Digital Realty Trust Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2022

Key Takeaways

  • Digital Realty achieved a record $176 million of Q3 bookings, marking the third time in four quarters that bookings exceeded $150 million, driven by robust demand in the >1 MW segment.
  • Full-year 2022 core FFO per share guidance was lowered to $6.70–$6.75 (down $0.075 at midpoint) as a 400–500 bps drag from FX headwinds offsets underlying growth.
  • The acquisition of a majority interest in Teraco closed on August 1, adding seven South African data centers, 22,000+ cross-connects and direct subsea cable access to Digital Realty’s EMEA footprint.
  • Digital Realty’s development pipeline grew to over 400 MW with 60%+ pre-leased, reducing speculative risk and providing clear visibility into future revenue streams.
  • Northern Virginia faces power constraints through 2026, which is tightening supply and bolstering pricing power, with early spillover demand emerging in Dallas, Hillsboro and other metros.
AI Generated. May Contain Errors.
Earnings Conference Call
Digital Realty Trust Q3 2022
00:00 / 00:00

There are 15 speakers on the call.

Operator

Afternoon, and welcome to the Digital Realty Third 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 Zappler, Digital Realty's Senior Vice President of Public and Private Investor Relations. Jordan, please go ahead.

Speaker 1

Thank you, operator, and welcome everyone to Digital Realty's Q3 2022 earnings conference call. Joining me today On the 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, 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 This call will contain non GAAP financial information. Reconciliations to GAAP net income are included in the supplemental package furnished to the SEC and available on our website.

Speaker 1

One important item to note this quarter, while TeraCo's results are consolidated into our financial statements since closing on August 1st, We have excluded the Platform's contribution from leasing, backlog and other portfolio statistics that will be cited on We achieved another quarter of record bookings led by robust demand within the greater than a megawatt segment. 2nd, the signs of improvement in our core portfolio continued to emerge in the quarter with 120 basis point sequential improvement in base data center revenues on a constant currency basis. 3rd, with the closing on our investment in Teraco, we cemented our position as leading provider of colocation and connectivity in South Africa. And lastly, our management team guided by decades of experience Remains focused on navigating the current environment and maximizing the opportunity that lies before us. With that, I'd like to turn the call over to our CEO, Bill Stein.

Speaker 2

Thank you, Jordan, and thank you everyone for joining our call. The world has experienced significant change so far in 2022 and Digital Realty is adapting to that change. Our business continues to be levered to powerful long term secular demand trends broadly driven by ongoing digital transformation and the growth And IT and data as our record leasing results underscore. We also have an unmatched global operating footprint That is supported by a strong development pipeline that allows us to capture opportunities wherever they may emerge. As you all understand, global capital markets have become extraordinarily volatile and interest rates have risen sharply from historic lows to levels that we have not seen since 2,008.

Speaker 2

At the same time, The U. S. Dollar has strengthened against the euro to levels not seen in nearly 20 years. While you've had to look back Over 30 years to find the last time the dollar was this elevated against the pound or the yen. This volatility is being driven by a number of factors from a global economy emerging from the pandemic to the war in Ukraine And of course, the heightened resolve of central bankers to tap down on elevated global inflation.

Speaker 2

And while the underlying fundamentals of our business remain strong and Fortune can indeed favor the brave, experience Has taught us that an ounce of prevention is worth a pound of cure, and we feel that it is most prudent today To adapt to the current environment by: 1, prioritizing and sharpening the lens through which we view new investments to ensure that we are focused on the most strategic transactions that offer the highest potential risk adjusted returns 2, By pressing our newly gained advantage on pricing and improving our internal growth profile and the longer term durability of our cash flows And 3, by enhancing liquidity to ensure that we have the capital to meet the commitments that we have made to our customers while maintaining a comfortable cushion. With over 300 data centers around the world and a revenue base of over $4,500,000,000 Digital Realty remains focused on how to best position ourselves for the long run. Our 3rd quarter results were strong With a record $176,000,000 of new bookings, making the 3rd time in the past 4 quarters that our bookings have exceeded $150,000,000 Core FFO per share was $1.67 despite stiff FX and interest rate headwinds.

Speaker 2

On a constant currency basis, we see evidence of the turn that is starting to take shape in our core portfolio. Digital Realty's global platform enables us to capture demand wherever it emerges. North America was the standout this quarter With our largest deals landing in the region, multinational companies are using platform digital to enable digital transformation across multiple regions And metros globally. A good example of this is a large multisiteenterprise built to suit Looking ahead, sales activity remains healthy as the secular trends driving data center demand remain in place. 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, but the world is changing.

Speaker 2

We are seeing sales cycle lengthen and global uncertainty extends decision times. Importantly, We are pushing prices higher to reflect tightening supply and rising costs. Admittedly, Some of the deals this quarter have been in process for many months and do not fully reflect today's environment. Today, New leases are being priced to reflect current market conditions. And while this will likely be an iterative process, We expect the strong secular trends driving demand toward 3rd party data centers to continue for years to come.

