Digital Realty Trust Q2 2022 Earnings Call Transcript

Key Takeaways

  • Record bookings and robust pipeline: Generated $113 million of new Q2 bookings with EMEA leading the way and grew development capacity to over 360 MW, more than half of which is pre-sold.
  • Core FFO outperformance: Reported Q2 core FFO per share of $1.72, a 12% year-over-year increase, and reaffirmed the constant-currency full-year guidance despite FX headwinds.
  • FX headwinds persist: A stronger U.S. dollar trimmed roughly 300–400 basis points off full-year revenue and core FFO growth, prompting a modest $0.05 cut to the as-reported FFO guidance range.
  • Power constraints in Northern Virginia: Dominion Energy’s potential transmission bottleneck could delay new Ashburn capacity until 2026, tightening supply and reshaping pricing dynamics in the world’s largest data center market.
  • Service Fabric Connect launch: Rolled out an open interconnection and orchestration platform in over 30 markets to streamline hybrid multi-cloud connectivity for enterprise and service provider customers.
AI Generated. May Contain Errors.
Earnings Conference Call
Digital Realty Trust Q2 2022
00:00 / 00:00

There are 14 speakers on the call.

Operator

Afternoon, and welcome to the Digital Realty Second Quarter 2022 Earnings Call. Please 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.

Operator

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.

Speaker 1

Thank you, operator, and welcome everyone to Digital Realty's Q2 2022 earnings conference call. Joining me on today's call are CEO, Bill Stein and President and CFO, Andy Power Chief Investment Officer, Greg Greit Chief Technology Officer, Chris Sharp and Chief Revenue Officer, Corey Dyer are also on the call and will be available for Q and 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 ks and subsequent filings with the SEC.

Speaker 1

This call will contain non GAAP financial information. Reconciliations to net income are included in the supplemental package furnished First, the overarching trend of digital transformation remains a secular driver for our business, which was highlighted by yet another quarter of 2nd, the improved re leasing spreads we saw last quarter continued in 2Q and we remain focused on offsetting the impacts of rising costs throughout our line of new opportunity and development. 3rd, our transformation into a leading global data center solutions provider remains on track With our investment in Teraco expected to close within the next 2 weeks. And finally, our core FFO per share results Exceeded consensus for the quarter, though we tempered our expectations for the second half and full year 2022, Principally due to continued FX headwinds as we reaffirmed our constant currency core FFO per share guidance for 2022. With that, I'd like to turn the call over to our CEO, Bill Stein.

Speaker 2

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 in IT and data. We have an unmatched global operating footprint along with Strong development pipeline continue to deepen and expand that footprint to meet our customers' growing needs. Those customers are a growing community of more than 4,000 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 $113,000,000 of new bookings And core FFO per share of $1.72 a 12% increase over the Q2 of last year And a 3% sequential increase despite stiff FX headwinds.

Speaker 2

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 rents escalators and helping to maintain Stable development returns. 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 5 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 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, An open interconnection solution and orchestration platform designed to support the wider industry shift to a hybrid data centric architecture.

Speaker 2

This product launch empowers our enterprise and service provider customers to connect to anyone, Anywhere at any time through an open and neutral digital marketplace. Service Fabric Connect It's the first of several related interconnection oriented products that we have on our roadmap and was launched With availability in over 30 markets around the world, we are excited to bring this product to life and we look forward Delivering these enhanced connectivity benefits to our customers. Let's turn to our investment activity on Page 4. 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 Q2, we acquired land in 3 European markets For ground up development to support strong demand.

Speaker 2

In addition, we announced our entry into Israel With the formation of a joint venture with Mivni, a leading Israeli real estate group. Together, we plan to develop a data center campus in Petah Tikva, 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 Terica, a leading colocation and interconnection provider in South Africa. We now expect to close the transaction within the next 2 weeks.

Speaker 2

Our active development pipeline remains robust and grew by more than 10% sequentially with 41 projects underway Supporting over 360 Megawatts of IT 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 are being appropriately compensated For the elevated risk throughout the capital markets and the broader economy. We have sought to mitigate these risks Through our VMI 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.

