Digital Realty Trust, Inc.

Good afternoon and welcome to the Digital Realty First Quarter 2022 Earnings Call. Please note this event is being recorded. During today's presentation, all parties will be in a listen-only mode. Following the presentation, we will conduct a question and answer session. Callers will be limited to one question plus a follow-up, and we will conclude promptly at the bottom of the hour. I would now like to turn the call over to Jordan Sadler, Digital Realty's Senior Vice President of Public and Private Investor Relations, Jordan, please go ahead.

Thank you, Operator, and welcome everyone to Digital Realty's first quarter 2022 earnings conference call. Joining me on today's call are CEO Bill Stein and President and CFO Andy Power, Chief Investment Officer Greg Wright, Chief Technology Officer Chris Sharp, and Chief Revenue Officer Corey Dyer are also on the call and will be available for Q&A. Management may make forward-looking statements including guidance and underlying assumptions on today's call. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC. This call will contain non-GAAP financial information. Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website. Before I turn the call over to Bill, let me offer a few key takeaways from our first quarter. First, we kicked off the year on a high note with record bookings of $167 million, led by strength in the leases greater than one megawatt and supported by steady bookings in the zero to one megawatt and interconnection category. Second, we saw a notable and broad-based improvement in our releasing spreads in the quarter, reflecting a healthier pricing environment, but also the active engagement we are having with customers on the digital realty value proposition. Third, we remain poised to continue our expansion in Africa with plans to close our investment in Teraco later this quarter. And finally, our core FFO per share result exceeded consensus expectations despite FX-related headwinds. With that, I'd like to turn the call over to our CEO, Bill Stein.

Thanks, Jordan, and welcome to the digital team. Our formula for long-term value creation is a global connected sustainable framework. and we made further progress on each front during the first quarter. First, we continued to globalize our business with the announcement of our definitive agreement to acquire a majority stake in Terrico in early January. We also continued to grow our business organically around the world. We posted another record quarter of global bookings, totaling $167 million of annualized rent, including our second highest quarter in each of the Americas and Asia Pacific regions, together with another solid quarter in EMEA. Bookings this quarter were led by strong results in the greater than one megawatt category, particularly in the Americas, while sub-one megawatt bookings remain steady and in line with our 2021 average. Let's discuss our sustainable growth initiatives on page three of our earnings presentation. We are committed to minimizing our impact on the environment, and simultaneously meeting the needs of our customers, our investors, our employees, and broader society, while advancing our goal of delivering sustainable growth for all stakeholders. During the first quarter, Digital Realty was named one of America's most just companies, and third overall in the real estate industry by Just Capital and CNBC. We also maintained our status as a member of the FTSE For Good Index, which measures the performance of companies demonstrating strong ESG practices, continuing our record of recognition for our leading sustainability initiatives. During the first quarter of 2022, Digital Realty continued our diversity, equity, and inclusion efforts through our employee-led DEI Council, which seeks to promote inclusion and create opportunities for each of our employee communities. Through the DEI Council, Digital Realty has expanded its philanthropy and community engagement activities with strategic donations and partnerships with global charitable organizations. Digital Realty has also taken a stand in solidarity with the people of Ukraine and those impacted by the Russian invasion. We do not have any data centers or operations in Russia or Ukraine, and our company will abide by sanctions against Russia. Until the peaceful and legal resolution of this conflict We will not invest in Russia. Furthermore, we are funding philanthropic organizations to support Ukrainian refugees, those displaced within Ukraine, and the growing humanitarian crisis. Let's turn our investment activity to page four. We continue to invest in our global platform. We acquired land in three markets for organic development, including the first location for our joint venture with Brookfield in India, along with two parcels in Europe to support the strong demand in that region. After the quarter, we purchased three additional land parcels in Europe, including a beachhead in Barcelona, marking our organic entry into this complementary Mediterranean metro. Our active development pipeline reached an all-time high in the quarter, with 44 projects underway supporting over 300 megawatts of IT capacity in 28 metros around the world. 58% of this capacity is already pre-sold, reflecting strong customer demand. We've expanded our development in the Americas, adding further capacity in New York, Northern Virginia, and Toronto. Demand remains very strong in EMEA, and we are continuing to invest across this region with active development projects in 17 of our 18 markets. Frankfurt is still the most active development market in EMEA, followed by Paris. We continue to make good progress toward closing the TerraCo transaction, which we still expect to close in the first half of this year. Let's turn to the macro environment on page five. We are fortunate to be operating in a business leveraged to secular demand drivers. We are also proactively managing risks to help insulate digital reality against the impact of the current inflationary and rising interest rate environment. We are well protected against the impact of rising energy costs, given the pass-through nature of substantially all of our customer contracts, and we are effectively managing against rising input costs through our vendor-managed inventory program and the expansion of our pre-purchase equipment pool. We are constructively engaging with new and existing customers on the impact of rising costs, which is translating into better pricing. This is partly reflected in the broad-based and improved cash leasing spreads we experienced in the first quarter, but is also showing up in new lease transactions across most of our markets. Our leadership position provides us with a unique vantage point to detect secular trends as they emerge globally on platform digital. Our customers continue to solve the most complex IT infrastructure and activity and data integration challenges. We see a growing trend of multinational companies across all segments deploying and connecting large private data infrastructure footprints on platform digital across multiple regions and metros globally. Recently, industry research firm IDC updated their global data sphere forecast for 2025, predicting the annual data creation rate will exceed 180 zettabytes per year are roughly triple the 21 rate. IDC concludes that companies of all sizes will need to prioritize data sharing and security to improve business resiliency and create a differentiated experience for their customers. Earlier this week, we published our inaugural Global Data Insights Survey with strategic insights from 7,200 companies across 23 countries and nine industries about the role of data in their business agenda. According to the survey, 70% of these companies are prioritizing secure data exchange in their current plans. The global data survey will augment our data gravity index to provide critical telemetry for our customers, partners, and the respective industries as they evolve their business platforms to harness the power of data and co-located infrastructure to unlock a new era of growth through connected data communities. In addition, Digital Realty recently joined the iMasons Climate Accord as a founding member. This coalition of leading companies is united in their views on carbon reduction in digital infrastructure. The group will establish an independent governing body to define an open standard that provides transparency, traceability, and measurement of progress toward reducing carbon from source power and embodied carbon found in materials, products, and operations of digital infrastructure. This is another great example of our commitment to the continuous innovation and execution of our platform digital roadmap to provide a sustainable and differentiated value proposition for our customers, partners, and the broader industry. Given the resiliency of the demand drivers underpinning our business and the relevance of our platform in meeting these needs, we believe that we are well positioned to continue to deliver sustainable growth for customers, shareholders, and employees, whatever the macro environment may hold in store. With that, I'd like to turn the call over to Andy to take you through our financial results. Thank you, Bill.