Speaker 2

Andy will provide further color on our results and our outlook shortly. During the Q3, We successfully completed the acquisition of a majority interest in Teraco, a leading carrier and cloud neutral data center and interconnection Services Provider in South Africa. Carico is a gem with 7 data centers across 3 metros And robust interconnectivity, including more than 22,000 crossconnects, 7 cloud on ramps And direct access to 7 subsea cables with more on the way. Tereco has plenty of room to expand and is expected to generate some of the best growth within our portfolio. Erika uniquely enhances our position in EMEA, complementing our existing operations in Eastern Africa through Icolo, Western Africa through Medallion and in Europe and the Mediterranean with InterXion, Altus IT, Lambda's Helix and our newest JV with Mivni in Israel.

Speaker 2

These are all highly connected assets that leverage Subsea cable landing and brings the world closer together linking Europe, Asia, the Middle East and Africa. Consistent with that strategy, we recently acquired land on the Greek island of Crete to create an interconnection hub In the Eastern Mediterranean to complement our existing hub in Marseille along with developing hubs in Barcelona and Israel, which will feed additional traffic into Greece, the Balkans, Turkey and Northern Africa. We expect that this highly differentiated project will generate strong double digit returns while enhancing the value of our existing facilities in the region. Moving to our dispositions in the quarter. We sold a non core mixed use data center property in Dallas for $206,000,000 and reached an agreement with DigitalCore REIT To sell a 25% interest in a Frankfort data center campus for $140,000,000 with an option to acquire up to 90% of the same campus plus a 90% share of 1 of our Dallas data centers in a larger transaction valued at approximately $750,000,000 Both transactions are subject to unitholder approval with a vote expected for November.

Speaker 2

Funding organic new market entry through the disposition of stabilized facilities is our preferred source of capital. It enables us to leverage Platform Digital to capitalize on value creation opportunities and harvest capital once those facilities have stabilized. We also favor joint ventures like the one in Israel where we leverage the local knowledge and expertise of our partner and pair that with Platform Digital to expand our global footprint and to better serve our customers. Before turning it over to Andy, I'd like to update you on our ESG success shown on Page 3 of our earnings presentation. We were honored to be recognized by GRESB as the Sector Leader for Technology and Science category in the Americas for the 2nd consecutive year, Maintaining our 5 star rating from this leading investor driven ESG benchmarking organization.

Speaker 2

We are proud of our ESG related efforts. And while the awards and recognition are nice, we are focused on ESG because our customers demand it And because quite simply, it is the right thing to do. 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. Turning to Page 5. As Bill noted, we signed record bookings of $176,000,000 With a $13,000,000 contribution from interconnection during the Q3, excluding the results from Tereco. The Greater Than A Megawatt Business in the Americas was the big driver of this quarter's record leasing and nearly $100,000,000 signed. Sub 1 Megawatt plus interconnection accounted for 24% of the record quarterly bookings, while the Shell portion of a large multi site enterprise build to suit deal fell into our other category.

Speaker 3

Importantly, As we've discussed, we have meaningfully shifted our cadence toward further insulating our portfolio from the effects of inflation through the addition of CPI based escalators into our new leases. While more than 95% of our portfolio includes rent escalation clauses, Less than 20% are specifically tied to CPI, while the balance are fixed. In our highest leasing volume quarter ever, We were able to achieve CPI based escalators on 40% of the leases signed in the quarter, which demonstrates our resolve and our customers' acknowledgment Of this important factor, the balance of our leases signed in 3Q include fixed rent escalators. Moving on to markets. In North America, Portland and Dallas were particularly strong with large deals landing in each of those metros, Demand in Northern Virginia also remained high.

Speaker 3

In EMEA, totals were consistent with expectations with particular strength in Paris. While Sao Paulo led in LatAm and Osaka led the APAC region. These deals drove additional starts within our development pipeline, Which grew to over 400 megawatts, but is also now more than 60% pre leased, mitigating much of the risk related to this capital spend and providing significant visibility into future revenue. As Bill touched on in his remarks, We signed 4 leases in the quarter with a large multinational financial services customer that has fully embarked upon its digital transformation journey. This large multi site, multi market build to suit transaction drove the upside in our greater than 1 megawatt North America leasing And also serve to increase our development pipeline sequentially while reducing our anticipated yields.

Speaker 3

Importantly, This deal is structured as a yield on cost development supported by a long term triple net lease to a strong investment grade credit with fixed escalators, which serves to insulate Digital Realty from construction costs and operating expense volatility. Excluding this transaction, Our development life cycle average yield will be closer to the yield we presented last quarter. During the Q3, We added another 103 new customers, continuing the 100 plus new logos we've added each quarter since the closing of the InterXion transaction 2.5 years ago. Key customer wins in the quarter include a Global 2,000 luxury goods maker is expanding its capabilities from digital to add data exchange with its strategic cloud providers to its existing capabilities. Global 2000 Multinational Technology manufacturer is expanding its hybrid IT capability in multiple metros across 2 global regions With Platform Digital, a Global 2000 retailer is rationalizing its data centers and joining Platform Digital as part of its hybrid IT architecture To have greater proximity to a key cloud service provider while enhancing both performance and ecosystem benefits.

Speaker 3

A Global 100 top insurance company is rationalizing its data centers and moving to Platform Digital Gain strong access to 2 leading cloud service providers. Landing with us as a new logo in 4Q 2021, A Global 2000 U. S. Energy provider expanded into 2 more metros with Digital Realty as it continues to re architect its network as part of a long Hybrid IT Transformation. And a Global 2000 Aerospace and Defense Contractor is rationalizing its data center portfolio, while supporting the rearchitecture of its network and interconnecting with cloud providers on platform digital.

