Q2 2022 Digital Realty Trust Inc Earnings Call
Good afternoon, and welcome to the digital Realty second quarter 2022 earnings call. Please.
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 Jordan Sadler Digital Realty's Senior Vice President of public and private Investor Relations.
Please go ahead.
Thank you operator, and welcome everyone to digital Realty's second 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 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 second quarter first the overarching trend of digital transformation remains a secular driver for our business, which was highlighted by yet another quarter of greater than $110 million of bookings and over 100, new logos added which was well diversified.
Terms of product N G SEC.
Second.
The improved re leasing spreads we saw last quarter continued into Q and we remain focused on offsetting the impact of rising costs throughout our pipeline of new opportunity and development.
Third our transformation into a leading global datacenter solutions provider remains on track with our investment in <unk> expected to close within the next two weeks and finally, our core F O per share results exceeded consensus for the quarter that we tempered our expectations for the second half and full year 2022 principal.
Due to continued FX headwinds as we reaffirmed our constant currency core <unk> per share guidance for 2022.
With that I'd like to turn the call over to our CEO Bill Stein.
Thank you Jordan.
And thanks to everyone for joining our call.
Digital Realty is levered to powerful long term secular demand trends.
Broadly driven by ongoing digital transformation and the growth and IGN data.
We have an unmatched global operating footprint.
Along with our strong development pipeline to continue to deepen and expand that footprint to meet our customers' growing needs.
Those customers are a growing community of more than 4000 organizations across the globe.
Including the world's largest cloud service providers communication providers that enable the global transport of data.
Global 2000 enterprises, as well as many multinational and industry leading companies.
Our second quarter results were strong with $113 million, new bookings and core F O per share of $1.72, a 12% increase over the second quarter of last year, and a 3% sequential increase despite stiff FX headwinds.
The dialogue with our customers surrounding the evolving supply demand dynamic and our compelling value proposition has started to translate with price increases driving positive cash renewals supporting our push for appropriate rent escalators and helping to maintain stable development return.
Ernst.
Despite generally higher prices.
Demand for data Center solutions remains strong around the world with notable productivity in each of our regions.
EMEA was a standout this quarter with all five of our largest deals landing in the region as the world's leading cloud service providers continued to utilize our platform to expand their infrastructure and support their growing needs.
Looking forward our pipeline remains robust as enterprises continue their digital transformation with a growing preference for hybrid cloud architecture, while cloud and connectivity providers continue to expand their infrastructure to better serve their customers around the world.
Andy will provide more color on our results shortly.
But first I want to touch on the recent launch of service fabric connect and open interconnection solution and orchestration platform designed to support the wider industry shift to a hybrid data centric architecture.
This product launch and powers, our enterprise and service provider customers to connect to anyone.
Anywhere at any time through an open and neutral digital marketplace.
Service fabric connect is the first of several related interconnection oriented products that we have on our roadmap.
It was launched with availability in over 30 markets around the world.
We are excited to bring this product to life and we look forward to delivering these enhanced connectivity benefits to our customers.
Let's turn to our investment activity on page four.
We continue to invest in our global platform through a combination of organic new market entries that enhance our global productivity offering as well as existing market expansions that are designed to meet our customers longer term capacity and connectivity solution requirements.
Along these lines in the second quarter, we acquired land in three European markets for ground up development to support strong demand.
In addition, we.
We announced our entry into Israel with a formation of a joint venture with many a leading Israeli real estate group.
Together, we plan to develop a data center campus in purdah picked up the primary connectivity hub in Israel.
Our presence in Israel will complement our facilities across the Mediterranean and will support the emergence of new connectivity routes that subsea cable operators are developing between the Mediterranean and the Red Sea.
Finally, we have received the necessary regulatory approval in South Africa to close on the acquisition of Turkey, but leading colocation and interconnection provider in South Africa.
We now expect to close the transaction within the next two weeks.
Our active development pipeline remains robust and grew by more than 10% sequentially with 41 projects underway supporting over 360 megawatts of I T capacity in 18 strategically important metros around the world.
More than half of this capacity is already pre sold reflecting strong customer demand.
Given the dynamism of the current environment, we know how important it is to make sure that we're being appropriately compensated for the elevated risk throughout the capital markets and the broader economy.
We have sought to mitigate these risks through our V. M. I program appropriate pricing adjustments and CPI based rent escalators that help insulate us from the impact of higher operating costs throughout the life of our customer contracts.
Finally, as we have discussed in the past we remain focused on opportunistically, calling our portfolio.
Since the end of 2019, we monetize over $4 billion of assets through a combination of outright sales joint ventures and more recently through the contributions to our Singaporean capital partner digital core right.
We view these sales and contributions as an important source of capital raising as we continue to expand our diverse global portfolio and accelerate our growth.
Before turning it over to Andy I'd like to highlight an important update to our board.
And then discuss the success, we were having with other ESG initiatives shown on page five of our earnings presentation.
In June .
Mary Hogan proceed a 30 year REIT industry veteran was named chairman of the board.
Succeeding Laurence Chapman.
Mary has served on our board since 2017.
