Digital Realty Trust Q1 2023 Earnings Call Transcript

Participants

Corporate Executives

• Jordan Sadler, Vice President of Public and Private Investor Relations
• Andrew Power, Chief Executive Officer
• Matt Mercier, Chief Financial Officer
• Corey Dyer, Chief Revenue Officer
• Chris Sharp, Chief Technology Officer
• Greg Wright, Chief Investment Officer

Analysts

• Nick Del Deo, MoffettNathanson
• Jonathan Atkin, RBC
• Jon Petersen, Jefferies Financial Group Inc.
• Michael Rollins, Smith Barney Citigroup
• Michael Elias, TD Cowen
• Frank Louthan, Raymond James
• David Guarino, Green Street
• Matt Niknam, Deutsche Bank Aktiengesellschaft
• Eric Luebchow, Wells Fargo & Company

Presentation

[Operator]

Good afternoon, and welcome to the Digital Realty First Quarter 2023 Earnings Call. [Operator Instructions].

I would 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, Vice President of Public and Private Investor Relations at Digital Realty Trust]

Thank you, operator, and welcome, everyone, to Digital Realty's First Quarter 2023 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, 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 certain 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 first quarter. First, our customer value proposition is resonating as we delivered yet another strong quarter of nearly $50 million of leasing in our 0-1 plus interconnection segment, including our second strongest quarter of bookings in EMEA and record interconnection bookings, helping to push interconnection revenue over $100 million in the quarter for the first time.

Second, the first quarter delivered on the inflection and fundamentals we have guided to for 2023 as demonstrated by 4.5% re-leasing spreads on renewals and a 3.4% increase in stabilized portfolio cash NOI growth. And, third, we remain confident in our funding plan for 2023. We are deeply engaged in the process with multiple institutional buyers, including new and existing partners and we'll update you on specifics once we finalize the transactions.

With that, I'd like to turn the call over to our President and CEO, Andy Power.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Thanks, Jordan. Thanks to everyone for joining our call. Digital Realty remained focused on our customers and executing our strategic plan while delivering a strong first quarter despite global uncertainty. This included reaching another major milestone with our platform now supporting 5,000 customers worldwide. We posted strong sequential growth in revenue, adjusted EBITDA and AFFO, and remained focused on disciplined capital allocation while benefiting from strong secular trends supporting the data center industry.

Last quarter, I identified strengthening our customer value proposition as one of our key strategic priorities. Let me expand on this a bit. Digital Realty has been on a journey since 2015 when we acquired Telx to expand our product offering and global footprint in order to provide the full spectrum of data center solutions to our customers. At the time, we said that we were seeking to expand our product mix and presence in the attractive colocation and interconnection space. When we announced that deal, our annual colocation revenues were about $88 million, which is less than the bookings we posted in the last two quarters in the 0-1 megawatt plus interconnection segment.

Since 2015, we've expanded our colocation and connectivity capabilities, both organically and through acquisitions, including the [Indecipherable] city portfolio, Interxion, the Westin Building, Altus IT, Lambda Helix, Medallion and Teraco. Today, our 0-1 megawatt segment revenues are well over $1 billion and represent 35% of total annualized rent, including a few colo and connectivity oriented organic new market additions that are currently underway and other important subsea cable landing station oriented to facilities.

We expect to soon have a presence in more than 30 countries across six continents. Importantly, according to Cloudscene's H2 2022 Data Center Ecosystem Leaderboard results, which ranks operators based on their data center footprint and performance with a focus on service providers and cloud owners within their ecosystem, digital Realty ranked in the top two slots within North America Europe and LATAM are taking the top spot in the Middle East and Africa region.

Meanwhile, we've also shed noncore assets, recycled capital out of stabilized core assets and created joint ventures with some of the leading institutions around the world to own, operate and develop data centers. Along the way, we've added connectivity-related product capabilities, such as service exchange, Cloud Connect, and last summer, ServiceFabric, while talking to the additions of cloud owners in our data centers around the world. These initiatives have meaningfully improved our customer value propositions and bolstered our results within the colo and connectivity segment.

Since the end of 2015, our interconnection revenue has grown nearly 150%, while our colo and connectivity bookings have increased almost 400%. We now have 214,000 cross connects across our portfolio, an increase of over 250% over the same period. But there is more to do. Our vision is to serve a large and growing customer base that is focused on digital transformation and empowering their business through technological advancements at global scale today, tomorrow and for years to come.

To do that, we served the meeting place offering the full spectrum of data center solutions globally, enabling our customers with a colo capacity and connectivity solutions leases to support their hybrid multi-cloud deployments and also providing line of sight to future availability of scale capacity and infrastructure advancements. Consistent with our strategic priorities, strengthen our customer value proposition, we are pleased to announce the hiring of Steve Smith as Managing Director of our Americas region. Steve joins us following nearly 8 years at CoreSite, where he most recently served as Chief Revenue Officer.

Steve's experienced expertise within the colo and connectivity segment in the US will be invaluable as we look to accelerate and enhance the offering in our largest market. We welcome Steve and the team, and look forward to an upcoming start in July.

Let's move to our first quarter results. This quarter marks an important inflection in the fundamental recovery we have been anticipating in our core portfolio, as re-leasing spreads were positive across all products and in all regions, and scheduled price escalations translated into a positive inflection in our stabilized same capital portfolio growth year-over-year. New leasing during the quarter was $83 million, led by a strong 0-1 megawatt plus interconnection leasing, representing 57% of total signings, helped by the best quarter of interconnection science in company history.

We continue to overindex towards CPI-based escalators within our new leases with over 40% of the new signed leases in the quarter containing inflation length increases with fixed rate escalators on the balance.