Speaker 3

Turning to our backlog on Page 7. The current backlog of signed but not yet commenced leases grew to $466,000,000 by quarterend As our record signings were partially offset by $90,000,000 of commencement, the lag between signings and commencements moved up to 17 months For the leases signed in the Q3 due to the large multi site enterprise build to suit deal discussed by Bill a moment ago. Excluding this deal, our signed to commence lag was under 8 months consistent with our historical average. Approximately 25% of our record backlog is slated to commence in the 4th quarter, while another 45% will commence in 2023, Split fairly evenly throughout the first and second halves of next year. Moving on to Page 8, we signed 100 and 0 to 1 Megawatt Renewals were positive across each region and up 3.1% overall, demonstrating the criticality of these deployments the differentiation of our facilities.

Speaker 3

This product segment has historically experienced steadily positive renewal rates and cash renewal rates have steadily increased throughout this year. After 2 consecutive 3 plus percent bumps in 1Q and 2Q, the cash mark to market was way down By the greater than a megawatt segment in the Q3. Despite this result, we are confident in a slightly positive cash releasing spread for the full year 2022. Importantly, we are encouraged by the general trajectory of market rents across our product line. We expect that the dislocation of volatility of capital markets coupled with rising costs and the reduced availability of power in several markets, Including the world's largest market Loudoun County, Virginia is constraining the ability to bring on new data center capacity despite the secular demand for data center infrastructure.

Speaker 3

With regard to power delivery in Northern Virginia, We are continuing to work with the primary power provider to ensure appropriate allocations with an acute focus on capacity needed Support our customers in this market. We have an incredibly unique footprint in Loudoun and a set of capabilities that we are working to tap into in order to take advantage of this backdrop of continuing tightening market fundamentals. In terms of operating performance, Total portfolio occupancy rebounded by 80 basis points sequentially driven by the strong commencements. 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. Same capital cash NOI growth fell 7.3% in the 3rd quarter, negatively impacted by another 480 basis point FX headwind.

Speaker 3

This is disappointing on the surface, but once the noise is removed, the improving operating picture that we have been painting starts to emerge. On a constant currency basis, data center operating revenue, rental revenue and interconnection was actually up 10 basis points year over year improved by 120 basis points sequentially, demonstrating the turn that has started to take hold in our core operations. The sequential step up was supported by a 50 basis point occupancy improvement over the Q2 along with the benefits of the positive releasing spreads We've seen year to date. Turning to our risk mitigation strategies on Page 9. 56 of our 3rd quarter operating revenue was denominated in U.

Speaker 3

S. Dollars with 21% in euros, 6% in Singapore dollars, 5% in British pounds And 2% in Japanese yen. The U. S. Dollar continued to strengthen over the last few months, negatively impacting Same capital revenue growth by 5.30 basis points and NOI growth by 4.80 basis points year over year As shown in our constant currency analysis on Page 10, this strong headwind contrasts with typical FX impacts of 50 to 100 basis points in either direction during periods with more normal FX volatility.

Speaker 3

While the outsized Appreciation of the euro this year has been a major driver of headwinds for our P and L. It also represents the lion's share of our development pipeline. To be clear, we are operating and then investing locally rather than repatriating proceeds into U. S. Dollars.

Speaker 3

Our operations, Investment pipeline and funding in locally denominated debt serve as a natural hedge. As we discussed on our call last quarter, Given the growth of our global portfolio along with heightened FX volatility, we took a closer look at our hedging strategy during the Q3 and executed additional swaps to mitigate our remaining FX exposure. In August, we executed a U. S. Dollar to euro Currency swap against an existing $1,000,000,000 tranche of 20.27 notes outstanding and in late September Alongside our US550 $1,000,000 bond, we swapped those borrowings in the euro and Japanese yen, which also reduced the effective interest rate on those 5 year notes to just 3% versus the 5.55% coupon achieved via the offering.

Speaker 3

In terms of earnings growth, we reported 3rd quarter core FFO per share of $1.67 which is 1% higher on a year over year basis And 3% lower sequentially due to the negative impact of FX, higher interest and operating expenses The initial dilution we incurred from the closure of Tereco, which is consistent with the forecast we provided last quarter. On a constant currency basis, core FFO was 6% higher year over year, but down a penny sequentially. The reported core FFO underperformance versus our prior expectation for the quarter was purely a function of greater than expected FX headwinds. Looking forward, we expect core FFO per share will remain under pressure from stiff FX headwinds given the appreciation of the U. S.

Speaker 3

Dollar, So this should be offset by core growth. As you can see from the bridge on Page 11, we expect FFO will remain flat sequentially in the 4th quarter as FX and interest expense headwinds are partly balanced by NOI growth. Accordingly, We've adjusted our underlying guidance assumptions to reflect the continued pressures of FX and interest rates. We are also updating our core FFO per share guidance range for the full year 2022 to $6.70 to 6.75 reflecting a $0.075 per share adjustment at the midpoint of the range. Importantly, due to the sharper than expected move in interest rates since our last call, We are reducing our constant currency core FFO per share range by $0.025 at the midpoint to a new range of 6.95 to $7 for 2022, which represents approximately 7% growth over 2021.

