Digital Realty Trust Inc

NYSE:DLR

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, and welcome to the Digital Realty Second Quarter 2022 Earnings Call. Please note, this event is being recorded. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]

I would now like to turn the call over to Jordan Sadler, Digital Realty's Senior Vice President of Public and Private Investor Relations. Please go ahead.

[Jordan Sadler, SVP, Public and Private Investor Relations]

Thank you, operator, and welcome everyone to Digital Realty's second 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 second quarter. First, the overarching trend of digital transformation remains a secular driver for our business, which was highlighted by yet another quarter of greater than $110 million of bookings and over a 100 new logos added, which was well diversified in terms of product [and GO]. Second, the improved re-leasing spreads we saw last quarter continued in 2Q, and we remain focused on offsetting the impacts of rising costs throughout our pipeline of new opportunity and development; third, our transformation into a leading global data center solution provider remains on track with our investment in Teraco expected to close within the next two weeks; and finally, our core FFO per share results exceeded consensus for the quarter, though we tempered our expectations for the second half and full year 2022, principally due to continued FX headwinds as we reaffirmed our constant currency core FFO per share guidance for 2022.

With that, I'd like to turn the call over to our CEO, Bill Stein.

[Bill Stein, Director and CEO]

Thank you, Jordan, and thanks to everyone for joining our call. Digital Realty is levered to powerful long-term secular demand trends, broadly driven by ongoing digital transformation and the growth in IT and data. We have an unmatched global operating footprint along with a strong development pipeline continue to deepen and expand that footprint to meet our customers' growing needs. Those customers are a growing community of more than 4,000 organizations across the globe, including the world's largest cloud service providers, communication providers that enable the global transport of data, Global 2000 enterprises as well as many multinational and industry-leading companies.

Our second quarter results were strong with $113 million of new bookings and core FFO per share of $1.72, a 12% increase over the second quarter of last year and a 3% sequential increase, despite stiff FX headwinds. The dialogue with our customers surrounding the evolving supply-demand dynamic and our compelling value proposition has started to translate with price increases driving positive cash renewals, supporting our push for appropriate rent escalators and helping to maintain stable development returns.

Despite generally higher prices, demand for data center solutions remains strong around the world with notable productivity in each of our regions. EMEA was a standout this quarter with all 5 of our largest deals landing in the region as the world's leading cloud service providers continued to utilize our platform to expand their infrastructure and support their growing needs. Looking forward, our pipeline remains robust as enterprises continue their digital transformation with a growing preference for hybrid cloud architecture, while cloud and connectivity providers continue to expand their infrastructure to better serve their customers around the world. Andy will provide more color on our results shortly.

But first, I want to touch on the recent launch of ServiceFabric Connect, an open interconnection solution and orchestration platform designed to support the wider industry shift to a hybrid data-centric architecture. This product launch empowers our enterprise and service provider customers to connect to anyone, anywhere at any time through an open and neutral digital marketplace. ServiceFabric Connect is the first of several related interconnection-oriented products that we have on our roadmap and was launched with availability in over 30 markets around the world. We are excited to bring this product to life, and we look forward to delivering these enhanced connectivity benefits to our customers.

Let's turn to our investment activity on Page 4. We continue to invest in our global platform through a combination of organic new market entries that enhance our global productivity offerings as well as existing market expansions that are designed to meet our customers' longer-term capacity and connectivity solution requirements. Along these lines, in the second quarter, we acquired land in three European markets for ground-up development to support strong demand. In addition, we announced our entry into Israel with the formation of a joint venture with Mivne, a leading Israeli real estate group. Together, we plan to develop a data center campus in Petah Tikvah, the primary connectivity hub in Israel. Our presence in Israel will complement our facilities across the Mediterranean and will support the emergence of new connectivity routes that subsea cable operators are developing between the Mediterranean and the Red Sea.

Finally, we have received the necessary regulatory approval in South Africa to close on the acquisition of Teraco, a leading colocation and interconnection provider in South Africa. We now expect to close the transaction within the next two weeks. Our active development pipeline remains robust and grew by more than 10% sequentially with 41 projects underway, supporting over 360 megawatts of IT capacity in 18 strategically important metros around the world. More than half of this capacity is already presold, reflecting strong customer demand.

Given the dynamism of the current environment, we know how important it is to make sure that we are being appropriately compensated for the elevated risk throughout the capital markets and the broader economy. We have sought to mitigate these risks through our VMI program, appropriate pricing adjustments and CPI-based rent escalators that help insulate us from the impact of higher operating costs throughout the life of our customer contracts.

Finally, as we have discussed in the past, we remain focused on opportunistically culling our portfolio. Since the end of 2019, we have monetized over $4 billion of assets through a combination of outright sales, joint ventures, and more recently, through the contributions to our Singaporean Capital Partner Digital Core REIT. We view these sales and contributions as an important source of capital raising as we continue to expand our diverse global portfolio and accelerate our growth.

