Digital Realty Trust Inc (DLR) — Q3 2021 Earnings Call Transcript

Thank you, operator. The speakers on today's call are CEO, Bill Stein; and CFO, Andy Power. Chief Investment Officer, Greg Wright; Chief Technology Officer, Chris Sharp; and Chief Revenue Officer, Corey Dyer are also on the call and will be available for Q&A. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC. This call will contain non-GAAP financial information. Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website. Before I turn the call over to Bill, I'd like to hit the tops of the waves on our third quarter results. We further strengthened connections with customers, landing record new logos and delivering our fourth consecutive quarter with over $100 million of bookings. We also continued to deliver for our customers around the world despite volatility in the global supply chain, leveraging our scale, diversification and strategic procurement processes to continue to deliver on time and on budget for our customers. We continue to enhance our global platform by expanding into new markets with tremendous growth potential while continuing to expand capacity in existing markets around the world. We delivered solid financial results, with double-digit revenue growth leading to a beat in the current quarter and a raise to the outlook for the balance of the year. Last but not least, we further strengthened our balance sheet by raising approximately $600 million of low-coupon Swiss green bonds and over $1 billion of common equity to fund our future growth. With that, I'd like to turn the call over to Bill.

Thank you, John. Good afternoon, and thank you all for joining us. Our formula for long-term value creation is a global, connected, sustainable framework, and we made further progress on each front during the third quarter. We continue to globalize our business with significant bookings and solid performance across regions. Our bookings were diversified by both region and product type, reflecting our unique full-spectrum global product offering. We also announced our entry into two high-potential emerging markets, India and Nigeria, during the third quarter while expanding our connectivity capabilities by working with Zayo to develop the largest open fabric-of-fabrics that will interconnect key centers of data exchange. We are also extending our capabilities for customers to the edge with the announcement of what will be one of a few strategic partnerships in this arena. Let's discuss our sustainable growth initiatives on Page 3. During the third quarter, Digital Realty was honored to be recognized by GRESB as an overall global sector leader in the technology and science category for exemplary ESG performance, receiving a coveted 5-star rating from this leading global ESG benchmarking organization and reflecting Digital Realty's commitment to being a global leader in ESG. We also became a UN Global Compact signatory in September, aligning our ESG goals and commitment to the UN Sustainable Development Goals with a global initiative. We also advanced our sustainable financing strategy, raising our first-ever Swiss green bonds and publishing the allocation of $440 million of proceeds from our September 2020 Euro green bond, which funded sustainable data center development projects in four countries across three continents certified in accordance with leading sustainable rating standards. We are committed to minimizing our impact on the environment while simultaneously meeting the needs of our customers, our investors, our employees and broader society while advancing our goal of delivering sustainable growth for all of these stakeholders. While on the topic of energy, I'm pleased to report that Digital Realty experienced only a small negative impact from the substantial rise in energy costs during the third quarter. In Europe, where concerns of an energy crisis were most acute, we typically contract for energy supplies a year or more in advance, providing price visibility and certainty for our customers. Elsewhere around the world, energy costs are typically passed through to customers, minimizing our direct exposure. We continue to keep a close eye on energy prices, but given the resiliency of our business model, we do not expect rising energy costs to impact our reported results by more than a few pennies. Let's turn to our investment activity on Page 4. We continue to invest in our global platform. As previously announced, we entered into a joint venture with Brookfield to expand PlatformDIGITAL into India, a giant underserved market with the fifth largest GDP in the world. Like many emerging markets, India presents some unique challenges, underscoring the need for local knowledge and experience. To that