Speaker 3

We expect currency headwinds could represent a 400 to 500 basis point drag on full year 2020 revenue and core FFO per share growth. A review of our leverage is on Page 12. Our reported leverage ratio at quarter end was 6.7 times, while fixed charge coverage is at 5.5 times. We drew $400,000,000 down from last September's forward equity offering as part of our funding for Tereco. So pro form a for the remaining forward equity and adjusting for our full quarter's contribution from Tereco, our leverage ratio drops to 6.4 times, While pro form a fixed charge coverage is 5.7 times.

Speaker 3

While leverage is above our historical average, we have bolstered our liquidity to ensure that we have the capital in hand To fund our committed development spend throughout the end of next year and maintain a comfortable cushion. Since our last Earnings call, we have raised or received commitments for approximately $2,000,000,000 of debt capital at an effective blended average of just over 3%. These include more than $650,000,000 of term loan commitments received subsequent to quarter end. With cash and forward equity outstanding Totaling more than $700,000,000 we have increased our current available liquidity to approximately 3,000,000,000 We expect to see leverage moderate back toward our longer term target over time through a combination of non core dispositions, Joint ventures of core holdings, lease up of available capacity and the retention of free cash flow. As Bill discussed, the current capital markets environment and increased cost of capital have led us to sharpen our lens and prioritize new investments to those that are of the highest strategic merit and offer the best potential risk adjusted returns.

Speaker 3

Our financial strategy includes a diverse menu of available capital options while minimizing the related cost of our liabilities. The execution against this financing strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital and enables us to fund our strategic objectives. As you can see from the chart on Page 13, our weighted average debt maturity is about 5.5 years And our weighted average coupon is 2.4%. Approximately 3 quarters of our debt is non U. S.

Speaker 3

Dollar denominated, Reflecting the growth of our global platform. More than 80% of our net debt is fixed rate and 97% of our debt is unsecured, We repaid the remainder of a 2022 debt earlier this month and have only a small Swiss bond maturing in 2023. 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. As a reminder, we ask participants to limit themselves And our first question will come from John Atkins of RBC. Please go ahead.

Speaker 4

Thanks very much. I wondered if it's possible to kind of frame the magnitude and the timing of the CapEx associated with all the leasing that you did during the quarter And then maybe to kind of bring it home to the $3,000,000,000 in liquidity that you talked about, sources of funding that incremental CapEx?

Speaker 3

Thanks, John. So if you look at our development life cycle, That lays it out region by region. And it has, call it, let's say, starts with a, call it, just $3,800,000,000 of, call it, approved projects. And that includes all the leases signed during the last quarter as well as some projects that Not leased because it's only 60% pre leased roughly. If you kind of break that down over the next call it 5 quarters, You're spending about $2,700,000,000 of that.

Speaker 3

Again, that is not all contractual spend, Only a portion of that is tied to customer contracts. So if you exclude the call it assumptive or Speculative spend, you call it closer to $2,000,000,000 The $3,000,000,000 of liquidity I mentioned, That includes, call it, really 2 parts, dollars 1,700,000,000 of cash and revolver capacity and then $1,200,000,000 of the Undrawn equity forward and new U. S. Dollar term loan commitments in hand. So that call totals just about $3,000,000,000 of contractual liquidity right now.

Speaker 3

That is everything we have right this minute. We are also continuing with our normal game plan of Non core dispositions, call it $1,500,000,000 over several quarters, as well as joint ventures on core holdings. So we feel pretty good about being able to fund this attractive growth for our customers.

Speaker 4

And then secondly on the 17 month metric that you mentioned in the earnings release and in the script about essentially book to bill And then putting that in the context of what Bill said about elongated sales cycles, how much of that is due to Perhaps lack of server availability on part of the customers or from your standpoint, delays in power procurement Or ability to construct just given supply chain challenges facing data center infrastructure?

Speaker 3

I would parse those in 2 topics and I'd say coincidentally look like they're connected. What the long the extended book to bill really was our largest transaction was with a large multinational financial Service customer, it's been in the works for really since the very beginning of this year. It's across 4 different locations. It's incredible. It's really flattered to be part of their digital transformation, which is really going to cloud in a hybrid IT fashion.

Speaker 3

And given those projects are literally at land stage, we're designing to their specifications, That is what's extending that out. And if you carve those forward transactions with that customer out, you really had a normal book to bill cycle. I think I'll let Bill comment on what he referenced in terms of call it what we're seeing in terms of the business in terms of somewhat

Speaker 2

It's a little bit elongated, John. But as Andy said it, If you were to strip out the 4 build to suits that are in this quarter, the effect On the book to bill this quarter would be minimal.

Operator

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

Speaker 5

Great. Thank you. Have you guys increased pricing on cross connects as well? And if so, what is sort of the How much have you raised that and what percentage are on the new pricing? And then going forward, you're fairly creative as far as the getting the Effective rate on your financing down close to 3%.

Speaker 5

Is that an what sort of expectation do you have for what sort of financing you can get going forward? Do you think you can keep it around that Thanks.

Speaker 3

Thanks, Frank. Maybe Chris and I will ham and egg pieces through our M and A and have been aligning our cross connect pricing across various regions, including the latest and greatest addition to digital with Teraco, the leading platform across South Africa. So it's not necessarily a uniform step shift, but We have been investing in that platform, bringing more value to our customers and driving commensurate increases in prices. Chris, anything you want to add on cross connect prices or any data points there?