Speaker 2

Since the end of 2019, We have monetized over $4,000,000,000 of assets through a combination of outright sales, joint ventures And more recently through the contributions to our Singaporean capital partner DigitalCore REIT. 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 In June, Mary Hogan Prusi, a 30 year REIT Industry veteran was named Chairman of the Board, Succeeding Lawrence 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 have pursued our transformation to being a global Full spectrum data center provider. We are fortunate that Lawrence will continue to serve on our Board of Directors and provide his deep well of experience, Understanding and leadership.

Speaker 2

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 in her new role. We also continue to advance the ball towards our sustainability goals in the Q2. In addition to publishing our 4th annual ESG report, We became the 1st data center operator to achieve the milestone of 1 gigawatt of sustainably certified data center capacity. We also further expanded our renewable portfolio in the U.

Speaker 2

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 of our data centers are powered by 100 percent 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.

Speaker 3

Thank you, Bill. Let's turn to our leasing activity on Page 7. As Bill noted, we signed total bookings of 113,000,000 With a $12,000,000 contribution from interconnection during the Q2. New business was healthy across product types As sub-one Megawatt Plus Interconnection accounted for 42% of the quarter's bookings, while deals larger 1 megawatt accounted for 57% of this quarter's bookings. The weighted average lease term on new leases was more than 7 years.

Speaker 3

EMEA accounted for well over half of this quarter's new business as Frankfurt continued to set the pace in the region, While Paris was also a meaningful contributor, leasing was also geographically broad based during the quarter With significant contributions from Northern Virginia, Athens, Zurich, Tokyo, Sao 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 3 60 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 1 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. During the Q2, we added another 108 new customers, bringing the total to more than 1,000 new logos since Closing the InterXion transaction a little over 2 years ago.

Speaker 3

We see a growing trend of multinational companies deploying and 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 IT service provider has experienced the full range of benefits offered on Platform Digital From greater performance and scalability to cost savings, this customer has expanded their capabilities across 3 metros in 2 geographic regions, Emphasizing hybrid IT by integrating bare metal and cloud storage. 2 leading Global 2,000 Financial Services Firms Chose Platform Digital for multisite deployments in multiple metros across North America and Asia Pacific. 1 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 the strong community to top cloud providers And robust security being key drivers.

Speaker 3

NA Life Sciences organization is switching to Platform Digital in 2 markets across North America Turning to our backlog on Page 9. The current backlog of signed but not yet commenced leases tapered to $393,000,000 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 signing into a new campus development in Frankfurt, excluding that lease, the signed commencement period More in line with our recent experience of about 8 months. Moving on to Page 10, we signed $173,000,000 of renewal leases during the second quarter at a positive 3.4% cash releasing spread compared to 3.3% positive last quarter. Renewal rates were positive in each product segment and also in each of our 3 regions.

Speaker 3

The majority of total renewals were sub-one megawatt deals, Reflecting the higher unit price contracts that are characteristic of that segment. These renewals climbed by 3% during the Q2. Among larger deals, rates increased by 1.1%. We are encouraged by the positive trajectory of renewal spreads As well as our constructive engagement with customers on the current inflationary environment and our highly compelling value proposition. In terms of operating performance, total portfolio occupancy rebounded by 60 basis points sequentially, Driven by the strong commencements from our record backlog.

Speaker 3

These improvements in our occupancy come despite 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 IT infrastructure, Connectivity and Data Integration Challenges. Same capital cash NOI growth fell 5.5% In the Q2, primarily driven by a 400 basis point FX headwind and the last leg of a previously discussed sizable churn event. Most of the space has already been re leased and will more fully commence over the next several quarters, which should drive an improved trend in revenue growth on a constant currency basis. Turning to our risk mitigation strategies on Page 11. 57% of our 2nd operating revenue was denominated in U.

Speaker 3

S. Dollars with 22% in euros and 7% in Singapore dollars, 6% British pounds 2% in Japanese yen. We have also actively mitigated interest rate risk by proactively terming out short term variable rate debt For longer term fixed rate financing. Turning back to currency, the U. S.

