Q1 2022 Digital Realty Trust Inc Earnings Call
Good afternoon, and welcome to the digital Realty first quarter 2022 earnings call.
Note. This event is being recorded during today's presentation, all parties will be in a listen only mode. Following the presentation, we will conduct a question and answer session.
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 Jordan Sadler Digital Realty's Senior Vice President of public and private Investor Relations Gordon. Please go ahead.
You operator, and welcome everyone to digital Realty's first quarter 2022 earnings conference call.
Joining me on today's call are CEO , Bill Stein, and President 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 guidance and the underlying assumptions on today's call forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially for a further discussion of risks related to our business see our 10-K and subsequent filings with the SEC.
This call will contain non-GAAP financial information reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.
Before I turn the call over to Bill Let me offer a few key takeaways from our first quarter first we kicked off the year on a high note with record bookings of $167 million led by strength in the leases greater than one megawatt and supported by steady bookings in the zero to one megawatt and interconnection category.
We saw a notable and broad based improvement in our re leasing spreads in the quarter, reflecting a healthier pricing environment, but also the active engagement, we are having with customers on the digital realty value proposition.
Third we remain poised to continue our expansion in Africa with plans to close our investment in <unk> later this quarter and finally, our core <unk> per share results exceeded consensus expectations. Despite FX related headwinds with that I'd like to turn the call over to our CEO Bill Stein.
Yeah.
Thanks, Jordan and welcome to the digital team.
Our formula for long term value creation is a global connected sustainable framework and we made further progress on each front during the first quarter.
First we continue to globalize, our business with the announcement of our definitive agreement to acquire a majority stake in <unk> in early January .
We also continue to grow our business organically around the world.
We posted another record quarter of global bookings totaling $167 million of annualized rent, including our second highest quarter in each of the Americas and Asia Pacific regions together with another solid quarter in EMEA.
Bookings this quarter were led by strong results in the greater than one megawatt category, particularly in the Americas, while sub one megawatt bookings remain steady and in line with our 2021 average.
Let's discuss our sustainable growth initiatives on page three of our earnings presentation.
We are committed to minimizing our impact on the environment and simultaneously meeting the needs of our customers our investors our employees and broader society, while advancing our goal of delivering sustainable growth for all stakeholders.
During the first quarter digital Realty was named one of America's most just companies and third overall and the real estate industry by just capital and CNBC.
We also maintained our status as a member of the FTSE for good index, which measures the performance of companies demonstrating strong ESG practices, continuing our record of recognition for our leading sustainability initiatives.
During the first quarter of 'twenty to 'twenty two.
<unk> continued our diversity equity and inclusion efforts through our employee led dei council, which seeks to promote inclusion and create opportunities for each of our employee communities.
Through the DDI Counsel digital Realty has expanded its philanthropy and community engagement activities with strategic donations and partnerships with global charitable organizations.
Digital Realty has also taken a stand in solidarity with the people of Ukraine, and those impacted by the Russian vision, we do not have any data centers or operations in Russia, or Ukraine, and our company whereby by sanctions against Russia.
Until the peaceful and legal resolution of this conflict, we will not invest in Russia.
Furthermore, we are funding philanthropic organizations to support Ukrainian refugees those displaced within Ukraine, and the growing humanitarian crisis.
Let's turn our investment activity to page four.
We continue to invest in our global platform.
We acquired land in three markets, where organic development, including the first location for our joint venture with Brookfield in India, along with two parcels in Europe to support the strong demand in that region.
After the quarter, we purchased three additional land parcels in Europe , including a beachhead in Barcelona, marking our organic entry into this complementary Mediterranean Metro.
Our active development pipeline reached an all time high in the quarter with 44 projects underway supporting over 300 megawatts of capacity in 28 metros around the world.
58% of this capacity is already pre sold reflecting strong customer demand.
We've expanded our development in the Americas, adding further capacity, New York, Northern Virginia and Toronto.
Demand remains very strong in EMEA and we are continuing to invest across this region with active development projects and 17 of our 18 markets.
Frankfurt is still the most active development market in EMEA, followed by Paris.
We continue to make good progress toward closing the telco transaction, which we still expect to close in the first half of this year.
Let's turn to the macro environment on page five.
We are fortunate to be operating in a business leverages secular demand drivers.
We are also proactively managing risk to help insulate digital realty against the impact of the current inflationary and rising interest rate environment.
We are well protected against the impact of rising energy costs, given the pass through nature of substantially all of our customer contracts and we are effectively managing against rising input costs through our vendor managed inventory program and the expansion of our pre purchase equipment pool.
We are constructively engaging with new and existing customers on the impact of rising costs, which is translating into better pricing.
This is partly reflected in the broad base and improved cash leasing spreads we experienced in the first quarter.
But it's also showing up in new lease transactions across most of our markets.
Our leadership position provides us with a unique vantage point to GTECH secular trends as they emerge globally on platform digital.
Our customers continue to solve their most complex infrastructure and activity and data integration challenges.
We see a growing trend of multinational companies across all segments deploying and connecting large private data infrastructure footprints on platform digital across multiple regions and metros globally.
Recently <unk>.
Industry research firm IDC updated their global data sphere forecast for 2025 predicting the annual data creation rate will exceed 180, <unk> Z debates per year or roughly triple the 'twenty one right.
IDC concludes that companies of all sizes, we will need to prioritize data sharing and security to improve business resiliency and create a differentiated experience for their customers.