Let's turn to our leasing activity on page seven. As Bill noted, we signed total bookings of $167 million with an $11 million contribution from interconnection during the first quarter. This is our second consecutive quarterly record, and the seventh time in the last eight quarters we have delivered bookings over $100 million. While our new business was healthy across product types, larger deals accounted for 70% of the quarter's bookings, while sub-1 megawatt plus interconnection accounted for 30% of the total. The weighted average lease term on new leases was more than seven years. Demand was particularly strong in the Americas, with Northern Virginia and Toronto leading the way. Fundamentals continue to tighten in both metros, as reflected by the high levels of pre-leasing on our development pipeline. In EMEA, Frankfurt remains the standout, while in APAC, demand remains robust in Singapore and Japan. Nearly one-third of our sub-1 megawatt plus interconnection bookings were exported from one region to another, reflecting the value customers realized from our global platform. North America was the most common export region, with most of those exports landing in EMEA, followed by Asia Pacific and Latin America. We landed 128 new logos during the first quarter, maintaining the momentum we have built over the last several quarters, which has been a strong validation of platform digital and our global strategy. In terms of specific wins during the quarter and around the world, Zenlayer, a global edge cloud provider, is expanding on platform digital across three continents to improve its geographic coverage, scale, and access to customer communities across various industries. A global 2000 consumer financial services firm continued to expand with digital realty, leveraging Platform Digital's full suite of capabilities, including rationalizing data centers, implementing IT controls, and interconnecting with key business communities. Box Technologies, a leading innovator of high performance desktop as a service applications, is deploying on Platform Digital, supporting enterprise data architecture applications, serving the manufacturing, construction, and engineering industries. A leading IT company is leveraging our full product spectrum by utilizing our connectivity offerings to support data exchange across three metros in North America and LATAM to improve performance and scalability and reduce costs. Magnite, a global independent advertising platform, is expanding on platform digital in multiple metros across the Maya to enable their hybrid IT transformation. And a Global 2000 reinsurer selected platform digital for mainframe migration with seamless connectivity to top cloud providers and robust security being key drivers. Turning to our backlog on page nine, the current backlog of leases signed but not yet commenced grew by 15% from 378 million to a record 436 million, driven by the strong first quarter signings which outpaced commencements. The lag between signings and commencements moderated to seven months, with nearly two-thirds of our $436 million backlog scheduled to commence later this year. Moving on to page 10, we signed $177 million of renewal leases during the first quarter at a positive 3.3% cash-releasing spread. Renewal rates were positive across the board, with spreads in the black across product types in all three regions. Two-thirds of total renewals were sub-1 megawatt deals, resulting in a smaller sample size for the 1-plus megawatt category in the quarter. Excluding one larger short-term extension, our cash renewal spread would have been positive 2.5%. We are encouraged by the positive trajectory on renewal spreads, as well as constructive engagement with customers on the current inflationary environment and our highly compelling value proposition. In terms of operating performance, portfolio occupancy ticked down by 30 basis points sequentially, driven by previously reported churn events, most of which has already been released. Consistent with our four-year guidance, same capital cash NOI growth was negative 3.1% in the first quarter, primarily driven by 220 basis points of FX headwinds, the timing of no move-outs, and a customer bankruptcy. The U.S. dollar continued to strengthen over the last several months, and FX represented a 200 to 250 basis point drag on the year-over-year growth in our first quarter reported results from the top to the bottom line, as shown on page 11. Our operations, along with our capital funding and locally denominated debt, act as a natural hedge, so only our net assets within a given region are exposed to currency risk from an economic perspective. Turning to our risk mitigation strategies on page 12, a little less than 60% of our first quarter operating revenue was denominated in U.S. dollars, followed by approximately 25% in euros and roughly 5% each in Singapore dollars and British pounds. 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 SOFR would have roughly a 75 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, first quarter core FFO per share of $1.67 was flat on both a year-over-year and sequential basis, despite FX headwinds, a one-penny impact related to a customer bankruptcy, and a difficult comp due to the contribution of assets to digital core REIT. In terms of the quarterly run rate, we expect the split between the first half of the year and the second half of the year to be approximately 49-51. In other words, as you can see from the bridge chart on page 13, We expect to dip down a couple of pennies in the second quarter due to normalized OPEX spending and near-term dilution from closing the Terrico transaction before bouncing back in the second half of the year as leases from a record backlog commence. Most of the drivers underlying our guidance remain unchanged, but given the improving pricing environment, we are bumping up our outlook for cash-releasing spreads for the full year to slightly positive compared to flat last quarter. We are maintaining our existing core FFO per share range of $6.80 to $6.90, despite the customer bankruptcy and stiffer FX headwinds. Given the continued strength of the U.S. dollar, we expect currency headwinds could represent a 250 to 300 basis point drag on full year 2022 revenue and core FFO per share growth. Last, but certainly not least, let's turn to the balance sheet on page 14. We were active again in the capital markets during the first quarter. We took advantage of favorable early-year market conditions to lock in 750 million euros at 1.375% for 10 1⁄2 years. And later in the quarter, we completed a dual-taunch Swiss bond offering, raising a total of 250 million Swiss francs at a blended coupon of approximately 1.25%. We used a portion of the net proceeds to redeem 450 million of bonds at 4.75%. Reported leverage ratio is 6.3 times, while fixed charge coverage is 5.5 times. Adjusting for the proceeds from the forward equity offering last September, our pro forma leverage ratio drops to 5.9 times, while fixed charge coverage improves to 5.7 times. We continue 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. 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 15, our weighted average debt maturity is over six years, and our weighted average coupon is 2.2%. A little over three quarters of our debt is non-US dollar denominated, reflecting the growth of our global platform, while also acting as a natural FX hedge for investments outside the US. Over 90% of our debt is fixed rate, guarding against a rising rate environment, and 99% of our debt is unsecured, providing the greatest flexibility for capital recycling. Finally, as you can see from the left side of page 15, we have 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?