And has played a critical role in driving digital realty's expansion and innovation as we pursued our transformation to being a global full spectrum datacenter provider.
We are fortunate that Lawrence will continue to serve on our board of directors.
His deep well of experience understanding and leadership.
Mary's appointment aligns with digital realty's commitment to strong governance, our focus on sustainability and the aim to balance fresh thinking with experience and continuity.
I look forward to working with Mary and her new role.
We also continued to advance the ball towards our sustainability goals in the second quarter.
In addition to publishing our fourth annual ESG report, we became the first data center operator to achieve the milestone of one gigawatt of sustainably certified data center capacity.
We also further expanded our renewable portfolio in the U S by contracting for 158 megawatts of new solar energy before the recent run up in power prices supporting our data centers in California and Georgia.
Globally 119, if our data centers are powered by 100% renewable energy.
We are committed to minimizing our impact on the environment, while delivering sustainable growth for all of our stakeholders.
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 $113 million with a $12 million contribution from interconnection during the second quarter.
New business was healthy across product types.
Hub, one megawatt plus interconnection accounted for 42% of the quarter's bookings while deals larger than a megawatt accounted for 57% of this quarter's bookings.
The weighted average lease term on new leases with more than seven years.
Mayor accounted for well over half of this quarter's new business.
<unk> continued to set the pace in the region, while Paris was also a meaningful contributor.
<unk> was also geographically broad based during the quarter with significant contributions from Northern Virginia, Athens, Zurich, Tokyo, So Paulo, New York, Dublin and Amsterdam.
Reflecting the strength of demand from our customers. We grew the size of our development pipeline to more than 360 megawatts under construction as we started over 100 megawatts of new projects in EMEA, and North America, including 35 megawatts in Frankfurt and 38 megawatts in Paris.
Nearly one third of our sub one megawatt class 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.
During the second quarter, we added another 108, new customers, bringing the total to more than 1000, new logos since closing the interaction transaction a little over two years ago.
We see a growing trend of multinational companies deploying in connecting large private data infrastructure footprints on platform digital across multiple regions and metros globally.
In terms of specific customer wins during the quarter.
A leading service provider has experienced the full range of benefits offered on platform digital.
Greater performance and scalability to cost savings these customers expanded their capabilities across three metros in two geographic regions, emphasizing hybrid I T by integrating bare metal and cloud storage.
Two leading global 2000 financial services firms chose platform digital for multi site deployments in multiple metros across North America and Asia Pacific.
One of the world's leading video game developers is expanding on platform digital to access our global footprint scalability and low latency performance.
A global 2000 reinsurer is expanding on platform digital with full spectrum benefits from a strong community to top cloud providers and robust security being key drivers.
And then life Sciences organization is switching to plot from digital to markets across North America to reduce network costs, while implementing artificial intelligence and high performance computing applications.
Turning to our backlog on page nine the current backlog of signed but not yet commenced leases taper to $393 million by quarter end as record level of commenced leases outpaced new signings.
The lag between signings and Commencements moved up to 13 months due to one larger sun and into a new campus development in Frankfurt.
Excluding that lease the sign to commencement period was more in line with our recent experience of about eight months.
Moving onto page 10, we signed $173 million of renewal leases during the second quarter and a positive three 4% cash releasing spread compared to three 3% positive last quarter.
Renewal rates were positive in each product segment and also in each of our three regions. The majority of total renewals were sub one megawatt deals.
The higher unit price contracts that are characteristic of that segment.
These renewals climbed by 3% during the second quarter.
One larger deals rates increased by one 1%.
We are encouraged by the positive trajectory of renewal spreads as well as our constructive engage with customers on the current inflationary environment and are highly compelling value proposition.
In terms of operating performance total portfolio occupancy rebounded by 60 basis points sequentially driven by the strong commencement from a record backlog.
These improvements in our occupancy come to slight our active intention to grow our global Colocation inventory in order to meet the growing demand of our expanding customer base, who continue to solve for complex IP infrastructure connectivity and data integration challenges.
Same capital cash NOI growth fell five 5% in the second quarter, primarily driven by a 400 basis point FX headwind in the last leg of a previously discussed sizable churn event.
Most of this space has already been released and we will more fully commence over the next several quarters, which should drive an improved trend in revenue growth on a constant currency basis.
Okay.
Turning to our risk mitigation strategies on page 11, 57% of our second quarter operating revenue was denominated in U S dollars with 22% in euros, and 7% in Singapore dollars, 6% British pounds and 2% in Japanese yen.
We are also actively mitigating interest rate risk by proactively terming out short term variable rate debt with longer term fixed rate financing.
Turn it back to currency the U S. Dollar continued to strengthen over the last several months.
<unk> represented a 400 to 450 basis point drag on year over year growth in our second quarter reported results from a top to the bottom line as shown in our constant currency analysis on page 12.
As we've highlighted in the past currency fluctuations has more typically served as a 50 to 100 basis point headwind or tailwind to earnings in periods of lower volatility.
While the outsized depreciation of the Euro this year has been a major driver of the headwinds for our P&L. It also represents the lion's share of our 4 billion plus development pipeline to be clear. We are operating and then investing locally rather than repatriating proceeds into U S dollars.