end, we were pleased to announce the hiring of Seema Ambastha as CEO for the India joint venture. Seema has years of experience in the Indian IT sector broadly and in the data center industry specifically where she most recently served as a senior executive leader with the NTT Netmagic data center business across India. We believe the India data center market has the potential to experience significant growth over the next decade, and we're thrilled to have such a strong partner and strong leader in this exciting new venture. During the third quarter, we continued to expand iColo, our Kenyan data center operator, acquiring a land parcel in Mozambique to build a facility positioned to land subsea cables and other connectivity-focused customers. We also acquired a controlling interest in Medallion Communications, the leading colocation and interconnection provider in Nigeria in partnership with our existing African partner, Pembani Remgro. As the African Internet economy matures, we expect Nigeria will represent a significant growth opportunity, given its large and relatively young population, a growing and diversifying economy as well as a maturing regulatory environment. Given the connectivity of Africa from our existing hub in Marseille, our platform will now offer the market-leading destinations, connecting Africa to Europe and beyond. We're also investing to organically expand our capacity. As of September 30, we had 44 projects underway around the world, totaling almost 270 megawatts of incremental capacity with over 250 megawatts scheduled for delivery before the end of 2022. We continue to invest most heavily in EMEA, where we now have 27 projects underway in 15 different markets, totaling 150 megawatts of incremental capacity, most of which is highly connected, including significant expansions in Frankfurt, Marseille, Paris and Zurich. Our investment in organic development is a reflection of the strength of demand across EMEA. We're being a bit more selective in North America. We're seeing strong demand in Portland where we have a 30-megawatt facility under construction that is 100% pre-leased and scheduled for delivery in the first quarter of next year, while we also have significant projects underway in Northern Virginia, New York and Toronto. Finally, in Asia Pacific, we continue to pursue strong organic development, both on our own and with our joint venture partners. We are adding capacity in Hong Kong that will open this quarter and expect to open Korea's first carrier-neutral facility in Seoul in early 2022. We are building a connected campus in Seoul to provide the full spectrum of solutions for our customers. The larger second facility will accommodate up to 64 megawatts of capacity and will be located within 25 kilometers of our first facility. Let's turn to the macro environment on Page 5. We are fortunate to be operating in a business levered to secular demand drivers, and our leadership position provides us with a unique vantage point to detect developing trends as they emerge globally on PlatformDIGITAL. Just over a year ago, we introduced the Data Gravity Index, our market intelligence tool that forecasts the growing intensity of the enterprise data creation life cycle and its gravitational impact on global IT infrastructure. Earlier this year, we published an industry manifesto, enabling connected data communities to guide cross-industry collaboration, tackle data gravity head-on and unlock a new era of growth opportunity. Recent third-party research continues to support the growing relevance of data gravity. According to IDC, the amount of digital data created over the next five years will be greater than twice the amount of data created since the advent of digital storage. This digital data creation is expected to drive exponential growth in enterprise user data aggregation, storage and exchange, providing a powerful tailwind for data center demand. We continue to see enterprise and service provider customers deploying their own data hubs and using interconnection to securely exchange data in multiple metros on PlatformDIGITAL to accommodate their own data creation growth. Recently, for the second consecutive year, Digital Realty was ranked as the only outperformer and global leader by GigaOm for edge colocation. This ranking reflects our continued innovation and the execution of our PlatformDIGITAL roadmap for delivering global differentiated capabilities and value for our customers and partners. We are honored by the strong validation of our platform and our market-leading innovation to capture the growing global demand opportunity from data-driven businesses. With that, I'd like to turn the call over to Andy to take you through our financial results.