Speaker 6

Yes, absolutely. Thanks for the question, Frank. A couple of points, right? We definitely take a customer led approach on Aligning value to the overall reach and overall offering you're able to provide them. I would echo Andy's sentiment that like in the Weston Building, I think we Talked about it a couple of quarters ago where we're driving that consistency of our overall interconnection products and capabilities in that market Truly just delivering more value and you're going to start to see more revenue pick up in the next year on being able to uniformly bring that into the overall Platform digital delivery capabilities.

Speaker 6

I'd say this next piece is more probably pointed to your question is in EMEA, right, where we've been Talking for some time now about increasing those prices and that's been performing great. And I think that's something that you'll continue to see growing, Which is represented in the interconnection numbers that we put up this last quarter. So you'll see that performing I think much better over the course of the next year here.

Speaker 3

And just to not to leave you without any numbers in terms of spec rate or growth increases, I mean, The ranges are pretty wide, but it's anywhere from, call it, low mid single digits to some definitely some outliers that are in the teens at the very least. I think the overall pricing environment is probably even more relevant to the heart of your question though. We are continuing to see Improving pricing power across our platform, whether it's in our, let's call it, less than a megawatt enterprise colocation footprint, We're, I'd say, call it 10% to 15% sequential pricing changes in many markets and also seeing Similar types of increases in the larger plus than a megawatt as well. In relation to your second question, I mean, Big kudos to the Digital Realty Finance Capital Markets team. I mean, really, Called staying nimble and acting fast in a volatile environment and really bringing together call it, what is it, dollars 2,000,000,000 of capital in call it 60 days.

Speaker 3

We've also been tapping into, called incremental FX hedgings, Given the more volatile business volatile FX world and a more global business, and we've been able to call it Get our cost of capital, call it, roughly 3%. I'm not sure that's a permanent number where we go from here. We've had, call it, the most rapid increase In the U. S. Treasury in 40 years or Fed funds rates in 40 years, but we're definitely using all the tools in our toolkit to maximize those menu of options and drive down the cost of our capital.

Speaker 5

Great. Thank you very much.

Operator

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

Speaker 7

Hey guys, thanks so much for taking the questions. I guess First question would be, Andy, can you walk us through how This bubble of lease renewals in 2023 is going to work out. I guess on supplement page 23, 15% of annualized rent is coming due next year. You've had some success, with positive lease renewing spreads Year to date and it'd be helpful to kind of get some comfort level there. And then I guess the follow-up would be, I think we were hoping to get some comfort on what your Understanding with Dominion in Northern Virginia Energy Availability would be in the development pipeline on a go forward basis.

Speaker 7

And if you could kind of share what your latest thinking is there? Thanks.

Speaker 3

Thanks, Steve. Maybe I'll take them in reverse order because I think the second question ties a little bit into your first question. So As a broader reminder, literally, I think it was 90 days ago to the day, we got the, call it, the newer news from Dominion on the pinch Eastern Lounder County on power deliveries. I can tell you we're in regular dialogue with the power company on a path forward. But I would say also that the essence of the initial messaging remains intact, because there's just going to be significantly less power provided to ongoing development in this region until 2026.

Speaker 3

The feedback we've received Is that 2026? We should be back to more normal practices. So this is not a permanent thing. It's due to transmission, not generation, And that's what they expressed to us. But between now and then, it's going to be less supply in the biggest consistently high demand market.

Speaker 3

What that means and what we're seeing and I alluded to earlier is that the pricing power pendulum is shifting back towards us. And it's nice to be, I believe, the largest incumbent with, call it, 500 megawatts of in place capacity and Just under, I think, 200, call it, coming due contractually, expiration wise in the next 3 years. When it comes to available capacity, We've sold quite well in that market. We probably in hindsight wish we didn't do so well, but who knew this was going I don't think any market participant will expect this. We do our shelves are not completely barren, and we do have a 200 megawatt Parcel in Manassas that is to date in the unaffected zone, which is really nice to have in times like this.

Speaker 3

And while I cannot guarantee it right now, I think we're optimistic that the responsible parties in Loudoun will work with digital to deliver on behalf of those customers That have signed contracts to grow with us and are sitting in our backlog. Turning to your second question, The pricing power of pendulum again, I think is continuing to move in the favor of the providers given that demand has been robust for so long and the outlook Is looking to be continue to be such and the supply has just been absorbed. You pointed out The 15%, which is like a less than a megawatt piece of our exploration schedule, I mean that's in times like these when prices are moving your friend, it's nice to have more bites at the apple To continue to ensure commensurate value is generated for our contracts. So I feel that is usually our most network dense sticky portion that consistently on the front end of our exploration schedule side, feel pretty darn good about that in terms of not only retention, but price And I think even the piece you didn't mention in the larger of the megawatt, I think that my commentary around Northern Virginia and other New markets, I think, will also continue this trend of more positive cash releasing spreads, which were Positive the first two quarters this year and remain positive on a full year basis for 2022.

Operator

The next question comes from Michael Rollins of Citi. Please go ahead. Hi.