Before turning it over to Andy, I'd like to highlight an important update to our Board and then discuss the success we’re having with other ESG initiatives shown on Page 5 of our earnings presentation. In June, Mary Hogan Preusse, a 30-year REIT industry veteran was named Chairman of the Board, succeeding Laurence Chapman. Mary has served on our Board since 2017 and has played a critical role in driving Digital Realty's expansion and innovation as we have pursued our transformation to being a global full spectrum data center provider. We are fortunate that Laurence will continue to serve on our Board of Directors to provide his deep well of experience, understanding and leadership. Mary's appointment aligns with Digital Realty's commitment to strong governance, our focus on sustainability and the aim to balance fresh thinking with experience and continuity. I look forward to working with Mary in her new role.

We also continue to advance the ball towards our sustainability goals in the second quarter. In addition to publishing our fourth annual ESG report, we became the first data center operator to achieve the milestone of 1 gigawatt of sustainably certified data center capacity. We also further expanded our renewable portfolio in the U.S. by contracting for 158 megawatts of new solar energy before the recent run-up in power prices, supporting our data centers in California and Georgia. Globally, 119 of our data centers are powered by 100% renewable energy. We are committed to minimizing our impact on the environment while delivering sustainable growth for all of our stakeholders.

With that, I'd like to turn the call over to Andy to take you through our financial results.

[Andy Power, President & Chief Financial Officer]

Thank you, Bill. Let's turn to our leasing activity on Page 7. As Bill noted, we signed total bookings of $113 million with a $12 million contribution from interconnection during the second quarter. New business was healthy across product types as sub-1 megawatt plus interconnection accounted for 42% of the quarter's bookings, while deals larger than a megawatt accounted for 57% of this quarter's bookings. The weighted average lease term on new leases was more than 7 years. EMEA accounted for well over half of this quarter's new business as Frankfurt continued to set the pace in the region, while Paris was also a meaningful contributor.

Leasing was also geographically broad based during the quarter with significant contributions from Northern Virginia, Athens, Zurich, Tokyo, Sao Paulo, New York, Dublin and Amsterdam. Reflecting the strength of demand from our customers, we grew the size of our development pipeline to more than 360 megawatts under construction. as we started over 100 megawatts of new projects in EMEA and North America, including 35 megawatts in Frankfurt and 38 megawatts in Paris. Nearly 1/3 of our sub-1 megawatt plus interconnection bookings were exported from one region to another, reflecting the value customers realize from our global platform. North America was the most common export region with most of those exports landing in EMEA, followed by Asia Pacific and Latin America.

During the second quarter, we added another 108 new customers, bringing the total to more than 1,000 new logos since closing the Interxion transaction a little over two years ago. We see a growing trend of multinational companies deploying and connecting large private data infrastructure footprints on PlatformDIGITAL across multiple regions and metros globally. In terms of specific customer wins during the quarter, a leading IT service provider has experienced the full range of benefits of PlatformDIGITAL from greater performance and scalability to cost savings. These customers expanded their capabilities across three metros in two geographic regions, emphasizing hybrid IT by integrating bare metal and cloud storage.

Two leading Global 2000 financial services firms chose PlatformDIGITAL for multi-set deployments in multiple metros across North America and Asia Pacific. One of the world's leading video game developers is expanding on PlatformDIGITAL to access our global footprint, scalability and low latency performance. A Global 2000 reinsurer is expanding on PlatformDIGITAL with full-spectrum benefits from the strong community to top cloud providers and robust security being key drivers. And a life sciences organization is switching to PlatformDIGITAL in two markets across North America to reduce network costs while implementing artificial intelligence and high-performance computing applications.

Turning to our backlog on Page 9. The current backlog of signed, but not yet commenced leases, tapered $393 million by quarter end as record level of commenced leases outpaced new signings. A lag between signings and commencements moved up to 13 months due to one larger signing into a new campus development in Frankfurt. Excluding that lease, the sign of commencement period was more in line with our recent experience of about eight months.

Moving on to Page 10. We signed $173 million of renewal leases during the second quarter at a positive 3.4% cash re-leasing spreads compared to 3.3% positive last quarter. Renewal rates were positive in each product segment and also in each of our three regions. The majority of total renewals were sub-1 megawatt deals, reflecting the higher unit price contracts that are characteristic of that segment. These renewals climbed by 3% during the second quarter. Among larger deals, rates increased by 1.1%. We are encouraged by the positive trajectory of renewal spreads as well as our constructive engagement with customers on the current inflationary environment and our highly compelling value proposition. In terms of operating performance, total portfolio occupancy rebounded by 60 basis points sequentially, driven by the strong commencements from our record backlog. These improvements in our occupancy come despite our active intention to grow our global colocation inventory in order to meet the growing demand of our expanding customer base who continue to solve for complex IT infrastructure, connectivity and data integration challenges.

Same capital cash NOI growth fell 5.5% in the second quarter, primarily driven by a 400 basis point FX headwind in the last leg of a previously discussed sizable churn event. Most of this space has already been re-leased and will more fully commence over the next several quarters, which should drive an improved trend in revenue growth on a constant currency basis.