Our operations and our investment pipeline, along with our capital funding and locally denominated debt service as a natural hedge of course, given the growth of our global portfolio along with the heightened FX volatility we will continue to evaluate our hedging strategy on an ongoing basis.
In terms of earnings growth second quarter core <unk> per share of $1 72 was 12% higher on a year over year basis, and 3% higher sequentially. Despite increased FX headwinds.
The outperformance versus our prior expectations for the quarter was principally a function of lower than expected opex spend and a short delay in the closing of the <unk> transaction.
Looking forward, we expect core <unk> per share remained under pressure from different than expected FX headwinds given the appreciation of the U S dollar.
As you can see from the bridge chart on page 13, we expect <unk> will dip down a couple of pennies in the third quarter, principally due to FX, but also as a result of the delayed normalization of Opex spend near term dilution from closing the telco transaction and higher interest rates.
Accordingly, we've adjusted our underlying guidance assumptions that remained under pressure from foreign currency exchange and interest rates.
We're also updating our core <unk> per share guidance range for the full year 2022 to 675 to $6 85, reflecting a five cent per share adjustment at the low and high end of the range.
Accordingly, we are reaffirming our constant currency core <unk> per share range of 695 to 705 for 2022.
Given the continued strength of the U S. Dollar, we expect currency headwinds could represent a 300 to 400 basis point drag on full year 2022 revenue and core <unk> per share growth.
Lastly, let's turn to the balance sheet on page 14.
Our reported leverage ticked down to six two times as of June 30th while fixed charge coverage increased to six <unk> times.
Adjusted for the proceeds from the West September forward equity offering our pro forma leverage drops to five eight times, while fixed charge coverage improved to six two times.
We remain focused on our financial strategy.
<unk> the menu of available capital options, while minimizing the related cost of our liabilities.
The execution against this financial 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 the pack and enables us to prudently fund our strategic objectives.
As you can see from the chart on page 15.
Our weighted average debt maturity is nearly six years and a weighted average coupon is two 2%.
Approximately three quarters of our debt is non U S dollar denominated, reflecting the growth of our global platform.
Nearly 90% of our debt is fixed rate and 99% of our debt is unsecured providing the greatest flexibility for capital recycling.
Finally, as you can see from the left side of page 15, we have modest near term debt maturities and a well lettered maturities scheduled for the foreseeable future.
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'd 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, 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.
If youre 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 the roster.
And our first question comes from Eric Lube <unk> of Wells Fargo. Please go ahead.
Hey, Thanks for taking the question.
First of all just curious on what your pipeline looks like in terms of Hyperscale. I know you saw a tremendous amount of absorption in Q1, it was a little bit lighter, especially in the U S. In Q2 now any sense at all the large cloud operators are pulling back after a few record leasing quarters or is this just the natural ebbs and flows of the market maybe.
You know slightly more limited inventory you had in some of your key markets.
Yeah. So Eric this is Corey just responding to you. Thanks for the question and I would tell you that our hyperscale demand in our in our bookings this quarter were really strong especially across Europe .
Really solid bookings across North America, as well as Tokyo with Hyperscale, and we haven't really seen a slowdown in it.
Going forward from our pipeline our pipeline broadly is really strong it's the highest we've ever had.
All of our segments, including Hyperscale, So feel really good about where we are there continuing just to to take.
Take advantage of the offering that we offer them, they're crossed her with us across about 40 different markets.
You really utilizing us for the connectivity of the enterprise customers that we have and really taking advantage of our platform on an ongoing basis. So no real slowdown that I see so far Andy.
Okay.
Oh, great. Thanks, well the only thing.
Sorry, sorry.
Sorry go ahead go ahead please.
I was just going to ask a separate question.
So it's something that we heard about recently, where some challenges about.
Our supply for new construction in Ashburn.
Some news reports that that's been severely restricted by the local utilities. So I'm just wondering if that's having any impact at all in your ability to build new capacity, particularly at the Western lands campus are in.
In Ashburn or if you feel relatively insulated based on perhaps pre commitments for power generation and then.
Separately I think we've heard some comments from bill that maybe you're working with some hyperscale is at that campus sits when some deals or perhaps an update as to what the sales funnel looks like in northern Virginia, specifically thanks.
Sure. So the only thing I was going to add on.
Sorry to interrupt you reported two.
Korea's first piece does that.
If you look at like the plus the megawatt signings, where most of the hyperscale larger.
Land.
North of 50 megawatts I think our largest deals 10 megawatts, we had to around five each. So then you had call. It 30 megawatts of call. It one to four megawatts in size, including new landings and expansions from a diverse group of those hyperscale.
So that was the only data plans going out to the first question on your second question Eric.
I would say you definitely.
Got the Scoop are in terms of Oh, something that's certainly very recent in late breaking so I'll try to provide a little context and as well to answer your question Dominion and Dominion energy, which is the primary power provider in that market informed its major customers.
Very recently regarding a called a potential pinch point.
In eastern Loudoun kept Loudoun County.
That could delay deliveries.
Til.
2026, so a little bit out there.
