Digital Realty Trust Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 12 speakers on the call.

Operator

Afternoon, and welcome to the Digital Realty Second Quarter 2023 Earnings Call. Please note this event is being recorded. During today's presentation, all parties will be in a listen only mode. Following the presentation, we will conduct a question and answer session. Callers will be limited to one question plus a follow-up and we will aim to conclude at the bottom of the hour.

Operator

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

Speaker 1

Thank you, operator, and welcome everyone to Digital Realty's Q2 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, Colin McLean are also on the call and will be available for Q and 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 ks and subsequent filings with the SEC.

Speaker 1

This call will contain non GAAP financial information. Reconciliations to net income are Before I turn the call over to Andy, Let me offer a few key takeaways from our Q2. First, our customer value proposition continues to resonate. We delivered yet another strong quarter of leasing in our 0 to 1 Megawatt Plus Interconnection segment and saw a healthy rebound in greater than a megawatt leasing. And second, this past quarter confirmed the continued inflection in fundamentals we have been speaking about for much of the past year, supported by a strong pricing environment.

Speaker 1

Re leasing spreads were the strongest in 3 years and stabilized same cash NOI grew by 5.6% marking the 2nd Consecutive quarter of positive growth and the best growth in almost 9 years. And third, We bolstered our total liquidity, which now stands at more than $4,000,000,000 and further diversified Our capital sources and reduced our leverage well off of peak levels through more than $2,000,000,000 of dispositions and JVs over $1,000,000,000 of equity issued under our ATM. With that, I'd like to turn the call over to our President and CEO, Andy Power.

Speaker 2

Thanks, Jordan, and thanks to everyone for joining our call. Against the backdrop of an extraordinarily dynamic first half of the year, We have remained focused on advancing our strategic priorities and delivering on behalf of our 5,000 plus customers. Digital Realty made strong progress in the 2nd quarter with improved operational results, progress on our funding plan and increased liquidity, Continued organizational improvements and increasing recognition of the critical role that data centers will play in support of both digital transformation We posted sequential growth in revenue, adjusted EBITDA and CFFO per share, While improving development returns, bolstering liquidity and delevering the balance sheet. During the quarter, we made progress on each of the 3 key 1st, we strengthened our customer value proposition By enhancing our communities of interest with more connectivity options, posting record double digit interconnection revenue growth and the 2nd highest quarter of new logo additions in company history. 2nd, we innovated and integrated, Delivering enhancements designed to support high performance compute, including AI by enabling data centers to support liquid cooling solutions, We're also broadening our existing partnership with NVIDIA with the certification of our first GTX H100 Ready Data Center And integrating with additional organizational enhancements designed to deliver a consistent structure and experience, while leveraging data to improve our effectiveness and 3rd, we accessed diverse capital sources during the quarter, including the sale of a non core asset in an attractive 4.4 percent cap rate and equity raised under our ATM.

Speaker 2

Subsequent to the end of the quarter, we formed a Stabilized hyperscale data center joint venture with a new private capital partner that acquired an interest in 2 facilities in Chicago. And today, we announced a similar joint venture transaction alongside a second new private capital partner for 3 Stabilized Hyperscale Data Centers in Northern Virginia. Just a little more than halfway through the year, we are now well ahead of the midpoint of our original funding plan for 2023 and we remain focused on putting Digital Realty's balance sheet into position to support the growing opportunity that lies ahead. The current state of the data center infrastructure landscape is very healthy. There is widespread demand for our data center capacity across various regions and products.

Speaker 2

However, there is limited new supply due to decreased power availability and tight financial conditions. The global expansion of cloud computing paired with continuous digital transformation of enterprises underscores the Importance of both data and AI in shaping demand. Presently, we are collaborating with numerous clients On AI focused request for proposals and implementations. The initial surge is anticipated in power intensive training applications, Followed by a rise in inferencing applications, including access to private datasets, which are expected to necessitate enhanced performance And reduced latency. Additionally, the intricate nature of these models is necessitating larger capacity blocks, which aligns seamlessly with our extensive product suite.

Speaker 2

As the global meeting plays for data exchange And a full spectrum provider of data center solutions, Digital Realty stands at a strategic vantage point. This allows us to cater to the needs of enterprises, facilitating their efficient integration of AI applications within their digital transformation journeys. In the Q2, we unveiled Data Gravity Index 2.0, which represents our extended commitment to data science. This tool is designed to assess the effects of enterprise data generation and consumption in both public clouds and private data centers, Offering enterprises a framework to manage and derive insights from their data. Moreover, our innovative approaches in data gravity and comprehensive data center architecture were recognized as we secured a patent for these.