Speaker 8

Thanks for taking the questions. So with some of the comments on demand, but also A lengthening of the sales cycle, should investors look at Slide 5 a little differently in terms of The range of sales outcomes that you've achieved over the last 6 to 8 quarters relative to what the next 6 quarters or 4 quarters might look like. And then secondly, just given some of the comments that you provided on currency On interest rates, if everything stays where it is currently, can you share a sense of what the potential

Speaker 3

So, we'll do them in reverse and I'll hit the currency and interest rates and then we can talk to pitch over to Corey about call it Expectations on signings for call it the next several quarters. The I mean based on where we're seeing the currencies, I would say, especially precipitated by, I think, the activity in the sterling the British Sterling pound, over the last several I still believe currencies will remain somewhat of a headwind in 2023 relative to 2022. I don't think that's a permanent fixture, but based on the pace of, call it, governmental base rate increases and the currency differentials. So we haven't put that together nor the interest rate called headwind. The interest rate 1 is Excuse me, I should say, FX is going to be less of a headwind in my gut for 2023 than 2022.

Speaker 3

I mean, we're just absorbing, call it, 400 basis points. So I don't have the exact number, but I don't see it being even half of that in the end of the day or in the next year, Unless you literally have the euro and the pound literally drop another 30% over the next 12 months. Interest rates, We have called 80 plus percent of our debt is fixed rate. We saw in the last quarter looking to Access Capital across various markets and various currencies that align with our asset and revenue base To essentially buck some of the interest rate trend, but I mean I think a good proxy is if you looked at call it the Quantity of our floating rate debt and you apply what the expected software increases over the next 12 months, that probably give you a ballpark of terms of on a year over year basis, Mike. In terms of I'll turn it back to Corey to how we're thinking about range of outcomes on new signings.

Speaker 5

Yes. So thanks Mike for the question and Andy for the let me go second. First off, I'll tell you that we don't forecast, so I'm not going to try to Play a game on what it's going to look like. But what I would tell you from a demand and a pipeline perspective, our multi quarter pipeline is really robust, I mean, not robust. I'll say resilient and very healthy.

Speaker 5

And that comes off of our quarter that was our top quarter ever. The demand is healthy across all regions. The one softness area would probably be in the small enterprises, where they're having a little bit more I'd say they're more susceptible To the macro issues, to the war in Europe, to all those different items. And so we saw those cycles lengthening moderated some of our results in the somewhat megawatt. But broadly across the globe, we've got really strong hyperscale demand.

Speaker 5

We've got strong demand and increasing demand from, call it, our large, 1,000,000,000 plus multinationals. Our channel business is going really well. We're seeing new logos uptick from that cohort as well as the possible demand from just new signings in that area. So Positive from a broad space. It's resilient and really healthy after our best quarter ever.

Speaker 9

Thanks, Mike.

Operator

The next question comes from Eric Luebchow of Wells Fargo. Please go ahead.

Speaker 10

Great. Thanks for taking the question. As we think about your the impact of inflation on your development cost next Beyond, just I believe you have some VMI contracts renewing in early 2023 for your equipment spend. Maybe you could talk about What your expectations are there in terms of cost inflation on development as we enter the new year? And then second, As we think about the better pricing power and perhaps some constraints on new development in markets like Ashburn, are you in a position to perhaps have Declining capital intensity in the next few years, which would kind of help reduce your needs for capital or how should we think about that dynamic as well?

Speaker 10

Thank you.

Speaker 3

Sure. Thanks, Eric. So we have numerous risk mitigations when it comes To our development and construction, which includes our vendor management inventory program you mentioned, other supplier contracts, At a more local level bundling our projects with GCs and subcontractors. So When you put that all together in the current backdrop environment and we look at, call it, the next batch, which will be projects Probably more back half of 'twenty three into 'twenty four, on a fully all including all Based into the whole basis of the project, we're still estimating that our costs are, call it, in the mid- to high single digits ish type of potential Increase. Based on current outlook, and you touched a little bit on the supply demand dynamic, we believe that The rate of rate growth will outpace that or at least hold firm that our yields will hang in there and not be degraded by that inflationary impact.

Speaker 3

And that's something we're working day in, day out to keep focused And working with our great vendors around the world on. When it comes to pricing power, when it comes to capital intensity, I would just echo really what Bill said at the outset of this call that in the last several months, The world has become more volatile. The capital markets have become more challenged. The talk of a looming recession, The war in Eastern Europe has continued and we're raising the bar at digital when it comes to focus on our strategic priorities. And we obviously have an incredible pipeline of projects.

Speaker 3

We have probably one of the most distinguished land banks development and because we're focusing on projects that are delivering on those strategic priorities and delivering the highest risk adjusted returns.

Speaker 8

Thanks, Andy.

Speaker 3

Thanks.

Operator

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

Speaker 11

Great. Thank you. Andy, I wonder if you could talk about the M and A market a little bit, both in terms of Your ability to sell your assets given the sort of the derating of the public company multiples, have you seen any change in the market on the private side And how will that affect your fundraising? And you've obviously bought Tereco. How are you thinking about acquisitions in terms of market expansions or Expanding in existing markets over the next year or 2.

Speaker 3

We didn't get to share much on Tereco. And I'll start with that, then I'm going to hand it to Greg to talk about both of your questions. Having spent Some time down in region with the Teraco team, I think we're even more pleased with the incredible addition to our Global platform, not only in terms of the most highly connected destinations across South Africa, but we're a really fantastic team Delivering on behalf of their customers, our customers and really growing that platform. I apologize, we did We obviously consolidated Tereco into our financials, but we did not roll them out into all the stats, and we just closed in, call it, the middle of August. That's coming in a quarter's time.