Thank you, Bill. Let's turn to our leasing activity on Page 7. For the second straight quarter, we signed total bookings of $113 million, this time with a $12 million contribution from interconnection. Deal mix was consistent with the prior four-quarter average, sub-1 megawatt deals plus interconnection represented about 40% of the total, while larger deals represented around 60%. Space and power bookings were also well diversified by region, with EMEA and APAC contributing 45% of our total, about the same as the Americas, with interconnection accounting for the remaining 10%. The weighted average lease term was a little over 5.5 years, and we landed a record 140 new logos during the third quarter, with strong showings across all regions, demonstrating the power of our global platform. In terms of specific wins during the quarter and around the world, a leading cloud-native cybersecurity platform is expanding its high-performance computing capabilities by leveraging PlatformDIGITAL in four markets across North America and Europe, connecting with cloud providers, improving performance and driving down cost. A market-leading autonomous driving technology developer partnered with Digital Realty to tailor an innovative and unique infrastructure solution for simulation workloads. Two major North American energy firms chose Digital Realty to leverage our geographic reach and re-architect their network to interconnect with cloud providers and implement security controls as part of their hybrid IT strategy. A public university in the eastern U.S. is launching a global research initiative with other universities in EMEA and deploying PlatformDIGITAL network hubs across two continents and three cities to help enable this project. A maker of high-performance computing systems is expanding their footprint by deploying on PlatformDIGITAL across multiple regions to guarantee GDPR compliance while enhancing their security, performance and sustainability. And finally, a Global 500 fintech provider is expanding their own hybrid IT availability zones into multiple new metros, using PlatformDIGITAL to support their data-intensive and high-performance computing requirements. Turning to our backlog on Page 9. The current backlog of leases signed but not yet commenced rose from $303 million to $330 million, and third quarter signings more than offset commencements. The lag between signings and commencements was down slightly from last quarter at just over seven months. Moving on to renewal leasing activity on Page 10. We signed $223 million of renewal leases during the third quarter, our largest-ever renewal quarter in addition to new leases signed. The weighted average lease term on renewals signed during the quarter was a little over 3.5 years. Renewal rates for sub-1 megawatt deals remain consistently positive. Greater than 1 megawatt renewals were skewed by our largest deal of the quarter that combined a sizable 30-megawatt renewal with our largest new deal for the quarter, which will land entirely in existing currently vacant or soon-to-be-vacant capacity across Chicago and Ashburn. Excluding this one transaction, our cash mark-to-market would have been a positive 1%. This multifaceted transaction was a prime example of what we mean when we talk about our holistic long-term approach to customer relationship management. We believe we have a distinct advantage when we are competing for new business with a customer that we are already supporting elsewhere within our global portfolio. And whenever we can, we try to provide a comprehensive financial package across multiple locations and offerings, including both new business as well as renewals. In terms of first quarter operating performance, reported portfolio occupancy ticked down by 50 basis points, largely driven by the sale of fully-leased assets during the quarter. Upon commencement of the large combination renewal expansion lease I mentioned a moment ago, portfolio occupancy is expected to improve by 70 basis points. Same-capital cash NOI growth was negative 5.5% in the third quarter, primarily driven by a spike in property taxes in Chicago, where local assessors have adopted a very aggressive posture along with the impact of the Ashburn churn event in January. Of the 70 megawatts we've got back on January 1, approximately 80% has since been released to multiple large and growing customers. As a reminder, the Westin Building in Seattle, the Interxion platform in EMEA, Lamda Hellix in Greece and Altus IT in Croatia are not yet included in the same-store pool, so these same-capital comparisons are less representative of our underlying business today than usual. And while we're still in the early stages of our budgeting process, we are optimistic in terms of where our same-store NOI growth goes for 2022. Turning to our economic risk mitigation strategies on Page 11. The U.S. dollar strengthened during the third quarter, providing a small FX headwind in the third quarter. As a reminder, we manage currency risk by issuing locally denominated debt to act as a natural hedge, so only our net assets within a given region are exposed to currency risk from an economic perspective. Our Swiss green bond offering during the quarter is a good example of this. In addition to managing credit risk and foreign currency exposure, we also mitigate interest rate risk by proactively terming out short-term variable rate debt with longer-term fixed-rate financing. Given our strategy of matching the duration of our long-lived assets with long-term fixed rate debt, a 100 basis point move in LIBOR would have approximately a 50 basis point impact on full year FFO per share. Our near-term funding and refinancing risk is very well managed and our capital plan is fully funded. In terms of earnings growth, third quarter core FFO per share was up 7% on both a year-over-year and sequential basis, driven by strong operational execution, cost controls and a reduction in financing costs from the debt refinancings and redemptions of preferred stock over the past year. To avoid any confusion, our core FFO outperformance excludes the benefit of a nearly $20 million promote fee received in connection with the monetization of our joint venture with Prudential. Heading into the final quarter of the year, we have solid momentum so we are raising our full year outlook for revenue, adjusted EBITDA and core FFO per share to reflect this underlying momentum in our business. Last but certainly not least, let's turn to the balance sheet on Page 12. We continue to recycle capital by disposing of assets that have limited growth prospects, raising over $100 million in the third quarter for our 20% position in the Prudential JV and some land in Arizona. We also raised approximately $95 million of common equity under our ATM program in July, as well as $950 million of common equity in a September forward equity offering. Our reported leverage ratio remains at 6x, but including committed proceeds from the September forward equity offering, the leverage ratio drops to 5.6x, while our fixed charge coverage improves to 6x. We continued to execute our financial strategy of maximizing the menu of available capital options while minimizing the related cost and extending the duration of our liabilities to match our long-lived assets. Our two capital markets transactions this quarter are examples of our prudent approach to balance sheet management. This successful execution against our financing strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers and enables us to prudently fund our growth. As you can see from the chart on Page 13, our weighted average debt maturity is over 6 years and our weighted average coupon is down to 2.2%. Three-quarters of our debt is non-U.S. dollar denominated, reflecting the growth of our global platform while also acting as a natural FX hedge for our investments outside the U.S. Over 90% of our debt is fixed rate, guarding against a rising rate environment, and 98% of our debt is unsecured, providing the greatest flexibility for capital recycling. Finally, as you can see from the left side of Page 14, we have a clear runway with nominal near-term debt maturities and no bar too tall in the out years. Our balance sheet is poised to weather a storm but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy. This concludes our prepared remarks, and now we will be pleased to take your questions. Operator, would you please begin the Q&A session?