We will now open up the call for questions. As a reminder, we ask participants to limit themselves to one question plus a follow-up in order to keep the call to an hour and to give all callers an opportunity to participate. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from John Atkin with RBC Capital Markets. Please go ahead. Thanks.

Two questions. Wanted to find out a little bit about the elevated demand in the record leasing, and I wondered how much of that you might attribute to, in the greater than one megawatt category, any kind of a shift in the mix between building, self-building and leasing on the part of the hyperscalers. And then the second question around pricing. given higher costs and some of the developments that you mentioned, do you see this as really having the impact of protecting your target development yields given the higher cost or perhaps aiming to enhance your target yields? Thanks.

Corey, you'll start off. John, thanks for the question. On the enterprise demand, I'll pick up hyperscale, and I think Bill will tackle the second part of your question.

Yeah, so we'll be pretty comprehensive here with our answer to you, Jonathan. Thanks for the question. I would tell you that with regard to the enterprise demand, we've got customers that are just being driven to the business needs and opportunities that are in front of us. Bill mentioned earlier we just published our global data insight survey, with data becoming a critical agenda topic for all the businesses. And it raised really five key things. Data was pervasive. It's the business agenda. It requires aggregation and control, and it's localizing, and it's a data-first strategies win. And so we're seeing that is really what's driving a lot of the demand across the enterprise. As far as, you know, where is it happening from a regional perspective, if you even want to do a baseball analogy, sometimes you guys ask. I'd say North America is probably middle innings with a healthy bullpen that you ought to have in it. And then I'd tell you that EMEA is probably third inning, maybe an inning behind APAC, a little behind that. as customers are still really waking to the data opportunity that's right above all of us. And it was really highlighted in the index that we just did in that survey. I'd also tell you that we had really strong exports across all regions, which was great. And then we're seeing an uptick in all the multi-market and multi-region wins. So really happy with the enterprise. I'll let Andy give you a little bit of the perspective on the hyperscalers.

Thanks again, John. I mean, I think we've now had a several, I think in the prepared remarks, seven to eight quarters north of 100 million a gap, which speaks to consistent demand in the hyperscale being a major component of that. You had a record called in the fourth quarter, you had another record, and these records are called demonstrably higher than the prior called $100 million averages. Your question about the self-build versus procuring through digital realty or other providers, that I don't think the pendulum is swung to a point where the self-build is off the table, but I would think in times like today when there's increased volatility, supply chain issues, a war in Eastern Europe, having a global platform to support hyperscaler growth across now 50 metropolitan areas in 26 countries is a tremendous value add to our hyperscale customers. And I think their demand has been consistent for the last several quarters with some peaks along the way, and we see the forecast remaining quite strong as well.

Relative to pricing, John, pricing dynamics are clearly market-specific and will depend on both supply and demand in each market. So when demand exceeds supply, we've been able to raise our prices significantly. And this is reflected in our results. So, for example, if you look at our first quarter leasing results in Northern Virginia, our average prices were about 6% higher than just last quarter in the fourth quarter. That market is increasingly tightening. We're also fortunate to be in a position where we're well insulated from the increased costs on our current development pipeline. And that's because of our contracts with suppliers and our vendor-managed inventory program. So, and this has obviously helped us not just in terms of cost, but to assure that we do have the supply to continue around the world.