Speaker 3

Dollar continued to strengthen over the last several months And FX represented a 400 basis point to 4 50 basis point drag on year over year growth in our 2nd 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 points 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 and L, it also represents the lion's share of our 4 Our operations and our investment pipeline along with our capital funding and locally denominated debt serve 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, 2nd quarter core FFO per share of 1.72 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 TeraCo transaction.

Speaker 3

Looking forward, we expect core FFO per share remain under pressure from stiffer 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 FFO will dip down a couple of pennies in the 3rd quarter, Principally due to FX, but also as a result of the delayed normalization of OpEx spend, near term dilution from closing the Teraco transaction and higher interest rates. Accordingly, we have adjusted our underlying guidance assumptions that remain under pressure from foreign currency exchange and interest rates.

Speaker 3

We are also updating our core FFO per share guidance range for the full year 2022 to $6.75 to 6.85 Reflecting a $0.05 per share adjustment at the low and high end of the range. Importantly, we are reaffirming our constant currency core per share range of $6.95 to $7.05 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 FFO per share growth.

Speaker 3

Lastly, let's turn the balance sheet on Page 14. Our reported leverage ticked down to 6.2 times as of June 30, Fixed charge coverage increased to 6.0x. Adjusting for the proceeds from the last September's forward equity offering, Our pro form a leverage drops to 5.8 times, while fixed charge coverage improved to 6.2 times. We remain focused on our financial strategy maximizing 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.

Speaker 3

As you can see from the chart on Page 15, Our weighted average debt maturity is nearly 6 years and our weighted average coupon is 2.2%. Approximately 3 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 percent of our debt is unsecured, providing the greatest flexibility for capital recycling.

Speaker 3

Finally, as you can see from the left side of Page 15, we have modest near term debt maturities and a well laddered maturity schedule 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'll be pleased to take your questions. Operator, would you please begin the Q and A session?

Operator

We will now open up the call for questions. And our first question comes from Eric Luebchow of Wells Fargo. Please go ahead.

Speaker 4

Hi, 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.

Speaker 4

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 related to slightly more limited inventory you had in some of your Key markets.

Speaker 5

Yes. So Eric, this is Corey just responding to you. Thanks for the question. I would tell you that our hyperscale demand and our bookings this quarter were really strong, especially across Europe, really solid bookings across North America As well as Topia with Hyperscale and we haven't really seen a slowdown in it. Going forward from our pipeline, our Pipeline broadly is really strong.

Speaker 5

It's the highest we've ever had across all of our segments, including hyperscale. So feel really good about where we are. They're continuing just To take advantage of the offering that we offer them, they're across they're with us across about 40 different markets, really utilizing us 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.

Speaker 4

Andy? No. Great. Thanks. Sorry, Andy.

Speaker 4

Sorry, go ahead.

Speaker 3

Go ahead, please.

Speaker 4

I was just going to ask a separate question. So something that We heard about recently, were some challenges about power supply for new construction in Ashburn, Some news reports that it's been severely restricted by the local utility. So, I'm just wondering if that's having any impact at all Your ability to build new capacity, particularly at the Westernlands Campus, in Ashburner, 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 hyperscalers at that campus to plan some deals or perhaps an update as to what the sales funnel looks like in Northern Virginia specifically? Thanks.

Speaker 3

Sure, Eric. So the only thing I was going to add on, sorry to interrupt you, Corey's first piece is that If you look at like the plus the megawatt signings where most of the hyperscale larger deals land, we did north of 50 megawatts. I I think our largest deal is 10 megawatts. We had 2 around 5 each. So then you had, call it, 30 megawatts of, call it, 1 to 4 megawatts in size, including new landings and So that was the only data point I was going to add to that first question.

Speaker 3

On your second question, Eric, I would say you definitely got the scoop in terms of something that's certainly very recent and late breaking. So I'll try to provide a little context and as well to answer your question. Dominion Energy, which is the primary power provider in that market, Informed its major customers very recently regarding a call it a potential pinch point in Eastern Loudoun County That could delay deliveries till 2026, so a little fair bit out there. The cause has been described to me as transmission, not generation, I. E, the pipes Or the power line infrastructure, not the actual power.