Do you cause it's been described to me as transmission not generation I E. The pipes are or the power line infrastructure not the actual power.
The power company did not give definitive answers to most of the relevant questions Lee and I would think you and others on this call would probably have but they have been transparent about the potential issue and they are working very diligently to finalize their assessment and then ultimately communicate their findings.
What this means I mean, while we're still obviously handicapping the potential outcomes, but <unk>.
Net net.
If this is to come to fruition as we recently learned that it would obviously likely be a slowdown in delivery of new supply in what is our largest and the largest and most consistently and demand data center market in the world.
So I see two possible outcomes, there one being called just essentially greater pricing power and higher rates tied to the sharp reduction of near term availability.
Which should be favorable to digital.
Given our standing in market.
And then also so are likely to be potential some winners and losers as it relates to the various developers.
Food and digital seeking to bring new inventory online in that in that market.
We have you kind of go to the rundown of our footprint call. It 40 megawatts available you can see in our finished up a 500 megawatts of I T load operational as of <unk>.
We also then have caught 50 megawatts Saar last building on that legacy Loudoun campus I think this building or in the alphabet, they're I would say feels like on the lower risk of having an issue, but again this is very new and subject to change.
We have another 200 megawatts, one or Manassas campus.
Which given its.
And that market seems on the lower risk side.
And then we do have called.
Based on the substation, that's already built about 200 megawatts on that digital Dulles AK Western lands called one plus gigawatt site that is called Oh.
We got to figure out what's how that's going to play out in terms of delivery and timeline, but I do like our odds of if any given that we have a sitting substation already there.
This deal has been erected the capital deployed.
Net net.
Given our activity in that market only 24 megawatts of what I just mentioned other than the 40 available would deliver by the fourth quarter of 'twenty three.
Just normal timeline, so I don't see this as a huge impact to 'twenty three.
And then last not least I mean.
Given the other than the tighter market fundamentals I mean, I do like our odds here relative to the competitive set in northern Virginia, I mean, we're the largest provider of consistently operating with Dominion, we have substations and power infrastructure already building our campuses as I mentioned.
And I think we are a very important player in that market to help helped the power company address this problem given our strategically important land parcels in an easement. So sorry for the long winded response, but I did feel at that topic needs some clarity.
Giving you kind of just broken that news just yesterday the day before.
The next question comes from Matt nickname of Deutsche Bank. Please go ahead.
Hey, guys. Thanks for taking the questions. So first on pricing it sounds like it's been an incrementally positive story.
Just based on.
Some of the recent commentary you've been hearing so I'm just wondering if maybe you can elaborate on what you're seeing on the pricing front across regions.
And then also on demand I know I think Cory referenced very strong demand and I'm just wondering in light of maybe some elevated concern around a potential macro downturn any regions any verticals, where you may have seen or started to see any sort of moderation in terms of demand from your customers. Thanks.
Okay.
Obviously, those things are linked Matt So maybe I'll have corning.
Speak to demand first and then I can tackle the pricing topic, yeah, Matt Thanks, as far as banana I mentioned hyperscale or demand earlier.
Our demand across the board is really good we've got it across all all for all of our regions I mentioned I think Andy mentioned in the prepared remarks, the demand across EMEA that was our largest landing spot for our business. Our pipeline is the highest pipeline I've ever had and that's on top of a couple of years of huge growth in Pi.
And in the business.
So we feel really good about where the where the demand is and where the pipeline is enterprise customers are continuing to take advantage of platform digital make use of the data gravity opportunity in front of them and I feel like in a hybrid world, but probably the best position to help them do that and so we've seen our demand just grow across the board enterprises Cross.
All regions and hyper scaler as well if you look at the sub one megawatt which is your colocation interconnection.
That was our third highest quarter ever ride on the back of two of our highest quarters ever so I feel really good about the demand.
And then and then Matt on your second question as it relates to pricing.
I would say the commentary is fairly consistent with what bill and I shared at.
At the NAREIT conference call in early June .
2022.
On the backs of cold.
Executing on the business and strengthening our value proposition, which pricing power accrued to for several years.
2022 has started off or the first half. It's certainly been a called pendulum shifting dynamic the demand is clean remain robust our value proposition is certainly resonating.
<unk> seen in the results.
And the pace of inventories had a challenge keeping up with it and when.
What I just relayed on Loudoun County is called just one of the examples but there've been others throughout the year as well and that has allowed us to essentially move a list rates up numerous times starting at very end of 2021 through 2022 executed at high.
Their rates are across both of our larger footprint and small footprint.
Push rates on a renewal contracts, which last quarter, we had positive cash mark to markets are certainly inflection and on our cash Mark to markets are we raised our guidance for the full year and we followed with the second quarter.
Our cash mark to markets as well.
And I would say all these things.
Flow through the entire called commercial engagement with our customers to escalators and other provisions so pricing.
Pricing has been moving in our favor in the first half of 2022.
That's great. Thank you both.
The next question comes from Michael Bilerman of Citi. Please go ahead.
Thank you Andy.
Andy I wanted to talk just a little bit about foreign exchange.
As the U S dividend payer and obviously you have to be mindful and when I mean.
