Digital Realty Trust, Inc. (DLR) Earnings Call Transcript & Summary

Good day, and welcome to the Digital Realty Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jordan Sadler. Please go ahead.

Thank you, operator, and welcome, everyone, to Digital Realty's Second Quarter 2024 Earnings Conference Call. Joining me on today's call are President and CEO, Andy Power; and CFO, Matt Mercier; Chief Investment Officer, Greg Wright; Chief Technology Officer, Chris Sharp; and Chief Revenue Officer, Colin McLean, are also on the call and will be available for Q&A. Management will be making 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 Andy, let me offer a few key takeaways from our second quarter. First, we continue to execute within a very favorable demand environment with $164 million of new leasing executed in the quarter, again, marking one of the top quarters in our history, which, together with last quarter's record leasing drove a record first half of the year. Second, our operating momentum continued through the second quarter as a record level of commencements translated into meaningful improvement in both total and same capital occupancy while cash re-leasing spreads remain firmly positive, and continued growth in cross-connects drove interconnection revenue to a new record in the quarter. And third, through capital recycling and demand-driven equity issuance in the quarter, we reduced our leverage to 5.3x at quarter end, below our long-term target level, helping to position Digital Realty to the opportunity that we continue to see in front of us. With that, I'd like to turn the call over to our President and CEO, Andy Power.

