners of assets like ourselves, but maybe I'll turn it over to Andy to go ahead and see if he's got that just one thing just.
Two buckets, there selling outright noncore assets to Greg did a great job of describing streamlining our portfolio of aligning with growing customers long term growth assets.
Then.
And it was touched on one of the first or second question is on also evolving our capital sources in terms of core assets in raising private capital all of this with initiative of trying to accelerate our bottomline growth through capital efficiency.
The next question comes from Erik Rasmussen of Stifel. Please go ahead.
Yes, thanks for taking the questions just two <unk>.
First on the Africa JV.
You announced that yesterday with Bonnie.
Can you just provide any additional color around how big these data centers are maybe some details around the acquisition.
And then.
As you look.
Sort of investments are you looking to make as you look to expand in that market.
Yes.
Sure Hey, Eric its Greg again look I think when you look at the transactions right. The transactions we've talked about here are clearly.
A company called Medallion communications in Nigeria, and the total consideration for that project was $29 million, we partnered with Penn Bonnie on that so the amount of capital we have is even less.
In another transaction we disclosed.
The acquisition of a land parcel in Mozambique, again with Penn Bonnie.
That was for $3 million. So I mean look these are clearly.
Well, what I would say is these are small seeds that were planning in these highly connected assets because they are they're highly connected communities of interest and we're doing it with a smart local partner and Penn Bonnie.
And when you look at a market like Nigeria, right. It's got the largest GDP and population in Africa.
And the size of that investment as I said is very small for a company our size and as I mentioned, Mozambique is even smaller and we did that wanted to gain a location that again will play a critical role with the subsea cable.
Activity that will circle Africa.
I think as you as you think about it right when you look and see in Europe right. We have Marseille in Western Europe, right, which is a highly connected hub than we have done the transaction with Lambda helix in Greece, which we believe is going to become a highly connected hub and as you look at that so you have more sand in the west you have increased to the east and as you move down into.
Africa right you look at Nigeria on the way you look at Kenya in the East right and then you look at Mozambique that goes down to the south.
Really view this as really one large like crossroads of connectivity. If you will that we think are going to bode well long term for the company.
Great. Thanks.
Look forward to hearing more about it and then maybe just on the Q3 leasing.
It held steady at $113 million.
As the U S and I think hyperscale somewhat where there any limitations with capacity in certain markets was there anything else that you can really call out.
As we think about Q3 results.
No.
I don't think Theres any limitations, we always have room for more leasing in any given quarter.
And I know Cory is also chomping at the bit for more inventory to sell into quickly.
I think it was a pretty very healthy quarter, and you look at the Geo mix well spread across each of the regions.
At the enterprise mix with less than a megawatt in interconnection call. It 40% record 140, new logos that record $1 40 at a record contribution from lease recognized six quarters in North America, and I think number two from EMEA contribution.
You could see from the new logos or some of the logos, we called out in my prepared remarks.
Like more overall enterprise global power firms and universities too.
Burgeoning technologies like autonomous driving so.
And I think on the Hyperscale side.
A little bit similar some of the court house names of digital growing with us into existing inventory as well as some call. It next generation Hyperscale hours.
Planning with us.
Tokyo, which I think was our second and third largest signs so broadly pretty healthy.
And we're not done yet for 2021.
Yeah.
The next question comes from Colby <unk> of Cowen. Please go ahead.
Great. Thanks for fitting me in.
A few questions.
One on renewals renewals.
Our renewal spreads down negative five 6% still guiding to slightly negative for the year do.
Do you think renewals spreads can be positive in 2022.
Second question, just a little bit of clarification are you, saying that your biggest deal, which I guess is the combination of Chicago and Northern Virginia West for 30 megawatts.
Or was that what the megawatts that were bringing.
And then.
Facebook just put out their earnings last night to increase their capex budget for 2022 by over 50%, So somewhere I think near $30 billion.
Do you think that that could have positive implications for the data center space and then forgive me, but you just had an ATM in an 18 month draw on that that <unk> done in the past had been 12 months I'm curious why you pushed it out to 18. Thank you.
So Colby I think that's four questions relevant to limit.
Color to some of them are like in the Q <unk>.
And so we'll go we'll go we'll go get them all rapid fire here.
I think we've been saying for some time, we think we're moving into better territory.
On a cash mark to market.
And I think what you've.
Our guidance, including the fourth quarter relative to what we are trending already reported for the year speaks to that and I think I've been saying that.
For some time that I think were heading to.
Better territory so.
Again, we're not done with the budget and certainly not our guidance for 2022.
But it feels like were based on the mix, both product and Geos and composition.
And a better better territory than we were certainly at the beginning of this year on that stat.
We did.
We did.
Across four or so suites, so different buildings.
Across roughly half and half Ashburn and Chicago, a total of about 30 megawatts of new signings.