Turning to our risk mitigation strategies on Page 11. 57% of our second quarter operating revenue was denominated in U.S. dollars with 22% in euros, and 7% in Singapore dollars, 6% British pounds and 2% in Japanese yen. We have also actively mitigated interest rate risk by proactively terming out short-term variable rate debt or longer-term fixed-rate financing.

Turning back to currency. The U.S. dollar continued to strengthen over the last several months, and FX represented a 400 basis point to 450 basis point drag on year-over-year growth in our second quarter reported results from a top to the bottom line, as shown in our constant currency analysis on Page 12. As we've highlighted in the past, currency fluctuations has more typically served as a 50 basis point to 100 basis point headwind or tailwind to earnings in periods of lower volatility.

While the outsized depreciation of the euro this year has been a major driver of the headwinds for our P&L, it also represents the lion's share of our $4 billion-plus development pipeline. To be clear, we are operating and then investing locally rather than repatriating proceeds into U.S. dollars. Our operations and our investment pipeline along with our capital funding and locally denominated debt serve as a natural hedge. Of course, given the growth of our global portfolio, along with the heightened FX volatility, we will continue to evaluate our hedging strategy on an ongoing basis. In terms of earnings growth, second quarter core FFO per share of $1.72 was 12% higher on a year-over-year basis and 3% higher sequentially, despite increased FX headwinds. The outperformance versus our prior expectations for the quarter was principally a function of lower-than-expected OpEx spend and a short delay in the closing of the Teraco transaction.

Looking forward, we expect core FFO per share will remain under pressure from stiffer than expected FX headwinds given the appreciation of the U.S. dollar. As you can see from the bridge chart on Page 13, we expect FFO will dip down a couple of pennies in the third quarter, principally due to FX, but also as a result of the delayed normalization of OpEx spend, near-term dilution from closing the Teraco transaction and higher interest rates. Accordingly, we have adjusted our underlying guidance assumptions that remain under pressure from foreign currency exchange and interest rates. We are also updating our core FFO per share guidance range for the full year 2022 to $6.75 to $6.85, reflecting a $0.05 per share adjustment at the low and high end of the range. Importantly, we are reaffirming our constant currency core FFO per share range of $6.95 to $7.05 for 2022. Given the continued strength of the U.S. dollar, we expect currency headwinds could represent a 300 basis point to 400 basis point drag on full year 2022 revenue and core FFO per share growth.

Lastly, let's turn to the balance sheet on Page 14. Our reported leverage ticked down to 6.2x as of June 30, while fixed charge coverage increased to 6.0x. Adjusting for the proceeds from the last September's forward equity offering, our pro forma leverage drops to 5.8x, while fixed charge coverage improved to 6.2x. We remain focused on our financial strategy of maximizing the menu of available capital options while minimizing the related cost of our liabilities. The execution against this financial strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital, sets us apart from the pack and enables us to prudently fund our strategic objectives. As you can see from the chart on Page 15, our weighted average debt maturity is nearly six years, and our weighted average coupon is 2.2%. Approximately 3/4 of our debt is non-U.S. dollar denominated, reflecting the growth of our global platform. Nearly 90% of our debt is fixed rate and 99% 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 modest near-term debt maturities and a well-laddered maturity schedule for the foreseeable future. Our balance sheet is poised to weather the storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy.

This concludes our prepared remarks, and now we'll be pleased to take your questions. Operator, would you please begin the Q&A session?

[Operator]

[Operator Instructions] And our first question comes from Eric Luebchow of Wells Fargo.

[Eric Luebchow, Wells Fargo]

First of all, just curious on what your pipeline looks like in terms of hyperscale. I know you saw a tremendous amount of absorption in Q1. It was a little bit lighter, especially in the U.S. in Q2. Now any sense at all the large cloud operators are pulling back after a few record leasing quarters? Or is this just the natural ebbs and flows of the market maybe related to a slightly more limited inventory you had in some of your key markets?

[Corey Dyer, Chief Revenue Officer]

Yes. So Eric, this is Corey. Just responding to you. Thanks for the question. And I would tell you that our hyperscale demand and our bookings this quarter were really strong, especially across Europe. Really solid bookings across North America as well as Tokyo with hyperscale, and we haven't really seen a slowdown in it. Going forward, from our pipeline, our pipeline broadly is really strong. It's the highest we've ever had across all of our segments, including hyperscale. So we feel really good about where we are. They're continuing just to take advantage of the offering that we offer them. They're across -- they're with us across about 40 different markets, really utilizing us for the connectivity, the enterprise customers that we have and really taking advantage of our platform on an ongoing basis. So no real slowdown that I see so far. Andy?

[Andy Power, President & Chief Financial Officer]

No...

[Corey Dyer, Chief Revenue Officer]

Sorry, Andy.

[Andy Power, President & Chief Financial Officer]

Sorry, go ahead, please.