Earlier this week, we published our inaugural global data insights survey.
With strategic insights from 7200 companies across 23 countries and nine industries about the role of data in their business agenda.
According to the survey 70% of these companies are prioritizing secured data exchange in their current plans.
The global data survey walkman or data gravity index to provide critical telemetry for our customers partners and their respective industries as they evolve their business platforms to harness the power of data and co located infrastructure to unlock a new era of growth through connected data communities.
In addition, digital Realty recently joined the eye Maisons climate accord as a founding member.
This coalition of leading companies is United in their views on carbon reduction and digital infrastructure.
The group will establish an independent governing body to define an open standard that provides transparency.
<unk> ability and measurement of progress toward reducing carbon from sourced power and embodied carbon found in materials products and operations of digital infrastructure.
This is another great example of our commitment to the continuous innovation.
And execution of our platform digital roadmap to provide a sustainable and differentiated value proposition for our customers partners and the broader industry.
Yeah.
Given the resiliency of the demand drivers underpinning our business and the relevance of our platform in meeting. These needs. We believe that we are well positioned to continue to deliver sustainable growth for customers shareholders and employees whatever the macro environment may hold in store.
With that I'd like to turn the call over to Andy to take you through our financial results.
Thank you Bill.
Let's turn to our leasing activity on page seven.
As Bill noted, we signed total bookings of $167 million with an $11 million contribution from interconnection. During the first quarter. This is our second consecutive quarterly record in the seventh time in the last eight quarters, we've delivered bookings over $100 million.
While our new business was healthy across product types larger deals accounted for 70% of the quarter's bookings while sub one megawatt plus interconnection accounted for 30% of the total.
The weighted average lease term on new leases was more than seven years.
Demand was particularly strong in the Americas, with Northern Virginia, and Toronto, leading the way.
Fundamentals continue to tighten in both metros as reflected by the high levels of pre leasing on our development pipeline.
In EMEA Frankfurt remains the standout while in APAC demand remains robust in Singapore and Japan.
Nearly one third of our sub one megawatt plus interconnection bookings were exported from one region to another reflecting the value customers realize from our global platform.
North America was the most common export region with most of those exports landing in EMEA, followed by Asia Pacific and Latin America.
We landed a 128 new logos during the first quarter, maintaining the momentum we have built over the last several quarters, which has been a strong validation of platform digital and global strategy.
In terms of specific wins during the quarter and around the world.
Zen layer, a global edge cloud provider is expanding on platform digital across three continents to improve its geographic coverage scale and access to customer communities across various industries.
A global 2000 consumer financial services firms continue to expand with digital Realty leveraging platform Digital's full suite of capabilities, including rationalizing data centers implementing it controls and interconnecting with key business communities.
Box technologies, a leading innovator of high performance desktop as a service applications is deploying our platform digital supporting enterprise data architecture applications, serving the manufacturing construction and engineering industries.
A leading companies leveraging our full product spectrum by utilizing our connectivity offerings to support data exchange across three metros in North America, and Latam to improve performance and scalability and reduce costs.
<unk> a global independent advertising platform is expanding our platform digital and multiple metros across EMEA to enable their hybrid it transformation.
And a global 2000, reinsurer selected platform digital where mainframe migration with seamless connectivity of the top cloud providers and robust security being key drivers.
Turning to our backlog on page nine.
The current backlog of leases signed but not yet commenced grew by 15% from $378 million to a record $436 million driven by the strong first quarter signings, which outpaced commencements.
Between signings and Commencements moderated to seven months with nearly two thirds of our $436 million backlog scheduled to commence later this year.
Yeah.
Moving on to page 10, we signed $177 million of renewal leases during the first quarter and a positive three 3% cash releasing spread.
Renewal rates were positive across the board where spreads in the black across product types and all three regions.
Two thirds of total renewals were sub one megawatt deals, resulting in a smaller sample size for the one plus megawatt category in the quarter exclude.
Excluding one larger short term extension, our cash renewal spread would have been positive two 5%.
We are encouraged by the positive trajectory on renewal spreads as well as constructive engagement with customers on the current inflationary environment and are highly compelling value proposition.
In terms of operating performance portfolio occupancy ticked down by 30 basis points sequentially.
Driven by previously reported churn events, most of which has already been re leased.
Consistent with our full year guidance same capital cash NOI growth was negative three 1% in the first quarter, primarily driven by 220 basis points of FX headwinds the timing of no move outs and a customer bankruptcy.
The U S. Dollar continued to strengthen over the last several months and FX represented a 200 to 250 basis point drag on the year over year growth in our first quarter reported results from the top to the bottom line.
As shown on page 11.
Our operations, along with our capital funding and locally denominated debt Act as a natural hedge so only our net assets within a given region are exposed to currency risk from an economic perspective.
Turning to our risk mitigation strategies on page 12.
A little less than 60% of our first quarter operating revenue was denominated in U S dollars.
<unk> by approximately 25% in euros, and roughly 5% each in Singapore dollars in British pounds.
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.
Our strategy of matching the duration of our long lived assets.
With long term fixed rate debt, a 100 basis point move in sofa would have roughly a 75 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 first quarter core <unk> per share of $1 67 was flat on both a year over year and sequential basis. Despite FX headwinds a one penny impact related to a customer bankruptcy and a difficult comp due to the contribution of assets to digital core right.
In terms of the quarterly run rate, we expect the split between the first half of the year in the second half of the year to be approximately 49 51.