Thanks, Jordan, and thanks to everyone for joining our call. The momentum we experienced in the first quarter continued in the second quarter. The first half of 2024, our new leasing was up over 100% from the activity we saw in the first half of 2023, with a strong and steady contribution from our 0-1 megawatt plus interconnection segment. Demand for data center capacity remains as strong as we've ever seen, especially for larger capacity blocks in our core markets. We are well positioned to take advantage of this favorable demand environment, given our track record of execution across 6 continents, a robust land bank and shell capacity that could support 3-plus gigawatts of incremental development, reduced leverage and our growing and diverse array of capital partners. During the second quarter, we remain focused on our key priorities. We signed $164 million of new leasing in the second quarter, which excluded another $16 million of bookings within one of our newest hyperscale private capital ventures. While bookings in the greater-than-a-megawatt category were once again the primary driver, there was no contribution from our largest hyperscale market, Northern Virginia as Dallas led the way in the second quarter. Importantly, we posted one of our strongest quarters ever in the 0-1 megawatt plus interconnection segment, with the record new logos and near-record bookings in each of the 0-1 megawatt and interconnection categories. This leasing strength is a positive reflection of the value that our 5,000 and growing base of customers realize from our full spectrum product strategy. We also delivered strong operating results with 13% data center revenue growth year-over-year pro forma for the capital recycling activity completed over the last year. In addition, we have enjoyed healthy growth in recurring fee income associated with our new hyperscale ventures. In the first half, fee income was up 26% over the first half of 2023, primarily reflecting the formation of almost $10 billion of institutional private capital ventures over the last year. And we would expect this line item to continue to gather momentum. With the record commencements in the second quarter and the healthy backlog of favorably priced leases ready to commence in the second half, we are well positioned for accelerating top line and bottom line growth for the remainder of 2024 and into 2025. Subsequent to quarter end, we also strengthened our value proposition in Europe through our entrants into the Slough submarket of London with the acquisition of a densely connected enterprise data center campus, which we expect to be highly complementary to our existing colocation capabilities in the City and the Docklands. The new campus supports an existing community of more than 150 customers utilizing over 2,000 cross-connects. Consistent with our key priorities, we continue to innovate and integrate as we unveiled our HD Colo 2.0 offering in the second quarter with advanced high-density deployment support for liquid-to-chip cooling across 170 of our data centers globally. In addition, just last week, we announced the deployment of a new Microsoft Azure ExpressRoute Cloud On-Ramp at our Dallas campus, along with the launch of the new Azure ExpressRoute Metro service in the Amsterdam and Zurich market. We also bolstered our balance sheet and significantly diversified our capital sources, availing Digital Realty of more than $10 billion of private capital over the past year through our new hyperscale ventures and noncore dispositions. During the quarter, we expanded our existing Chicago hyperscale venture with the sale of a 75% interest in CH2, the remaining stabilized data center on our Elk Grove campus. We also sold an additional 24.9% interest in a data center in Frankfurt to Digital Core REIT, increasing their total position in the campus to just under 15%. These 2 transactions together raised over $0.5 billion. Finally, we raised approximately $2 billion of equity since our last earnings call, including the $1.7 billion follow-on offering in early May and proceeds raised under our ATM. These transactions, together with the others of the past year, have positioned our balance sheet to capitalize on this unique environment and construct the capacity that our customers demand. Artificial intelligence innovation is reshaping the global data center landscape. As new applications are developed and proliferate across industries and around the world, AI is driving the incremental wave of demand for robust computing infrastructure. According to Gartner, global spending on public cloud services is projected to grow over 20% to reach $675 billion in 2024 and is forecast to grow another 22% in 2025, with AI-related workloads driving a significant portion of this growth. Digital transformation, cloud and AI are fueling demand for data center capacity worldwide. Traditional data centers were already being pushed to the limits by demand for cloud and digital transformation, where demand for AI-oriented data center infrastructure is being accommodated in upgraded suites in our existing facilities and in newly built facilities. These AI workloads are taking place on specialized hardware with massive parallel processing capabilities and lightning-fast data transfer speeds. Fortunately, Digital Realty's modular data center design can accommodate these evolving requirements. The growth in demand is global. We're seeing strong demand across our North American metros first, but it is spread and beyond with interest in locations like London, Amsterdam and Paris in EMEA and Singapore and Tokyo in APAC. Our global footprint is well suited to capture this growing demand, whether it be for major cloud service providers adding to an availability zone, a major enterprise digitizing their business processes or an AI model being trained or be it -- or put into production. However, this exponential growth in data center demand is not without its challenges. The environmental impact of these energy-intensive facilities are growing alongside the scaling of user requirements. According to the IEA, data centers consumed almost 2% of global electricity in 2022, a figure that could double by 2026 absent significant efficiency improvements. I will touch on Digital Realty's latest sustainability highlights in a moment. As we look to the future, the interplay between AI advancements and data center evolution will continue to shape the global technology landscape. IDC predicts that by 2027, worldwide spending on digital transformation will reach nearly $4 trillion driven by AI, further accelerating the demand for data center infrastructure. We believe that the providers who can officially scale their capacity while addressing sustainability concerns, we'll be best positioned to benefit from these 3 key drivers: digital transformation, cloud and AI in the years to come. Customers and partners are recognizing the value that Digital Realty can bring to their applications around the world. During the second quarter, we added 148 new logos, marking a new quarterly record. A growing number of these new logos are being sourced by our partners who efficiently expand our sales team to reach into enterprises around the world. The wins this quarter include a Global 2000 advanced engineering and research enterprise, developing a private AI sandbox on PlatformDIGITAL to enable experimentation and development by federal agencies and brought to us by one of our large connectivity partners, Lumen Technologies. Another partner bought in new logo that is an AI-enabled SaaS provider, repatriating all public cloud to save costs and enable growth. That same partner was also assisting 2 large financial institutions to increase their capacity on PlatformDIGITAL in APAC and North America. And yet another example of our growing partnerships, an AI SaaS provider and recognized leader in natural language speech synthesis is growing their commitment to PlatformDIGITAL, with an expansion of current AI workloads where proximity is the driving requirement. A Global 2000 manufacturer is rearchitecting their network on PlatformDIGITAL, with a regional hub to improve efficiency, lower their network costs and implement controls while eliminating the capital cost of maintaining their own facilities. And 2 leading financial services firms are both leveraging PlatformDIGITAL to extend their respective virtual desktop infrastructure environments to improve performance and user experience across their North American and EMEA employee base. Before turning it over to Matt, I'd like to touch on our ESG progress during the second quarter. We continue to make meaningful progress on ESG performance. We were recognized by TIME and Statista as one of the world's most sustainable companies of 2024. We also released our annual ESG report in June, highlighting our ongoing efforts to develop and operate responsibly. As described in our ESG report, we further increased our renewable energy supplies with 152 data centers now matched with 100% renewable energy. We improved water efficiency and expand the use of recycled water, which accounted for 43% of our total water consumption last year. We also launched a new supplier engagement program to drive sustainability and decarbonization through our supply chain. We remain committed to minimizing Digital Realty's impact on the environment while delivering sustainable growth for all of our stakeholders. With that, I'm pleased to turn the call over to our CFO, Matt Mercier.

