Digital Realty Trust Inc (DLR) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to the Digital Realty Third Quarter 2021 Earnings Call. Please note, this event is being recorded. (Operator Instructions) I would now like to turn the call over to John Stewart, Digital Realty's Senior Vice President of Investor Relations. John, please go ahead.

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 2 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 4 countries across 3 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 5 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 road map 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 4-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 4 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 2 continents and 3 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 7 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 1 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 2 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%. 3/4 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?

(Operator Instructions) And our first question comes from Jon Atkin of RBC.

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 take your first question and I'll hand it over to Andy to adjust the -- to answer the Singapore REIT. First of all, I think you're right about inflation in terms of the opportunity that it presents. I think there's no doubt that it disproportionately, adversely affects our smaller competitors and widens our competitive moat. Over time, I would expect that rental rate increases will disproportionately accrue to the larger incumbent providers.

There are basically 2 pieces to the inflation issue: the first is development, the second is operations. On the development side, we are -- our pipeline is on time and it's on budget, and they're kudos to Erich Sanchack, who leads our operations and procurement team for the vendor management programs that he's put in place, providing us fixed pricing for several years out, for diversifying our vendor mix and for allowing our -- for locking in our general contractors. We have a lot of construction sites around the world, and we're able to move our GCs around and keep them fully occupied.

And I think our global scale as well as our maturity as a builder gives us a substantial competitive advantage here. But again, I don't think there's any doubt that market rents will eventually need to move up to maintain risk-adjusted returns. And I think that, that's both because of the increase in construction costs that show up in the denominator. But I think for our private competitors who are operating with more leverage, I think you're going to see that show up in the higher interest rates. So to -- I think they're going to have to raise their costs for that reason as well.

And I think the readthrough here is actually really positive for our renewals because as our rates on new product increase, our rates will also, I expect, increase for renewals. So the bottom line there is that modest inflation, we think, is quite healthy for the business. And in terms of our customers, this shouldn't come as a surprise to them because to the extent that they're doing it themselves, they're seeing this development in their own supply chains.

Relative to the operations of the P&L, I think as you probably know, our leases provide for significant pass-throughs. So for example, over 90% of our utility costs this last quarter were passed through to customers. We also have rent bumps generally between 2% and 3%. And then we have, I think, the highest operating -- or the best operating leverage of highest margins in the business. So what that means is that labor or labor costs, which I think is what's most susceptible to inflationary pressure, is a relatively low percentage of the revenue component in the income statement. And so with that, I'll hand it over to Andy to talk about 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.

The next question comes from Jordan Sadler of KeyBanc Capital Markets.

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 rentable concession 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 4 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. And 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 -- Jordan, this is Andy again. I'll try to take them in backwards order. So we have, call it, approaching 300, 270-something of megawatts, shovels in ground all the way to opening doors as we speak. And we are insulated in terms of our cost and procurement, whether it's through our VMI programs or through just supplier contracts and other things we do have been focused on building new capacity for so many years consistently.

Beyond that, we are not fully insulated but those VMIs I just mentioned do extend. They're primarily focused in North America. They extend until 2023 so we do have a fair bit of insulation. We're not whistling by the graveyard on this topic. Obviously, inflation is here and will impact anyone that's called in the development arena. But we do believe given our size, scale as the largest developer and track record, that we're going to fare better than our competitor set and especially any newer incumbents to development.

In terms of urgency, I think our customers are always urgent despite making massive financial decisions. Maybe I'll have Corey jump in a little bit to give you a little bit of flavor on 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.

The next question comes from David Barden of Bank of America.

I'll ask my 2 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 2 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 watching the edge for some time now. We do see -- it's still in its early stages of being a material opportunity. But one of the things that we've done is partner with AtlasEdge that we think they can provide a significant value in extending our platform deeper into the metro. And so that's something that we're looking at learning and understanding how to gain more intelligence in their new types of infrastructure they're bringing to market. And quite frankly, it expands and enhances our core to edge strategy so that our partners and our customers can get the benefit of extending their existing infrastructure out to the edge when it matures over time.

I would also say that a critical piece that I think you picked up on, David, which is great, is that we at Digital, we're open, right? This is one of many partners and relationships that we're going to continue to prosecute because we see that there's many types of avenues out into accessing this edge infrastructure. But you're going to see a lot of partnerships over the course of the next couple of quarters where we'll further invest and refine exactly how we're going to prosecute that edge opportunity.

Andy?