And then lastly, just on the bankruptcy filing from earlier in April that, you know, had some implications for digital core REIT and then kind of a letter of guarantee from you. Um, this has been kind of going on for, for a couple of years, but, but any sort of an update with respect to, to that customer and your direct exposure, are they current on payments? What are you sort of anticipating, um, with respect to, to that tenant?

Sure. And, um, we'll give you an extra, we'll give you an extra question here. Uh, gratis. So, uh, so that customer, um, From a current-on receivables, they had a very modest amount of pre-petition outstanding receivables. They were a regularly current-paying customer, not a late-paying customer, and they were fairly pretty well up-to-date. A couple million, I would say, really concentrated in the U.K. was outstanding when they entered bankruptcy. Obviously, they're going to go through a process under UK administration in the U.S. and also Canada. That will play out over several months. I think if you take a step back, really, I think what's more relevant is that customer obviously got called sideswiped by two particular issues. One, obviously, part of their business, which is not common in our customer base, was disaster recovery for office, which has obviously got impacted by the zoomification during the pandemic. And then secondly, the elevated power prices, especially in Europe, creating incremental liquidity constraints. I don't see that as a really recurring theme in our customer base, especially the first piece of what I described. And this customer is going to obviously work through its bankruptcy process. And I think we've been taking active steps, not just related to this customer, but in general to continue to streamline and focus our portfolio on core assets that we see robust and long-term demand, multi-customer facilities, less single standalone facilities. And quite frankly, Why we entered the co-location and connection business several years ago, not only was to grow our business, but also to be prepared in the event that some of our co-location resellers ran into financial times and we had to step in and support their end customers, only in the event that leases were rejected, obviously.

Our next question will come from Michael Rollis with Citi. Please go ahead.

Thanks, and good afternoon. So one follow-up and one question. So on the follow-up, when you're talking about leasing, can you unpack the opportunities to lease up the existing inventory and how much of the bookings you're seeing go towards that and where occupancy on the existing portfolio can get over the next 12 to 24 months? And then just a second question. I think it's page 20. in the supplemental, the same store numbers. How does that look if you were to put that on a constant currency basis in terms of the rental performance on the revenue side? And how does that look over the next 12 months as you talked about the pricing opportunities and some of the positive renewals that you're seeing?

Thanks, Michael. So let me try. There's a couple of numbers questions in there. So let me start and try to get through some of those and then also hand off on the leasing question a little bit to Corey as well. So in reverse, in our earnings deck, we try to provide both as reported and constant currency. And we also try to show adjustments for apples and oranges and comparisons on year-over-year comparisons. So you can see that the second set of bars on that chart has had our as reported same store cash NOI down negative 3%, which was in line with our guidance. On a constant currency basis, it was down 90 basis points. And the hit I just called out in terms of the bankruptcy customer, I call it four or five million or whatever, That was, I think, about 60, almost 70 basis points of that negative 90. Those are all on an NOI basis. I apologize. I don't have the revenue equivalent off the top of my head. That same pool is also getting impacted by a year-over-year elevated property taxes, which we previously mentioned. And more importantly, we're releasing vacated capacity, which I think dovetails with your first question. We've made a concerted effort to focus more and more of our leasing wherever possible into already built infrastructure, given the high flow through contribution of that revenue into that capacity. And having an install base that wants to expand with adjacency or grow on our campuses is always a little bit easier than going out and landing a new customer. In terms of the leasing into that capacity, If you basically just take the signed already this quarter or last quarter or two that has not commenced and hit our occupancy, that would bring our same store occupancy up about 80 basis points by itself, i.e. the leases are signed. They're just literally waiting for the customers to move in throughout the year. That obviously is going to flow through. into our 22 results in a partial year period and then a full year period in 23. As I mentioned, we're very focused on releasing that vacant capacity. We're incentivizing wherever possible. And quite honestly, some of the supply-demand dynamics that are playing out industry-wide, in addition to execution against our platform, are really lending itself to fill that up at a more accelerated pace. I think we did about 20 plus megawatts into that type of vacated capacity, i.e. that it weren't the first customer in that suite in the first quarter of this year. And that is at a rapidly accelerated pace relative to call prior year velocity.

Our next question will come from Matt Nickman with Deutsche Bank. Please go ahead.

Hey, guys. Thank you for taking the questions. Just two, if I could. First, on some of the strength in hyperscale, I'm just wondering, and it's beyond just one queue, are you sort of sensing any pull forward of demand from customers given looming concerns around supply chain constraints, or do you sense that the strength here is more sustainable And then just to go back to Michael's question also, one of the slides, slide 11, I think you outlined core FFO per share growth on a normalized sort of constant currency basis this year would be north of 7%. I know, Andy, I think in the past you've talked about mid to high singles core FFO per share growth on a forward basis. Just wondering, you know, all else equal as we start thinking about 2023, without giving specific guidance, is that sort of 7-ish percent rate That's on the slide for 22, a good sort of framework or start point to think about as we think beyond this year. Thanks.