Talking about obviously not repatriating a lot of income that foreign income because you're reinvesting. It I guess just stepping back how do you sort of think about.
Hmm.
Being a U S dividend payer and being a global company with global flows and you talked about other hedging techniques and I want to know how much of that just simply borrowing more and foreign currency, putting more currency swap hedges in place versus thinking about other potential structures and I recognize you did the S. REIT, but you did that.
With U S assets I don't know, if you're thinking about doing more localized and so maybe if you can just expand a little bit more on that hedging comment.
Sure. Thanks, Michael So I mean.
And we've touched a little bit this on the script. We've we've followed this playbook that's somewhat summarized here.
I mean, often when we go into more volatile parts of the world like Latin America, we do it in partnership so we're not our equities not entirely at risk.
We also have I've put a disproportionate amount of our debt and non U S. Dollar financings hidden the eurobond Swiss bonds Sterling bond, we have now called close to 4 billion multi currency revolver.
<unk> and.
So given that what that mismatch set of having the U S.
Price in the U S listed our U S currency dividends.
Put more and more caught accessing diverse sources of capital and creating natural FX hedges along the way.
At the same time, given the rate of return that we're investing relative to.
At least in more recent history has been very low rates and a lot of these currencies there has been called cash flow or CFO leakage.
The point I was trying to highlight in the script and this year the volatility just off the charts I mean, youre going to parity with the dollar.
<unk> is the highest it's been in several years and certainly has created a headwind.
Two are called P&L cough and cold for sure.
But those same euros, they've got deflated our in our P&L in 2022, we're also going into the ground with Europe being our largest development.
So part of the portfolio with 221 of our megawatts under construction across the across the continent or in London.
So.
That that has typically been our playbook we've not.
Uh Huh, followed some others in terms of called just P&L hedging which is really.
Transacting with foreign currency derivatives to call it take out volatility and <unk> and.
That's been what we've done to date now I've also said in the prepared remarks we're.
We're becoming a much more global company Theres no question of that call. It 50 plus metros.
26, 27 countries six continents, and we're certainly not in a longtime heightened volatility of the currency situation. So I think we're always open with good new ideas and something we will consider.
Consider in terms of adding to that FX playbook with various types of derivatives.
Am I Gonna go lock the euro at this point right now I'm not sure quite honestly I mean there.
There could be a chance for some of these non U S currencies, where countries start raising their rates and you have some reversion on some of this at the same time, so, but that's really been the past practice Biz and we're all we always looking at trying to figure out new ideas Oh, two to continue to actively hedge the business and mitigate risks.
And then as a follow up as you think about the Singapore entity that you listed in and obviously, you put U S assets into Singapore market, which at least driven.
Driven they that that was what the market is sort of wanted but is there an element that you look at that entity obvious it's well off its IPO price. It has a cost of capital it would need to transact on your U S assets at much higher valuations given how strong the U S. Dollar is does that so does that vehicles still work for you number one and then the second.
Part of it is.
Would you consider.
Vehicles at our local assets in local markets, which would accomplish you do it in private form would you execute that and any public form.
Well.
So the.
D C read digital core REIT.
It started out with the North America portfolio, but don't have a global mandate and really the selection of the initial assets was we had the most to pick from a North America given our.
Our history track records, our stage of development of those assets, but we do very well expect to globalize, it and diversify it with other types of assets in different parts of the world. The Singapore dollar is I don't think it's 100% linked currency to the U S. Dollar, but there is a I believe monetary policies or there is.
Some governmental linkage, where they try to track the U S dollar in terms of currency.
So it's not a usually a wildly divergent to the U S dollar type of currency I mean, we.
We view that vehicle as a.
Called the home for core assets.
Assets that.
They're stabilized fully operational long weighted average lease terms and again will be a global basis.
We also have ventures like SMT in Latin America, which today is held by our partners Brookfield, Oh or Mitsubishi are empty digital Realty in Japan, where our partners Mitsubishi Corporation that are certainly a private partners today, but those certainly could evolve into.
Two forms of public partnerships over time, so we're always looking at different ways to find the most appropriate.
Both debt and equity capital private and public for partners to most efficiently and prudently scale and grow the platform.
Yeah.
The next question comes from David Barden of Bank of America. Please go ahead.
Hey, guys. Thanks, so much for taking.
Taking the question I guess a couple the first would be bill you've talked about how you know.
Steady.
Kind of mid single digit inflation would be a useful tool for the pricing equation for the data center industry.
I think in the script you talked about resetting pricing on a CPI basis I'm wondering if this is really is it C. P. I based is it supply demand base. If you could kind of talk a little bit about your pricing.
Strategy Big picture, there and then back to the the launch of the service platform. I was wondering if you could kind of talk about any expectations that investors should have.
For that being a contributor to the business or Kpis that we should look for on a go forward basis. Thank you.
Sure so just to be clear.
C P I.
Based.
Returns are in the escalators.
So we've.
We've gone from where we're going from fixed annual increases to increases that are structured with with the minimums with floors.
And then CPI index increases above the floor.
And typically to some cap. So an example would be a 2% floor.