During the first quarter, churn remained low at 1.1%, and we added 122 new customers, continuing with the strength of 100 net new logos that we've added in quarter since closing the Interxion transaction. Our key winswins included a Global 500 pharmaceutical sourcing and distribution services company, who are exiting their legacy data centers and expanding on platform digital to ensure European data governance and compliance; a Global 2000 insurance provider, doing a campus migration from a competing provider. A key differentiator for this new customer was improved resilience over the incumbent provider, together with robust multi-cloud connectivity and expansion capabilities.

One of the largest public power companies in the US and a new logo for Digital Realty is leveraging PlatformDIGITAL to modernize its infrastructure with network and control hubs. This company is modernizing its infrastructure to embrace AI, improve analytics, and provide data to its B2B customers.

One of the largest financial services firms is building a new trading platform with Digital Realty, driving an entirely new ecosystem to capture global trading as it happens. Their requirements include low latency and high performance. One of the largest global retailers also joined PlatformDIGITAL to support its local business presence, diversified transit nodes and rearchitect their network topology.

Moving over to the power transmission issue in our largest market, Northern Virginia. We've continued to work constructively with the power divider in this market. And last quarter, we were pleased to be able to confirm the commitments that we have made to our customers. While the overarching conditions in this market have changed, we continue to work in partnership with the local providers to maximize potential availability within our 500-plus megawatt footprint. And we remain cautiously optimistic that we uniquely will be able to provide growth capacity for our customers in this market through new development and select churn opportunities. For now, Ashburn remains highly constrained and pricing is reflecting the decreased availability of data center capacity.

Moving on to our investment activity. During the first quarter, we acquired a 3-acre parcel land in Osaka, Japan, through our MC Digital Realty joint venture to support future development. We also monetized the 10% interest in the data center in Ashburn, Virginia, in the quarter alongside our joint venture partner. While the transaction was driven by our partner and is not a meaningful component of our capital recycling plan for 2023, it did indeed demonstrate the appetite for well-located data centers and strong valuations. This asset was sold at a valuation of nearly $17 million per megawatt which represents a substantial premium to our development cost today for new data centers in this market and significant value creation.

Given the ongoing process that we are undertaking to bolster our capital sources and increase the efficiency of our balance sheet, we remain confident in the institutional appetite to invest in data centers. Notably, over the course of the last few weeks, we have seen the announcement of the sale of a European hyperscale data center platform to a well-known global institutional investor on multiples that are consistent with where similar platforms have traded over the last few years. And we have witnessed the recapitalization of another data center platform by other institutional investors. We know that investors are eager to hear updates on our progress, and we will provide those once we have a transaction to announce.

Since our IPO in 2004, concerns have been periodically raised about various potential risks to data centers, including technology, customers, demand, supply and obsolescence. This is somewhat par for the course for a relatively nascent and growing asset class. Over the last year or so, we have witnessed the latest misinformation campaign cast upon the data center sector by those interested in seeing the price of our stock goes down.

I'd like to clarify a few important points. First, we operate a global portfolio of carrier-neutral and cloud-neutral data centers to facilitate communication and the exchange of information and data among and between enterprises, service providers and individuals all over the world. While we are focused on building what we call the meeting place for service providers and enterprise customers who are in pursuit of hybrid multi-cloud end-state IT architectures. We are also facilitating the connectivity and communities of interest supporting latency-sensitive applications and platforms. These are things that cannot happen in a stand-alone on-prem data center and aren't serviceable by a single cloud service provider.

Second, in contrast to the narrative that hyperscalers have forced prices lower, after a few years of negative same-store growth, the tide is turned. As the supply of data center capacity in the low-cost abundant capital environment that exists for much [Indecipherable] 10 years, has slowed meaningfully now that rates are higher and capital is more precious.

With continued robust demand, strong net absorption has driven vacancy lower, which has been supportive of data center rents. Accordingly, our releasing spreads have inflected positively as have our same capital core growth metrics. Our team delivered on our objectives in the first quarter, and we reiterate the recoveries we anticipate for these metrics for 2023.

Lastly, despite claims almost a year ago that hyperscalers would soon resource their data center requirements, 2022 was a record leasing year for Digital Realty, partly driven by demand from hyperscale customers. We believe the demand from these and other customers within our pipeline, driven by digital transformation and soon artificial intelligence remains robust.

Data center support the growth and evolution of technology that is improving our standard of living, productivity and the overall quality of our lives. We have now witnessed a meaningful and sustained pullback in demand in the nearly 20 years that we've been in business, and we are not seeing a pullback today. While an economic recession could slow capital spending, third-party data centers also benefit from the trend towards outsourcing.

Customers often make the decision to lease rather than build on the availability of capital titans. We saw the same thing during the great financial crisis. For many of our customers, data centers can also help drive revenue growth will facilitate lower costs or even enhance overall productivity. We are optimistic that our business will remain resilient in 2023 and for years to come.

Before turning it over to Matt, I'd like to touch on our ESG progress during the quarter. During the first quarter, a leading ESG ratings provider included Digital Realty in their 2023 top-rated ESG company list, noting that we are in the top 6.5% of companies in the US and Canada region. In addition, Digital Realty continues its efforts to incorporate renewable energy resources. We were named by the United States Environmental Protection Agency as one of the EPA's Top 25 Green Power Partners. We furthered our commitment to sustainability by signing a 10-year power purchase agreement for 116-megawatt share of a new solar project in Germany to increase our total solar and wind power under contract to over 1 gigawatt of renewable capacity.

Subsequent to quarter end, we announced additional renewable to support our portfolio in Australia, while our business in Japan also announced renewable procurement for a portion of its portfolio. We are committed to minimizing our 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.