In other words as you can see from the bridge chart on page 13, we expect to dip down a couple of pennies in the second quarter due to normalized opex spending and near term dilution from closing the <unk> transaction before bouncing back in the second half of the year as leases from our record backlog commence.
Most of the drivers underlying our guidance remain unchanged, but given the improving pricing environment. We are bumping up our outlook for cash releasing spreads for the full year to slightly positive compared to flat last quarter.
We are maintaining our existing core <unk> per share range of $6 80 to $6 90.
Despite the customer bankruptcy and stiffer FX headwinds.
Given the continued strength of the U S. Dollar, we expect currency headwinds could represent a 250 to 300 basis point drag on full year 2022 revenue and core <unk> per share growth.
Last but certainly not least let's turn to the balance sheet on page 14.
We were active again in the capital markets. During the first quarter, we took advantage of favorable earlier market conditions to lock in 750 million euros at 137, 5% for 10 and a half years.
And later in the quarter, we completed a dual tranche Swiss bond offering raising a total of 250 million Swiss francs at a blended coupon of approximately 125%.
We used a portion of the net proceeds to redeem $450 million of bonds at 475%.
Our reported leverage ratio was six three times, our fixed charge coverage is five five times adjusted for the proceeds from the forward equity offering last September our pro forma leverage ratio dropped to five nine times fixed charge coverage improved to five seven times.
We continue to execute our financial strategy of maximizing the menu of available capital options, while minimizing the related cost and extended the duration of our liabilities to match our long lived assets.
This successful execution against our financing strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital sets us apart from our peers and enables us to prudently fund our growth.
As you can see from the chart on page 15, our weighted average debt maturity is over six years and a weighted average coupon of two 2%.
A little over three quarters of our debt is non U S dollar denominated.
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 fixed a rising rate environment and 99% of our debt is unsecured providing the greatest flexibility for capital recycling.
As you can see from the left side of page 15.
We have a clear runway with nominal near term debt maturities and no bar too tall in the out years.
Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe consistent with our long term financing strategy.
This concludes our prepared remarks and now we will be pleased to take your questions. Operator would you. Please begin the Q&A session.
We will now open up the call for questions. As a reminder, we ask participants to limit themselves to one question plus a follow up in order to keep the call to an hour and to get all callers an opportunity to participate.
To ask a question you May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at anytime your question Thats been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Jon Atkin with RBC capital markets. Please go ahead.
Thanks, two questions wanted to find out a little bit about the the elevated demand and a record leasing and I wondered how much of that you might attribute to.
In the greater than one megawatt category any kind of a shift in the mix between building self building and leasing on the part of the Hyperscale orders and then the second question around pricing.
Given higher costs in some of the development that you mentioned.
You mentioned do you see this.
Yeah.
Really having the impact of protecting your develop targeted development yields given the higher cost or perhaps.
Aiming to enhance your target yields thanks.
Well Cory I'll start off John Thanks for the question on the enterprise demand and I'll pick up Hyperscale and I think bill will tackle.
Second part of your question, yes, it will be pretty comprehensive here with our answer to you Jonathan. Thanks for the question I would tell you that with regard to the enterprise demand. We've got customers that are just being driven to the business needs and opportunities that are in front of us.
Bill mentioned earlier, we just published our global data insights survey.
With data, becoming a critical agenda topic for all the businesses.
And it raised really five key things data was pervasive it's the business agenda requires aggregation and control and it's localizing and its a data for strategies win.
So we're seeing that is really what's driving a lot of the demand across the enterprise.
As far as where is it happening from a regional perspective, if you don't want to do a baseball analogy. Sometimes you guys ask let's say North America is probably middle innings with a a healthy bullpen that you ought to have in it.
And then I would tell you that EMEA is probably third inning, maybe anything behind APAC, a little behind that as customers are still really waking up to the data opportunity that in front of us all of us and it was really highlighted in the in the index that we just didn't that survey.
Also tell you that we had really strong exports across all regions, which was great and now we're seeing an uptick in all of the multi market and multi multi.
Region wins, so really happy with the enterprise I'll, let Andy give you a little bit of a perspective on the hyper scaler.
Thanks again John .
I mean, I think we've now had several I think was in the.
Prepared remarks, seven or eight quarters, north of 100, Meg $100 million of gap, which speaks to consistent demand.
In the Hyperscale being a major component of that you had a record called in the fourth quarter yet another record in these records and I'll call it demonstrably higher than the prior call it $100 million averages.
Your question about the self build versus preferred.
Karen through digital Realty or other providers.
I don't think the.
The panel has swung to a point, where the self builds off the table, but I would think in times like today, when there's increased volatility supply chain issues award in Eastern Europe .
<unk> global platform to support Hyperscale growth across now 50 metropolitan areas.
In 2006.
Countries is a tremendous value add to our hyperscale customers.
And I think their demand has been.
Consistent for last several quarters with some peaks along the way and we see the forecast remained quite strong as well.
Relative to pricing John .
Pricing dynamics are clearly market specific.
And we will well.
It depend on both supply and demand in each market.
So when demand exceeds supply.
We've been able to raise our prices.
And this is reflected in our results. So for example, if you look at our first quarter leasing results in Northern Virginia.
Our average prices were about 6% higher than just last quarter and the fourth quarter.
That market is.
Increasingly tightening.
So fortunate to be in a position, where we're well insulated from the increased costs.
Our current development pipeline.
And that's because of our contracts with suppliers that are in our vendor managed inventory program.