We sit with a CPI based increase above that to say, 6% is a cap and that's on an annual basis.
And so we feel that that.
Provides some hedge for us.
For inflation.
And then just you know keep in mind relative to inflation that over 90% of our power costs are passed through and that obviously has.
Has been the subject to a lot of inflationary pressure.
In terms of the base rents, that's more a function of supply and demand in any given market. So.
And you know with with supply chain challenges.
I would say so.
Supply is more challenged.
And demand continues at a very high pace.
So.
That plus the increasing input costs.
On new builds.
Not us so much because of our being BMI program, but certainly our competitors, whether it's a mature OS indoor labor.
And R R.
Our customers that are building their own are certainly experiencing these same pressures.
It's pretty easy to justify higher base rates, when you're talking to customers.
That answer your question.
Yeah, No I get I get the direction. Thanks Bill.
Yeah. Thanks, David for the question around the service fabric yeah. So we're.
I've kind of talked about this before to provide a little bit of color and background. It's a purpose built product right and it really enhances our customer experience, where we're removing technical complexity and so what that's going to translate to and what we're watching is driving more of that sub one megawatt deployments, where enterprises are looking to leverage and deploy their hybrid it.
<unk> or multi cloud deployments into our facility. So you'll see a lot more of that driving into our portfolio and also I think you know where you're going to see a continually extending the reach into.
Deeper sets of assets within our facilities set differently, both Colo and scale will start to get the true benefit of interconnection, which at the end of the day will allow us to drive more value and higher margins outside of that product and so that's one of the things we've been tracking extensively in that utilization, which is another key kpis for us is multi site.
Where we're starting to sell a blended set of capabilities, both scale and Colo all heavily interconnected because thats, where the market is headed and that's where we see a lot of these larger enterprises, requiring multi market access with a highly interconnected backbone with true S. L A's and Thats, what the service fabric was able to deliver to market there.
The next question comes from Jon Atkin of RBC capital markets. Please go ahead.
Thanks, maybe just a follow up to the topic raised it two or three questions ago about asset recycling and U S. REIT. They had their earnings calls I guess 12 hours ago, and specifically mentioned Chicago Dallas Frankfurt. So I wonder if there's anything you wanted to add to those comments around timing and are we going to see.
All three or a subset of those all from here, what's kind of the general cadence to suggest so that's kind of maybe the follow up and then the question I had was about book to Bill It seems to have lengthened this quarter.
That's kind of a choppy natural because I guess it depends on just the nature of the deals you happened to Friday in any given quarter, but it didn't like to noticeably anything to kind of call out there yeah Mike.
Relate to the velocity, if we keep demand that you might be seeing from the cloud providers or whether they might go through a digestion period.
Appreciate coil comments about the pipeline being really strong, but the lengthening book to Bill is that something that's going to maybe shorten or how do you see that trending.
Yeah, Thanks, Jonathan I'll take them in reverse because the second one is pretty clean.
So there was one specific transaction that we signed that into one of our newest Frankfurt campuses that I mean, they were just getting off that plot getting off the ground on so that was really what lengthen that out if you're if you excluded that one transaction.
The book to Bill to call. It eight months so called in line with our prior track record.
And then on you've shown you set when you first question I mean definitely I'm very.
Very pleased that our digital core team that's out of the gates with I think its official first.
Earnings call I'm not.
Not I don't think that a lot too much to report other than the biggest news being <unk>.
Making progress we are making progress collectively on on not really be on asset selection to diligence to transactional docs and haven't really circled a us assets in three markets.
As prime candidates to act on our forged first like of acquisition growth.
And as a reminder.
That vehicle, we took public last December .
With a called under Levered balance sheet. So it has embedded debt capacity of called approaching $200 million. So it's not reliant on the equity capital markets are.
Out of the gates.
But we do hope the equity capital markets respond favorably and continue to support that and because.
We'd love to see that vehicle grow and we think that's great.
Partner vehicle for these core parts of our campuses that fit that that vehicles mandate.
Slide 13, just thinking if he ever focus share ramp and the seasonality through the year.
And if you look at kind of you know you didn't put numbers on it but the tweets you into force you wouldn't have seen.
Fairly modest compared to what you saw <unk> as well as the NOI growth contribution to Q went to the fourth quarter. So I'm. Just wondering is there anything going on during the second half of the year that would moderate sequential growth.
You know in the second half specifically in the fourth quarter am I reading too much into that slide or is there anything in particular that would.
Cause the block the ramp to be so.
So much less significant the won't be seen in the last couple of quarters.
Hi.
John I think it really was just timing we had a really large commencement quarter in <unk> and in the back half you do have a few things called working against US which are the orange bars.
One is we do some of our beat in the second quarter was delayed timing on Opex spend which we believe is going to get pushed to the back half of the year not a new event.
At digital we do see a pickup in interest expense, which is everyone's can see.
And then we are closing telco in the coming weeks and then lastly.
Call It a.
24, 25% of our core FIFO is from like the euro the Sterling yen and in a quarter over quarter basis, you've seen degradation in those currencies about 5%.
Which is the FX headwinds, hence while we did.