[Matt Mercier, Chief Financial Officer at Digital Realty Trust]

Thank you, Andy. Let me jump right into our first quarter results. We signed a total of $83 million of new leases in the first quarter, highlighted by a second consecutive quarterly record in interconnection signings and continued strength in the 0-1 megawatt category, particularly in EMEA, which nearly matched the record level from last quarter. 0-1 megawatt plus interconnection accounted for a robust 57% of total bookings. Our greater than a megawatt bookings moderated to $35 million in the quarter. Though this activity was broadly dispersed throughout our global portfolio with leases signed in Toronto, the US, Mexico, Europe and South Africa, but nothing in Northern Virginia.

These deals can be lumpy and the downtick in the greater than a megawatt leasing follows a record year in 2022, in which we signed more than $370 million and 288 megawatts of new leases. Importantly, our demand funnel remains quite strong as a number of our highly strategic customers remain actively engaged and are seeking to add capacity across our global portfolio. Of course, as we have discussed on the last few calls our largest scale market, Northern Virginia, is experiencing capacity constraints as a result of the power transmission issues that emerged last summer. Over the course of the last three years, including the second half of 2022 we signed approximately $20 million per quarter of new leases in Northern Virginia, versus $2.5 million of new leases signed in this market in 1Q 2023. As I'll expand on in a moment, we expect the ballast to lower new lease volume to show up in better pricing including renewal spreads.

Turning to our backlog slide. The current backlog signed but not yet commenced leases was $434 million at quarter end, as commencements were once again well over $100 million, partly balanced by new leasing. We expect the remaining $200-plus million of commencements in 2023 to be somewhat evenly weighted throughout the balance of the year. The lag between signings and commencements in the quarter was 16 months, principally due to a few larger long-term leases that require buildouts.

During the first quarter, we signed $155 million of renewal leases with pricing increases of 4.5% on a cash basis, our strongest renewal pricing quarter since the early days of the pandemic. The strength was shared across both products and also across our three regions. So we're off to a good start relative to our full year 2023 guidance.

Renewal spreads in the 0-1 megawatt category continued accelerating up 4.6% in the first quarter on $118 million of volume, nearly 400 basis points faster than it was in the final quarter of 2021, but also more than 100 basis points better than full year 2022. Greater than a megawatt renewals were similarly strong in the first quarter, as cash re-leasing spreads increased by 4.4% on $30 million of renewals. We were also pleased to see 100% of the leases signed in the quarter roll up in this category, and we remain optimistic about the potential for the rest of this year.

Turning to our operating results. Our performance in the first quarter was a bit better than our expectations, highlighted by the continued improvement in our core operating performance, higher development returns and a record quarter in interconnection revenue. In terms of earnings growth, we reported first quarter core FFO of $1.66 per share, $0.01 better versus prior quarter and a $0.01 light relative to last year. On a constant currency basis, core FFO was $1.69 per share relative to the $1.67 we reported in the first quarter of 2022.

Total revenue was up 19% year-over-year and 9% sequentially. As discussed on the last call, this revenue growth is somewhat distorted due to the significant increases in utility costs and reimbursements as the impact of last year's energy price increases went into full effect in January. As most of you understand, the large majority of energy costs are directly passed through to our customers. Excluding utility reimbursements, total revenue was up 13% year-over-year and 4% sequentially, while reimbursements remained a relatively consistent percentage of utility expenses at 92%.

Due to a decline in spot energy prices between the fourth and first quarters, our top line revenue including utility reimbursements from our customers was more than $40 million below our original forecast, but this was directly mirrored by lower-than-expected utility expenses, since these expenses are directly borne by our customers. Interconnection revenue was up 5% sequentially, reflecting the ongoing improvement in our core operating performance. Other than utilities, expenses were well contained as NOI margins, excluding utilities, remained steady, resulting in adjusted EBITDA growth of 10% year-over-year and 4% sequentially.

On our last two calls, we've highlighted the improvement in operating performance that started to emerge with our stabilized same capital portfolio, but was largely masked by FX headwinds. These positive trends strengthened further in the first quarter despite continued year-over-year currency headwinds. Same-capital cash NOI grew 3.4% in the first quarter compared to 1Q 2022, demonstrating the turn in our core operations that we have been discussing. The step-up was driven by a 90 basis point improvement in same-store occupancy as commencements outpace churn, upside from annual rent escalators and the benefit of positive re-leasing spreads.

Turning to our currency slide, 51% of our first quarter operating revenue was denominated in US dollars, with 25% in euros, 6% in British pounds, 5% in Singapore dollars, 3% in South African rand and 2% in each of the Brazilian real and Japanese yen. The weakening of the US dollar in the first quarter provided a slight sequential tailwind, but the dollar's strength through much of 2022 resulted in a continued headwind to year-over-year results. As a result, the dollar strength negatively impacted our reported revenue growth and adjusted EBITDA growth by about 300 basis points apiece on a year-over-year basis, whereas core FFO per share saw just under 200 basis points headwind.

Turning to the balance sheet. Our reported leverage ratio at quarter end was 7.1 times, while fixed charge coverage was 4.4 times. In January, we completed a $740 million two year term loan with an initial maturity date at March 31, 2025, plus a one year extension option and an effective rate of 5.6%.

Leverage remains above our historical average and our long-term target, and we intend to reduce our leverage toward our long-term target over the course of 2023. Our plan hasn't changed. We are in active discussions on our asset sale and joint venture plans and remain confident in our ability to execute on these plans over the course of the year so that our leverage moves back towards the six times area by year-end.

Our weighted average debt maturity is at five years, and our weighted average coupon is 2.8%. Approximately 82% of our debt is non-US dollar-denominated, reflecting the growth of our global platform. Over 80% of our net debt is fixed rate and 97% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, we have minimal near-term debt maturities with only $100 million maturing in 2023, together with a well-laddered maturity schedule. Lastly, let's turn to our guidance. We are maintaining our core FFO and constant currency core FFO per share guidance ranges for the full year 2023 of $6.65 to $6.75. And our first quarter results were consistent with this range.