Thank you, Andy. Let me jump right into our second quarter results. We signed $164 million of new leases in the second quarter, with 2/3 of that falling into the greater-than-a-megawatt category, the majority of which landed in the Americas, with healthy contributions from both EMEA and APAC. Not to be overlooked, however, with the $40 million of 0-1 megawatt leasing and a standout $14 million of interconnection bookings. Our fourth consecutive quarter exceeding $50 million in our 0-1 megawatt plus interconnection segment. Turning to our backlog. We commenced a record $176 million of new leases this quarter, which was largely balanced by the strong second quarter leasing. As such, the $527 million backlog of signed but not yet commenced leases moderated by only 2% from last quarter's peak and remains robust and more than 9% of our total revenue guidance for full year 2024. Looking ahead, we have over $175 million scheduled to commence through the remainder of this year with over $230 million already scheduled to commence next year. During the second quarter, we signed $215 million of renewal leases at a 4% increase on a cash basis, driving year-to-date renewal spreads to 8.2%. Re-leasing spreads were once again positive across products and regions. Last quarter, we noted that the underlying renewal spread after stripping out 2 outliers was 3.4%. Our cash renewal spreads in the 0-1 megawatt segment were up 3.8% in the second quarter, while the greater-than-a-megawatt segment was up 3.9%. As a reminder, the 0-1 megawatt segment is the primary driver of our overall re-leasing spreads, given the heavier weighting of lease expirations in this category, which are typically shorter-term leases with inflationary or better escalators. 0-1 megawatt deals renew reliably and predictably making them track closer to market over time, thereby reducing the outsized movements that could come with larger or longer-term lease renewals. On the greater-than-a-megawatt side, renewals reflected the strong pricing environment with leases renewed at $159 per kilowatt compared to the $133 per kilowatt achieved on greater-than-a-megawatt renewals last quarter. The key difference between the quarters was the rate on the expiring leases. This quarter, leases in this segment expired at $153 per kW, while last quarter's leases expired at an average of $112 per kilowatt. For the quarter, churn remained low and well controlled at 1.6%, and our largest termination was immediately backfilled at an improved rate. In terms of earnings growth, we reported second quarter core FFO of $1.65 per share, reflecting continued healthy organic operating results, partly balanced by the impact of the meaningful deleveraging and capital raising activity executed over the course of the last year. Revenue growth in the quarter was tempered by the decline in utility expense reimbursements, a comparison that is likely to persist throughout this year, given the decline in electricity rates in EMEA year-over-year, along with the impact of substantial capital recycling activity. Despite the deleveraging headwinds, rental revenue plus interconnection revenues were up 5% on a combined basis year-over-year. Adjusted EBITDA also increased 5% year-over-year through the first half and remains well on track to meet our 2024 guidance. Pro forma for the capital recycling completed since last July, rental plus interconnection revenue and adjusted EBITDA grew by 13% and 14% year-over-year, respectively, in the second quarter. Stabilized same capital operating performance saw continued growth in the second quarter, with year-over-year cash NOI up 2% as 3.6% growth in data center revenue was offset by a catch-up in rental property operating costs, which were flat last quarter. Year-to-date, same capital cash NOI has increased by 3.5%. We have previously highlighted same capital NOI growth is expected to be impacted by nearly 200 basis points of power margin headwinds year-over-year, given the elevated utility prices in EMEA in 2023. Moving on to our investment activity. We spent $532 million on consolidated development in the second quarter plus another $90 million for our share of unconsolidated JV spending. We delivered 72 megawatts of new capacity across the globe for our customers in the quarter, while we backfilled the pipeline with 71 megawatts of new starts. Blended average yield on our overall development pipeline moderated 20 basis points sequentially to 10.4% as a result of a market mix shift of completions and starts in North America during the quarter. In the first half of the year, we spent a bit over $1 billion in development CapEx, tracking closely towards our full year guidance as the second half should see a ramp from newly commenced projects along with the typical seasonal uplift. Turning to the balance sheet. We continue to strengthen our balance sheet in the second quarter. With the closing of the 2 transactions in April that we disclosed during last quarter's earnings report and was referenced earlier by Andy, together, these 2 transactions raised just over $500 million of gross proceeds. Additionally, since our last earnings report, we sold 14.7 million shares, including a 12.1 million share follow-on offering in early May and incremental ATM issuance raising $2 billion of net proceeds while using cash on hand to pay off a EUR 600 million bond that matured in April and a GBP 250 million bond that matured last Friday. At the end of the second quarter, we had more than $4 billion of total liquidity, and our net debt-to-EBITDA ratio fell to 5.3x, which is below our long-term target. Moving on to our debt profile. Our weighted average debt maturity is over 4 years and our weighted average interest rate is 2.9%, approximately 84% of our debt is non-U.S. dollar denominated, reflecting the growth of our global platform and our FX hedging strategy. Approximately 86% of our net debt is fixed rate and 96% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, after paying off the Euro notes in April and Sterling notes last week, we have 0 remaining debt maturities through year-end. Beyond that, our maturities remain well laddered through 2032. Let me conclude with our guidance. We are maintaining our core FFO guidance range for the full year of 2024 of $6.60 to $6.75 per share, reflecting the continued strength in our core business, partly balanced by the front half weighted capital recycling and funding activity, which helped to reduce our reported leverage by a full turn to better position the company to fund development in 2024 and beyond. We are also maintaining our total revenue and adjusted EBITDA guidance ranges for 2024 as well as the operating, investing and financing expectations that we previously provided. Looking forward to the balance of 2024, core FFO per share remains poised to increase in the second half as the backlog commences and the impact of prior deleveraging moderates. This concludes our prepared remarks. And now we will be pleased to take your questions. Operator, would you please begin the Q&A session?