Hi, Nick. This is Corey. I'll take the first two questions I think that you had, one being around the supply chain impacts and then also the hyperscale demand. I'll take them in that order if that helps you out. And as Andy mentioned kind of at the beginning of the commentary, our sales and marketing engine just continues to build up our demand and our pipeline growth. And I would tell you that the supply chain, inflation, energy costs has not really been a factor in that. Our customers really are thinking through what they do and how they source those materials so that they're setting up their commencement dates ahead of it with us. So they're just being really thoughtful about it and thinking through these concerns. And what I think it's done is actually had us create better dialogue with our customers to think through how we're going to solve this, and created probably a little bit more demand for us as they think through it. But it hasn't negatively impacted it at all. As far as the hyperscale demand, we're really still experiencing really strong demand from the hyperscalers across all regions. They work with us to help their speed to market. We're with them increasingly around their business imperatives, around this data opportunity that the CSPs are helping all the enterprises with. We're seeing larger deal sizes of the CSPs as they work to keep up with demand. So we have a really healthy pipeline for the remainder of the year. And I'd also say, you know, there's probably a dozen or so of these CSPs and more of them emerging in Asia and across the board. It's also helping us increase our demand and our pipeline for it. So really happy with both of those and where we're seeing the trajectory.

And then, Matt, on your second question, I mean, we're just reporting the first one quarter of 2022, so obviously not prepared to put 2023 guidance out just yet. But you can see on a constant currency basis, we're now north of 7% on the bottom line core FFO per share. Extraordinary FX headwinds this year. If you look back the last several years, You had called currency fluctuations in the call of two to five or so percent. And this year, the euro called assumed to be like nine percent delta. The headwinds or or could be a tailwinds. Usually we're in the 50 to 75 basis points range. And now we're called north of 200 basis points of headwinds. I think the goal from the beginning of the year, as well as last year, to continue to accelerate bottom lines, earnings growth. Last year, we came out of the gates with guidance of 4%. We ended it with 5%. This year, we came out with guidance of 5%, which we are affirming this call, despite these FX headwinds, as well as despite a customer bankruptcy. And our goal is to kind of, again, keep consistently putting up mid to high signal digits, bottom line growth.

Our next question will come from Simon Flannery. It's Morgan Stanley. Please go ahead.

Great. Thank you very much. Andy, I wonder if you could just talk about the balance sheet a little bit. You talked about bringing the pro forma leverage down to 5.9 times. How are you thinking about, given the sort of interest rate environment, the uncertainty, where do you want to have that over the next few years? And I think you still have guidance for dispositions during the year. Again, how are you thinking about both the sizing of dispositions and what vehicles you might use for that?

Thanks. I'm so First and foremost, better to be lucky than smart. We're out of the gates with a sizable 750 million euro bond, literally the first, I think, business day of 2022, and priced 10.5-year paper in the 1-plus percent call-up category. So very pleased with that. Follow that up with, even during the more volatile start to the year, a Swiss bond offering which, again, both of those, I think, diversifying our sources of capital, increasing our FX hedge, locking in long-duration debt at attractive cost of capital. We also increased our revolving credit facility by an incremental $750-ish million during the quarter, just to bolster our liquidity given the broader uncertainty and backdrop. We still have not drawn down our close to a billion-dollar equity forward just yet. We look to close on Terco in the next couple months or so. Actually, probably a month or two, I guess. And then back half of the year in terms of capital sources on the leverage side to, again, keep us in line in terms of our targeted net debt to EBITDA. We will obviously evaluate equity as an alternative, but right now at these current levels, I think the the continued disposition of non-core assets, as well as incremental contributions of core assets from our portfolio to digital core REIT in the back half of the year are going to be our primary funding mechanisms. And we've made some great progress, obviously, getting digital core REIT through its first earnings season and also working on identifying that next leg of assets to continue to grow and diversify and strengthen digital core REIT.

Great. And how are you seeing this M&A multiples given the interest rate environment? Any change there?

Yes, Simon. Hi, it's Greg. Look, to date, I'd say the private market seems to be lagging the public markets a little bit. And I don't think that's uncommon. I think the public markets usually lead. But look, I think if rates stay up over time, you should start to see multiples come down. But right now, we see a lot of stuff out there. but it feels as though the private market multiples have been a little sticky high at this point.

Our next question will come from Eric Rasmussen with Stiefel. Please go ahead.

Yeah, thanks for taking the questions. So, you know, we've heard some very large deals in the first quarter. You know, what's changed in the market that would, you know, lead to these massive, you And then maybe with that, how do you plan for this?

Eric, I assume you're seeing large leases, large multi-megawatt leases. I think the growth in the sizing of customer requirements on the hyperscale front has been building for some time, not necessarily a completely overnight phenomenon. And I think you witnessed it in the first quarter of this year, the fourth quarter of last year, other quarters of last year, and the year prior. I think you're seeing this continued cloud adoption broadly, continued opening of new regions, opening and offering of new services. And you're seeing this digital transformation wave and the cloud customers, despite the volatility and the uncertainty of an economic backdrop or or the war and the like leaning in and securing infrastructure to future-proof their runway for their end customers. So it doesn't feel like the – one record quarter after another is a little bit of an unusual outcome, but it doesn't feel like the pace of demand is really slowing on the hyperscale front and I think what's also helped in that backdrop of this continuing steady demand, it's just become more challenging to be a provider. You have the inflationary pressures, you have supply chain challenges, you have labor challenges, and you even have moratoriums in certain parts of the world, season demand. And I think going to the part of how do you get ahead of this is that You be in this business for the long run, digitally been in this business for almost 20 years. You build the scale and capital sources to support your customers through good times and bad. You make sure you have the runway to future-proof their growth. That's the acres and acres of often contiguous expansion capacity. You secure your supply chains so that you're on time and under budget wherever possible, and be that trusted infrastructure partner. I think those are the key ingredients to our recipe.