Speaker 3

The power company did not give definitive answers to most The relevant question, Fui, and I would think you and others on this call would probably have, but they have been transparent about the potential issue And they're 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 net net, if this is to come to fruition as We recently learned it will obviously likely be a slowdown in delivery of new supply in what is our largest and the largest and most in demand data center market in the world. So I see 2 possible outcomes there. 1 being called just a sense of 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 likely to be potential some winners and losers as it relates to the various developers, Including digital, so you can bring new inventory online in that market.

Speaker 3

We have, you kind of go through the rundown of our footprint, call it 40 Megawatts available, you can see in our FinCup of 500 Megawatts of IT load operational as a 2Q. We also then have, call it, 50 megawatts, which is our last building on that legacy Loudoun campus. I think it's building R in the alphabet, That 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 on our Manassas campus, which given its Position in that market seems on the lower risk side. And then we do have called based on the station that's already built about 200 megawatts on that Digital Dulles aka Westernlands, call it 1 plus gigawatt site, that is Colt, we got to figure out what's how that's going to play out in terms of delivery and time line, but I do like our odds, If any, given that we have a sitting substation already there, the steel has been erected, the capital is deployed.

Speaker 3

Net net, Given our activity in that market, only 24 megawatts of what I just mentioned other than the 40 available We'll deliver by the Q4 of 2023, just normal time line. So I don't see this as a huge impact to 2023. And then last but not least, I mean, given 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 consistently operating with Dominion. We have sub Stations and power infrastructure already built on our campuses, as I mentioned. And I think we are a very important player in that market to Help the power company address this problem, given our strategically important land parcels and easement.

Speaker 3

So sorry for the long winded response, but I did feel that that topic needs some clarity, given you had kind of just broken that news just yesterday or the day before.

Operator

The next question comes from Matt Niknam of Deutsche Bank. Please go ahead.

Speaker 6

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 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.

Speaker 3

Obviously, those things are linked, Matt. So maybe I'll have Corey speak to demand first and then I can tackle the pricing Topic?

Speaker 5

Yes, Matt, thanks. As far as demand, I mentioned hyperscaler demand earlier. Our demand across the board is really good. We've got it across 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 pipeline and in the business. So I feel really good about where the demand is and where the pipeline is.

Speaker 5

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 IT world, we're probably the best position to help them do that. And so we've seen our demand just grow across the board, enterprises, across all regions and hyperscaler as well. If you look at, the sub-one megawatt, which is your colocation interconnection, that was our 3rd highest quarter ever, Right on the back of 2 of our highest quarters ever. So I feel really good about the demand.

Speaker 3

And then Matt on your second question as it relates to pricing. I mean I would say the commentary is fairly consistent with what Bill and I shared at the NAREIT conference, it's called early June, 2020 2, on the backs of call us executing on the business and strengthening our value proposition, which Pricing of power accrued to for several years. 2022 has started off or for the first half, it's certainly been a Called Pendulum Shifting Dynamic. The demand is Certainly resonating what you've seen in the results, and the pace of inventories had a challenge keeping up with it. And What I just relayed on Loudoun County is called just one of the examples, but there's been others throughout the year as well.

Speaker 3

And that has allowed us To essentially move our list rates up numerous times, starting at the very end of 2021 through 2022, Execute at higher rates across both our larger footprint and smaller footprint, push rates on our renewal contracts, which Last quarter, we had positive cash mark to markets, certainly inflection on our cash mark to markets. We raised our guidance for the full year and we followed with a second quarter of cash mark to markets as well. And I would say all these things kind of flow through the entire, call it, commercial engagement with the customers to Escalators and other provisions. So pricing has been moving in our favor in the first half of twenty twenty two.

Speaker 1

That's great. Thank you both.

Operator

The next question comes from Michael Bilerman of Citi.

Speaker 7

Thank you. Andy, I wanted to talk just a little bit about foreign exchange. As a U. S. Dividend payer, obviously, you have to be mindful.