[Operator Instructions] Your first question comes from Richard Choe with JPMorgan.

I wanted to ask about the long-term pipeline you're seeing for the over 1 megawatt category. I think there's some concerns that right now, we might be in a kind of pull forward or kind of elevated cycle. And just wanted to get your sense of how far out this pipeline of deals that you're looking at and the current environment could last?

Thanks, Richard. So I would say in the greater than megawatt category, we're seeing a continuation of the trends we've been playing out for the last several quarters. The biggest customers are desiring, one, contiguous capacity blocks that are very large; two, they want it right now or as soon as possible; and three, the desire of fungible markets, i.e., markets where they can service certainly GenAI workloads, training with multiple inference but also if they miss the measure, they can support their cloud computing needs as well. So we have not seen the pedal ease in terms of the demand for those attributes in the market.

The next question comes from Irvin Liu with Evercore ISI.

So I wanted to double-click on renewal rates. I guess a couple of items stood out. One in the Americas, the $146 per kilowatt monthly rate for the greater-than-1-megawatt segment. That marked a sequential decline. Similarly, we've seen rates on new leases declined sequentially as well. So can you help us understand what's driving the sequential declines versus a quarter ago? Was this step down mostly a function of markets and mix? Or were there other sort of industry dynamics that we should be thinking about?

Thanks, Irvin. So I think the one deal or the one market you were pointing to is just the North America greater than a megawatt, now it's just a mix of composition of deals. This quarter, in particular, Dallas market really led the way. It's had outside strength. And this is actually a quarter where we didn't actually have any signings into our Northern Virginia market, with not a lack of demand for that market. And we still have some great options for customers available on large capacity blocks in 2 parts of that market. But we just didn't have anything this particular quarter. So if you look more broadly, I think almost all the other, call it, regions in both segments had an uptick in rates. And that's always on apples to apples but the mix in the region could be different metros like that one example I just gave you, but that would be only outliers the one I've discussed.

Your next question comes from Michael Rollins with Citi.

Curious if you could talk about some of the ideas that you shared in the past around working on ways to participate in private capital recycling, whether it's trying to establish mechanisms to be able to react to when some of your private capital partners are going to hit their kind of maturity dates of those investments, what to do with those as well as maybe other opportunities in the category where there's private investments in other data center assets?

Thanks, Michael. Maybe I'll kick off and then Greg can expand upon this. So this topic is not new. I think we've embarked on this journey at least 18 -- or at least 1.5 years ago and made great progress, call it, accumulating north of $10 billion of, call it, hyperscale private ventures, the numerous parties. You've seen that a few places, which we called out in the prepared remarks, we've seen our fee revenue having a step up on a recurring revenue basis in the P&L. Two, you've seen that in the balance sheet. Those private capital initiatives have obviously certainly moved our balance sheet from a defensive posture to an offensive posture and allow us to now pull forward some of these great projects in our land bank that's north of 3 gigawatts of runway growth for our customers. And maybe I'll have Greg just give you a slightest preview of what's next in that evolution when it comes to our private strategic private account initiatives.