We are also affirming our full year adjusted EBITDA guidance of $2.7 billion[Phonetic] at the midpoint as the downward adjustment in our overall revenue guidance is purely due to lower utility expenses driven by lower spot electricity rates that are passed on directly to our customers.

We are also modestly tweaking our year to US dollar exchange rate expectations for the year to reflect the relative appreciation of the euro year-to-date. We also made meaningful progress on the turn in our fundamentals during the quarter, providing strong support to the organic operating metrics supporting our full year guidance, including cash and GAAP re-leasing spreads over 3%, same-capital cash NOI growth of 3% to 4% and year-end portfolio occupancy between 85% and 86%.

As I mentioned a few moments ago, we remain confident in our funding plan for the year. So we have reiterated our guidance for dispositions and JV capital. We have tweaked our debt financing cost expectation to be consistent with the move in rate seen since the banking sector fall out last month, which will be largely mitigated by the upside we saw versus our core FFO expectation the first quarter. This concludes our prepared remarks. And now we will be pleased to take your questions.

Operator, would you please begin the Q&A session?

Questions and Answers

[Operator]

We will now begin the question and answer session. [Operator Instructions] And our first question will come from Nick Del Deo of MoffettNathanson. Please go ahead.

[Nick Del Deo, Analyst at MoffettNathanson]

Hi, guys. Thanks for taking my questions. First, I want to drill into the greater than 1-megawatt leasing a bit. Obviously, that's been a bit below history in Q1, and you called out Ashburn as a driver of that. I guess, just thinking about some of the other drivers there, maybe can you expand upon the degree to which that was the result of making conscious decisions to maybe dial back a bit given the change in the cost of capital versus market conditions or other factors?

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Hey, thanks Nick. So I'll kick it off and I'll hand it to Corey. I would say there's no conscious decisions in dialing back or waving off business necessarily. You could see from our development life cycle, we've continued to raise the bar on our most strategic projects and fine-tuned capital allocations.

The -- I'd say it was a bit -- it was a little bit lower than prior run rates. But if you look at the prior year, which was a record and had a record quarter in there in the third quarter, I wouldn't say -- I think I won't over-index to anything other than call it the typical lumpiness you may have in that category. It was healthy in terms of pricing. I don't think we had a single deal pricing below $100 per kilowatt.

But Corey, do you want to expand?

[Corey Dyer, Chief Revenue Officer at Digital Realty Trust]

Yes, I would tell you that -- thanks, Nick. Nothing's fundamentally really changed our relationship or our position with these hyperscalers in the greater than 1 megawatt category. Coming off, as Andy mentioned, I think, Matt, maybe did in the prepared remarks a record year, and so I'd tell you, this is probably just a one-quarter timing issue, our hyperscale demand remains really healthy and varies a little bit by customer, but it's broad-based across the globe.

Keep in mind, we didn't do Ashburn deals on that this last quarter. And I'd say that they're going through some digestion of their demand signals and maybe a little bit more scrutiny with the macro environment but really confident in the macro demand, our relationships to execute.

And keep in mind, we had our highest and our largest connectivity quarter with the hyperscalers this last quarter. And so I just say that one quarter doesn't make a trend. I'd suggest you look at the multi-quarter trends as well as they expand in new markets, new products like the advent of AI and their edge nodes that we're winning and just new deployments across the globe. We're in a really good position with them from a pipeline perspective and demand. Thanks, Nick.

[Nick Del Deo, Analyst at MoffettNathanson]

Okay. That's helpful. Thank you guys. And I guess, more generally, obviously, the price environment is pretty favorable for you right now. I guess, I'm interested in your thoughts on how you're balancing between raising prices on new space and renewal deals where market conditions allow it versus kind of thinking holistically about your relationships with your top 10 or 15 or 20 customers you do business with globally, and trying not to alienate them or put the relationships.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Yes, Nick. So -- I mean, we all -- we're always trying to take a holistic approach to these relationships. And as you see from our top customer list, our largest customers can be with 20, 30, 40, 50 different locations. At the same time, the pricing is dynamic to overall supply/demand dynamics. And as inventory in various markets become more and more precious, we've seen that pendulum pricing move in our favor.

We try to be straight shooters with the customer. We try to bring all the -- everything to the table in a holistic fashion. We've done this before in terms of bringing renewals and new business, expansions, all-in-one holistic approach. And I think this is not new. These are -- these big hyperscale customers are seeing cost of doing business going up. Many of them self-build themselves and see inflation in construction costs or labor. So I think the understanding that the pricing dynamic is shifting a little bit towards the providers is playing out in a natural fashion.

[Operator]

The next question comes from Jonathan Atkin of RBC. Please go ahead.

[Jonathan Atkin, Analyst at RBC]

Thanks. So, on Corey's response about kind of the leasing volumes telling us to look at kind of the prior multi-quarter trend, curious about interconnection and the trends going forward given kind of the strength there. And any kind of mix shift that you could kind of point to there may be more how you're targeting your customers is a lot of that coming from existing logos or deserting your sales format to focus on interconnect-rich opportunities?

And then, secondly, I guess, on the competitive front, given so many privately-backed companies that are deploying a lot of capital into the sector. Does that affect your hyperscale sales pipeline at all?

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Sure. Thanks, Jon. On the first question, make Sharp and I'll tag team that. I mean -- I think I look at a few things. One, it's a holistic approach to these customers. There's a lot of good results in this quarter, whether it's the new logos, inflecting up 15% quarter-over-quarter, which was a high for several quarters, whether it was the overall interconnection plus less than a megawatt signings, the regional contributions, including a standout interconnection quarter.