So.
And this has obviously helped us.
Just in terms of costs, but too.
Assure that we do have the supply to continue.
Around the world.
And then last lastly, just on the.
The bankruptcy filing from from earlier in April that.
Had some implications for digital core lead core REIT, and then kind of.
A letter of guarantee from you.
This has been going on for a couple of years, but any sort of an update with respect to to that customer and your direct exposure are they current on payments, where do you sort of anticipating with respect to to that tenant.
Sure.
We will give you an extra will give you an extra question here.
Glottis so.
So that customer.
From a current on receivables.
They had a very modest amount of call it pre petition.
Standing receivables they were.
Regularly current paying customer not a late paying customer and they are fairly pretty well up to date.
Couple of million I would say.
It really is concentrated in the UK.
Was it was outstanding when they entered bankruptcy.
Obviously theyre going to go through a process.
And under U K administration.
In the U S and also Canada.
That will play out over several months.
<unk>.
I think if you take a step back and really what I think it was more relevant is that customer obviously.
Got called Sideswiped by two particular.
One obviously.
Part of their business.
Which is not common in our customer base.
With disaster recovery for office, which has obviously got impacted by the.
The zoom a vacation during the pandemic and then secondly.
The elevated power prices, especially in Europe .
Create incremental liquidity constraints I don't see that as a really recurring theme in our customer base, especially the first piece of what I described and <unk> customers can obviously work through its bankruptcy process.
I think we've been taking active steps not just related to this customer but in general to continue to streamline and focus our portfolio on core assets.
Do we see robust long term demand multi customer facilities less plus single standalone facilities.
And quite frankly.
While we entered the colocation or connection business several years ago, not only was the growth grow our business, but also to be prepared in the event that some of our Colocation resellers ran into financial times, and we had to step in and support their end customers only in the event that leases were rejected obviously.
Our next question will come from Michael Wallace with Citi. Please go ahead.
Thanks, and good afternoon.
So one follow up with one question.
On the follow up when you're talking about leasing can you unpack the opportunities to lease up of existing inventory and how much of the bookings you're seeing to go towards that and where occupancy on the existing portfolio can get over the next 12 to 24 months and then just a second question.
And I think it's page 20 in the supplemental.
The same store.
Numbers.
How did that look if you were to put that on a constant currency basis in terms of the rental performance.
On the revenue side.
And how does that look over the next 12 months.
You talked about the pricing opportunities in some of the positive renewals that you're seeing.
Okay. Thanks, Michael So let.
Let me try that.
<unk> numbers questions in there so let me start and try to get through some of those and then also hand off on the leasing question over to Corey as well.
So in reverse.
In our earnings deck, we try to provide.
Both as reported and constant currency.
And we also tried to show adjustments for.
Apples and oranges comparisons on a year over year basis.
So you could see that.
The same.
Set of bars on that chart has had our as reported same store cash NOI down <unk>, 3%, which was in line with our guidance on a constant currency basis. It was down 90 basis points and the hit I just called out in terms of the bankruptcy customer.
Call, it $4 million to $5 million or whatever.
That was I think about 60, almost 70 basis points of that negative 90. Those are all on an NOI basis I apologize.
The revenue equivalent off the top of my head.
That same pool is also getting impacted by a year over year elevated property taxes, which we previously mentioned and more importantly were.
Releasing vacated capacity, which I think dovetails with your first question.
We've made a concerted effort.
To focus more and more of our leasing wherever possible and to already built infrastructure given the high flow through.
Contribution of that revenue into that capacity.
And having an installed base that wants to expand with adjacency or growing our campuses is always a little bit easier than going out and them, adding a new customer.
In terms of.
Leasing into that.
Capacity, if you basically just take.
The the <unk>.
Signed already this quarter or last quarter or two that has not commenced and hit our occupancy.
That would bring our same store occupancy up about 80 basis points by itself Aida. The leases are signed there's just literally ready waiting for the customers to move in throughout the year.
That obviously is going to flow through into our 'twenty two results on a partial year period, and then a full year period and 23.
We are as I mentioned, we're very focused on re leasing that capacity were incentivising wherever possible.
Quite honestly.
Some of the supply demand dynamics that are playing out industrywide.
In addition to execution against our platform are really lending itself to fill that up.
More accelerated.
Piece I think we did about 20 plus megawatts into that type of vacated capacity I E. They didnt want the first customer in that suite in the first quarter of this year.
And that is there any rapidly accelerate piece relative to call it prior year.
<unk>.
Our next question will come from Matt <unk> with Deutsche Bank. Please go ahead.
Hey, guys. Thank you for taking the questions.
Two if I could first on some of the strength in Hyperscale I'm just wondering.
It's beyond just <unk> or are you sort of sensing any pull forward of demand from customers.
Given looming concerns around supply chain constraints or do you sense that the strengths here is more sustainable.
Then just to go back to Michael's question also one on one slide Slide 11, I think you outlined core <unk> per share growth.
On a normalized constant currency basis, this year would be north of 7%.
I know Andy I think in the past you've talked about mid to high single core <unk> per share growth on a forward basis.
Just wondering all else equal as we start thinking about.
2023, without giving specific guidance.
Is that sort of seven ish percent rate that's on the slide through 'twenty two a good sort of framework a start point to think about as we think beyond this year. Thanks.
Oh, Hi, Nick This is Cory I'll take the first two questions I think that you had one being around the supply chain.