Yes. Thanks, Andy. Thanks for the question, Michael. I think first thing I would say is consistent with, as Andy said, we laid out a year ago, January, we're going to continue to bolster and diversify these private capital sources, and that's just what we're doing. As we said, we did a lot of transactions over the last 18 months. We're continuing to evolve that strategy. And when we have something to report, we will. I think it's important to note that the importance of that capital because if you take a look at the demand profile for the business right now, the hyperscale business in of itself between now and 2030 is expected to grow almost 3x. And that includes AI hyperscale and non-AI hyperscale. So look, we think that the strategy that Andy laid out and that we embarked upon was the right strategy. But we're not done yet. And as we said, it's continuing to evolve. And when we have something to report on that front, we'll tell you.

Your next question comes from Jon Atkin with RBC.

I wonder about kind of the speed at which you can kind of deliver on your new starts that you've commenced recently, supply chain, access to energy, access to heavy equipment and so forth. Any kind of color there?

Thanks, Jon. So I mean, we are -- you almost think it was with our continuous conveyor belt of trying to deliver time to product for the customers' needs. That's certainly playing out in our enterprise colocation markets and now playing more than ever on the larger capacity blocks. This quarter, the book to signed and commenced was elongated to about to 20-ish months. That was based on one particular customer that we serviced and they had a very location-sensitive need than a radius restriction and only the thing will be having that radius with [ Atlanta ] state, likely it was on a campus where we own the land and we're ready to get moving on. So that obviously elongated the, call it, delivery time line for that particular surrounding. We excluded that, we were basically called signed and commencing like 4.5-type months. So we're continuously obviously delivering capacity and adding new capacity and whether it's from land to sales, [ sales active ] suites and making sure we're maintaining our production slots and vendor relationships for that time of delivery in our 30-plus metros around the world.

The next question comes from Jon Petersen with Jefferies.

I was hoping you could talk about some of the larger greater-than-1-megawatt lease expirations that are coming up in the coming quarters. How many of those have fixed renewal options and how much can be mark-to-market rents? And if I can sneak in a follow-up question. I think there's a $168 million impairment in the income statement. Just curious what that is related to.

Sure. Thanks, Jonathan. So in terms of lease expirations, so what I'd say is less than half of our greater-than-a-megawatt leases have options we call it [ fixed increases, all in ]. But I would call that significantly less than that are typically renewed pursuant to those options. And that's generally for a few reasons. One, our customers must provide us notice of renewal within the proper period. That doesn't always happen. Two, renewals must come, in essence, without any changes. So if there's any additional space, term, anything changes that opens up the contract. I think as we've talked about in the past. And third, some of those customers also end up churning. So that all gives us an ability to be able to bring those contracts to market for the majority of what ends up rolling within a given period. On your second point on impairment, yes, we did have impairment associated with a few of our noncore assets, which are part of our disposition plans, and those are all located in the secondary market. And I'd also put that in context to the fact that we've generated probably close to I think over $1.3 billion of gains from the capital recycling efforts that we've done over the last year.

Your next question comes from Aryeh Klein with BMO Capital Markets.

I guess some of the comments on the pipeline coming off 2 very strong quarters of leasing and with the development pipeline, 66% leased, including 80% in the Americas, how should we expect CapEx to trend from here? And then what's your appetite to add new domestic markets given what seems like broadening of demand?

Why don't I first let Colin just speak to the pipeline overall, and then can kind of talk about little bit of the development side of that as well as new markets.

Thanks, Aryeh. I appreciate the question. Andy highlighted [ greater-than-1-megawatt ] pipeline overall from megawatts to trending positively below 1 megawatt, which we deem as important as heading in the right direction as well, record pipeline driven from digital transformation, cloud and AI. You saw that trending positively in our results both directly and indirectly. Indirect execution has picked up via last quarter, and we're now 23% of our pipeline being indirect, which we think is a positive sign to value proposition there. One of the things that Andy highlighted is the key value of metros with the demand cycle. We're seeing enterprises and hyperscalers like see real value in proximity and the metro play that we have in key metrics across the globe and particularly important. Finally, the ability both for enterprises and hyperscalers to grow and scale and capacities of [ keen value ] really across the spectrum of low and above a megawatt.

Then Aryeh on the second part of your question, honestly, we remain very focused on our core markets, north of 50 of them around the world, nearly 30 countries on 6 continents. Those markets, we continuously see the robust and diverse customer demand, talking cloud compute from numerous CSPs, enterprise, hybrid IT and service providers and markets where we see really long-term barriers. And to be speaking to our actions on those sizable piece of our activation in shells moving from our 3-plus gigawatt land bank into shell and ultimately, to be delivered in suites is all in those same core markets.