And I'd also mention that this is a building momentum. It's been building over time for several quarters now. I think it's the power of the platform coming together, servicing our customers across 50-plus metros on six continents. It's the great work Corey team has done with the go-to-market. And I still would say that we got even further progress and even better results to deliver over time. This particular quarter did have I'd say, a lumpier win, let's call it, put it into the number one category interaction interconnection signings.

So I'm not sure that's necessarily repeatable next quarter with another record. But some of the work that we're doing with service providers, I think Chris can touch on, I think it's going to continue to build that momentum. But Chris, pick it up from that, please?

[Chris Sharp, Chief Technology Officer at Digital Realty Trust]

Yes. Appreciate it, Andy. And thanks for the question, Jon. A couple of dynamics here where I think we've led by our core existing products. And I think your direct question to, is it new logos or its existing, it's both, right? I really want to emphasize the fact that the physical cross connects reaching 214,000 and growing, it's something that we constantly have looked at and Andy referenced this earlier, growing the platform, right, investing and making sure that customers know how to access one another to get further value out of the deployment is absolutely important to us.

And so just really watching how that evolves over time. And with the advent of the ServiceFabric and bringing that to market and what that's being able to do for our customers, we're just starting to see -- it's early innings, but future growth on virtual, right, where it's going to be married to where now they're going to be able to access multiple destinations in a more simplistic fashion, because of that product being purpose built in the way that we brought it to market, it really removes a lot of the technical complexity that has precluded other customers from getting the full value out of the deployment.

But one of the things I'm just very pleased about is this customer-led and balanced approach that we've been doing on even new markets inside of Europe. We've talked about in the past where just bringing the value or the pricing closer to parity in some of these markets -- we see really strong growth within Germany and France, where making sure that we're delivering those capabilities to those customers in all these critical markets around the globe.

And I would just say lastly, I'm pleased with the fact that Digital has been able to provide one of the greatest quarters of interconnection signings in the company's history, and that's just really representative of the value we're bringing to the customers.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

And then, Jon, just around your second question about call it competition from private back, one, that's not a new phenomenon. We've been competing against private players for some time now and the ones that have been taken private they've been private for, call it, multiple years for some of them. I think what's changed is the ability to deliver this business for our customers has just gotten harder and harder, and at a global scale. And whether it's power, constraints, staffing, supply chains -- and certainly, cost and access to capital has certainly not been a friend of some of our competitors.

And I think our largest customers in the hyperscale arena turn to us given our permanence in our space. We're not here, gone tomorrow, we've invested for the long run, we're future-proofing that growth, we're constantly building for that growth with our suppliers and I think all those things probably make it leave a little bit more advantageous versus some of those private bank names in an environment like today.

[Operator]

The next question comes from Jon Petersen of Jefferies. Please go ahead.

[Jon Petersen, Analyst at Jefferies Financial Group]

Great. Thank you. I was hoping if we could talk about the leverage target. You guys reiterated getting down to six times leverage, and I know you're working through these various transactions. But I guess if you complete the $2 billion of transactions. I, mean, does that get you to six times? Like, can you just give us the moving pieces on getting to that target?

[Matt Mercier, Chief Financial Officer at Digital Realty Trust]

Yes, thanks. So I mean, the simple answer is, yes. So our capital plan, I think, as we laid out last quarter, and it really hasn't changed coming into this quarter, is based on, call it, $2-plus billion of capital recycling from our joint venture opportunities as well as the potential for noncore dispositions. And as that capital comes in as well as our expected growth in EBITDA this year, which is a little shy of 10%, we believe that by the end of the year, largely those two items will get us back towards that six times area this year.

[Jon Petersen, Analyst at Jefferies Financial Group]

Okay, great. And then if I could just ask on development. I'm curious, given the shift in cost of capital, like what's the minimum development yield? Or maybe you just talk broadly about how much those requirements for you guys have moved in the last year or so? Like, what does it take for you guys to start a development today in terms of return expectations?

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Thanks, Jon. I mean, we do an incredibly granular market-by-market assessment here. So, it really depends on the market and the relative risk fee rates and risk premiums. I would just by and large, and this is not something that just showed up in our approach this quarter, three quarters ago almost, we basically took a posture that we need to raise the bar on capital allocation and prioritize our most strategic projects, call it, highest return, not only highest return, but also projects to generate the high long-term growth as well.

So I don't have a single number answer to get -- to give you there, but I think you will see that come through our development returns at table as those numbers are inching into higher territory, and I can tell you more strategic long-term growth projects.

[Jon Petersen, Analyst at Jefferies Financial Group]

Great. Thank you.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Okay.

[Operator]

The next question comes from Michael Rollins of Citi. Please go ahead.

[Michael Rollins, Analyst at Smith Barney Citigroup]

Thanks, and good afternoon. I wanted to go back to the capital recycling topic. And just when we look at the guidance page, there is a wide range of outcomes. And what would be a good outcome for Digital in terms of the yield? And what would the scenario be in which you may just decide there is alternative forms of capital that are better than recycling?

And then just a second topic but related, if I could take a step back. As I think about the comments you've made about considering both stabilized assets and development for monetization, just curious if there is a more profound change in the business strategy and financial model that investors should be mindful of in terms of how this business, over the next couple of years, might look different in terms of the quantum of investment in a given year and the level of financial performance that you're driving off of those investments, just following on the comments you just made. Thanks.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

So Mike, a good outcome is we essentially get the, call it, $2 billion of funding completed and the range is wide, but the majority of that capital, the range is not that wide. The wide range is due to some of the noncore asset sales as well as the development, which is, call it, 25% of the $2 billion, right. But if you look at the majority, the 75%, which is stabilized joint ventures or development, development, those were zero yielding projects. On stabilized joint ventures, I think, the cap rates are in the low single-digit type category based on what we're seeing called six-ish type territory.