[Eric Luebchow, Wells Fargo]

I was just going to ask a separate question. So something that we heard about recently were some challenges about power supply for new construction at Ashburn. Some news reports that has been severely restricted by the local utility. So I'm just wondering if that's having any impact at all in your ability to build new capacity, particularly at the Western Lands campus in Ashburn or if you feel relatively insulated based on perhaps precommitments for power generation. And then separately, I think we've heard some comments from Bill that maybe you're working with some hyperscalers at that campus to plan some deals. So perhaps, an update as to what the sales funnel looks like in Northern Virginia specifically.

[Andy Power, President & Chief Financial Officer]

Sure, Eric. So the only thing I was going to add on, and sorry for interruption. Corey's first piece is that the -- if you look at the plus the megawatt signings were most of the hyperscale larger deals land. We did north of 50 megawatts. I think our largest deal is 10 megawatts. We had two around 5 each. So then you had, call it, 30 megawatts of, call it, 1 to 4 megawatts in size, including new landings and expansions from a diverse group of those hyperscalers. So that was the only data point I was going to add to that first question.

On your second question, Eric, I would say, you definitely got the scoop in terms of something that's certainly very recently breaking. So I'll try to provide a little context and as well to answer your question. Dominion Energy, which is the primary power provider in that market, informed its major customers very recently regarding the call a potential pinch point in Eastern Loudoun County that could delay deliveries until 2026. So a little fair bit out there. The cause has been described to me as transmission, not generation, i.e. the pipes or the power line infrastructure, not the actual power. The power company did not give definitive answers to most of the relevant questions we and I would think you and others on this call would probably have, but they have been transparent about the potential issue, and they're working very diligently to finalize their assessment and then ultimately communicate their findings. What this means -- I mean while we're still obviously handicapping the potential outcomes, but net-net, if this is to come to fruition as we recently learned, it will obviously likely be a slowdown in delivery of new supply in what is our largest and the largest and most consistently in demand data center market in the world.

So I see two possible outcomes there: one being called just a sense of greater pricing power and higher rates tied to the sharp reduction of near-term availability, which should be favorable to Digital given our standing in market; and then also likely to be potentially some winners and losers as it relates to the various developers, including Digital seeking to bring new inventory online in that market. We have -- you kind of go through the rundown of our footprint, call it, 40 megawatts available. You can see in our 500 megawatts of IT load operational as of 2Q. We also then have, call it, 50 megawatts was our last building on that legacy Loudoun campus. I think it's building all in the alphabet that I would say feels like on the lower risk of having an issue. But again, this is very new and subject to change.

We have another 200 megawatts on our Manassas campus, which given its position in that market seems on the lower risk side. And then we do have, call it, based on a substation that's already built about 200 megawatts on that Digital Dallas aka Western Lands, call it 1 plus gigawatt site that is called. We got to figure out how that's going to play out in terms of delivery and time line, but I do like our odds, if any, given that we have a sitting substation already there. The steel has been erected, the capital is deployed. Net-net, given our activity in that market, only 24 megawatts of what I just mentioned other than the 40 available would deliver by the fourth quarter of '23, just normal timeline. So I don't see this as a huge impact to '23. And then last but not least, I mean, given other than the tighter market fundamentals, I mean I do like our odds here relative to the competitive set in North Virginia. I mean we're the largest provider of consistently operating with Dominion. We have substations and power infrastructure already built on our campuses, as I mentioned. And I think we are a very important player in that market to help the power company address this problem given our strategically important land parcels and easement. So sorry for the long-winded response, but I didn't feel that, that top would need some clarity given you've kind of just broke that news just yesterday, the day before.

[Operator]

The next question comes from Matt Niknam of Deutsche Bank.

[Matthew Niknam, Deutsche Bank]

So first on pricing. It sounds like it's been an incrementally positive story just based on some of the recent commentary you've been hearing. So I'm just wondering if maybe you can elaborate on what you're seeing on the pricing front across regions. And then also on demand, I know -- I think Corey referenced very strong demand. I'm just wondering, in light of maybe some elevated concern around a potential macro downturn, any regions, any verticals where you may have seen or started to see any sort of moderation in terms of demand from your customers?

[Andy Power, President & Chief Financial Officer]

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

[Corey Dyer, Chief Revenue Officer]

Yes, Matt, thanks. As far as demand, I mentioned hyperscaler demand earlier. Our demand across the board is really good. We've got it across all four -- all of our regions. I mentioned -- I think Andy mentioned in the prepared remarks, the demand across EMEA that was our largest landing spot for our business. Our pipeline is the highest pipeline I've ever had, and that's on top of a couple of years of huge growth in pipeline and in the business. So we feel really good about where the demand is and where the pipeline is. Enterprise customers are continuing to take advantage of PlatformDIGITAL, make use of the data gravity opportunity in front of them. And I feel like in a hybrid IT world, we're probably the best position to help them do that. And so we've seen our demand just grow across the board, enterprises across all regions and hyperscaler as well. If you look at the sub 1 megawatt, which is your colocation interconnection, that was our third highest quarter ever, right on the back of 2 of our highest quarters ever. So I feel really good about the demand.