I think I'll ask both of mine upfront. I wondered, first of all, if you could talk about the factors that are affecting your CapEx to develop incremental capacity. John Stewart, I guess, in the prepared remarks talked about on time and on budget. But going forward, given what's happening with materials costs, I wondered whether you see an opportunity to adjust your pricing on new leases accordingly. And then the second question is just earlier this month, you acknowledged that you're exploring the potential creation of a Singapore REIT, and I wonder if you can just provide an update on that around the timing and scale and rationale on that project.

Thanks, Jon. I'll address your first question and then pass it to Andy regarding the Singapore REIT. You are correct about the opportunities that inflation presents. It certainly has a more negative impact on our smaller competitors, which helps us strengthen our competitive edge. Over time, I anticipate that rental rate increases will favor larger, established providers. There are two key aspects to the inflation issue: development and operations. On the development front, our pipeline is progressing as scheduled and within budget, thanks to Erich Sanchack and his team's vendor management initiatives that secure fixed pricing for several years, diversify our vendor base, and ensure we're able to secure our general contractors. With numerous construction sites globally, we can efficiently utilize our general contractors. Our global scale and building experience give us a substantial competitive edge in this regard. However, it's clear that market rents will eventually need to rise to maintain risk-adjusted returns, partly due to increasing construction costs that impact the overall equation. Additionally, our private competitors, who rely more on leverage, will also face higher interest rates, compelling them to increase their costs. The outlook is favorable for our renewals as we expect our rates to rise alongside new product rates. In summary, we believe that modest inflation is beneficial for our business. Our customers should not be surprised by this, as they are experiencing similar changes in their supply chains. Regarding our operations, our leases allow for significant pass-throughs. For instance, over 90% of our utility costs from the last quarter were passed on to customers. We typically have rent increases of 2% to 3% and we benefit from the highest operating leverage and margins in the industry. This means that labor costs, which are the most vulnerable to inflation, represent a smaller portion of our overall revenue. Now, I'll turn it over to Andy to discuss the Singapore REIT.

Thanks, Bill. So Jon, you picked up obviously in the 8-K we put out there a few weeks ago. We are kind of heading down the path of exploring essentially an IPO of a portfolio on the Singapore market. This is not our APAC business, which has significant amounts of capacity under construction and land and the like. This is essentially being more analogous to almost like a private capital partner to Digital Realty for stabilized, fully well-leased, high-quality core long-term hold data centers to Digital and our strategy. Somewhat analogous to one of our joint ventures that we've done in the past couple of years with that one of which was with a Singapore REIT. We're still working through this. It's a long IPO process. There's no certainty on the outcome or completion. Sizing would be obviously a modest IPO size to begin with. But we do think this option has the merits of being an attractive long-term partner vehicle to Digital Realty.

So first, I wanted to follow up, Bill, on sort of the price increase opportunity. I'm interested specifically in the greater 1 megawatt rents achieved in the Americas this quarter. They seem quite the opposite. I wonder at $80 per kW, it seemed like a low point relative to recent prints. I'm wondering what portion of that is a function of geography mix, et cetera. And then any color you could provide around the ability to push rate there.

Jordan, it's definitely a function of geographic mix. It's also a function of an extension that we were doing with existing customers that we were providing some rental concessions as well. Andy, you want to add anything to that?

Yes. Just maybe just a little more color. I mean the overall sign was a strong quarter, well north of $100 million. In North America, as you pointed out, it was in our prepared remarks, we had a sizable signing where we essentially came to the table with a holistic relationship-oriented solution for our customer, combining a renewal that impacted our mark-to-markets as well as the new signing. On the renewal, if you pulled that out of our mark-to-markets, we're positive 1%, but it was a 30-megawatt signing so it was a large kind of contributor to that. And on the new signing, I think it was into four or so different data halls. It was spread across both Ashburn and Chicago. It was 100% into existing vacant or to-be-vacated capacity, so a direct flow through to the bottom line, not, call it, future re-leasing. And so we think it was an attractive combination of helping a customer grow with us on our campus. This is a customer we see future growth in years to come. So happy to support them.

Okay. And then coming back to the supply chain, I have a little bit of a two-parter, which is one, how much urgency are you seeing from your larger customers that are looking to procure available inventory and just have line of sight to future product and infrastructure? And then second, how far forward have you pre-bought critical construction materials like generators, PDUs, crack units, UPSs?

So maybe I'll take them in backwards order. We have approximately 270 megawatts currently in progress, from initial ground-breaking to opening doors. We have some protection against cost increases and procurement challenges, whether through our VMI programs or supplier contracts. For many years, we have focused on building new capacity consistently. While we aren't completely insulated, the VMIs I mentioned primarily focus on North America and extend through 2023, providing us with a significant level of protection. We acknowledge the presence of inflation, which will affect everyone in development, but we believe our size, scale, and track record as the largest developer will allow us to perform better than our competitors, especially newer entrants in the field. Regarding urgency, our customers consistently exhibit urgency even when making large financial decisions. I’ll have Corey provide more insight into the customer plans.