And I think that's based on not what we see externally by third-party transactions. What we've seen on recent transactions with partners that we can recapitalize with our portfolio and through our progress on these capital recycling and joint venture efforts.

Holistically, more longer term here, we are looking to become more balance sheet efficient. What's not new is, call it, finishing out the noncore dispose, what's not new is joint venturing majority states in stabilized hyperscale-oriented projects that have lower long-term growth rates due to the credit quality and size of the customers, be it through rent bumps or pricing power. What is new is sharing a piece of both of our North America and EMEA development as it relates to hyperscale projects. And we're doing that with a view that these projects keep getting larger, and larger and larger. That non-income producing drag it remains a headwind, even though it is a significant long-term value creation.

And we believe there is ample partners to work with us on those projects which will ultimately make our balance sheet more efficient and more rapidly accelerate revenue and EBITDA drop into our bottom line.

[Operator]

The next question comes from Michael Elias of TD Cowen. Please go ahead.

[Michael Elias, Analyst at TD Cowen]

Great, thanks for taking the questions here. I guess first, just to double-click on what you said about balance sheet efficiency. As it relates to the development JV, aside from recouping the previously spent capex, is the intention of that JV to structurally reduce the on-balance sheet capex for digital? Or is the intention to keep capex more or less the same while being able to increase the set of opportunities you can pursue? And then I have a follow-up.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

The simple answer, Michael, is we're looking to partner around large-scale development projects where there will be incremental spend that we and our partner will jointly fund over time. So that it will -- we're looking for -- these are large projects, large swaths of acreage, large quantities and megawatts. Hence, the quality of capital or spend is not the entirety or near the entirety of where the project ultimately will be over time. So they would fund alongside us through the coming quarters.

[Michael Elias, Analyst at TD Cowen]

Okay. Maybe just to shift gears a little bit. Earlier on the call today, you're really emphasizing the steps you've made on the colo/enterprise side. Today, you also announced the appointment of Steve Smith. Clearly a focus on accelerating colo and connectivity, I mean, my question for you would be, as we consider the path ahead, what are the changes that you feel need to be made internally in order for you to really accelerate on that, call it, 0-1 megawatt side? Thanks.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

So Michael, I mean, again, I think this ties back to the first three strategic priorities I laid out in the prior call about really strengthening -- demonstrably strengthening our customer value proposition. We took advantage of this call to remind folks that this is not something we started with me becoming the CEO four months ago. This is something that's been in the works for roughly eight years through both inorganic and organic measures, putting together critical puzzle pieces, expanding across the globe in terms of where the customers need our capacity, adding connectivity hubs and innovating and bringing more to our customers, adding -- we've changed up our go-to-market motion over time.

What we go from here is, again, accelerating from that success. A piece of that -- delighted to have Steve Smith on board to lead our essentially newly created Americas region. Steve comes with a tremendous background of really driving the -- one of the only US-only focused interconnection and colo platforms in a prior -- previously a very formidable competitor.

And I think he's going to be very added to that our team, our leadership table. The incremental things that we're doing in terms of continuing to innovate and bring more value to our customers. Chris touched upon ServiceFabric, which I still would characterize as just out of the bar in terms of where we're going in terms of bringing more partners onto that platform, and drilling more value to our customers.

We are -- there's a whole host of things that I'd say we're doing behind the scenes to continue to accelerate our growth. And I think the fruits of our labor are continuing to build each and every quarter in terms of success. So I think there's multiple angles that we are moving towards in that endeavor to be one of a very short list of global interconnection colo providers. And I think the industry demands and the broader competitive backdrop are also our wins at our sales.

[Corey Dyer, Chief Revenue Officer at Digital Realty Trust]

And then Andy, just one thing to add from a go-to-market perspective. We've had a ton of success around the channel. We're continuing to grow the channel. I think this last quarter, 38% of our new logos were from the channel. Prior years, it was 31%. We're continuing to build on that success. We see the channel as being a huge advocate and a partner through their lens with all the enterprises.

So we're going to see that continue to build. So we're doing a lot of functional and strategic operational items that we need to do. We're also continuing to tweak and evolve our go-to-market, we think it's going to continue to add value.

[Operator]

The next question comes from Frank Louthan of Raymond James. Please go ahead.

[Frank Louthan, Analyst at Raymond James]

Great. Thank you. On the re-leasing spreads, thinking about greater than a megawatt in particular, but kind of with all of them, is there anything you see coming up in the year that could possibly push those spreads back negative by any large renegotiations? And then what is sort of the longer-term outlook with the bookings down a little bit, but pricing doing better, what sort of yield are we looking at going forward per se, you've got in the last couple of years when the bookings were higher?

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

I'll let Matt, take it off in re-leasing spreads and we can tag some longer term outlook pieces.

[Matt Mercier, Chief Financial Officer at Digital Realty Trust]

Yes. So thanks, Frank. I think, one, first, I'd reiterate, we're obviously off to a great start here with positive re-leasing spreads, again, not only across all product types, but across all regions. I will say, we're -- we feel confident that this positive pricing environment that we're in is sustainable and it's here to stay. I'm not going to necessarily speak about every single quarter. But again, I'd come back and reiterate that we're off to a great start.

We see that come for full year that we expect to be positive for the full year, not only in the 0-1 megawatt category but also in the greater than a megawatt category, which I think is, again, something we haven't seen in a few years. And reflects the positive environment and turn in fundamentals that we're seeing not only from that, but then down into our stabilized portfolio as well.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Frank, do you want -- do you mind repeating that second part of your question just to make sure we hear it correctly?