[Andy Power, President & Chief Financial Officer]

And then, Matt, on your second question as it relates to pricing, I mean I would say, the commentary is fairly consistent with what Bill and I shared at the NAREIT conference, call it, early June. 2022, on the backs of, call it, us executing on the business and strengthening our value proposition with pricing power accrued to for several years, 2022 has started off -- or the first half, it's certainly been a called pendulum shifting dynamic. The demand has remained robust. Our value proposition is certainly resonating with what you've seen in the results and the pace of inventories had a challenge keeping up with it. And -- but what I just relayed on Loudoun County is called just one of the examples, but there's been others throughout the year as well. And that has allowed us to essentially move our list rates up numerous times, starting at the very end of 2021 through 2022, executed at higher rates across both our larger footprint and small footprint. Push rates on our renewal contracts, which last quarter, we had positive cash mark-to-markets certainly inflection on our cash mark-to-markets. We raised our guidance for the full year, and we followed with a second quarter of cash mark-to-markets as well. And I would say, all these things kind of flow through the entire, call it, commercial engagement with the customers to escalators and other provisions. So pricing has been moving in our favor in the first half of 2022.

[Operator]

The next question comes from Michael Bilerman of Citi.

[Michael Bilerman, Citigroup]

Andy, I wanted to talk just a little bit about foreign exchange. As a U.S. dividend payer, obviously, you have to be mindful. And when I -- you're talking about obviously not repatriating a lot of income, not foreign income because you're reinvesting it. I guess just stepping back, how do you sort of think about being a U.S. dividend payer and being a global company with global flows? And you talked about other hedging techniques, and I want to know how much of that just simply borrowing more in foreign currency, putting more currency swap hedges in place versus thinking about other potential structures. And I recognize you did the REIT, but you did that with U.S. assets. I don't know if you're thinking about doing more localized. And so maybe if you can just expand a little bit more on that hedging comment.

[Andy Power, President & Chief Financial Officer]

Sure. Thanks, Michael. So I mean -- and we touched a little bit on this in the script. We've followed this playbook that you've somewhat summarized to your -- I mean often when we go into more volatile parts of the world like Latin America, we do partnerships. So we're not -- our equity is not entirely at risk. We also -- I've put a disproportionate amount of our debt in non-U.S. dollar financings, hitting the Eurobond, Swiss bond, Sterling bond. We have now called close to $4 billion in multicurrency revolver commitments. And so given that -- with that mismatch, you said of having a U.S. stock price in U.S. listed or U.S. currency dividends put more and more, call it, accessing diverse sources of capital and creating natural FX hedges along the way.

At the same time, given the rate of return that we're investing relative to at least in more recent history has been very low rates in a lot of these currencies. There has been called cash flow or CFFO leakage. The point I was trying to highlight in the script, and this year, the volatility is just off the charts. I mean the year ago, the parity with the dollar is the highest it's been in several years. And certainly, it's created a headwind to our P&L or core FFO per share. But those same euros that got deflated in our P&L in 2022. We're also going into the ground with Europe being our largest development as part of the portfolio with 221 of our megawatts under construction across the continent or in London. So that is typically in our playbook. We've not followed some others in terms of, call it, just P&L hedging, which is really transacting with foreign currency derivatives to call it take out volatility, and that's been what we've done to date.

Now I've also said in the prepared remarks, we're becoming a much more global company. There's no question of that. Call it, 50-plus metros, 27 countries, six continents, and we're in a -- certainly, and not in a long time heightened volatility to currency situation.

So I think we're always open to good new ideas and something we'll consider in terms of adding to that FX playbook with various types of derivatives. Am I going to go a lot the euro at this point right now? I'm not sure quite honestly. I mean there could be a chance where some of these non-U.S. currencies or countries start raising their rates, and you have some reversion on some of this at the same time. So -- but that's really been what the past practice is, and we're always looking at trying to figure out new ideas to continue to actively hedge the business and mitigate risk.

[Michael Bilerman, Citigroup]

And then as a follow-up, as you think about the Singapore entity that you listed, and obviously, you put U.S. assets into a Singapore market, which at least driven that was what the market had sort of wanted. But is there an element that you look at that entity? Obvious, it's well off its IPO price. It has a cost of capital. It would need to transact on your U.S. assets at much higher valuations given how strong the U.S. dollar is. Does that -- so does that vehicle still work for you, number one? And then the second part of it is, would you consider vehicles that are local assets and local markets, which would accomplish -- you do it in private form, would you execute that in any public form as well?

[Andy Power, President & Chief Financial Officer]

So the -- the DC REIT, Digital Core REIT, started out with the North America portfolio, but does have a global mandate. And really the selection of the initial assets was, we had the most to pick from in North America, given our history track record, stage of development of those assets. But we do very well expect to globalize it and diversify it with other types of assets in different parts of the world. The Singapore dollar is, I don't think it's 100% linked currency to the U.S. dollar, but there is, I believe, monetary policies or there is some governmental linkage where they try to track the U.S. dollar in terms of currency. So it's not usually a wildly divergent to the U.S. dollar type of currency. I mean, we view that vehicle as a, call it, the home for core assets with -- that are stabilized, fully operational, long-waited average lease terms, and again, will be a global basis. We also have ventures like Ascenty in Latin America, which today is held by our partners Brookfield or Mitsubishi or MC Digital Realty in Japan or our partners, Mitsubishi Corporation, that are certainly a private partner today, but those certainly could evolve into forms of public partnerships over time. So we're always looking at different ways to find the most appropriate both debt and equity capital, private and public, for partners to most efficiently and prudently scale and grow the platform.