Speaker 7

And when I you're 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 being a U. S. Dividend payer and being a global with Global Flows and you talked about other hedging techniques and I want to know how much of that just simply Borrowing more in foreign currency, putting more currency swap hedges in place versus thinking about other potential structures. I recognize you did the SREIT, but you did that with U.

Speaker 7

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.

Speaker 3

Sure. Thanks, Michael. So I mean, and we touched a little bit on the script. We follow this playbook that you've somewhat summarized here. I mean, often when we go into more volatile Parts of the world like Latin America, we do it in partnerships.

Speaker 3

So we're not our equity is not entirely at risk. We also have put a disproportionate amount of our A portion amount of our debt in non U. S. Dollar financings hitting the Eurobond, Swissbond, Sterling bond. We have now call it close to $4,000,000,000 currency revolver commitments and so given that with that mismatch you said of having the U.

Speaker 3

S. Stock price and U. S. Listed or U. S.

Speaker 3

Currency dividends put more and more call it 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, it's been very low rates in a lot of these currencies. There has been called cash flow or CFFO Leakage. The point I was trying to highlight in the script and this year the volatility is just off the charts. I mean the year going to parity with the dollar It is the highest it's been in several years and certainly it's created a headwind to our call P and L or core FFO were share, but those same euros that got deflated in our P and L in 2022 are also Going into the ground with Europe being our largest development, it's part of the portfolio with 2 21 of our megawatts Under construction across the continent or in London.

Speaker 3

So That is typically been our playbook. We've not followed some others in terms of call it just P and L hedging, which is really Transacting with foreign currency derivatives to call takeout volatility, and That's been what we've done to date. Now I've also said in the prepared remarks, we're becoming a much more global company. There's no question of that, call it 50 plus metros, 26, 27 countries, 6 continents. And we're in a Certainly, and not in a long time, heightened volatility to currency situation.

Speaker 3

So I think we're always open to good new ideas and something we'll Consider in terms of adding to that FX playbook with various types of derivatives. Am I going to go lock the euro at This point right now, I'm not sure quite honestly. I mean, there could be a chance for some of these non And we're always looking at trying to figure out new ideas to continue to actively hedge the business and mitigate risk. And then as a follow-up, as

Speaker 7

you think about the Singapore entity that you listed and obviously you put U. S. Assets into a Singapore market, which at least Driven that that was what the market sort of wanted, but is there an element that you look at that entity, obviously it's well off its IPO price. It has a cost of capital. It would Need to transact on your U.

Speaker 7

S. Assets at much higher valuations given how strong the U. S. Dollar is. Does that so does that vehicle still work For you, number 1, and then the second part of it is, would you consider vehicles that are local assets in local markets, which would You do it in private form, would you execute that in any public form

Speaker 8

as well?

Speaker 3

So the DC REIT, digital core REIT Start out with the North America portfolio, but does have a global mandate. And really the selection of the initial assets was we had the most to pick from in North America given Our history track records, 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, I believe monetary policies are there is some governmental linkage where they try to track the U. S.

Speaker 3

Dollar in terms of currency. So it's not usually a widely divergent to the U. S. Dollar type of currency. I mean We view that vehicle as a, call it, a home for core assets with their stabilized, Fully operational, long weighted average lease terms, and again, will be a global basis.

Speaker 3

We also have ventures, like Ascenty in Latin America, which today is held by our partners Brookfield Mitsubishi or MC Digital Realty in Japan, we're partners Mitsubishi Corporation that are We have private partners today, but those certainly could evolve into 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.

Operator

The next question comes from David Barden of Bank of America. Please go ahead.

Speaker 9

Hey guys, thanks so much for taking the question. I guess, a couple. Just the first would be, Bill, you've talked about How 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 CPI based?

Speaker 9

Is it supply demand based? If you could kind of talk a little bit about your pricing strategy big picture there. And then back to 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

Speaker 2

Sure. So just to be clear, The CPI based returns are in the escalators. So we've gone from we're going from fixed annual increases to increases that are structured With minimums with floors and then CPI index increases above the floor Typically to some cap. So an example would be a 2% floor with a CPI based increase above that To say 6% as a cap and that's on an annual basis. And so we feel that that provides Some hedge for us for inflation.