Change our as reported guidance, we were able to keep maintain our constant currency guidance, which is about just north of 7% year over year growth at the midpoint.
The next question comes from Ari Klein of BMO capital markets. Please go ahead.
Thanks.
Just following up on the power issue out in Ashburn.
What does this mean I guess for leasing in that market does it put it on a pause I guess.
In the near term and I think Corey mentioned kind of record pipeline that's out there what would that look like.
And then just curious how much you have in the way of expiring leases in that market over the next 12 to 24 months.
Yeah.
Thanks, sorry, so I mean.
And then it again.
Again, it's still subject to change because this is very new or late breaking.
But it's going to paint a picture, where we believe there is still going to be robust demand and a tightened or slowed supply environment.
So and those economics are.
In rates typically rise.
And in economics.
Providers.
We.
One first and foremost I don't see people, leaving Ashburn for this delay this isn't like a permanent feature of Ashwin. This is a call. It a bottleneck of a portion of Ashburn and you've got an incredible amount of customer's infrastructures network Ashburn grew to where it is for many reasons.
I don't I don't see demand just running away from in the base.
Piece of this I think the available capacity is going to become more precious.
That call. It 40 megawatts of operational that we have today is more precious and.
If we're able to proceed to bring on new capacity.
Did I outlined that becomes more precious.
And if we look at our expirations.
We've got about.
18, or 17 megawatts spine in the back half of this year another 75.
23, another 58 and 24 another 20.
Another 54 and 25, so call it north of 200 over the next.
Through the end of 'twenty five.
Which is a normal amount of role for us, but it ashwin is our largest market. So we have a lot of of megawatts rolling over the ensuing years.
Yeah.
Got it thanks, that's all right.
I guess in light of.
What's happening those releasing spread or the pricing around that you would anticipate <unk> being higher than you might have thought a couple of weeks ago.
Correct, Yes, I mean I think they are.
Asking rates on any available capacity in the Ashburn I mean, when we got wind of this this has went out to our entire field.
Is that the dynamics are shifting the Nashville and.
And they could shift quite dramatically so.
So asking rates as well as our negotiations on on renewal contracts.
The next question comes from Simon Flannery of Morgan Stanley . Please go ahead.
Great. Thank you very much I'm just following up on the comments on the strong cloud demand can you just update us on what your cloud customers are saying in terms of their desire to work with you versus building themselves or is there any change in that at one way or the other or from one location to another and then given some of the issues. We're just talking about.
In Ashburn.
Asleep power issues are even greater in Europe , and Europe , you've just committed to some major new builds in markets like Paris, and Frankfurt what is some on the ground there in terms of ensuring that you're going to have the availability of that power supply over the next several years for these and other expansions.
Hey, Simon I'll speak to the self build question.
So frankly, we've.
The trailers.
Have been building their own.
For a long time I'd say.
For the last 10 years.
They have pursued what we call a hybrid model. So they they have self builds and they have been they leased from third parties.
Is that how much they do anything.
Given time varies and they don't all do it at the same time.
So you know party a might be doing 100% third party leasing and no self building Wow Party B is relying mostly on self build in the next year they could change it up.
But I would say in the current environment.
So in the current environment, meaning the.
An environment, that's that's challenged by supply chain and inflation.
I think we're seeing an increased reliance on third party leasing.
And that's because we're.
We are as good as anybody at managing and what is I would characterize as a more challenging environment.
And you want to handle the.
The power question in Europe .
Sure so.
We have on the ground.
Teams that.
Speak the local language worked into municipalities network to the business leaders. So in each of these jurisdictions that called you mentioned, our top of the list relationships or two to make sure that we're in concert communication that doesn't mean something doesn't pop up like we are experiencing in ashburn.
Episodically, but obviously, we have a very good hand on the pulse of what's going on there.
I mean, there's we're supporting critical mission critical infrastructure here.
For a host of applications that I would say.
Even in a rationing of environment, we're very top of list in terms of access to resources, including power.
And we're constantly monitoring the power sources or deliveries were new projects and preparing for.
Even more draconian scenarios in terms of backup fuel sources.
Could play out.
Given the facts and circumstances of whats going on in Eastern Europe .
So and that's that's part of our business and and we have very very high stakes customers that I view as partners kind of in line with Bill mentioned, who are who are side by side with us on these issues right there with us.
Expressing the criticality of them going live on certain dates.
So I think that partnership is so we mutually benefit in terms of being able to derisk our execution on their behalf.
The next question comes from Frank Louthan of Raymond James. Please go ahead.
Great. Thank you what conversations have you had with folks kind of looking ahead to two policy shrinking economy and so forth are you seeing any proactive pull forward of digitization.
Saving costs and so forth and can you can you give us a little bit more color on sort of the verticals that you're seeing the strengths and I and the bookings any shift there from your usual cast of characters any any newer different industries that you're seeing coming in stronger. Thanks.
Thanks, Craig maybe I'll start it off.
And then Corey and I can ham and egg.
So.
I don't think we've seen.
To date.
Economic softness in our demand even hurting from quarterly towards description.
On the forward pipeline and and.
Look at our results in terms of new bookings and new logo additions.