[Operator]

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

[David Barden, Bank of America]

I guess a couple. The first would be, Bill, you've talked about how steady kind of mid-single-digit inflation would be a useful tool for the pricing equation for the data center industry. I think in the script, you talked about resetting pricing on a CPI basis. I'm wondering if this is really -- is it CPI based? Is it supply-demand based? If you could kind of talk a little bit about your pricing strategy big picture there. And then back to the launch of the service platform, I was wondering if you could kind of talk about any expectations that investors should have for that being a contributor to the business or KPIs that we should look for on a go-forward basis?

[Bill Stein, Director and CEO]

Sure. So just to be clear, the CPI-based returns are in the escalators. So we've gone from -- we're going from fixed annual increases to increases that are structured with the minimums with floors and then CPI Index increases above the floor and typically to some cap. So an example would be a 2% floor with a CPI-based increase above that to, say, 6% as a cap, and that's on an annual basis. And so we feel that, that provides some hedge for us for inflation. And then just keep in mind, relative to inflation that over 90% of our power costs are passed through, and that obviously, has been subject to a lot of inflationary pressure.

In terms of the base rents, that's more a function of supply and demand in any given market. So -- and with supply chain challenges, I would say, supply is more challenged and demand continues at a very high pace. So that plus the increasing input costs on new builds not us so much because of our VMI program, but certainly, our competitors whether it's materials and/or labor. And our customers that are building their own are certainly experiencing these same pressures, it's pretty easy to justify higher base rates when you're talking to customers. Does that answer your question?

[Andy Power, President & Chief Financial Officer]

And thanks, David, for the question around the ServiceFabric. Yes. So we're -- I've kind of talked about this before to provide a little bit of color and background. It's a purpose-built product, right? And it really enhances our customer experience where we're removing technical complexity. And so what that's going to translate to and what we're watching is driving more of that sub-1 megawatt deployments where enterprises are looking to leverage and deploy their hybrid IT or multi-cloud deployment into our facility. So you'll see a lot more of that driving into our portfolio. And also, I think we're going to see us continually extend the reach into deeper sets of assets within our facilities, set differently, both colo and scale, will start to get the true benefit of interconnection, which at the end of the day will allow us to drive more value and higher margins outside of that product. And so that's one of the things we've been tracking extensively. And that utilization, which is another key KPI for us is multi-site, right, where we're starting to sell a blended set of capabilities, both scale and colo all heavily interconnected because that's where the market is headed. And that's where we see a lot of these larger enterprises requiring multi-market access with a highly interconnected backbone with true SLAs, and that's what the ServiceFabric was able to deliver to market there.

[Operator]

The next question comes Jon Atkin of RBC Capital Markets.

[Jon Atkin, RBC Capital Markets]

Maybe just a follow-up to the topic raised two or three questions ago about asset recycling and the REIT. They have earnings call, I guess, 12 hours ago and specifically mentioned Chicago, Dallas, Frankfurt. So I wondered if there's anything you wanted to add to those comments around timing, and are we going to see all 3 or a subset of those all three or what's kind of the general cadence to suggest? So that's kind of maybe the follow-up. And then the question I had was about book-to-bill. It seems to have lengthened this quarter. That's kind of a choppy metric because I guess it depends on just the nature of the deals that you haven't designed in any given quarter, but it did lengthen noticeably anything to kind of call out there that might relate to the velocity of repeat demand that you might be seeing from the cloud providers or whether they might go through a digestion period. Appreciate Corey's comments about the pipeline being really strong, but the lengthening book-to-bill, is that something that's going to maybe shorten? Or do you see that trending?

[Andy Power, President & Chief Financial Officer]

Jon, I'll take them in reverse because second one is pretty clean. The -- so there's one specific transaction that we've signed that into one of our newest Frankfurt campuses that -- I mean that we're just getting off that plot, getting off the ground on. So that was really what lengthened that out. If you exclude that 1 transaction that I think the book-to-bill is, call it, eight months. So called in-line with our prior track record. And then on your -- on the first question, I mean, definitely, very pleased that the Digital Core REIT team down the gates with -- I think its official first earnings call. Not -- I don't think they have a lot -- too much to report other than the biggest news being making progress. We are making progress collectively on not -- really beyond asset selection to diligence to transactional docs and have really circled assets in three markets as prime candidates to act on for its first life of acquisition growth. And as a reminder, that vehicle, we took public last December with a called underlevered balance sheet. So it has embedded debt capacity called approaching $200 million. So it's not reliant on the equity capital markets out of the gates, but we do hope the equity capital markets respond favorably and continue to support that and because we want to see that vehicle grow, we think that's a great partner vehicle for these core parts of our campuses that fit that vehicle's mandate.