Great. And then maybe just my second question. As it relates to your development pipeline, which is very active, besides the chip shortages, what's happening on the construction side, whether it's getting the right materials or you know, having the proper staffing, you know, especially considering the demand backdrop and maybe even increased competition in some markets that you might be seeing.

Yeah, no, thanks, Eric. This is Chris. Yeah, it's something that we've been constantly looking at. And just to echo Andy's comments a little bit earlier, you know, we've always looked at long-term engagements with our construction teams and with our suppliers. And so the continued development pipeline that we've been putting to market, it's It's really paid off, right, where we keep the same crews on the projects and we keep rolling the new projects and just watching how that grows. I'd also say we have the gold standard in VMI, vendor-managed inventory, for building out a lot of this infrastructure. So even before some of the supply constraints hit us, we started ramping up the budgets for that. And I think one of the other great things with being with digital is we've been able to expand the program to be able to support our customer needs. And so now it's become a differentiator in the market where we're now able to provide some customer equipment to help them procure their infrastructure. And so it's just something that we've been able to plan ahead of. And we're constantly looking at different routes to market with particular chip shortages and things like that, looking at the secondary markets where leveraging a lot of secondary equipment that's been refurbished and put a warranty against it. It's been able to allow a lot of customers to overcome some of those challenges, but It's something we're constantly watching and looking at and making sure that we have the best capabilities and, quite frankly, equipment infrastructure available to our customers and for our own built on a global basis. So that's something that we're very proud about.

Our next question will come from Eric Lubko with Wells Fargo. Please go ahead.

Hey, thanks for taking the question. I'm curious about your development pipeline. It looks like you're almost 60% pre-leased across the entire globe and over 80% in North America. So you're fairly comfortable with your inventory position today, or if we do see a continuation of this large hyperscale demand, might you end up toward the higher end or even above the development CapEx guide you laid out?

Thanks, Eric. That is obviously a constantly evolving schedule where we're adding projects in terms of new starts and we're subtracting projects that are delivering and being commissioned for customers and opening at high levels of pre-leasing. It's a combination of obviously our co-location product as well as our scale and hyperscale dedicated data halls. We're trying to always stay ahead of the game focusing on the longest lead time parts of development, obviously land procurement, hence the acreage I mentioned previously, followed by shelves, and then Chris just touched on our overall infrastructure and build-outs. I think when you look at the combination of our current stabilized portfolio that has availability that we're actively leasing into, our sales and their delivery schedules, and as well as our land. I feel good. There's always a market or two that will be a little tighter than I would like, but I feel, I think, probably more in terms of the hyperscale front that these larger deals, you're often engaging and contracting at very early stages of the project. So, You don't need to necessarily have a finished data haul in order to sell that capacity. Hence, having that land bank and shelves coming online are very good selling tools by themselves.

Great. Thanks, Andy. And just one follow-up on the renewal spreads and mark-to-market. Do you think we're at the point now where those should continue to only improve after this year? And how much of that might be due to just improving the broadly improving pricing environment or perhaps a kind of better mix of leases the next couple of years, either more international, more enterprise, and fewer above-market leases?

So we've obviously been working through this for some time. I would say over the last several quarters, the mix was certainly helping us. as we've kind of chopped through some of our largest customers' major expirations, as we got through more of the North America and onto more international mix, having the less than a megawatt more highly connected destinations, legacy interaction, Westin, Telex, et cetera, being a bigger piece of the puzzle. And last year, we came in a little bit better than we had guidance, albeit negative. This year we guided to flat, which is a year-over-year sequential improvement. And I think what you're saying in this quarter are a few things. On the one hand, I wouldn't say that I can rule out that we'll never have a negative cash market to market on any given product for the next several quarters. I don't think we're at that level of positive yet. But you saw positive across the board. in the plus and less than a megawatt categories. It was in the less than a megawatt, which is the largest piece of it. It was up versus the LTM, about 130 basis points, north of two and a half percent, which is a pretty sizable move. And we got it now for the full portfolio for 2022, slightly positive. So again, not, I can't tell you we're fully done with ever, never having a negative cash market market, but, The trend is certainly playing out, which I would say is a combination of mix and also the broader pricing backdrop where the pendulum of pricing is swinging slightly more and more back to digital realty.

Our next question will come from Frank Luthan with Raymond James. Please go ahead.

Hey, guys. This is Rob one for Frank. Where did you guys end the quarter on quota-bearing heads? And, you know, have you seen any hiring issues in sales or across any other parts of the business to help maintain growth?

You know, we've got about 130 quota-bearing heads. You think about all the sellers we really have, there's more than that after you get to it because we've got a whole team of SAs and SEs, all of our management team on here looking at it. So it puts us closer to, I'd say, effectively more like 200 when you get to that point. But, yeah, we're seeing it do really well, and we're excited about the team and how they're performing and how they're engaging with our customers. I'm sorry, was there another follow-up?