Yes, sure. I can do that, Jordan. On the questions around this with via demand from the shortages in chips, we haven't seen it negatively affect any of our pipeline across the regions. We've actually seen it grow. And then also, we've got some sophisticated customers that thought forward about what was going to happen with the chip shortages and planned accordingly and therefore, have accelerated some of our opportunities across the globe. So at a net perspective, we kind of see it as a positive and people are thinking through it. Our customers are thinking through it. And on our end, it has really helped us kind of grow our pipeline at this point.

I'll ask my two upfront, too, if I could. I guess the first one would be, Bill, investors have been waiting a long time to kind of see how the big data center companies evolve their edge strategies. You've obviously struck a partnership a week or two ago and it sounds like you're planning on doing some more. Wondering if you could kind of elaborate a little bit now on what you're looking for and how you settled on this path that you've chosen with Atlas to begin with. And then maybe, Andy, just I want to kind of go back to the power thing. 90% pass-through, that leaves about $20 million on the income statement. A few pennies, still about $15 million of exposure. Is that kind of what you're budgeting to potentially happen in 2022?

Yes, I'm going to turn it over to Chris to handle the edge questions since he spends a fair bit of his days on that particular initiative.

No, I appreciate it, Bill, and thanks for the question, David. Yes, we've definitely been keeping an eye on the edge for some time now. We believe it is still in the early phases of becoming a significant opportunity. However, we have partnered with AtlasEdge, which we believe can add considerable value by allowing us to extend our platform more deeply into metropolitan areas. We're focused on learning and understanding how to gain insights from the new types of infrastructure they are introducing to the market. This partnership enhances our core to edge strategy, enabling our partners and customers to benefit from extending their existing infrastructure towards the edge as it develops over time. Additionally, I want to highlight an important point that I think you noted, David, which is that at Digital, we are open. This is just one of many partnerships and relationships that we will continue to pursue because we recognize there are several pathways to accessing this edge infrastructure. Expect to see numerous partnerships in the coming quarters as we further invest in and refine our approach to this edge opportunity.

To summarize a few points, 90% of our power costs are reimbursed overall. We adopt a hedging strategy mainly in our deregulated markets to manage potential volatility, and currently, we are about 85% hedged with contracts lasting between 1 and 3 years. We place significant emphasis on sustainability, and our procurement of green power plays a crucial role in this commitment. We've made progress in greening our portfolio, including through power purchase agreements, which can help mitigate costs if power prices spike. In the scenario where elevated power prices persist throughout 2022, we anticipate only a minor impact, equivalent to a few cents—approximately $3 million for every $0.01. Therefore, I would not categorize this as a significant challenge at this moment.

Andy, I want to clarify your comment about being optimistic on 2022 same-store NOI growth. Does that mean you think it's likely to be positive or exceed this year's growth? Also, Bill, could you discuss how the leasing situation has been consistently strong this year? What does the pipeline look like, and how is the competitive environment shaping up for the future?

Thank you, Simon. We are currently in budget season, and I have my head of FP&A with me, so I need to be careful with my comments. That said, we have a same-store pool that is expected to grow significantly. I believe we are heading in a positive direction with the addition of Interxion, the Westin Building, Altus IT, and our business in Athens. We have also gained components that enhance our pricing power. Additionally, we are making excellent progress in re-leasing space that was vacated at the start of this year; a large portion of the signings I mentioned this quarter has come from this vacant capacity, allowing us to quickly restore cash flow from space that was idle for part of 2021. Overall, I see several indicators that suggest a more positive trajectory for the same-store pool, which is why I am optimistic about our outlook for 2022.

Yes. And then also from a pipeline perspective, Simon, I would just tell you that PlatformDIGITAL and just our thought leadership around data gravity is really taking hold, right? Our enterprise pipeline's growing across all regions, so really happy with that. Gartner was forecasting solid growth in enterprise IT spend. It just feels like we're in kind of the early innings of the IT transformation for the enterprises. As mentioned in the opening remarks, this quarter represented a new high for us, new logos at 140 new logos, so think about that as a proxy for enterprises continuing to decide to buy and partner with us. So we feel good about the demand signals in our pipeline going forward. Hopefully, that answers your question, Simon.

Both of these are maybe piggybacking a little bit on the back of Simon's questions, but first, on the competitive landscape. I'm just wondering, you mentioned upfront being a little bit more selective as it relates to investments in the U.S. Just wondering if you can update us the competitive landscape you're seeing from both public and private peers, whether that's changed much at all in the last three months. And then secondly, as we think about core FFO or maybe even AFFO per share growth next year, I don't want to jump the gun, I know we may get an outlook in three months' time. But Andy, if there's any updates in terms of how you're thinking about that bottom line growth into '22, that would be great.