Speaker 2

Our patent further offers enterprises a roadmap to ensure their architectures remain relevant in the future. The evidence is clear. We have shifted from a physical economy to a digital economy, Which now is entering a new form, the data economy. Our research shows that the surge in server demand can be attributed to the rising needs Both public and private cloud infrastructure, further augmented by AI training and inference processes. At the same time, demand for storage devices is Poised to grow due to data regulation.

Speaker 2

Let's move to our 2nd quarter results. This Our pipeline remains strong during the quarter, helping to drive a sequential rebound in leasing volume, but also supporting strong pricing With re leasing spreads positive again across all product types and in all regions. New leasing during the quarter was $114,000,000 With continued strength in the 0 to 1 megawatt plus interconnection leasing, which represented 43% of total signings, Greater than a megawatt increased by over 60% sequentially, led by one of our strongest quarters ever in EMEA. Strong demand trends and reduced availability along with growing recognition of our value proposition continue to be supportive of pricing and are enhancing our expected returns. In the Q2, we saw releasing spreads climb to nearly 7% on a cash basis, Helping to drive the best same capital cash NOI growth that we have seen since I joined Digital Realty in 2015.

Speaker 2

During the Q2, churn remained low at 1.5% and we added 133 new customers, Our second best quarter ever and a nice continuation of the 100 plus new logo streak we have going. This is a strong validation of the stability of enterprise IT spend and digital transformation that we are seeing and of the value that customers recognize In Platform Digital, our key wins included an innovative sustainability oriented infrastructure provider The taps into Stranded Energy to support module edge compute sites chose Digital Realty for AI applications Utilizing Platform Digital's Network Control and Data Hub Solutions. Data intensive workloads are being deployed on Platform Digital By a major U. S. Federal agency to reduce costs and improve sustainability while interconnecting with their key ecosystem partners.

Speaker 2

A leading European bank chose Platform Digital to help simplify and secure their hybrid IT strategy in compliance With data sovereignty regulations while leveraging the available cloud connectivity, a Fortune 500 quick serve restaurant chain Is updating their internal infrastructure on Platform Digital to improve reliability and security, support existing systems and connect with key clouds to support Strong growth of their ecommerce business. A Global 2000 Pharmaceutical Sourcing and Distribution Services company It's expanding to a new platform digital to ensure global data governance compliance. And a Global 2000 auto manufacturer Platform Digital to upgrade their network architecture in Central Europe by adding key points of presence for the largest and most important production centers. Moving over to our largest market, Northern Virginia. In the years since we learned of the power constraints in this market, We've continued to work constructively with the power provider to confirm the commitments that we've made to our customers and to provide growth capacity for our customers Through new development and select churn opportunities, over the course of last several months with the support of our local utility partners, We've been able to identify nearly 100 megawatts of incremental billable capacity that we expect to be able to bring to market prior to 2026.

Speaker 2

This includes 40 megawatts of available capacity underway within the current development pipeline and the potential to move forward on almost another 60 megawatts. In addition to this Ashburn focused capacity, we've made meaningful progress on our 192 Megawatt development site in Manassas, which is now nearly in position to begin development. We are optimistic about the near term potential to offer this availability to our customers. Moving on to our investment activity. As we outlined in February, 2023 was poised to be an active year for our investments team And some of the fruit of their labor has been harvested since our last call.

Speaker 2

During the Q2, we acquired the land and shell associated with a previously leased data center in Amsterdam, Where we previously held a leasehold interest for $18,000,000 In a separate future proofing transaction, We purchased additional land adjacent to our highly connected Schifel campus in Amsterdam, which could support another 40 megawatts of potential IT load, providing ample runway for both enterprise and service provider growth. We also closed on the 1st non core disposition of the year in mid May At a 4.4% cap rate, resulting in $150,000,000 of net proceeds to Digital Realty, this facility was previously leased as a powered shell and was sold to one of its Primary occupants. In July, we saw a significant acceleration in our capital recycling initiatives, Closing on 2 separate stabilized hyperscale joint ventures in Chicago and Ashburn. These deals executed at just over a 6% cash cap rate on average and raised more than $2,000,000,000 of net proceeds for Digital Realty. These transactions are important validation of our current strategy as we remain focused on delivering shareholder value through the development new data centers at double digit unlevered returns and the monetization of stabilized hyperscale assets at a premium.

Speaker 2

But equally as important, we've substantially bolstered and diversified our sources of private capital so that we can execute on the opportunity that lies ahead without being overly reliant on any individual avenue of capital, while also increasing the efficiency of our balance sheet. While we've had remarkable traction on these transactions and all due credit goes to Greg Wright, his top notch team The rest of our platform for executing through a tumultuous capital markets environment, we are not resting on our laurels. We are well ahead of our plan on our stabilized hyperscale joint venture plan, but we see ample demand for the hyperscale development joint venture bucket that we have previously discussed and will provide updates as appropriate. Before moving on, I'm also delighted to welcome GEO, a Reliance Industries Company As our newest partner to our joint venture in India, the expanded partnership builds on the strong foundation laid by BAM Digital Realty Through the addition of Jio's massive digital and connectivity ecosystem and strong enterprise relationships with 80% of large private enterprises in India. Before turning it over to Matt, I'd like to touch on our ESG progress during the quarter.