[Jon Atkin, RBC Capital Markets]

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

[Andy Power, President & Chief Financial Officer]

Jon, I think it really was just timing. We had a really large commencement quarter in 2Q, and in the back half, you do have a few things, call it, working against us, which are those orange bars. One is, we do -- some of our beat in the second quarter was delayed timing on OpEx spend, which we believe is going to get pushed to the back half of the year, not a new event at Digital. We do see a pickup in interest expense, which everyone can see. And then we are closing Teraco in the coming weeks. And then lastly, call it, 24-ish or 25-ish percent of our core FFO is from like the euro, the sterling, the yen. And on a quarter-over-quarter basis, you've seen degradation in those currencies about 5%, which is the FX headwinds. Hence, while we did change our as-reported guidance, we were able to maintain our constant currency guidance, which is about just north of 7% year-over-year growth at the midpoint.

[Operator]

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

[Aryeh Klein, BMO Capital Markets]

Maybe following up on the power issue out in Ashburn. What does this mean, I guess, for leasing? In that market, does it put it on a pause, I guess, in the near term? And I think Corey mentioned kind of the record pipeline that's out there. What would that look like in Nova? And then just curious, how much you have in the way of expiring leases in that market over the next 12 or 24 months?

[Bill Stein, Director and CEO]

Thanks, Aryeh. So I mean -- and then -- again, it's still subject to change because this is very new or late breaking, but it's going to paint a picture where we believe there's still going to be robust demand in a tightened or slowed supply environment. So -- and those economics mean rates typically rise and economics accrue to the providers. We -- I don't -- first and foremost, I don't see people leaving Ashburn for this delay. This isn't like a permanent feature of Ashburn, this is a, call it, bottleneck of a portion of Ashburn. And you've got an incredible amount of customers, infrastructures, network Ashburn grew to where it is for many reasons. And I don't see demand just running away from in the face of this. I think the available capacity is going to become more precious. Hence, that call it, 40 megawatts of operational that we have today is more precious. And if we're able to proceed and bringing on new capacity that I outlined, that becomes more precious. And if we look at our expirations, we've got about 18 or 17 megawatts respond in the back half of this year. Another 75 in '23. Another 58 in '24. Another 54 in '25, so call it north of 200 over the next through the end of '25, which is a normal amount of role for us, but Ashburn is our largest market. So we have a lot of microwatts rolling over the ensuing years.

[Aryeh Klein, BMO Capital Markets]

Got it. I guess in light of what's happening, those re-leasing spreads or the pricing around that, you would anticipate maybe being higher than you might have thought a couple of weeks ago.

[Andy Power, President & Chief Financial Officer]

Correct. Yes. I mean, I think asking rates on any available capacity in Ashburn, I mean when we got won of this, we went out to our entire field. The dynamics are shifting in Ashburn, and they could shift quite dramatically. So asking rates as well as negotiations on renewal contracts.

[Operator]

The next question comes from Simon Flannery of Morgan Stanley.

[Simon Flannery, Morgan Stanley]

Just following up on the comments on the strong cloud demand. Can you just update us on what your cloud customers are saying in terms of their desire to work with you versus building themselves? Is there any change in that one way or the other or from one location to another? And then given some of the issues we're just talking about in Ashburn, obviously, power issues are even greater in Europe, and your -- you've just committed to some major new builds in markets like Paris and Frankfurt. What is on the ground there in terms of ensuring that you're going to have the availability of that power supply over the next several years for these and other expansions?

[Bill Stein, Director and CEO]

Simon, I'll speak to the self-build question. So frankly, we -- the pipe scalers have been building their own for a long time, I'd say, for the last 10 years. And they have pursued what we call a hybrid model. So they have self-build, and they have -- they lease from third parties. That -- how much they do at any given time varies, and they don't all do it at the same time. So party A might be doing 100% third-party leasing and no self-building while party B is relying mostly on self-build. In the next year, they could change it up. But I would say, in the current environment, so in the current environment meaning that an environment that's challenged by supply chain and inflation, I think we're seeing an increased reliance on third-party leasing, right? And that's because we are as good as anybody at managing in what is, I would characterize it as a more challenging environment. And do you want to handle the power question in Europe.

[Andy Power, President & Chief Financial Officer]

Sure. So we have on-the-ground teams that speak the local language, worked in the municipalities, network to the business leaders. So in each of these jurisdictions that call it, you mentioned our top of list relationships to make sure that we're in constant communication. That doesn't mean something doesn't pop off like we're experiencing Ashburn episodically, but I would say, we have a very good hand on the pulse of what's going on there. I mean this -- we're supporting critical -- mission-critical infrastructure here for a host of applications that I would say, even in a rationing environment, we're very top of list in terms of access to resources, including power. And we're constantly monitoring the power sources or deliveries for new projects and preparing for even more draconian scenarios in terms of backup fuel sources that could play out given the fact that circumstances of what's going on in Eastern Europe. So -- and that's part of our business, and we have very high stakes customers that I view as partners kind of in line what Bill mentioned who are side-by-side with us on these issues, right? They're with us with, expressing the criticality of them getting live on certain dates. So I think that partnership is -- so we would mutually benefit in terms of being able to derisk our execution on their behalf.