Sure, Matt. I'll answer your questions in reverse order for efficiency. Regarding core FFO, we haven't significantly revised our 2022 guidance, but we are pleased with our results this year, showing double-digit growth in revenue and about 7% year-over-year improvement in the bottom line. We've raised our guidance to just over 5% year-over-year for 2021. As mentioned by Corey and Bill, we are confident in our pipeline, and we expect to achieve higher bottom line growth next year than this year, which aligns with what I've been saying in previous quarters. However, I can’t provide any insights on 2022 guidance just yet. As for the competitive landscape, particularly in leasing, I don't believe there have been any significant changes due to M&A activity in our space. Corey may have additional thoughts, but overall, we’ve seen a positive trend with more customers attracted to our global platform, which spans 25 countries and 50 metropolitan areas. This includes a wide range of customers, from our 4,000 retail-oriented clients to dedicated data halls for hyperscalers across more than 45 locations. I haven't noticed any drastic changes in that regard, and the consistent results over several quarters reflect that. Corey, do you have any different insights?

No, I would just add to it that yes, we've had consistent results for a long time. To your point on our scale, we see all the competition out there. Our win rates and our cap rates are improving. So yes, I would just pile on to what you said and the success we're having and what we're seeing in the pipeline, the demand.

Two questions, if I could. First, just a little bit more on the edge strategy. Just curious how you're contemplating the edge in the North America market. And is that something that you're looking to create some further progression on in the near term or is that more of a longer-term ambition? And then just going back on some of the portfolio and pricing commentary. Just curious, when you have these large multi-megawatt deals where you're discounting to get new business or you have some repricing risk, is it because some of the needs of the customers are changing? Is it just market rents? Like what are some of the factors that are driving that? And how should investors think about just what might be left in the portfolio to get through on that basis?

Thanks, Mike. I'll address the second question and then let Chris discuss the upcoming developments in edge. We're consistently engaging in relationship-focused conversations with our customers, particularly our largest ones. We're supporting them across various markets and providing a complete range of products, from network-oriented deployments and hybrid IT to substantial cloud computing. We aim to offer comprehensive solutions, and if a renewal is approaching in the next few years, we ensure that it is part of our discussions. This often results in scenarios like what we saw in the last quarter, where customers may choose not to explore the market for new business and instead decide to expand within our existing framework. Our approach is truly relationship-driven. Regarding your core question, we dislike experiencing any decline in mark-to-market valuations, so a negative 5% quarter is certainly not ideal. However, we are maintaining our guidance for the full year. We had a modest positive result last quarter, and we anticipate strength in the fourth quarter. We’ve noted for some time that the early expirations are improving, particularly in terms of mix, with more higher pricing power opportunities and increased international footprints where we have greater pricing leverage on renewals. This analysis does not account for potential additional uplifts from the inflation-related impacts that Bill mentioned, which we expect to become evident over time. Chris, would you like to take it from here regarding edge?

Absolutely. Thanks, Michael, for the question. It gives me an opportunity. I just want to also commend Giuliano as getting the role of CEO over at AtlasEdge. It's a great opportunity for him and we'll continue to work closely with him. So I appreciate the question, Michael. But going one step further, and I think you're spot on in that we often talk about the edge evolving from the core out deeper into the metro. And I think one aspect of that is no two markets are equal, so there's definitely varying degrees of capabilities in each of the markets globally. So Europe is one, in a general sense, North America and APAC. We absolutely are pursuing different types of partnerships within all of these markets because, quite frankly, our largest customers are looking for a global solution. And so we're always looking at what is the best path to enable our customers in the most efficient way possible. That's at the core of what is our edge thesis that we continually refine and that's what we referenced even in the prepared remarks, I think, in Bill's section about you'll see other partnerships in different markets just to really helping us prosecute that opportunity when it matures over time.

What is sort of the development yield that you're targeting on that re-leasing, particularly the new customer that kind of dragged down the greater than 1 megawatt leasing? And then I've got a follow-up.

Frank, they're filling vacant capacity rather than constructing a new building. A significant portion of that is legacy DFT capacity, which involved a stock-for-stock deal, making it a sort of currency exchange. Therefore, considering development yields might not be the best perspective. In terms of its scale, it represented a major part of the North America signings in the over 1 megawatt category. While we always aim for higher rates, I believe we achieved a reasonable economic rate for that capacity in those two markets, and we are replenishing existing infrastructure included in our capitalization. We are responsible for real estate taxes on it and are actively operating the capacity, which will positively impact our bottom line. Our development target returns for the 270 megawatts currently under construction have modestly increased this past quarter.