Speaker 2

During the Q2, we issued our 5th annual ESG report outlining our initiatives for 2022. The report highlights the progress we have made Toward our science based targets commitment to reduce our global carbon emission by 68% by 2,030. We will enable our success by contracting for renewable energy wherever possible so that we have 1 gigawatt of Solar and wind energy under contract in the U. S. This has enabled us to match 126 of our data centers with 100% renewable energy.

Speaker 2

In the Q2, we also received a certificate of adherence from the Climate Neutral Data Center PAC. As a founding member of the PAC, Digital Realty worked with independent auditors to certify that we are on track to meet the overarching goal of the PAC For the industry to become climate neutral by 2,030, 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.

Speaker 3

Thank you, Andy. Let me jump right into our 2nd quarter results. We signed $114,000,000 of new leases in the 2nd quarter With broad based strength across the 0 to 1 Megawatt Plus Interconnection segment in each region. We leased approximately $50,000,000 in 0 to 1 megawatt plus interconnection category accounted for 43% of total bookings and becoming a larger part of our overall bookings since last year. Interconnection bookings were strong once again at over $12,000,000 concluding a record 12 month period.

Speaker 3

0 to 1 megawatt bookings excluding interconnection were among our strongest ever at $37,000,000 Digital Realty has come a long way over the past 4 years, More than tripling our bookings in the 0 to 1 Megawatt Plus Interconnection segment through a combination of organic and inorganic growth. These results demonstrate that our full spectrum strategy is working. Greater than a megawatt bookings totaled $61,000,000 in the quarter, A meaningful bounce back from last quarter's timing oriented pause. EMEA was the standout, including strong contributions from Johannesburg, Paris and Marseille, while we also saw notable strength in Northern Virginia and Tokyo. We also continue to over index toward CPI based escalators within our new leases with 35% of the newly signed leases in the quarter contain inflation linked increases With fixed rate escalators on the balance.

Speaker 3

Pricing has improved in many markets with our largest market Northern Virginia Seeing nearly a doubling of rates over the past year in response to supply constraints. Illustrating the changing tide in Ashburn, During the quarter, we opportunistically took back 8 megawatts of lease capacity from an existing customer and re leased it to another customer at a substantial premium. The original lease was signed in the Q1 of last year. Accordingly, our new leasing for the quarter only represents The uplift in rent achieved versus the prior lease rather than the full annualized value of the new lease. While we have previously tempered enthusiasm around the potential mark to market opportunity in Northern Virginia, we are encouraged By this recent transaction and our increased development potential and growing colocation and connectivity offering in this market.

Speaker 3

Aside from the shift seen in Northern Virginia, we have also seen an improvement in rates across the Americas Strength across product types and geographies. We expect ongoing and newly approved development capacity to be an important contributor to our growth through next year. Turning to our backlog slide. The current backlog of signed but not yet commenced leases $437,000,000 at quarter end as commencements were once again well over $100,000,000 balanced by new leasing. We expect the remaining $150,000,000 of commencements in the second half of twenty twenty three to be somewhat evenly weighted between the 3rd and 4th quarters.

Speaker 3

The lag between signings and commencements in the quarter was 11 months as certain hyperscale customers await build out completions. During the Q2, we signed $211,000,000 of renewal leases with pricing increases of 6.9% on a cash basis, Our strongest renewal pricing in 3 years. This strength was shared across both product segments And across our three regions, continuing the broad based improvement we saw last quarter. With renewal rates trending over 5% During the first half combined, we are raising our full year guidance for renewal spreads to better reflect the success year to date in today's improved Fundamental environment. Renewal spreads in the 0 to 1 megawatt category continued to climb for the 6th consecutive quarter To an increase of 4.8 percent in the 2nd quarter on $133,000,000 of volume.

Speaker 3

Greater than a megawatt renewals We're even stronger in the Q2 as cash releasing spreads increased by a considerable 8.7% on $73,000,000 of renewals, The largest increase within this category since the Q3 of 2019. Turning to our operating results. Our operating and financial performance in the 2nd quarter was a bit better than our expectations, highlighted by many of the same factors we highlighted last quarter. The continued improvement in our core operating performance, another record quarter of interconnection revenue and well controlled expenses. In terms of earnings growth, we reported 2nd quarter core FFO of $1.68 per share, 2% better versus the prior quarter and consensus expectations.