Speaker 3

So please be patient with us on that. But I'll give it to Greg and maybe speak to your question.

Speaker 12

Yes. Thanks for the question, Simon. Look, I would say pricing on recent transactions in the private market have remained firm. Look, we're fortunate to be in a sector that continues to experience growth in sector demand. That really isn't common for other sectors And we happen to have a product that's scarce in the market with growing demand.

Speaker 12

When you try to put some numbers to that, If you just look at the last two quarters in the second and third quarter, it's about $1,700,000,000 transactions and pricing has been very firm in terms of Cap rate and per kw basis. So look, today, look, the private capital again is looking to Increased their exposure to the space where there's a limited amount of supply. So to date, it's remained firm.

Operator

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

Speaker 9

Hey, guys. Thank you for taking the questions. Just first on macro, and I think there may have been a question alluding to this before, but I just want to get a better sense Whether you're seeing tightening financial conditions maybe starting to have an impact on your customers' propensity or willingness to invest Further in digital transformation as they think about 2023 and whether it's varied across hyperscale enterprise or whether it's varied by geography. And then I have one housekeeping follow-up on Tereco. Maybe Andy, if you can talk about any incremental color you can give on expected contributions Tereco perhaps in Q4 or maybe on a more annualized basis heading into next year?

Speaker 9

Thanks.

Speaker 3

So I'll handle the more mundane question on Tereco, and I'll toss it to Corey a little bit on buyer behavior in the current environment. So Tereco, I believe, did roughly $28,000,000 for just about 1.5 months, about $28,000,000 of revenue, dollars 16,000,000 of EBITDA. It I would say its signings were called and again, did not include any of our numbers, recall it just don't know the 6 megawatts Plus a decent chunk of connectivity. It does have a very sizable backlog. It added, I think, a sizable amount to our construction, called almost $500,000,000 to our construction in progress.

Speaker 3

And based on what we're seeing They're working on right now, feeling very good about the growth of that platform. Corey, do you want to hit on call buyer behavior in the current environment?

Speaker 5

I'll try to get that. Hey, Matt, thank you very much for the question. I would Tell you that the financial situation changes, pricing rates that we've risen have all affected, as I mentioned earlier, kind of small is the multinational $1,000,000,000 plus companies or our channel partners that are really our path towards the enterprise more So I think on that it's been moderated a little bit in the small enterprise. When you look at the hyperscale, we continue to see strong demand on the hyperscale across All regions. I think we mentioned Portland was our largest this past quarter.

Speaker 5

Paris was significant in EMEA. Osaka was significant in AP. And so we're seeing that across the board. We had large scale deals as mentioned earlier with an enterprise customer in Texas and Virginia. And so we're seeing larger scale deals.

Speaker 5

We're seeing it continue. Just a little bit of moderation, I think, in the small enterprises, But our pipeline is strong, resilient across all the different regions as well for you. So I think that hits everything you asked, Matt.

Operator

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

Speaker 13

Thanks. Bill, you mentioned sharpening the lens for new investments. Can you talk about practically speaking what changes there? And then Andy, just on the minus 8.8% renewal spreads for larger deals. You mentioned that negotiations there began months ago.

Speaker 13

What would those rates kind of look like if they were done today?

Speaker 2

Sharpening the lens, I think practically what you'll see is over time, higher returns From the deals that we do and lower returning assets or investments dropping out of the mix. That's the practical implications. Obviously, it's more complicated than that because we look at risk adjusted returns, we look at What return should be in any given market, what type of whether it's a build to suit or Speculative development, how much leasing there is, whether there's any magnetic attributes to the customer. But In general, I think you'll see over time higher yields.

Speaker 3

And then Ari, I get your question, I just want to apologize, I misspoke in answering Matt's question. We had 2 months, not a month and a half of the TeraCo, those numbers I quoted you in our financials. So just want to clean that one up. So as I mentioned before, the cash mark to markets have been moving in our favor For call it since we turned into 2022 and I would say it's been strengthening along the way and you saw that in our numbers and you saw that in our guidance. That being said, as I've said before, we're not going to be universally at this minute without any negative mark across any different product in any given quarter.

Speaker 3

I think the driver of the negative 8.8 actually was A data center, a one off data center we acquired a couple of years back in Chicago that customers contract was in place. It was above market at the time. The markets in Chicago had not caught up to when it rolled. I think the more strategic important story about that asset is that We literally just green light the conversion of some of the shelf space into growing our colo footprint in the suburbs of Chicago, Which has been a really great success more recently. To go into your question on call it, I think it's bigger deals, price action In just this past year, not our biggest deal that I mentioned, which is the call build to suit, but I think our 2nd biggest deal, which was a sizable plus megawatt deal, that transaction in North America Signed and caught almost 18% net effective rates higher Then a similar size transaction did, call it, a year prior.

Speaker 3

And the remaining space in that actually facility It's probably being marketed up another 10%, 15%. Now we haven't in that remaining space. So you're seeing a quick Reversal in some of these markets where again demand is continually as robust and diverse and the supply is being dwindled down.

Operator

The next question comes from David Guarino of Green Street. Please go ahead.