Speaker 2

And then just keep in mind relative to inflation that Over 90% of our power costs are passed through and that obviously has been 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 with supply chain challenges, I would say 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 BMI program, but certainly our competitors, Whether it's materials and or labor, and 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?

Speaker 9

Yes. No, I get the direction. Thanks, Bill.

Speaker 10

Yes. And thanks, David, for the question around the Service Fabric. Yes. 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 site and it really enhances our customer experience where We're removing technical complexity.

Speaker 10

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 or multi cloud deployments So you'll see a lot more of that driving into our portfolio. And also I think we're going to see us continually extend the reach into deeper sets of utilization, which is another key KPI for us is multi site, right, where we're starting to sell a blended set of capabilities, both Scale and Colo all heavily interconnected because that's 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 SLAs and that's what the Service Fabric was able to deliver to market there.

Operator

The next question comes from Jon Atkin of RBC Capital Markets. Please go ahead.

Speaker 8

Thanks. Maybe just a follow-up to the topic raised 2 or 3 questions ago about asset recycling and the SREIT. They had their Earnings call, I guess, 12 hours ago and specifically mentioned Chicago, Dallas, Frankfurt. So I wondered if there's anything you wanted to add to those comments around Timing and are we going to see all 3 or a subset of those all 3 or what's kind of the general cadence to suggest? So that's kind of maybe the follow-up.

Speaker 8

And then The question I had was about book to bill. It seems to have lengthened this quarter. That's kind of a choppy metric because I guess it Just the nature of the deals you happen to sign in any given quarter, but it did lengthen noticeably. Anything to kind of call out there That might relate to the velocity of repeat demand that you might be seeing from the cloud providers or whether they might go through a digestion period. I Appreciate Corey's 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?

Speaker 8

Thanks.

Speaker 3

Thanks, John. I'll take them in the reverse because the The second one is pretty clean. The so there's one specific transaction that we signed that into one of our newest Frankfurt campuses That I mean, that we're just getting off that plot getting off the ground on. So that was really what lengthened that out. If you excluded that one transaction, I think the book to bill is called 8 months, so called in line with our prior track record.

Speaker 3

And then on your first I mean, definitely very pleased that DigitalCore REIT team is out of the gates with I think its official first Earnings call, not I don't think we had a lot too much to report other than the biggest news being Making progress we are making progress collectively on not moving beyond asset selection to diligence to transactional docs And have really circled assets in 3 markets as prime candidates to act on Ford's first like of Acquisition Growth. And as a reminder, that vehicle we took public last December With a call it under levered balance sheet, so it has embedded debt capacity of call it approaching $200,000,000 So it's not reliant On the equity capital markets 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 vehicle's mandate.

Speaker 8

Slide 13, just looking at the FFO per share ramp and the seasonality through the year, as we look at kind of You didn't put numbers on it, but the 3Q into 4Q ramp seems fairly modest compared to what you saw 1Q into 2Q As well as the NOI growth contribution 2Q into the current quarter. So I'm just wondering, is there anything going on during the second The year that would moderate your sequential growth in the second half, specifically into the 4th quarter. Am I reading too much into that slide? Or is there anything in particular that would cause the ramp to be so much less significant than what we've seen in the last couple of quarters?

Speaker 3

John, I think really it was just timing. We had a really large commencement quarter in 2Q. And in the back half, you do have A few things, working against us, which are those orange bars. 1 is we do Some of our beat in the Q2 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 everyone can see.

Speaker 3

And then we are closing Tereco in the coming weeks. And then lastly, call it 24 ish or 25 ish percent of our core FFO is from like The euro, the sterling, the 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 maintain our constant currency guidance, which is about Just north of 7% year over year growth at the midpoint.

Operator

The next question comes from Ari Klein of BMO Capital Markets. Please go ahead.

Speaker 11

Thanks. Maybe 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 the record pipeline that's out there. What would that look like in Nova? And then just curious how much you have in the way of expiring leases in that market over the next 12 or 24 months?