And I think that's based into that we are really.
Oh really mission critical priority, we're not discretionary spend we are we're facilitating performance enhancement facilitating.
Growth through digital transformation for our customers businesses as well as efficiencies for our customers. So.
That's an end.
We've also been through a few economic cycles as well and the history would say that that that that our trend is our friend on that topic.
If you look at the sectors.
I think some of the usual ones in North America, we saw a good good amount of financial services side.
Cyber security.
In EMEA, we saw this quarter's immediate telecommunications and as the cloud in Asia Pacific.
Uh huh.
Similar to what we saw both in America and it made us so pretty broad brush as well as call. It more general corporate enterprise across healthcare or manufacturing retail et cetera. So.
And I think that goes back to Theres, a common theme across almost all of these industries about what our people are our services are doing to enable.
They're there they're their services.
I would add to it.
Frank that we had 17 sub segments do more than a million dollars in bookings this last quarter, which speaks to the breadth of the demand we haven't seen a pullback if you think about the secular trends around service providers driving revenue enterprises.
Having money, adding features as far as efficiencies taking advantage of a hybrid it world that we're really well positioned for we haven't seen that affect the demand in any way.
Maybe pull forward, a little bit, but I haven't seen it.
<unk> really affect it because I've got a record pipeline Colo record pipeline and interconnection record pipeline in enterprise and just a record pipeline overall, so if there is an effect on <unk>.
On.
On inflation, then I would tell you that it's it's not enough that it did it but it keeps them from continuing to come to look to us.
Build out their infrastructure.
Okay that helps.
Next question comes from Nick del Deo of Moffett Nathanson. Please go ahead.
Oh, Hey, thanks for taking my questions.
First on the you.
You know looking at your expected returns on the development pipeline.
You know pricing is up it looks like the returns are consistent maybe falling a little bit, particularly in Europe is that a function of mix shift you know with more large deals in the pipeline or other factors at play there.
Hey, Thanks, Nick.
I think the returns went down 30% or 40 basis points from 10 four.
<unk> 10, which is really a mixed shift we've added to the.
<unk>.
Base, some larger scale projects with thought.
That already have or will have some anchor leases our.
That are were certainly on the lower end of our return spectrum.
But.
I would say the pricing.
Is robust, particularly in Europe , which is one of our tightest regions and has got a a numerous markets, where we're serving both large and small customers.
So I attribute that's pretty much solid quarter over quarter mix shift.
Okay got it thank you.
And then you know.
Maybe one more on the on the Ashburn power topic.
I think he made a case that you know customers are not going to leave Ashburn you know in droves because of this you know it if it does cause any customers to kind of reconsider their.
The concentration in Ashburn, and maybe wanted to diversify a little bit say into adjacent markets like Richmond or Culpeper Manassas do you think you can react quickly to capitalize on any sort of diversification trend.
Yeah.
So I'm not sure.
I think the diversification trend will likely happen out outside of like that Northern Virginia are part of the world quite honestly and we've got shells.
In Atlanta, we got capacity in the suburbs of New York City.
And in our Chicago and Dallas, So Theres I think you could see a spillover effect in a temporary basis to other parts of the United States, but I don't think.
You're going to see a running to other cities in Virginia quite honestly.
And and I'm not.
I don't I mean, the this is.
Patiently sensitive workloads right the infrastructure at networking has been in the ground and been built upon and grown upon for years and years in Ashburn. The clouds have architected their networks with on ramp location digital location sensitive availability zones that have radius restrictions.
And I don't I.
Fact that this is a slowing of the ashburn not a halting of the ashburn.
Pocket of Ashburn to me says I don't think that you're going to really be able to move this.
Tremendous center of gravity for the data centers worldwide.
Okay.
Yeah.
This concludes the question and answer portion of today's call I'd now like to turn the call back over to CEO Bill Stein for his closing remarks. Please go ahead.
Thank you Andrea.
I'd like to wrap up our call today by recapping, our highlights for the second quarter.
As outlined on the last page of our presentation.
First digital transformation remains an important secular driver of our business.
Which drove another strong quarter of bookings and new business additions to our global platform.
The robust demand that we're seeing is reflected in our growing development pipeline.
Second.
We continue to press our advantage.
Through tactical inorganic new market entries as the additions of Israel in Barcelona, This quarter will enhance our connectivity offering and in the Mediterranean, while our investment in our leading co location can add connectivity provider in South Africa is expected to close in short order.
Third we posted stronger than expected core <unk> per share results. Despite stiff FX headwinds and we maintained our constant currency core <unk> per share forecast for the year, which represents more than 7% growth year over year.
Last we are very proud of our team's launch of service fabric and open and neutral digital marketplace supporting our customers' digital transformation journey, and enabling hybrid multi cloud requirements.
Before signing off.
I'd like to thank our dedicated and exceptional team of digital Realty, who keep the digital real digital World Attorney.
I hope all of you will stay safe and healthy and we look forward to seeing many of you in the coming weeks at upcoming events.
Sure.
The conference has now concluded. Thank you for joining today's presentation and you may now disconnect.
Okay.
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Yeah.
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Okay.