Speaker 8

Thanks. On the inclusion of the CPI linked rent escalators, is that a trend you're seeing from hyperscale tenants? Or is that more heavily skewed towards the 0 to 1 megawatt And then the second question is switching gears, just with the supply and power restrictions in a few of the top markets like Northern Virginia, do you think that's why you saw such Strong demand in Dallas and Hillsboro this quarter. And are there any other spillover markets that you're seeing early signs of demand picking up that Maybe they could have went to Nova if there was capacity there?

Speaker 3

Thanks, David. So First off, CPI was a predominant term, I would say, mostly in our European footprint even before inflation was such a buzzword. Hence, and that's the majority of call it just under 20% of our in place contracts that have CPI escalations. We've been, call it, in the face of the current environment, making this a priority in our customer discussions. And it's not we're seeking that on larger contracts as well as larger contracts as well as smaller contracts.

Speaker 3

I would Tell you on a smaller contract, that already likely has a shorter duration, I. E, 2 years, 3 years, it's probably a little bit less priority because you get another bite at the apple depending on the market rates, but we're trying to push it in those contracts. But if you look at our signings, We had a record quarter, 176 40% had CPI escalation. Some of them had caps We're just call it 2% or 3% on the floor and call it 5% or 6% on the cap, but we were able to Include in a significant percentage of our greater than 1 megawatt signings, the CPI escalation, And those look greater than 1 megawatt signs are typically the longest contracts, call it, 10 years, hence, where it's the most needed Because we won't get another opportunity to reset to the appropriate market rates for a fair bit of time. When it goes to Nova spillover Dallas, Portland, I don't think our activity I would not describe our activity as spillover activity.

Speaker 3

The Dallas activity, a good portion of that was this build to suit customer Demand, that customer picked they wanted multiple cities, so they were always going to pick not just Nova. And then the Portland demand was very, call it, locational sensitive. I do think you and this is a I mean, you don't Typically by data centers like rushing to the grocery store and grab stuff off the shelf and running to the checkout. So in the last 90 days when this Nova power issues come on the I think the spillover effects are still playing out as we speak. I would say we see more of the early interest of spillover effects To call it Atlanta, where we have, call it, almost 30 megawatt Shell capacity, Northern New Jersey, potentially Chicago, Dallas could be in the mix as well, but as well as I mean nearby spillovertex where in Manassas 200 megawatts.

Operator

The next question comes from Michael Elias of Cowen and Company. Please go ahead.

Speaker 14

Thanks for squeezing me in guys and congrats on the leasing. Just two questions from me. First is, as you think of Northern Virginia and The power delays, you mentioned how the conversations are evolving with Dominion, but how are the conversations going with the customers themselves who have pre leased capacity? Is there any risk to those leases maybe being canceled or anything like that? And then second, your leverage is now running around 6 point 7 times or 6.4 if we adjust for forward.

Speaker 14

Based on the conversations you've had with the rating agencies, what's the highest level of leverage that You can hold before you run the risk of maybe being downgraded or losing that investment grade status. Thank you.

Speaker 3

Thanks, Michael. I think we saved the best for last. So happy to tick through both these. So I think the customers are obviously alarmed, right? Most of these customers probably never anything like this.

Speaker 3

But at the same time, I think they're incredibly grateful that they're in our hands and not some upstart competitor. And I know I'm biased in saying that, but I really mean it. When we're the largest in the market with this diverse set of campuses, I'll call it half a gig of IT load and a truly experienced team holding their hands through it. And I'll reiterate what I said before, Well, I cannot guarantee it right now. We are optimistic that the responsible parties in Laudan will work with digital to deliver on behalf of all of these customers.

Speaker 3

As it relates to your second question, we are obviously, the leverage is ticked up a little bit here. We are this is not a new normal. This is not where we desire to be. We've had a lot of moving parts in our capital stack with Asset sales, joint ventures, acquisition closings with partial periods, we still have, call it, dollars 500,000,000 of equity forward, Which we've not drawn down, and we see a path to return to target leverage through leasing up our vacant capacities. We had you saw the occupancy, was a great stat, really moving the needle on a sequential basis.

Speaker 3

We are seeing a more friendly mark to markets in our cash flows, and we're going to do what we've been doing for a long time, which is capital And tapping into our private capital sources. We sold 1,000,000,000 of dollars of non core assets and joint ventures, and that's going to continue to be our playbook. And we think there's a great lineup of partners that want to work with us to call it CR leverage to be a capital partner to Digital Realty That will bring that leverage back down towards target levels.

Operator

His closing remarks. Bill, please go ahead.

Speaker 2

Thank you, Andre. I'd like to wrap up our call today by recapping our highlights for the Q3 as outlined on the last page of our presentation. 1st, digital transformation remains an important secular driver of our business And drove record quarterly bookings. These additional commitments are reflected in our growing development pipeline And the high level of pre leasing. 2nd, we continue to enhance our global platform with the closing of Teraco, Giving Digital Realty the leading position in South Africa and a critical complement to our existing capabilities elsewhere in EMEA.

Speaker 2

3rd, we continue to execute with improving results in our core data center business, though these improvements are masked by foreign exchange headwinds. Finally, the capital markets are very were very volatile in the 3rd quarter, And we've taken action by adding significant liquidity to our balance sheet and prioritizing our new investments. Before signing off, I'd like to thank our dedicated and exceptional team here at Digital Realty who keep the digital world turning. I hope all of you will remain safe and healthy and we look forward to seeing many of you at NAREIT next month in San Francisco. Thank you.

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