Speaker 3

Thanks, Ari. So I mean, and then again, Still subject to change because this is very new or late breaking, but it's going to paint a picture where we believe there's still going to be Demand in a tightened or slowed supply environment. So in those economics I mean, rates typically rise and economics accrued the providers. We I don't 1st and foremost, I don't see People leaving Ashburn for this delay. This isn't like a permanent feature of Ashburn.

Speaker 3

This is a, call it, a bottleneck of a portion of Ashburn. And you've got an incredible amount of customers, infrastructures and network. Ashburn grew to where it is for many reasons. And I don't see demand just running away from in the phase of this. I think the available capacity is going to become more precious.

Speaker 3

Hence that, call it, 40 megawatts of operational that we have today is more precious. And if we're able to proceed in bringing on new capacity That I outlined that becomes more precious. And if we look at our expirations, we've got about 18 or 17 megawatts corresponding to back half of this year, another 75 in 23, another 58 and 24, another 54 and 25, so call it north of 200 over the next Through the end of 2025, which is a normal amount of roll for us, but Ashburn is our largest market. So we have a lot of Of Megawatch rolling over the ensuing years.

Speaker 11

Got it. Thanks for the color. So I guess In light of what's happening, those releasing spreads or the pricing around that you would anticipate maybe being higher than You might have thought a couple of weeks ago.

Speaker 3

Correct. Yes. I mean, I think asking rates On any available capacity in Ashburn, I mean, when we got wind of this, this went out to our Tire Field, that the dynamics are shifting to Ashburn, and they could shift quite dramatically. So asking rates as well as Negotiations on renewal contracts.

Operator

The next question comes from Simon Flannery of Morgan Stanley. Please go

Speaker 12

ahead. Great. Thank you very much. Just following up on the comments on the strong cloud demand. Can you just update us on what your cloud customers are In terms of their desire to work with you versus building themselves, is there any change in that one way or the other or from one location to another?

Speaker 12

And then given some of the issues we're just talking about in Ashburn, obviously 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 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.

Speaker 2

Hey, Simon, I'll speak to the self build question. So frankly, we've the pipe scalers have been building their own For a long time, I'd say for the last 10 years and they have pursued what we call hybrid model. So they have self builds and they have been leased from 3rd parties. How much they do Any given time varies and they don't all do it at the same time. So, party A might be Doing 100% third party leasing and no self building, while Party B is relying mostly on self build and the next year they could change it up.

Speaker 2

But I would say in the current environment, so in the current environment, meaning that an environment That's challenged by supply chain and inflation. I think we're seeing an increased reliance on 3rd party leasing. And that's because We are as good as anybody at managing in what is I would characterize as a more challenging environment. Andy, you want to handle the power question in Europe?

Speaker 3

Sure. So We have on the ground teams that speak the HOKA language, worked in the municipalities, Network to the business leaders. So in each of these jurisdictions that you mentioned are top of the list, relationships To make sure that we're in constant communication, that doesn't mean something doesn't pop up like we're experiencing Ashburn episodically, But I would say we have a very good hand on the pulse of what's going on there. I mean this we're supporting 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 for new projects, and preparing for even more draconian scenarios in terms of backup fuel sources That could play out, given the fact and circumstances of what's going on in Eastern Europe. So, and That's part of our business and we have very high stakes customers that I view as partners kind of in line with Bill mentioned, who are side by side with us on these issues, right?

Speaker 3

They're with us expressing the criticality of them getting live on certain dates. So I think that partnership is we would mutually benefit in terms of being able to de risk our execution on their behalf.

Operator

The next question comes from Frank Louthan of Raymond James. Please go ahead.

Speaker 11

Great. Thank you. What conversations have you

Speaker 5

had with folks kind of looking ahead to possibly shrinking economy and so forth. Are you seeing any proactive pull forward of digitization, saving costs and so Can you give us a little bit more color on sort of the verticals that you're seeing the strengths in, in the bookings? Any shift there from your usual cast characters, any new or different industries that you're seeing coming in stronger? Thanks.