[Frank Louthan, Analyst at Raymond James]

Yes. I mean, leasings are down a little bit, obviously better pricing. What does the yield look like now per se, the last couple of years ago when bookings were higher and so forth? And how long do you think this is sustainable? What sort of yields are you seeing coming in now even though the absolute bookings are a little bit lower?

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Yes. Frank, I'd direct you to our development table to follow, see the progression of yields. There's -- I would say the yields are improving in our favor. The pricing dynamic is outpacing the inflationary pressures. It's not an overnight phenomenon, but we are moving into a better territory. I mean, you can look at episodic things like Ashburn, Virginia, where quite frankly, the rates have pretty much doubled in a pretty short time from deals in the, call it, low $70s to now call it, market rates of, call it, $140, and that's flowing to the bottom line and enhancing those deals dramatically.

So I think that table is a work in progress in our sub because it's got a lot of pre-leasing, some of which was signed prior to some of this price progression. But as we continue to add more projects to that, that they are not pre-leased or we fill out the leasing on the available capacity, I think there's ability to raise those yields. And I would also say the North America piece of that has a large project in it that is an open book build-to-suit to a very highly rated financial institution on a triple net lease basis. So it's an apple to the oranges there in a good way. It's been dramatically derisked in terms of its build and in terms of its ongoing revenue and EBITDA stream at the same time, lowering our Americas yields.

[Frank Louthan, Analyst at Raymond James]

Okay, great. Thank you very much.

[Operator]

The next question comes from David Guarino of Green Street. Please go ahead.

[David Guarino, Analyst at Green Street]

Hey, thanks. Andy, in the press release, you were quoted as saying that you're seeing broad-based demand and reduced data center availability. I was just wondering, why do you think that isn't translating into outsized growth in rental rates like we've seen across other commercial real estate sectors like industrial or self-storage? And it definitely feels like the pendulum has firmly swung back to landlords, but data center rents just aren't rising like we've seen elsewhere.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

I would say, I mean, it's a new phenomenon in terms of recent history of the data centers, which is still, I'd call a nascent asset class, but we are seeing it. If you look at -- our less than a megawatt signings, either the Americas region or EMEA region where there's critical consistent massive new signings, the rates have been up, call it, four quarters in a row. And that example I gave you, in Ashburn, Virginia, from rates going from [Indecipherable] to $140 plus E. That is quite a run. And I know I'm picking out one particular market there, an example, but it is the largest and most diverse market out there, our largest market as well. And it's flanks the East Coast with a power constraint problem, but the West Coast is having the same low with Santa Clara now having power constraints to likely outpace when power comes online in Virginia.

And I think this phenomenon is going to continue in other parts of the world, not just the US. And I think you're going to continue to see those rates move more and more favor. David, I know you're a student of the traditional real estate asset classes. I mean, it was a good 20 years where industrial had no rate growth before it's had the renaissance that's been experienced in the last few years. And I'm not saying that that's going to happen to data centers, but it feels like we're teeing ourselves up way for a healthier pricing environment for the incumbents.

[David Guarino, Analyst at Green Street]

That's encouraging to hear. And then maybe kind of sticking with that theme, you said we've been hearing some similar chatter also about difficulty securing power in some other markets. I've heard Chicago come on the radar and possibly even Hillsboro now. So given just -- it feels like these are popping up everywhere across the industry, what do you think that means for your pace of new leasing activity going forward? I mean, are the things we saw in the years past probably unlikely to happen just given the power constraints?

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Yes, if you look at our financials, we've got a sizable amount of contiguous land capacity and available power that's committed to us outside of these, call it, zones of disruption. But longer term, eventually we will exhaust that and you could have that phenomenon. At the same time, when you're doing business at twice the rates, you have to sell half the kilowatts in certain markets. So, I'm not sure that the top-line pacing on our new signings will be all that disrupted near term based on what we have in this table in terms of capabilities and estimated power. But I agree with you this assessment and it's going to continue.

The other thing I'd emphasize is, we're actively managing our platform and our capabilities, and we're essentially always looking to reproductize for higher, better use when applicable. So if we have churn, which this is not a totally static business, it provides opportunity to release that capacity at higher rate opportunities and often higher better uses towards some granular enterprise colocation oriented customers. And on a big company like digital, you probably don't see that. It's not top of the waves, but that's happening in terms of how we manage our footprint.

[David Guarino, Analyst at Green Street]

Great. Thank you.

[Operator]

The next question comes from Matt Niknam of Deutsche Bank. Please go ahead.

[Matt Niknam, Analyst at Deutsche Bank Aktiengesellschaft]

Hey guys. Thanks for squeezing me in here. Just two, if I could. First, on the capital recycling, not to beat a dead horse, but you did talk about being deeply engaged in the process. I'm just wondering if there's any more color you can share on the progress made thus far across the different buckets that you've laid out?

And then maybe switching gears. On AI, I mean, we've heard so much about this over the last several months. I'm just wondering how the increased focus on AI impacted your customer leasing plans and your conversations with them as they think about deployment plans over the next year? Thanks.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Thanks, Matt. I'm going to have Greg tackle the first one and then Sharp and I can both tackle the second one.

[Greg Wright, Chief Investment Officer at Digital Realty Trust]

Thanks, Matt. Look, I'd say, look, with respect to our capital initiatives, I'd say we're still on track with the plan we outlined in our earnings call in early February. But you should recall that was the $500 million of the noncore dispositions, call it, roughly $750 million from core JVs and $750 from million development JVs.