[Operator]

The next question comes from Frank Louthan of Raymond James.

[Frank Louthan, Raymond James]

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

[Andy Power, President & Chief Financial Officer]

Thanks, Frank. Maybe I'll start it off, and then Corey can -- so we've -- I don't think we've seen to date economic softness in our demand. You heard from Corey's description on the forward pipeline and look at our results in terms of new bookings and new logo additions, and I think that's based into that we are really mission-critical priority. We're not a discretionary spend. We are -- we're facilitating performance enhancement. We're facilitating growth through digital transformation for our customers' businesses as well as efficiencies for our customers. So I think that's -- and we've also been through a few economic cycles as well, and the history would say that our trend is our friend on that topic. If you look at the sectors, I think some of the usual ones, in North America, we saw a good amount of financial services. Cybersecurity, in EMEA, we saw this quarter's media telecommunications, initiative cloud and Asia Pacific, similar to what we saw both America and EMEA. So pretty broad brush as well as call more general corporate enterprise across health care, manufacturing, retail, et cetera. So -- and I think that goes back to -- there's a common theme across almost all these industries about what our services are doing to enable their services.

[Corey Dyer, Chief Revenue Officer]

Yes, I would add to it, Frank, that we had 17 subsegments do more than $1 million in bookings this last quarter, which speaks to the breadth of the demand. We haven't seen a pullback. If you think about the secular trends around service providers driving revenue, enterprises saving money, adding features as far as efficiencies, taking advantage of a hybrid IT world that we're really well positioned for. We haven't seen that affect the demand in any way. Maybe pull forward a little bit, but I haven't seen it really affected because I've got a record pipeline in colo, record pipeline in interconnection, record pipeline in enterprise and just a record pipeline overall. So if there is an effect on inflation, then I would tell you that it's not enough that it keeps them from continuing to come to look to us to build out their infrastructure.

[Operator]

The next question comes from Nick Del Deo of MoffettNathanson.

[Nicholas Del Deo, MoffettNathanson LLC]

First, on the -- looking at your expected returns in the development pipeline, pricing is up. It looks like returns are consistent, maybe falling a little bit, particularly in Europe. Is that a function of mix shift with more large deals in the pipeline or other factors at play there?

[Andy Power, President & Chief Financial Officer]

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

[Nicholas Del Deo, MoffettNathanson LLC]

Okay. Got it. And then maybe 1 more on the Ashburn power topic. I think you made a case that customers are not going to leave Ashburn because of this. If it does cause any customers to kind of reconsider their concentration in Ashburn and maybe you want to diversify a little bit, say, into adjacent markets like Richmond or Culpeper or Manassas. Do you think you can react quickly to capitalize on any sort of diversification trend?

[Bill Stein, Director and CEO]

So I'm not sure I think diversification trend would likely have been outside of like that Northern Virginia part of the world, quite honestly. And we've got shells in Atlanta, we've got capacity in the call it the suburbs of New York City and Chicago and Dallas. So there's -- I think you could see a spillover effect on a temporary basis to other parts of the United States. But I don't think you're going to see a running to other cities in Virginia, quite honestly. And I don't -- I mean, the -- this is locationally sensitive workloads, right? The infrastructure and networking has been in the ground and been built upon and grown upon for years and years in Ashburn. The clouds have architected their networks with on-ramp locations that are locationally sensitive availability zones that have radius restrictions. And I don't -- the fact that this is a slowing of the Ashburn, not a halting of the Ashburn or a pocket of Ashburn to me says, I don't think that you're going to really be able to move this tremendous center of gravity for the data centers worldwide.

[Operator]

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

[Bill Stein, Director and CEO]

Thank you, Andrea. I'd like to wrap up our call today by recapping our highlights for the second quarter as outlined on the last page of our presentation. First, digital transformation remains an important secular driver of our business, which drove another strong quarter of bookings and new business additions to our global platform. The robust demand that we are seeing is reflected in our growing development pipeline. Second, we continue to press our advantage through tactical and organic new market entries as the additions of Israel and Barcelona this quarter will enhance our connectivity offering in the Mediterranean while our investment in a leading colocation and connectivity provider in South Africa is expected to close in short order. Third, we posted stronger-than-expected core FFO per share results, despite stiff FFX headwinds, and we maintained our constant currency core FFO per share forecast for the year, which represents more than 7% growth year-over-year. Last, we are very proud of our team's launch of ServiceFabric, an open and neutral digital marketplace, supporting our customers' digital transformation journey and enabling hybrid multi-cloud requirements.

Before signing off, I'd like to thank our dedicated and exceptional team at Digital Realty, who keep the digital world turning. I hope all of you will stay safe and healthy, and we look forward to seeing many of you in the coming weeks at upcoming events. Thank you.

[Operator]

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