I think it was the hiring, the ability to hire it for that opportunity.

Oh, yeah, and so we've been able to hire. I think when you look at salespeople and they think about where they're going to come and can we hire them, They look at where are you going to have the most prospects going forward. And the differentiated value that we have with our global platform, and I would tell you that we're really kind of pulling away from the competition. There's probably two of us out there. So if you're in the data center business or if you're in the networking business and you want to be successful as a salesperson, this is a great place to be. Teams making more money, we're being successful, and I think they look for it in that kind of standpoint. Sorry I didn't understand the rest of the question, but that's about where we are on it. and really happy with it. Thanks.

Our next question will come from David Guarino with Green Street. Please go ahead.

Hey, thanks. Bill, maybe going back to that comment you made earlier, it was really helpful on NOVA going up 6% on the rental rate. Did you clarify if that was on renewal or new leases? And assuming it is on new leasing, I just wanted to talk on that healthy pricing environment. Do you think it's just a temporary boost for the sector given we've got this lack of leaseable capacity? Or would you say we've truly turned a corner and rental rates are going to start trending higher from here on out?

David, let me help just clarify numbers. That was not a cash market market. That was a life for life new rates. So showing progress in the overall market rates and trying to do it as a best we could as apples to apples in terms of size of deal, all the nuances that go into the deal. I was literally just down in the market a week ago, and that market is overall experience, incredibly robust and continuous demand, and we've done quite well. I can pay more than our fair share in that market, not just in the last quarter, but over several quarters. And that combined with just overall constraints on bringing on capacity in that market, running up on ability to get power, permitting, and the like, I think it's all going to continue to trend in a more positive territory in terms of healthier rates in that market. If you look at our, just one last data point on that, our operating portfolio in that market, it's called 91-something in the sub, but that's missing some leases that have signed but not commenced. If you include that, we're at like 94% leased on the operating portfolio, and then I think have 16 out of 86 megawatts left in terms of that's not leased, that's under construction. We're basically down to, I think, one or two more buildings in the legacy three digital DFT and Loudoun Campus and are already moving on to our called Western Lands or Digital Dulles location for our next flag of growth.

That's helpful. And I guess the kind of the gist of the question really is, you know, we've had these periods historically in the sector where demand goes lumpy for certain periods. And it just kind of occurs to me, if that happens again, if we kind of don't repeat this record new levels of industry-wide leasing activity, do you think we resume to downward pressure on asking rents, I guess? Just want to get your perspective on if this is a temporary phenomenon we're seeing this quarter and last quarter.

It feels to me like the lumpiness has subsided. I mean, you look at our quarterly leasing stats for several quarters. It's just been more diverse and more consistent. And based on the last few quarters of demand, kind of combined with the broader supply backdrop dynamic, It doesn't feel like there's a – it doesn't feel like – I feel like the rates are going to be nowhere near peak rates yet, so we've got a long way to run back to peak rates. But still, I think marching in a more positive trajectory for some time to come.

Our next question will come from David of Barden with Bank of America. Please go ahead.

Good afternoon, everyone. Thanks for taking my question. This is Alex on for Dave. Andy, maybe just my first one here. I think last quarter you noted the TerraCo acquisition was going to give around a partial year contribution of $100 million in revenues and $70 in EBITDA. Just wanted to double check to see if there are any updates there and just confirm that that's already baked in the guidance. And then secondly, I know we've kind of touched on global M&A before, but just... Just kind of thinking about the state of the market and any specific geographies of interest. Thanks.

On the TerraCo, I don't think there's any updates. We're still in the same vicinity of closing time period, and there's been no change to our underwriting numbers since we announced. I don't. Let us follow up online to triple-check, confirm those numbers with you with your model just to make sure, because I don't recall what I exactly said a call ago on those numbers in terms of a partial calendar year contribution. And then your second question, Alex, was that about leasing or M&A? I just want to make sure. You said the GOs. I just want to make sure.

M&A.

Yeah. Hey, Alex. It's Greg. Look, I think you asked what the state of the M&A, global M&A market is. And look, I would say it remains robust right now. There's a lot of private capital chasing deals. We've read about them. You see deals still occurring. As I mentioned earlier, multiples have been sticky high on these transactions. But with that said, you know, there is a lot of private capital. And I think you're starting to see these private investors, the infrastructure funds and the like and others, starting to see, you know, the quality of the asset class, whether it's the creditworthiness of the customer, the quality of the assets, and the growth prospects of the business, it really feels like it's starting to become more of a core investment asset class relative to some others. There's actually been somewhat of a shift there. In terms of our strategy, you know, our strategy, I would say this quarter is probably best representative of how we're looking at it and where we see the best risk-adjusted returns. You heard Andy and Corey talk about supply-proofing, but, you know, we went into two new markets through land purchases, one in Chennai, one in Barcelona this quarter, and then we backfilled supply-proof markets in Zurich, in Paris, in Frankfurt, and in Dublin. And if you look at all that together, you know, you're talking about 385 megawatts of total developable capacity. So, We look at that and look at it on a risk-adjusted basis. We think that's the right place for us. But in terms of geographies, I mean, look, we're still looking to selectively backfill in certain areas of Eastern Europe. As we've said previously, we are still working to expand our footprint in APEC and, you know, selectively backfill in the Americas. So that's basically how we're thinking about it.