And I would characterize it without saying too much, is that we're making good progress in these transactions. And we've received significant interest from multiple institutional partners, whether it's sovereign wealth funds, infrastructure funds, PE, real estate funds, pension funds, insurance companies and the like. So the way I'd characterize it is we're executing on plan. And we feel good about where we are into these processes.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

And turning to your second question -- just one quick thing for I turn over to Chris [Indecipherable] to give his view on AI. The -- I think a misnomer here is that, in my opinion, that everyone thinks every data center is going to turn into one that's going to be supporting artificial intelligence. The use cases, the applications, the workloads that exist today are still going to be thriving within the global data center footprint and digital. Yes, we have many data centers that lend themselves towards supporting the increasing power densities and cooling environments that will be required, and we're doing a lot of that as we speak.

But I look at more -- the bigger picture around AI is that this is an incremental major wave of long-term demand that will certainly need to have proximity to the major data that sits today. And the first two waves of demand of moving from on-prem locations to hybrid locations and the second wave of multi-cloud haven't even hit the shore yet while this next wave of demand, it is falling behind it. But Chris, why don't you speak a little your view on AI?

[Chris Sharp, Chief Technology Officer at Digital Realty Trust]

Yes. No, absolutely. I appreciate the question. A couple of pieces. Just to reiterate what Andy said, the existing cloud infrastructure we have today, AI is cloud adjacent because of a lot of the applications, it's empowering and the way the customers are bringing it to market it's something we've been watching for many, many years. And I think one of the pieces I always try to emphasize is that a lot of the R&D from the hyperscalers and from the technological providers has been happening within digital, which has allowed us to evolve our infrastructure with this demand.

And I would reiterate also that there are pockets of AI that we're able to support rather efficiently. And I think this is something that's unique to Digital's designs and the R&D work that we've been doing with some of the cooling technologies. It's really important for us to continue to support the broader spectrum of the customer requirements, so not only their traditional type of digital transformation, but we are seeing more and more customers show up with AI specific requirements and association with that digital transformation.

And then the last one is, really emphasizing that to the customer base to design early and understand the implications of not only the power, but the interconnectivity. And just to circle back to why we believe the value of from Digital is differentiated is the ability to interconnect in an open fashion with the right partners in a very simplistic manner is what's making a lot of these AI deployments successful. And so that's the core of how we continue to focus on AI and bringing that to market in a very repeatable fashion.

And so you'll see some recent sales tools we'll start talking about publicly to visualize how you tie together this infrastructure on a global basis. So very exciting about this additive demand coming to market, and you'll see more and more of the use cases and case studies coming out on the success that our customers are having within Platform Digital.

[Operator]

The last question comes from Eric Luebchow of Wells Fargo. Please go ahead.

[Eric Luebchow, Analyst at Wells Fargo & Company]

Hey. Thanks guys for squeezing me in. I wanted to touch base on Ashburn, it sounds like the transmission line has been approved to be in service by late 2025 year at Digital Dallas. So when do you think you might be able to start additional development in that market? And do you think you're seeing any spillover impacts in terms of other markets or submarkets where you're seeing additional activity levels because of the tightness in Ashburn?

And I guess just related to that on the pricing front, I think you mentioned that you're seeing rents as high as $140. I think a lot of your rents in Ashburn are rolling at $80 or $90. So just wondering if you have any color on what you've seen on the re-leasing spreads across that market and what you expect going forward? Thank you.

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Thanks Eric. And we touched a little bit on this in the prepared remarks. The good news is that the powers that be in the region are sorting out ways to bring incremental power to the region by 2026. I think the -- from there, I think you'll see a much more rational providing power to that market. And I do think it's going to move ourselves to be our history and track record of working in that region is going to keep us top of queue when power becomes more freely. Between now and then we -- last quarter, had a good fortune having worked with the local providers to be able to deliver on all of our customer commitments, which is fantastic.

We do believe that we will be able to bring on incremental growth capacity in this market between now and 2026 through called some development as well as some churn. We are working through all the resources we have in terms of excess power at sites, customers that may not be using their suites and be able to go to spare some capacity. So I don't have a fine point of the quantity, but I don't believe our shelves at Digital will be bearing, and we will be able to support our customers. Certainly our colocation customers and some of our hyperscale customers we'll be able to grow with Digital in Ashburn in the coming years. And then as we get a finer point on the quantities probably in lockstep with leasing in that capacity, we'll certainly be happy to share. In terms of spillover effect, the spillover is real.

Manassas, I think is front center of a spillover market to the Loudoun County pinch point. I would say that's -- we've seen the greatest spillover effect. But there's always potential some of the non-Northern Virginia markets will continue to but at auction. But I don't think -- I don't see anyone packing their wagons and leaving Ashburn due to this. I think the momentum has been building for years, and it's called out escape velocity in terms of its criticality to the data center industry and its customers.

[Eric Luebchow, Analyst at Wells Fargo & Company]

Great. Thank you.

[Operator]

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

[Andrew Power, Chief Executive Officer at Digital Realty Trust]

Thank you, Andrea. Digital Realty is off to a strong start to the year. Our results demonstrate that our value proposition is resonating with customers which was confirmed by our record interconnection signings, continued strength in the 0-1 megawatt category and strong new logo additions. We expect that our operating momentum will continue through the year and the steps we are taking will further accelerate our progress.

We also remain confident in our funding plan, and I look forward to updating you with further developments on this front at the appropriate time. We are very excited to bring together our customers and partners on May 24 and 25 at our Marketplace Live 2023 event. The theme this year is the crossroads of the digital world, the data meeting place. The entire digital realty community from around the world will come together virtually to network, gain inspiration and bring their digital strategies to life. Please join us, you can register at marketplacelive.com.

I'd like to thank everyone for joining us today and say a special thank you to our hard working and exceptional team and Digital Realty to help keep the digital world running. Thank you.

[Operator]

[Operator Closing Remarks]