All right, great. So the follow-up. Bill, you mentioned that you could see inflation work in your favor in the re-leasing. When should we expect that? Or I guess, it didn't help as much this quarter. Or is that going to help more broadly for colo and smaller deals as opposed to more hyperscale deals?

I don’t think we will see that impact next quarter or the quarter after. However, if inflation persists, it will begin to affect our competitors' construction costs. I believe this will result in higher interest rates and put upward pressure on rents overall, impacting both our new leases and renewals. It's difficult to predict a specific timeline, and I can definitely say it won't happen in the next couple of quarters.

Curious on what you see in the enterprise funnel. We heard there are some larger deals coming to the market, particularly in the financial services arena. Have you seen deal requirements across enterprise picking up in size? And do you think an acceleration in deal flow could give you the opportunity to do even better in that arena as we go forward? And then just one more question. You've said in the past capital recycling may start to moderate in the coming years. But given the cap rate on the Prudential joint venture sale sub-5%, are there opportunities to maybe sell more noncore markets or assets in the coming years?

Yes. So Eric, thanks. The question, I think, was on enterprise demand and continuing that as well as possible deals we have for the quarter. I'm not going to talk through specific deals. But we do see an uptick in requirements as well as uptick in the size of the requirements, which is what you were specifically asking when you think through our full spectrum of offerings and opportunity that we have for the enterprises that uniquely positions us around PlatformDIGITAL and how you're going to handle the data gravity and the opportunities around that. So yes, we're seeing some larger footprints go in across, call it, our 300 kW band and 600 kW band that speaks to people thinking through data performance hubs for us and data hubs out there for us to improve in their enterprise solutions. So yes, we're seeing that across the board. Did I get you your answer, Eric?

Eric, with respect to capital recycling, I guess what I would say is things are still consistent with what we said a few years ago. And a few years ago, we said we were going to sell a few billion dollars of assets over a few years. And again, the reasons that we were recycling out of those assets and redeploying that capital into more core strategic assets remains. Whether they were assets that weren't core to our business or certain markets that weren't core to our business, that's why we're selling assets. We're not just selling assets because there's strong cap rate activity in the market. Now that obviously helps. But again, if an asset is core to us, we're not going to sell it just because cap rates are getting better. But again, it does put a little wind at our back to the extent we are selling assets now, given the improved pricing we're seeing in the market. And you're right, we saw strong pricing in our portfolio disposition in Europe this past year. And now on the Prudential deal, we saw very strong pricing, as you said, on the stabilized assets. It was mid-4s, of which we were fortunate to recognize almost $20 million of promote out of that transaction as well.

Just two questions. First, regarding the Africa joint venture that you announced yesterday with Pembani. Can you share more details about the size of these data centers and the acquisition? Additionally, what kind of investments are you planning to pursue to expand in that market?

Sure, Erik, it's Greg again. When you look at the transactions we've discussed, one is with Medallion Communications in Nigeria, with a total consideration of $29 million. We partnered with Pembani, which means our capital commitment is even lower. Another transaction involved acquiring a land parcel in Mozambique for $3 million, also with Pembani. These investments are relatively small for a company of our size, especially considering Nigeria's position as having the largest GDP and population in Africa. The Mozambique investment is even smaller and is aimed at securing a location that will be crucial for the subsea cable activity that will encircle Africa. When you think about the connectivity landscape, we have Marseille in Western Europe as a key hub and a transaction with Lamda Hellix in Greece that we expect will become another significant hub. In Africa, we have Nigeria in the west and Kenya in the east, with Mozambique further south. We see this as a major crossroads of connectivity that we believe will benefit the company in the long term.

Great. Look forward to hearing more about it. And then maybe just on the Q3 leasing. It held steady at $113 million. As the U.S. and, I think, hyperscale ease somewhat, were there any limitations with capacity in certain markets? Or was there anything else that you could really call out as we think about Q3 results?

Erik, I believe there are no limitations. We always have the opportunity to lease more each quarter. Corey is also eager for additional inventory to sell quickly. Overall, I think it was a very healthy quarter. If you examine the geographic distribution, it's well balanced across all regions. The enterprise mix shows that less than 1 megawatt in interconnection accounts for about 40%, with a record 140 new logos. This record number of new logos had significant contributions from North America, marking the highest in the last six quarters, and it’s the second largest contribution from the EMEA region. We’ve seen a range of new logos, including traditional enterprise, global power companies, and universities, alongside emerging technologies like autonomous driving. Similarly, on the hyperscale side, some established digital firms continue to grow with us using existing inventory, and we have also welcomed some next-generation hyperscalers in Tokyo, which were among our second and third largest signings. Overall, it's looking very favorable, and we still have more to accomplish in 2021.