Our next question will come from Ari Klein with BMO Capital Markets. Please go ahead.

Thanks. Just going back to the same story, NOI growth, it was down 3% in the quarter, and it sounds like the trends are supportive of improvement, but the full-year guidance suggests that it kind of remains in this down 3% range for the remainder of the year. Is that just FX, or is there something else at play?

Well, the FX has... gone against our favor for the year. But we've had some success in the first quarter relative to our budget, a little bit on the OPEX side. But we are absorbing a cost for bankruptcy, which is going to be in your headwind to that. Hence, we're holding our guidance for same-store cash NOI for the year.

Got it. And maybe I missed it, but the bankruptcy, is that in the FFO outlook? And what's the impact from that, if it is?

Bankruptcy, aside from a, call it non-core straight line right ad back that's not in core FFO, we basically already absorbed about almost $4 million of a hit in for the first quarter due to call pre-petition receivables, which I mentioned earlier on the call. And then we've made an assumption as to additional call at $6 million of headwind for the remainder of the year. Because quite honestly, we're kind of just handicapping the outcome of events because the customer is obviously going to go through the court process and either accept or reject leases. The last time this go around, I think almost all the leases were accepted. I'm not sure that will be the case this go around. And then there's the scenarios as to if a lease is rejected and their end customers could be essentially absorbed by digital realty. So $6 million of incremental and on top of the $4 million taken in the first quarter is our essentially hit or adjustment due to the bankruptcy for the year.

Our next question will come from Irvin Lu with Evercore ISI. Please go ahead.

Hi, thank you for the question. Just one for me. Maybe Andy can answer this. I wanted to ask about the FX spot rate movement. You mentioned that bonds denominated in local currencies act as a natural profit hedge. And we do see this reflected on slide 11. There's a three-point revenue headwind, but only a 2.3-point FFO headwind. Historically, is there any way to think about how well local currency-denominated bonds offset some of these FX headwinds for FFO? And would you consider any derivative instruments looking ahead to help you smooth out some of these headwinds?

Sure. Thanks, Irvin. So, I mean, and I'm Sorry to play the record again, because I wanted to touch on this, and I think I hit it in one of the QA. If you look historically, the last three years, our business has been roughly 40% international. And prior to this year, the headwinds or tailwinds, because it doesn't always go against you, are called in the 50 to 75 basis points called vicinity, with much less volatility than we're seeing this year. essentially by issuing non-US dollar financings, be it euros or Swiss francs or sterlings or multi-currency revolver, are going to natural lending sources, often in long durations, and essentially creating asset liabilities to the bonds, but also cash flow liabilities to offset the euros we receive from revenue or the pounds we receive from revenue. Given we invest at development returns of 9% to 12% or something, and the rates are so modest right now, there's a leakage. We've been migrating more and more of our debt to be non-US dollars. I think it's 75% of it's non-US dollars today, because 100% of our equity is US dollars, and 100% of our common dividends are US dollars. So we have that natural match for our US dollar hedge. I've always been a big fan of this approach because it allows to have multiple benefits to the strategy of tapping diverse capital sources at attractive rates and create a natural FX hedge. It obviously does not provide 100% P&L volatility elimination. We are continuing to become more international. We are continuing to, in smaller amounts, go into slightly more volatile markets in terms of currencies, be it Latin America or Africa. So I would say we're not, our ears are always open to good ideas, and we'll continue to evolve our thinking if the time comes to look at incremental types of foreign currency derivatives to further eliminate any P&L volatility from the FX.

That concludes the Q&A portion of today's call. I'd now like to turn the call back over to CEO Bill Stein for his closing remarks. Bill, please go ahead.

Thank you, Matt. I'd like to wrap up our call today by recapping our highlights for the first quarter as outlined here on the last page of our presentation. Our value proposition is clearly resonating with customers. We posted our second straight record bookings quarter with $167 million of annualized rent while attracting 128 new logos. Our sales momentum is exceedingly strong, and the benefits of platform digital continue to grow. Digital Realty's operational excellence is second to none, and customers are relying on us to solve their needs for data center solutions today while providing a clear path for their expanded needs tomorrow. Our customers trust us with their mission-critical application, and digital delivers. We're continuing to extend our global platform. In early January, we announced a definitive agreement to acquire a majority stake in Terrico to establish digital realty as the leading co-location and interconnection provider in Africa by positioning ourselves at key points of interconnection and subsea cable landing locations. We are also expanding organically with over 300 megawatts of new capacity under development. We posted strong core FFO per share results, exceeding consensus estimates despite foreign exchange and other headwinds against us. We maintained our core FFO per share guidance for the year, and our constant currency core FFO per share forecast represents more than 7% year-over-year growth. Last but not least, we remain very adept at sourcing attractive capital, raising over $1 billion of European debt at a blended 1.3% coupon and weighted average term of nine years, while redeeming higher-cost U.S. dollar-denominated debt during the quarter. 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 you all are safe and healthy, and we hope to see many of you again at NAE REIT and other in-person events. Thank you.

The conference is now concluded. Thank you for joining today's presentation.