With the same customer that also did roughly 30 megawatts of renewals in the same quarter and you can see this was a.
Really super high renewal quarter overall for us.
We usually been doing like 100 megawatts were just shy of that and that plus the megawatt LTM standpoint, and so you can see I think we had 53 or something in that category. This quarter, So hot high renewal activity quarter.
So hopefully that paints a picture on those too.
Undrawn forward equity offering.
The equity offering was again.
Opportunistically.
In our development Capex plan.
And we were able to extend the duration of that contract. So we have greater flexibility.
Essentially feathered into our.
Our sources or uses over time at the right at the right time for the business.
Which hopefully better it's better measured and help contribute to the.
Our earnings growth.
In the ensuing years.
Facebook Capex increasing.
I don't think we have got any inside information on that.
There are a large customer we've done we didn't do business with them in the last quarter.
But.
I don't see how it could be a negative necessarily but I don't want to over index in some super positive to the industry.
The next question comes from Ari Klein of BMO capital markets. Please go ahead.
Thanks for sneaking me in here.
Andy earlier on the call you kind of mentioned inflation is here.
How is that flowing from the lease pricing standpoint are there any term.
Our changing.
Tax DLR again inflation, maybe some kind of change in that later.
All right. So I mean inflation I believe inflations here, if you fill up your car or purchased milk in the grocery store.
I think bill's comments too one of the questions.
Didn't mean like overnight the data center industry has got a rate reset.
I think we've seen inflationary pressures prior to this hard cost inflation happened where markets just got tighter as they ran up to the physical boundaries of infrastructure right. So our Santa Clara Northern Sirna players example of that.
I mean, our leasing success has been certainly a healing.
Two the Ashburn market. We saw this in Frankfurt, Singapore saw this in terms of supply limitations driving up pricing, which we've raised pricing there at least five times I think in the last 12 months.
And I think Bill's commentary is that listen.
<unk> continues to hit card costs and delivery or access to the infrastructure to bring on new supply.
We believe is going to be disproportionately impacting smaller.
Subscale newer entrants.
That means that our customers have less options in terms of their providers.
And I think that as our costs get instated.
To examine our rates.
And on a market by market supply and demand and cost basis.
I think we are.
We're going to be the best out there in terms of insulating our customers from this.
But I think it is.
Periods continues for a long time, we haven't had a deflation realistically since call it.
At the end of the Carter administration, so, but so we're in new territory for many of us.
But I think I think it's I think we're going to fare better in the end of the day.
And we are we.
Our insulated.
In terms of we have rent escalators fixed bumps in most of our contracts.
I think our scale and purchasing power on an operating side as well as the build cost side provides installation. In addition to some of the other risk mitigation as we mentioned earlier in the call.
Yes.
Thanks for that and then just on that large we know all how did that mark to market rate compare to actual market rates.
Percentage above market rate.
I would I believe it's probably 10% above.
New signings in apples to apples comparable markets.
We typically see.
Renewals have greater pricing power.
New deals.
Just on the customer has a strong preference to not risk infrastructure, a workload on a move.
And is that 10% kind of the normal range that you can see.
It could be higher than that actually I would say, it's probably that's maybe on the skinnier side.
But.
It all depends on the facts and circumstances of the supply and the band the.
The utilization of the infrastructure of the customers' growth plans. The workload is it <unk> appear to be all these things kind of go into the.
The factors that drive that.
Commercial outcome on those.
Okay.
And it was 30 megawatts all at once right. So 30 megawatts of new signings for 30 megawatts of renewals all with a stroke of a pen.
This concludes our question and answer session I'd now like to turn the call back over to CEO Bill Stein for his closing remarks. Please go ahead.
Thank you Andrea.
I'd like to wrap our call today by recapping, our highlights for the third quarter.
As outlined here on the last page of the presentation.
One our value proposition is clearly resonating with customers.
Platform digital attracted a record number of new logos, we had another quarter of strong new bookings and a record level of renewals.
Most importantly customers know that we will do what we say.
Human global supply chains are stressed digital realty delivers.
Two.
We're continuing to extend our global platform.
We are investing organically to enhance our global footprint.
Expanding our platform into India, along with additional strategic connectivity destinations circling the African continent.
Three we generated double digit revenue growth during the third quarter.
Once again exceeded consensus expectations.
And once again, we raised our full year outlook.
Last but not least we further strengthened our balance sheet locking in attractively priced long term debt and.
And supplementing it with equity capital that will be drawn down over the next 18 months to support our global development program.
I'd like to once again, thank the digital Realty frontline team members in critical data center facility roles, who have kept the digital world turning.
I hope that you all stay safe and healthy and we hope to see many of you virtually in a couple of weeks at NAREIT and hopefully in person again sometime soon thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.