Speaker 3

Thanks, Craig. Maybe I'll start it off and then Corey and I can hand it So, we've I don't think we've seen, to date, economic softness in our demand. You've heard it from Cory's description on the forward pipeline 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 a really mission critical priority. We're not a discretionary We are facilitating performance enhancement.

Speaker 3

We're facilitating growth Through digital transformation for our customers' businesses as well as efficiencies for our customers. So I think that's And we've also been through a few economic cycles as well and the history would say 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 amount of financial services, cyber security, in EMEA, we saw this quarter's media Telecommunications, initial cloud, in Asia Pacific, similar to what we saw both in America and in EMEA, so pretty Broad Brush, as well as call it more general corporate enterprise across healthcare, manufacturing, retail, etcetera. So And I think that goes back to there's a common theme across almost all these industries about what our services are doing To enable their services.

Speaker 5

Yes. I would add to it, Frank, that We had 17 sub segments do more than $1,000,000 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, saving 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 really effective because I've got a record pipeline in colo, record pipeline in interconnection, Record pipeline in enterprise and just a record pipeline overall.

Speaker 5

So if there is an effect on inflation, then I would tell you that It's not enough that it keeps them from continuing to come to look to us to build out their infrastructure.

Speaker 2

I hope

Speaker 8

that helps.

Operator

The next question comes from Nick Del Deo of MoffettNathanson. Please go ahead.

Speaker 13

Hey, thanks for taking my questions. First, on the looking at your expected returns in the development pipeline, Pricing is up. It looks like returns are consistent, maybe falling a little bit, particularly in Europe. Is that a function of mix shift With more large deals in the pipeline or other factors that play there?

Speaker 3

Thanks, Nick. I think the returns went down 30 or 40 basis Points from 10.4 to about 10, which is really a mix shift. We've added to the base Some larger scale projects that already have or will have some anchor leases that are we're certainly on the lower end of our return But I would say the pricing is robust, particularly in Europe, which is one of our tightest regions and has got numerous markets where we're serving both large and small customers. So I attribute that's pretty much solely to that quarter over quarter mix shift.

Speaker 13

Okay. Got it. Thank you. And then maybe one more on the Ashburn power topic. I think you made a case that customers are not going to leave Ashburn in droves because of this.

Speaker 13

If it does cause any customers to kind of reconsider their concentration in Ashburn and maybe want to diversify a little bit, Say into adjacent markets like Richmond or Culpeper or Manassas, do you think you could react quickly enough to capitalize on any sort of diversification trend?

Speaker 3

So I'm not sure. I think diversification trend would likely happen outside of Like that Northern Virginia, part of the world quite honestly. And we've got shells, in Atlanta. We've got capacity in the suburbs New York City, and Chicago and Dallas. So there's our I think you could see a spillover effect in a temporary basis to other parts of the United States.

Speaker 3

But I don't think you're going to see a run into other cities in Virginia quite honestly. And I'm not I don't I mean, this is locationally sensitive workloads, Right. The infrastructure and networking has been in the ground and been built upon and grown upon for years years in Ashburn. The clouds have architected their networks with on ramp location that are locationally sensitive availability zones that have radius restrictions. And I don't the fact that this is a slowing of the Ashburn, not a halting of the Ashburn or a pocket of Ashburn To me it 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.

Operator

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.

Speaker 2

Thank you, Andrea. I'd like to wrap up our call today by recapping our highlights for the Q2 As outlined on the last page of our presentation. 1st, 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 are seeing Is reflected in our growing development pipeline. 2nd, we continue to press our advantage Through tactical and organic new market entries as the additions of Israel and Barcelona this quarter will enhance our connectivity offering in the Mediterranean, While our investment in a leading colocation and connectivity provider in South Africa is expected to close in short order.

Speaker 2

3rd, we posted stronger than expected core FFO per share results despite stiff FX headwinds And we maintained our constant currency core FFO 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, an 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 at Digital Realty who keep the Digital world turning. 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. Thank

Operator

you. The conference has now concluded. Thank you for joining today's presentation and you may now disconnect.