A few questions. One, on renewals, renewal spread's down negative 5.6%, still guiding to slightly negative for the year. Do you think renewal spreads could be positive in 2022? Second question, just a little bit of clarification. Are you saying that your biggest deal, which I guess was the combination of Chicago and Northern Virginia was for 30 megawatts? Or was that what the megawatts were that were renewed? And then Facebook just put out their earnings last night. They increased their CapEx budget for 2022 by over 50% to somewhere, I think, near $30 billion. Do you think that, that could have positive implications for the data center space? And then forgive me, but you just did an ATM. You have an 18-month draw on that. The ATMs you've done in the past have been 12 months. I'm curious why you pushed it out to 18.

So Colby, I think that's four questions relative to our two limit, but I wanted to provide some additional context. So we're going to address everything quickly here. We've been indicating for a while that we believe we're entering a more favorable position in the cash mark-to-market. The guidance you see, including for the fourth quarter, reflects what we are currently reporting for the year. I've mentioned this before, but I truly believe we're moving into a better phase. We are still finalizing the budget and our guidance for 2022, but it appears that based on the mix of products and geographic distribution, we're in a better position than we were at the start of the year. In terms of new signings, we had about 30 megawatts with the same customer across four different buildings, split between Ashburn and Chicago, which also included around 30 megawatts of renewals in the same quarter. This quarter was particularly strong for renewals overall. Historically, we've been doing around 100 megawatts or slightly less, and in this quarter, we had about 53 megawatts in that category, indicating a robust renewal period. As for the undrawn forward equity offering, our aim was to opportunistically de-risk our development CapEx plan, and we've managed to extend the contract's duration, providing us with more flexibility to integrate it into our financial sources and uses over time at suitable moments for the business. This should ideally contribute to our earnings growth in the upcoming years. Regarding Facebook's increased CapEx, we don't have inside information on that. They are a significant customer, and we engaged in new business with them last quarter. However, I don't see it as necessarily negative, though I also don't want to overly emphasize it as extremely positive for the industry.

Andy, earlier on the call, you kind of mentioned inflation is here. How is that flowing through from a lease pricing standpoint? Are there any terms that are changing tax DLR against inflation, maybe some kind of change in that escalator structure?

Yes, Aryeh. I believe inflation is present. If you've filled up your car or bought milk at the store, it shows. Bill mentioned that the data center industry didn't see an overnight rate reset. Inflationary pressures have impacted the market even before this recent cost increase, tightening it as we approached infrastructure limits. Santa Clara is an example, where our leasing success has positively affected the Ashburn market. We noticed similar trends in Frankfurt and Singapore, where supply constraints drove up prices, and we've increased pricing there multiple times over the past year. As these factors affect costs and access to infrastructure, they will disproportionately affect smaller, newer players, leading to fewer options for our customers. As our costs rise, we must review our pricing based on supply and demand as well as costs in each market. We aim to protect our customers during this period. If inflation continues for a long time, it would be new territory for many of us, as we haven't experienced it significantly since the late 1970s. However, I believe we will emerge in a strong position. We have built-in rent escalators and fixed increases in most contracts, and our scale and purchasing power help shield us from these challenges, alongside other risk mitigations mentioned earlier.

And then just on that large renewal, how did that mark-to-market rate compare to actual market rates? Or was it some percentage above market rates?

I believe it's probably around 10 percent higher than new signings in comparable markets. We generally observe that renewals have stronger pricing power than new agreements, primarily because customers prefer not to jeopardize their infrastructure or workload with a transition.

Thank you, Andrea. I'd like to wrap our call today by recapping our highlights for the third quarter as outlined here on the last page of the presentation. One, our value proposition is clearly resonating with customers. PlatformDIGITAL attracted a record number of new logos. We had another quarter of strong new bookings and a record level of renewals. Most importantly, customers know that we will do what we say. Even when global supply chains are stressed, Digital Realty delivers. Two, we're continuing to extend our global platform. We are investing organically to enhance our global footprint while expanding our platform into India, along with additional strategic connectivity destinations circling the African continent. Three, we generated double-digit revenue growth during the third quarter, once again exceeding consensus expectations. And once again, we raised our full year outlook. Last but not least, we further strengthened our balance sheet, locking in attractively priced long-term debt and supplementing it with equity capital that will be drawn down over the next 18 months to support our global development program. I'd like to once again thank the Digital Realty frontline team members in critical data center facility roles, who have kept the digital world turning. I hope that you all stay safe and healthy, and we hope to see many of you virtually in a couple of weeks at NAREIT and hopefully in person again sometime soon. Thank you.