And then David, on the second question, so just to review a few facts. So 90%, if you look at our just P&L, 90% of the power is reimbursed overall. We do pursue a hedging strategy primarily on our deregulated markets where you see potential greater volatility. We're about 85% hedged with contract durations ranging from 1 to 3 years. We also, as you know, are incredibly focused on sustainability. Green power procurement is a massive part of that playbook, and we pride ourselves in what we've done in that efforts to further green our portfolio, including power purchase agreements.

Some of those have a potentially offsetting impact if in the event that power prices are to surge that provides an incremental hedge to power costs. So where we see it in the event that this elevated power scenario plays out for the duration of 2022, we'd look at it as just a couple of cents, which call it, every $0.01 is just almost $3 million. So not -- I wouldn't say a material headwind at this time.

The next question comes from Simon Flannery of Morgan Stanley.

Andy, I just want to clarify, you made a comment that you're optimistic on 2022 same-store NOI growth. Does that mean you can -- you think it's going to be positive or better than this year? Any clarity you have there? And then just more broadly, Bill, and to maybe just talk about leasing has been consistently strong this year. How does the pipeline look? And how does the competitive environment look going forward?

Thanks, Simon. So listen, we are in the middle of budget season, and I got my head of FP&A to my right and he'll step on my foot really painfully if I get out of my skis here. But that being said, listen, we got a same-store pool that's going to materially grow. And I think it's in a positive direction with the addition of Interxion, the Westin Building, Altus IT, our business in Athens. We've acquired higher pricing power components added to the mix.

We're also making great progress on re-leasing the capacity that was vacated at the beginning of this year, a huge portion of signings as -- that I mentioned we did this quarter has been falling into vacant or vacated capacity, so a quick resumption of cash flow from that space that sat idle for a portion of 2021. So net-net, I think there's a few things that kind of point to this kind of more positive trajectory in the same-store pool. Hence, my comment about optimistic of where we're going for 2022.

And then Q4 is best situated to address the pipeline.

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.

The next question comes from Matt Niknam of Deutsche Bank.

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 3 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 3 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. So Matt, maybe I'll do it in reverse order here for just in order of efficiency here, make sure everyone gets the question. So core FFO, we're not -- we didn't pull forward our 2022 guidance dramatically. But I think we're definitely pleased with how we're putting up results this year that has got, call it, double digits top line, kind of 7% year-over-year performance at the bottom line. We've now raised our guidance, so we're just over the 5%, call it, year-over-year for 2021. And you heard from Corey and Bill and the others we're confident in the pipeline.

So we think -- we're looking to kind of grow the bottom line higher next year than this year. So that's a continuation of things I've been saying for pretty much every quarter of '21. But sorry, no sneak preview on '22 guidance just yet. On competitive landscape, I think that refers to leasing competitive landscape, and has there been any changes on the backs of M&A or whatever in our space? I mean, Corey should chime in here, but by and large, I don't think I've seen any dramatic change.

I think the trend has been our friend, for now, several quarters of more and more customers attracted to a global platform across 25 countries, 50 metropolitan areas, spanning the full customer spectrum, supporting those -- most of those 4,000 customers in the retail-oriented environments all the way up to the dedicated data halls for hyperscalers who we have in, call it, north of 45 different locations. And I've not seen any dramatic change in that. And I think you can see that now on several quarters of consistent, call it, results. But Corey, I don't know if you have any different observations.

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.

The next question comes from Michael Rollins of Citi.

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. Maybe I'll take the second question and hand off to Chris to talk about what's next on edge. So I mean, listen, we're always in active relationship-oriented dialogues with our customers but especially our largest customers who we're supporting in so many different markets and really the full suite of products from network-oriented deployments, hybrid IT, all the way out to their true massive cloud compute.

And we just want to -- we try to come to the table with holistic solutions. If they have a renewal that's coming in the coming years, we just make sure that's part of the conversation, right? And it often leads to situations like which recently transpired in the last quarter where they may not take some of the new business out to a full search of the market or say, "You know what, I've already deployed on your campus and then growing these adjacent data halls is the right move." So it's really a holistic relationship-oriented approach.

As it relates to, I think, the heart of your question, yes, we don't like having any mark-to-market go down at all, so a negative 5% quarter is not great. But in the scheme of things, we're still holding our guidance for the full year. We had a positive 0-point -- a very modest positive last quarter and we're seeing strength in the fourth quarter. And we've been saying for some time, we think the front [review] of these expirations are getting better in terms of the mix, more higher pricing power footprints as well as more international footprints where we have greater pricing power on these renewals. And that's putting aside incremental uplift potential from this inflation-related impact that Bill kind of highlighted that should manifest itself over time. Chris, do you want to tackle the 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 2 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.