Your next question comes from David Barden with Bank of America.

So I guess two, if I could, Andy, I guess, last quarter, you talked about how 50% of these record bookings were roughly 50% were AI-related. It obviously stepped down sequentially. But to your point about the lengthening of the delivery period, it seems like there's still some very large customers in what was the new leasing number this quarter. Could you kind of revisit on an apples-and-apples basis, how 2Q unfolded versus 1Q from an AI versus non-AI type of new leasing pattern? And how do we think about this? Is there going to be a seasonality to this sort of thing? That would be kind of my first question. And then the second question is, I was just going back to 2019, you guys generated $6.65 of core FFO, which is kind of what you're guiding to for 2024. And I know that you've laid out a hope that there will be growth, more meaningful growth in the forward-looking periods. Also, you said that your balance sheet is now less in a defensive and more in an offensive position and historically, when you've been offensive, it's meant dilution to secure future growth opportunities. So I was wondering if you could kind of, Andy, revisit the bull case for growth to take all these great things that are happening at the top line and turn it into bottom line growth.

Thanks, Dave. So I would say, close to apples-to-apples from a 50% contribution last quarter to this quarter is probably closer [ to a quarter of our signings ], we would say we would pin on AI use cases. But I would caveat that in a few ways. One, that's in a quarter, that's not a record quarter, but I think the top 4 quarter overall signings, great contribution, both 0-1 and plus 1 megawatt as well as a near record in interconnection signings. And that means we're still winning with the traditional demand drivers, digital transformation, cloud computing, and the like, that, that demand has not nearly exhaust itself or playdown. I would also say that there was certainly a deal that I didn't count in the category of AI that is certainly pushing the envelope on power density and [ posting drawing ] already thinking about evolving that capacity block or signed with them in towards what will ultimately be supporting AI down the road is my guess, which I think speaks to the modularity of our design and how we're able to scale infrastructure to the demands of our customers as they need it. The second part of your question, first off, I don't want to confuse the word offense with M&A. I think we've not done any real M&A or external growth for several years now. You can maybe say the resolution of the Cyxtera relationship, but that was, I think, making lemonade out of lemons more than anything. And when I used the word offense, I mean that's converting this 3-plus gigawatt land bank which we've assembled over the years, i.e., we didn't just go buy that yesterday and turning that into a great product for our customers to land and expand and great returns on our investment. And you've been seeing that play out now with our ROI development schedule crescendoing into the double digits. You've seen that in the pricing power. You're seeing our value proposition really resonate in all of our customer segments across our core markets. And lastly, our eyes on the prize of accelerating bottom line. That's where we've reoriented our strategy 18 months ago, value proposition, integrated innovating, bolstering and diversifying our capital sources. And all those things were about called, making sure we're driving per share, FFO per share growth that's accelerating, and it's going to be continuous and compounding for years to come. So there's been no divergence in that conviction of what comes next for the rest of 2024 and what we said about 2025 next year.

Next question comes from Eric Luebchow with Wells Fargo.

Andy, could you maybe comment on what type of market rent growth you're seeing right now in some of your key metros on an apples-to-apples basis relative to last year, whether that's continue to evolve as this year has progressed. And then as you look out into the future, do you see an opportunity for market rent growth to continue to outstrip your development costs and we could see the kind of 10% to 12% development yields you have in your pipeline move even higher?

Thanks, Eric. I mean I would [ couch ] that market rent growth is continuing to move in our favor. You've seen 2 elements happening, the most precious capacity blocks in the key markets like in Northern Virginia continue to set new records in terms of rates. And you've also seen a catch-up phenomenon where other markets in North America or outside of the U.S. were catching up a fair bit in terms of their trajectory of growth. I look at this, you've got -- these waves of demand, be it cloud computing, digital transformation, hybrid IT and now AI that are just getting going in some of these. They're large and dynamic that is happening and it's supply-constrained backdrop from numerous avenues of supply constraint. And those elements are ultimately resulting in the increases in rates that we've been able to execute on for several quarters. And then I believe there will be quarters to come. And I also believe they will likely outstrip the whatever inflationary costs we see in terms of build costs and at least maintain these ROIs if not continue to notch up slightly higher.

The next question comes from Jim Schneider with Goldman Sachs.