<unk> and then also the Hyperscale demand I'll take them in that order if that helps you out and as Andy mentioned kind of at the beginning of the of the.
Commentary, our sales and marketing engine just continues to build up our demand in our pipeline growth right and I would tell you that the supply chain inflation energy costs has not really been a factor in that our customers really are thinking through what they do and how they source those materials, so that they're setting up their commencement date.
Out of it with us so they're just being really thoughtful about it and thinking through these concerns and what I think it is on is actually how to create better dialogue with our customers to think through how we're going to solve this and created probably a little bit more demand for us as they think through it but it hasn't negatively impacted it at all as far as the Hyperscale demand, where it really still experiencing really.
Strong demand from the Hyperscale are across all regions right. They work with us to help their speed to market.
With them increasingly around their business imperatives around this data opportunity to csp's or helping all the enterprises with we're seeing larger deal sizes as csp's as they work to keep up with demand. So we have a really healthy pipeline for the remainder of the year and I would also say you know, there's probably a dozen or so of these CSP and more of an emerging.
And eight in Asia and across the board and it's also helping us increase our demand and are on our pipeline for it so really happy with both of those and where we're where we're seeing the trajectory.
And then on your second question.
I mean, obviously, we're just we're just reported first one quarter of 2022.
Honestly not prepared to put 2023 guidance out just yet but.
But obviously, but you can see on a constant currency basis, we're now north of 7% on the bottom line <unk> per share.
The.
Extra ordinary FX headwinds this year, if you look back the last several years.
You had call currency fluctuations in the call. It two five or so percent and this year the euro call it assumed to be like 9% Delta.
The headwinds or could be a tailwind as usually we are in the 50 to 75 basis points range and now we're caught.
Two north of 200 basis points.
Of headwinds.
I think.
The goal from the beginning of the year as well as last year to continue to accelerate bottom line earnings growth.
Last year, we came out of the gates with guidance of 4%. We ended up with 5%. This year, we came out with guidance of 5%, which we are affirming this call. Despite these FX headwinds as well as despite a customer bankruptcy.
And our goal is to kind of again keep consistently putting up mid to high single digits Bottomline growth.
Our next question will come from Simon Flannery with Morgan Stanley . Please go ahead.
Great. Thank you very much Andy I Wonder if you could just talk about the balance sheet a little bit how are you.
You talked about bringing the pro forma leverage down to five nine times, how are you thinking about given the sort of interest rate environment the uncertainty.
Where do you want to have that over the next few years and I think you still have guidance for dispositions during the year again, how are you thinking about both.
Both the sizing of dispositions and support vehicles, you might use for that.
Thanks, Sam so.
First and foremost.
It's better to be lucky than smart.
We are out of the gates with a sizable $750 million eurobond literally the first business day of 2022.
And priced 10, and a half year paper and the the one plus percent call it category.
So very pleased with that followed that up with.
Even during the volatile more volatile start to the year, our Swiss bond offering.
Which again both of those I think diversifying our sources of capital increasing our FX hedge locking in long duration debt at.
At attractive cost of capital.
We also increased our revolving credit facility by an incremental 750 ish million during the quarter just to bolster our liquidity given the broader uncertainty and backdrop.
We still have not drawn down on call it close to $1 billion equity forward.
Yet.
We look to close on <unk> in the next couple of months or so.
Actually probably.
Month to month or two I guess.
And then back half of the year in terms of capital sources on the leverage side to again keep us in line in terms of our targeted net debt to EBITDA.
We will obviously evaluate equity as an alternative but right now at these current levels I think the continued disposition of noncore assets as well as incremental contributions of core assets from our portfolio to digital core right in the back half of the year, we're not going to be our primary funding mechanisms.
We've made some great progress.
Obviously getting digital codes through its first.
Earnings season.
And also working on identifying that next leg of assets to continue to grow and diversify and strengthen our digital core right.
Great.
How do you how are you seeing this sort of M&A multiples given the interest rate environment any change there.
Yes, Simon Hi, its Greg look.
To date I would say the private market seems to be lagging the public markets, a little bit and I don't think that's uncommon I think the public markets usually lead.
But look I think if rates stay up over time, you should start to see multiples come down.
But right now there we see a lot of stuff out there.
But it feels as though the private market multiples have been a little sticky high at this point.
Our next question will come from Erik Rasmussen with Stifel. Please go ahead.
Yes, thanks for taking the questions.
We've heard some very large deals in the first quarter.
What's changed in the market that would lead to these massive deals and then maybe with that how do you plan for this.
Eric I think I assume you're seeing large leases large multiple megawatt leases.
Right.
Got it.
The theme the growth in the sizing of customer requirements on the Hyperscale front.
<unk> has been building for some time.
Not necessarily.
Lately overnight phenomenon.
And I think you've witnessed in the first quarter. This year, the fourth quarter of last year other quarters last year and the year prior.
I think you're going to see.
Seeing this continued.
Sure.
Cloud adoption broadly.
<unk> opening up new regions opening an offering of new services.
And you're seeing this digital transformation wave and.
And the cloud customers despite the.
The volatility and the uncertainty of a of an economic backdrop.
Or the war and the like leaning in and securing infrastructure to future proof their runway for their end customers.
So it doesn't feel like.
And record one record quarter. After another is a little bit of an unusual opposite our usual outcome.
But it doesn't feel like the pace of demand is really.
Slowing on the Hyperscale front end.
I think what's also helped in that backdrop of this continuing steady demand.