The next question comes from Frank Louthan of Raymond James.

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.

Honestly, Frank, they're backfilling vacant capacity so it wasn't like we were building out a new building. I think a good chunk of that is legacy DFT capacity, which we did a stock-for-stock deal and hence, it was kind of a currency exchange. So I don't think the development -- I don't think the development yield would be the right way to look at it.

You can look at the -- given its size, it was the preponderance of the North America signings in the plus megawatt category, which -- listen, we always want rates to be higher, but we -- those are 2 markets where I would say that we -- I think we garnered a fair economic rate for that capacity, and we're refilling something that's already built in our capitalization. We're paying tax -- real estate taxes on it. We're operating the capacity so it's going to flow through to our bottom line. And we've not changed, I would say, our development target returns on the, call it, 270 megawatts that we have under construction. That actually inched up a smidge this last 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?

Yes, Frank, I mean, that's -- I don't think that's going to be -- that's not going to show up next quarter or the quarter after, I think. But I do think if you see sustained inflation, it's going to start flowing through to our competitors' construction costs. As I said, I think it will show up in higher interest rates. And I think it will put upward pressure on rents across the board, which will affect not just our new leasing but renewal leasing. But it's hard to put a specific time on it, certainly not going to be in the next quarter or two.

The next question comes from Eric Luebchow of Wells Fargo.

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?

Corey, why don't you hit the first one and Greg and I can tag team the second one?

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?

Yes. Yes, that's great.

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.

So look, your point is right, pricing is strong. We think that bodes well for the sector and for big owners of assets like ourselves. But maybe I'll turn it over to Andy to go ahead and see if he has anything to add.

Just one thing, just 2 buckets there, selling outright noncore assets that Greg did a great job of describing, streamlining our portfolio, aligning with growing customers, long-term growth assets. And then I think it was touched on one of the first or second questions on also evolving our capital sources in terms of core assets and raising private capital, all of this with the initiative of trying to accelerate our bottom line growth through capital efficiency.

The next question comes from Erik Rasmussen of Stifel.

Just two. First, on the Africa JV. You announced that yesterday with Pembani. Can you just provide any additional color around how big these data centers are, maybe some details around the acquisition? And then as you look -- what sort of investments are you looking to make as you look to expand in that market?

Sure. Erik, it's Greg again. Look, I think when you look at the transactions, right, the transactions we've talked about here are clearly a company called Medallion Communications in Nigeria, and the total consideration for that project was $29 million. We partnered with Pembani on that, so the amount of capital we have is even less.

And another transaction we disclosed was the acquisition of a land parcel in Mozambique, again, with Pembani. That was for $3 million. So I mean, look, these are clearly -- what I would say is these are small Cs that we're planning in these highly connected assets because they are, they're highly connected communities of interest. And we're doing it with a smart local partner in Pembani. And when you look at a market like Nigeria, right, it's got the largest GDP and population in Africa. And the size of that investment, as I said, is very small for a company our size. And as I mentioned, Mozambique is even smaller. And we did that one to gain a location that again will play a critical role with the subsea cable activity that will encircle Africa.

I think as you think about it, right, you look and see in Europe, right, we have Marseille in Western Europe, right, which is a highly connected hub. Then we've done a transaction with Lamda Hellix in Greece, which we believe is going to become a highly connected hub. And as you look at that, so you have Marseille to the west, you have Greece to the east. And as you move down into Africa, right, you look at Nigeria on the west, you look at Kenya in the east, right, and then you look at Mozambique that goes down to the south, and we really view this as really one large, like, crossroads of connectivity, if you will, that we think are going to bode well long term for the company.

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 don't think there's any limitations. We always have room for more leasing in any given quarter. And I know Corey's also chomping at the bit for more inventory to sell into quickly. But listen, I think it was a pretty very healthy quarter. You look at the geo mix, how well spread across each of the regions. You look at the enterprise mix with less than 1 megawatt in interconnection, call it, 40%; record 140 new logos. That record 140 had a record contribution from -- on quarter lease, [reckon] last 6 quarters from North America and I think #2 from an EMEA contribution.

You could see from the new logo or some of the logos we called out in my prepared remarks, kind of like more old world enterprise, global power firms and universities to burgeoning technologies like autonomous driving. And I think on the hyperscale side, a little bit similar. Some of the, call it, house names of digital growing with us into existing inventory as well as some, call it, next-generation hyperscalers landing with us in Tokyo, which I think was our second and third largest signing. So broadly pretty healthy and we're not done yet for 2021.

The next question comes from Colby Synesael of Cowen.

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 4 questions relative to our 2 limit, but (inaudible) color to...

Some of them are like 5 seconds.

So we're going to get them all rapid-fire here. Listen, I think we've been saying for some time, we think we're moving into a better territory on the cash mark-to-market. And I think the -- what you see in our guidance, including the fourth quarter, relative to what we are trending already reported for the year speaks to that. And I think I've been saying that for some time that I think we're heading to more -- better territories. So again, we're not done with the budget and certainly not our guidance for 2022, but it feels like we're -- based on the mix, both product and geos and composition, we're in a better territory than we were certainly at the beginning of this year on that stat.

We did -- across 4 or so suites, so different buildings across roughly half and half Ashburn and Chicago, a total of about 30 megawatts of new signings with the same customer that also did roughly 30 megawatts of renewals in the same quarter. And you could see this was a really super high renewal quarter overall for us. We've usually been doing like 100 megawatts or just shy of that in that plus than [1-megawatt] LTM standpoint on. And so you can see, I think we had 53 or something in that category this quarter. So a high renewal activity quarter. So hopefully, that paints the picture on those two.

Undrawn forward equity offering, yes, we -- listen, we -- the equity offering was again opportunistically derisking our development CapEx plan, and we're able to extend the duration of that contract so we have greater flexibility to essentially feather it into our sources or uses over time at the right time for the business, which hopefully better -- is better measured and help contributes to our earnings growth in the ensuing years.

Facebook CapEx increasing, I don't think we have got any inside information on that. They're a large customer. We've done -- we did new business with them in the last quarter. But I don't see how it could be a negative necessarily, but I don't want to over-index that is super positive to the industry.

The next question comes from Aryeh Klein of BMO Capital Markets.

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, so I mean, inflation -- I believe inflation is here. If you filled up your car or purchased milk at the grocery store, I think Bill's comments to one of the questions, it didn't mean like overnight, the data center industry got a rate reset. I think we've seen inflationary pressures prior to this hard cost inflation happen where markets just got tighter as they ran up to the physical boundaries of infrastructure, right? So our Santa Clara and Northern -- Santa Clara's an example of that. I mean our leasing success has been certainly a [healing] to the Ashburn market. We saw this in Frankfurt. Singapore saw this in terms of supply limitations, driving up pricing, which we've raised pricing there at least 5 times, I think, in the last 12 months.

And I think Bill's commentary is that, listen, as this continues to hit [car] costs and delivery or access to the infrastructure is to bring on new supply which is, we believe, is going to be disproportionately impacting smaller subscale newer entrants, that means that our customers have less options in terms of their providers. And I think that as our costs get inflated, we have to examine our rates and on a market-by-market supply and demand and costing basis.

And listen, I think we're -- do the -- going to be the best out there in terms of insulating our customers from this. But I know -- I think if this period continues for a long time, we haven't had inflation realistically since, call it, the end of the Carter administration. So we're in new territory for many of us. But I think it's -- I think we're going to fare better at the end of the day.

And we are insulated in terms of we have rent escalators, fixed bumps in most of our contracts. And I think our scale and purchasing power on an operating side as well as the build cost side provides insulation in addition to some of the other risk mitigations we mentioned earlier in the call.

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 would -- I believe it's probably 10-ish percent above new signings in apples-to-apples comparable markets. We typically see renewals have greater pricing power than new deals, just on the customer has a strong preference to not risk infrastructure or workload on a move.

And is that 10% kind of the normal range that you'd see?

It could be higher than that, actually. I would say it's probably that's maybe on the skinnier side. But it all depends on the facts and circumstances of the supply and demand, the utilization of the infrastructure, the customers' growth plans, the workload. Is it B2C? Is it B2B? All these things kind of go into the factors that drive the commercial outcome on those. And it was 30 megawatts all at once, right? So 30 megawatts of new signs for 30 megawatts of renewals, all with a stroke of a pen.

This concludes our question-and-answer session. I'd now like to turn the call back over to CEO, Bill Stein, for his closing remarks. Please go ahead.

Thank you, Andrea. I'd like to wrap 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.

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