It's just become more challenging.
To be a provider.
You have the inflationary pressures you have supply chain challenges you have labor challenges.
And even up more 20th in certain parts of the world season demand and I think go into the part of what how do you get ahead of this.
Is that you'd be in this business for the long run the digital had been in this business were 20, almost 20 years.
You build a scale.
And capital sources to support customers through good times and bad.
You make sure you have the runway to future proof their growth that's the acres and acres of often.
<unk> expansion capacity.
Superior supply chains.
So that your Oh.
On time and under budget wherever possible.
And be that trusted infrastructure partner I think those are the key ingredients to our recipe.
Great.
And then maybe just my second question.
As it relates to your development pipeline, which is very active BC.
Besides the chip shortages whats happening on the construction side, whether it's getting the right materials or having the proper staffing, especially considering the demand backdrop.
Maybe even an increased competition in some markets that you might be seeing.
Yes, no. Thanks, Eric This is Chris Yeah, it's something that we've been constantly looking at and just to Echo Andy's comments earlier, we've always looked at long term engagements with our construction teams and with our suppliers and so the continued development pipeline that we've been putting to market, it's really paid off right.
We keep the same crews on the projects.
And the new projects and just watching how that growth I would also say we have the gold standard in BMI vendor managed inventory for building out a lot of this infrastructure. So even before some of the supply constraints hit US we started ramping up the budgets for that and I think one of the other great things with being with digital as we've been able to expand the program to be.
To support our customer needs and so now it's become a differentiator in the market, where we're now able to provide customer some customer equipment to help them procure their infrastructure and so it's just something that we've been able to plan ahead of and we're constantly looking at different routes to market with particular to chip shortages and things like that looking at the secondary market.
We're leveraging a lot of secondary equipment that's been reached.
<unk> and put a warranty against it.
<unk> been able to allow our customers to overcome some of those challenges, but it's something we're constantly watching and looking at and making sure that we have the best capabilities in.
Quite frankly equipment infrastructure available to our customers and for our own built on a global basis. So that's something that we're very proud about.
Our next question will come from Eric <unk> with Wells Fargo. Please go ahead.
Hey, Thanks for taking the question.
I'm curious about your development pipeline it looks like you're almost 60% pre leased across the entire globe and over 80% in North America, So you're fairly comfortable with your inventory position today or if we do see a continuation of this large hyperscale demand and might you end up towards the higher end or even above the <unk>.
Capex guide you laid out.
Okay.
Thanks, Eric I mean.
That is obviously a constantly evolving schedule, where we're adding projects in terms of new starts and we're subtracting projects that are.
Delivering big Commission for customers and opening at high levels of pre leasing.
It's a combination of office and see our colocation product as well as our scale and Hyperscale dedicated data holds.
Where we are.
We're trying to always stay ahead of the game.
Focusing on the longest lead time parts of development, obviously land procurement that hence the acreage acreage I mentioned previously followed by shells.
And then Chris just touched on are called overall infrastructure build outs.
I don't I think when you look at the combination of.
Our current stabilized portfolio that has.
Availability.
That we're actively leasing into our shells and their delivery schedules.
And as well as our land.
I feel good.
There's always a market or two that will be a little tighter than I would like but I feel I think probably more in terms of the Hyperscale front.
These larger these larger deals.
Europe , Youre, often author engagement contracting at very early stages of the product projects. So you don't need to necessarily have a.
Finished data hall in order to sell that capacity, hence to having that land bank and shelves coming online.
Very good selling tools by themselves.
Great. Thanks, Thanks, Andy and just one follow up on the renewal spreads and mark to market.
Do you think we're at the point now where were those should continue to only improve after this year end.
How much of that might be due to just improving the broadly improving pricing environment or perhaps a better mix.
Of.
Of leads with the next couple of years, even more international more enterprise.
You were above market leases.
Yeah. So.
We've obviously been working through this for some time I would say.
For the last several quarters.
The call it the mix was certainly helping us.
As we kind of chop through some of our largest customers major expirations as we got through most more than North America, and more and more onto more international mix, having the less than a megawatt more highly connected destinations legacy interaction Westin <unk>.
<unk> et cetera, being more a bigger piece of the puzzle.
And as you said last year, we came in a little bit better than we had guidance for albeit negative.
This year, we guided to flat, which is a year over year sequential improvement.
And I think what youre seeing in this quarter are a few things.
On the one hand, I'm not I wouldn't say that I can't rule out that we'll never have a negative cash mark to market on any given product for next several quarters I don't think we're.
At that level.
Positive yet but use.
You saw positive across the board.
In the plus less than a megawatt categories.
It was less than a megawatt which is the largest piece of it it was up versus the LTM of about 130 basis points.
North of two 5% which is a.
A pretty sizable move.
And we got it now for the full portfolio for 2020 to slightly positive.
So again not I can't tell you, we're fully done with ever never having a negative cash mark to market, but.
The trend.
Playing out which I would say is a combination of mix and also the broader pricing backdrop will depend lumber pricing is swing slightly more and more back to.
Digital Realty.
Yeah.
Our next question will come from Frank Louthan with Raymond James. Please go ahead.
Hey, guys. This is rob on for Frank.
Where did you guys end the quarter on a quota bearing heads and have you seen any hiring issues in sales or across any other parts of the business to help maintain growth.
We've got about 130 quota bearing head.
Think about all of the sellers, we really have theres more than that after you get to it because we got a whole team of essays in SCS all of our management team on here looking at it. So it puts us closer to I'd say effectively more like 200, when you get to that point, but.
But yes, we're seeing it do really well and we're excited about the team and how they're performing and how they are engaging with our customers and I'm sorry was there another solid.
I think it was the.
Hiring the ability to hire at for that opportunity.
Yeah, and so we've been able to hire and we've.
I think when you look at salespeople and they think about where theyre going to come in can we hire them. They look at where you're going to have the most prospects going forward and the differentiated value that we have with our global platform and I would tell you that we're really kind of pulling away from the competition. There is probably two of us out there. So if youre in the datacenter business or if you're in the internet.
Working business and you want to be successful as a salesperson is a great place to be right teams, making more money, we're being successful and I think they look for it in that kind of standpoint, so I understand that the rest of the question, but that's about where we are on it and really happy with it.
Okay.
Our next question will come from David Guarino with Green Street. Please go ahead.
Hey, Thanks, and Bill maybe going back to that comment you made earlier I was really helpful on Nova going up 6% on the rental rate did you clarify if that was on renewals or new leases and assuming it is on new leasing and I just wanted to talk on that healthy pricing environment. Do you think it's just a temporary boost for the sector. Given we've got this lack of leasable capacity or.
Would you say, we've truly turned the corner and rental rates are going to start trending higher from here on out.
Hey, David Let me just clarify numbers that was not a cash mark to market that was a like for like new rates, so showing progress and the overall market rates.
In terms of in trying to do it as best we could it is apples to apples in terms of size of deal all of that.
The nuances that go into the deal.
Okay.
I was I was literally just down the market a week ago and.
That market is overall experience incredibly robust continuous demand and.
We've done quite well contained more than our fair share in that market not just in the last quarter over several quarters.
And that combined with just overall constraints on bringing on capacity in that market running up on ability to get power.
Permitting and the like.
I think that's all going to continue to trend in a more positive territory.
In terms of healthier rates in that market. If you look at our two to.
One last data point.
On that our operating portfolio in that market is call. It 91, something in this up but thats missing some leases that have signed but not commenced if you include that were like 94%.
Leased on the operating portfolio and then I think we have 16 at 86 megawatts.
Left in terms of does.
That's not least it's under construction where basically.
Down to I think one or two more buildings and the legacy three digital digital DFT in Loudoun campus.
Moving on to <unk>.
Are called Western lands are digital Dulles location for our next leg of growth.
That's helpful and I guess, they kind of they just had a question really is you know we've had these periods historically in a sector where demand goes lumpy for certain periods end.
Kind of curious if that happens again, if we can I don't repeat this record new levels of industry wide leasing activity do you think we resumed to downward pressure on asking rents I guess just wanted to get your perspective on if this is a temporary phenomenon, we're seeing in this quarter and last quarter.
It feels to me like the Lumpiness has subsided and you looked at our quarter leasing stats for several quarters.
It's just been more and more diverse and more consistent.
And based on the last few quarters of demand.
Kind of combined with a broader supply backdrop dynamic.
It doesn't it doesn't feel like there's a it.
It doesn't feel like it feels like the rates are going to be.
Nowhere near peak rates, yet so we've got a long way to run back to peak rates.
But still I think marching in a more positive trajectory for some time to come.
Our next question will come from David Barden with Bank of America. Please go ahead.
Good afternoon, everyone. Thanks for taking my question. This is Alex on for Dave Andy Maybe just my first one here I think last quarter. You noted the <unk> acquisition was going to give a round of partial year contribution of $100 million in revenues and 70 in EBITDA just wanted to double check to see if there are any updates there and just confirm that that's already baked in the guide.
And then secondly, I know, we've kind of touched on global M&A before.
But.
Just kind of thinking about the state of the market in any specific geographies of interest.
Yes on the telco.
I don't think Theres any updates.
We're still in the same vicinity of closing time period end.
Theres been no change to our underwriting numbers.
Since we announced I don't let us follow up online to triple check confirm those numbers with you with your model just make sure because I don't recall, what I exactly said a call or go on those numbers in terms of a partial calendar year contribution.
And then your second question, Alex was that about leasing or M&A, just want make sure you said.
The Geos I just want make sure.
M&A.
Yeah, Hi, Alex it's Greg.
I think you asked what the state of the M&A Global M&A market is and look I would say it remains robust right now there's a lot of private capital chasing deals. We've read about them you see deal is still occurring as I mentioned earlier.
Multiples are have been sticky high on these transactions.
But with that said.
There is a lot of private capital and I think youre starting to see these private investors the infrastructure funds and the like and others starting to see the quality of the asset class, whether it's the creditworthiness of the customer the quality of the assets and the growth prospects of the business. It really feels like it's starting to become more of a of a <unk>.
Core investment asset class relative to some others has actually been somewhat of a shift there.
In terms of.
In terms of our strategy.
Our strategy I would say this quarter is probably best representative of how we're looking at it and where we see the best risk adjusted returns you heard Andy and Corey you talked about supply proofing, but we went into two new markets through land purchases one in Shanghai, one in Barcelona. This quarter and then we backfill the supply proof markets in Zurich.
In Paris, and Frankfurt and in Dublin.
And if you look at all of that together, you're talking about 385 megawatts of total developable capacity. So when we look at that and look at it on a risk adjusted basis, we think thats the right place for us.
But in terms of geographies I mean look we're still looking to selectively backfill in certain areas of eastern Europe .
As we've said previously we are still working to expand our footprint in APAC.
And you know selectively backfill in the Americas.
So that's basically how we're thinking about it.
Our next question will come from Ari Klein with BMO capital markets. Please go ahead.
Thanks.
Going back to the same store NOI growth it was down 3%.
In the quarter and it sounds like the trends are supportive of improvement, but the full year guidance suggests that that kind of remains in this.
Down 3% range for the remainder of the year is that just FX or is there something else at play.
Well.
FX has.
As <unk> gone against our favor.
For the year.
But we've had some success in the first quarter relative to our budget.
Little bit on the Opex side.
But we are absorbing a customer bankruptcy, which is going to be in your headwind to that had some.
We're holding our guidance for same store cash NOI for the year.
Got it and maybe I missed it but the bankruptcy is that in that SSO outlook and what's the impact from that if it is.
Bankruptcy.
Aside from a call it noncore.
Straight line right.
Add back Thats, not an <unk>, we basically already absorbed almost $4 million of a hit.
<unk>.
For the first quarter due.
Due to call it shouldn't.
<unk>, which I mentioned earlier on the call.
And then we.
Major assumption.
As to additional called $600 million of headwind.
For the remainder of the year.
Quite honestly.
Kind of just handicapping the outcome of events because of the.
The customer is obviously going to go through the court process and either accept or reject the leases.
Last time. This go round I think almost all of the leases were accepted.
I'm not sure that will be the case this go round.
And then theres the scenarios as to if the leases rejected.
And their end customers.
Could be essentially absorbed by digital realty's so.
$6 million of incremental on top of the 4 million taken in the first quarters are.
Essentially hit or adjustment due to the bankruptcy for the year.
Our next question will come from urban loop with Evercore ISI. Please go ahead.
Hi, Thank you for the question just one for me.
Maybe Andy can answer this I wanted to ask about the FX spot rate movement, you mentioned debt bonds denominated in local currencies Act as a natural profit hedge.
And we do see this reflected on the slide 11, there's a three point revenue headwind, but only a 2.3 point.
<unk> headwind.
Storage is there any way to think about how well local currency denominated bonds offset some of these FX headwinds for <unk> and would you consider any derivative instruments looking ahead to help you smooth out some of these headwinds.
Sure. Thanks, <unk>, so I mean.
Sort of play the record again because I.
Wanted to touch on this and I think I hit on one of the Q&A. If you look historically.
<unk>.
The last three years, our business has been roughly 40% international.
And prior to this year.
The headwinds or tailwind because it doesn't always go against you or call. It in the 50 to 75 basis points.
Vicinity.
With much less volatility than we're seeing this year.
We're essentially what these not by issuing non U S dollar financings.
<unk> bid euros, or Swiss francs, or sterling or multi currency revolver are going to natural lending sources, often the long durations and essentially creating asset liabilities through the bonds, but also cash flow.
Liabilities to offset the euros, we received from revenue or the pounds, we received from revenue.
Given we invested development returns of 9% to 12 or something percent and the rates are.
So modest right now there is there is leakage.
We've been migrating more and more of our debt to be non U S. Dollars I think it was 75% of its non U S dollars today.
100% of our equity is U S dollars and 100% of our common dividends are U S. Dollars. So we have that natural match for our U S dollar hedge.
I've always been a big fan of this approach because it allows us to.
Call it have multiple benefits to the strategy of tapping diverse capital sources at attractive rates and create a natural FX hedge it obviously does not provide 100% P&L volatility.
Elimination.
We are continuing to become more international we are continuing to in smaller amounts go into slightly more volatile markets in terms of currency Latin America or Africa.
So I would say we're not our ears are always open to good ideas and we will continue to evolve our thinking.
<unk> comes to.
Look at incremental types of foreign currency derivatives to further eliminate any P&L.
Volatility from the FX.
That concludes the Q&A portion of today's call I'd now like to turn the call back over to CEO Bill Stein for his closing remarks Bill. Please go ahead.
Thank you Matt.
I'd like to wrap up our call today by recapping our highlights for the first quarter as outlined here on the last page of our presentation.
Our value proposition is clearly resonating with customers.
We posted our second straight record bookings quarter with $167 million of annualized rent.
<unk> 128, new logos.
Our sales momentum is exceedingly strong and the benefits of platform digital continue to grow.
Digital Realty's operational excellence is second to none.
And customers are relying on us to solve their needs for data center solutions today, while providing a clear path for their expanded needs tomorrow.
Our customers Trust us with their mission critical application and digital delivers.
We're continuing to extend our global platform.
In early January we announced a definitive agreement to acquire a majority stake in <unk> to establish digital Realty is the leading colocation and interconnection provider in Africa by positioning ourselves at key points of interconnection and subsea cable landing locations.
We're also expanding organically with over 300 megawatts of new capacity under development.
We posted strong core <unk> per share results exceeded consensus estimates, despite foreign exchange and other headwinds against us.
We maintained our core <unk> per share guidance for the year and our constant currency core <unk> per share forecast represents more than 7% year over year growth.
Last but not least we remain very adept at sourcing attractive capital.
Raising over $1 billion of European debt.
At a blended 1.3% coupon and weighted average term of nine years, while redeeming higher cost U S dollar denominated debt during the quarter.
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 you all are safe and healthy and we hope to see many of you again at NAREIT and other in person events. Thank you.
The conference has now concluded. Thank you for joining today's presentation you may now.
Yeah.