Speaker 2

On a

Speaker 3

constant currency basis, core FFO was $1.69 per share relative to the $1.72 we reported in the Q2 of 2022. Total revenue was up 20% year over year and 2% sequentially. Year over year revenue growth was impacted by both the inclusion of Tereco this year and the significant volatility in utility costs and reimbursements, Particularly in Europe over the past 12 months. Most of these energy costs are directly passed through to our customers. Excluding utility reimbursements, total revenue was up 12% year over year.

Speaker 3

Critically, our rental revenues In the Q2 included a $25,000,000 one time write off of non cash straight line rent and a $6,000,000 Bad debt reserve related to a tenant that declared bankruptcy during the quarter. We also wrote off $3,000,000 of non cash Straight line rent related to the re leasing opportunity we executed in Northern Virginia. These write offs of non cash straight line rent Approximately $28,000,000 combined are excluded from core FFO per share. Interconnection revenue was at a record level in the quarter, Increasing by 12% year over year and 3% sequentially. Excluding Tereco, interconnection revenue was up 8% year over year, Reflecting the ongoing organic strength in our core footprint.

Speaker 3

Bookings were higher in all three regions and service fabric activations doubled in the quarter. Other than utility costs, expenses were well contained as rental property operating expenses and insurance were both flat sequentially, resulting in adjusted EBITDA growth of 14% year over year and 4% sequentially. Improvement in our stabilized same capital operating performance continued in the 2nd quarter with year over year cash NOI up 5.6% and 1.7% sequentially. This marked the strongest year over year growth in our same capital pool Since 2014, demonstrating the churn and fundamentals that we have been highlighting. The improvement was driven by an 80 basis increase in occupancy as commencements outpaced churn with upside from rent escalators and stronger than expected re leasing spreads.

Speaker 3

While we're very encouraged by the improvement we've seen to date in this metric and the trend does indeed appear to be our friend, Our enthusiasm for the second half of twenty twenty three is tempered by the uncertainty related to a recent customer bankruptcy filing. We expect to know more about the potential impact by the time we report Q3 results. Turning to the balance sheet. As Andy outlined in his remarks, as of this week, we are meaningfully ahead of the funding plan that we laid out for you in February. We have already closed And approximately $2,200,000,000 of asset sales and stabilized joint ventures and expect to make additional progress on development joint ventures in the second half of this year.

Speaker 3

Specifically, earlier in July, we closed on the sale of a 65% interest in 2 stabilized hyperscale data centers On our Chicago campus raising $743,000,000 of gross proceeds and as announced this afternoon, We sold an 80% interest in 3 stabilized hyperscale data centers on our Ashburn campus, raising another $1,300,000,000 of gross proceeds. Including proceeds from the sale of the non core asset in Texas we announced last month, we've raised over $2,000,000,000 in capital At a blended average cap rate of just over 6% so far this year. In addition to this capital recycling activity, during the second quarter, We raised $1,100,000,000 of proceeds from the sale of 11,000,000 shares of equity under our ATM. Included in this total was approximately 3,500,000 Shares were $335,000,000 that was structured as forward equity issuance. These shares were settled earlier this week.

Speaker 3

Our reported leverage ratio at the quarter end was 6.8 times, while fixed charge coverage was 4.2 times. Pro form a for the JV transactions and the settlement of the forward equity outstanding at quarter end, leverage was 6.3 times, putting us on track toward our near 6 time target by year end. Moving on to our debt profile. Our weighted average debt maturity is nearly 5 years And our weighted average interest rate is 2.7%. Approximately 84% of our debt is non U.

Speaker 3

S. Dollar denominated, Reflecting the growth of our global platform, approximately 83% 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 $100,000,000 maturing during the rest of this year And a well laddered maturity schedule throughout the out years. Lastly, let's turn to our guidance. We are affirming our full year revenue guidance range of $5,500,000,000 to $5,600,000,000 and adjusted EBITDA guidance of $2,700,000,000 at the midpoint.

Speaker 3

As the recent acceleration in capital recycling has been balanced by better than expected re leasing spreads And same capital cash NOI. We are however adjusting our core FFO in constant currency core FFO per share guidance ranges for the full year 2023 by $0.10 per share To a new range of $6.55 to $6.65 to reflect the following: $0.03 per share Tied to the acceleration of our funding plan, including greater than expected stabilized joint venture sales and over $1,000,000,000 of equity issuance $0.05 to $0.07 per share for the write off of unpaid rent and additional near term uncertainty related to recent customer bankruptcy And about a $0.01 per share of lower non cash straight line rent tied to the opportunistic termination and re leasing in Northern Virginia. Given the continued progress on the turn and our fundamentals during the quarter, we are also updating the organic Operating metrics supporting our full year guidance, including cash and GAAP re leasing spreads moving up to greater than 4% and greater than 8% respectively An increase in our same capital cash NOI growth guidance by 100 basis points to a revised range of 4% to 5%, Despite the potential impact of the customer bankruptcy this quarter, partly balanced by a reduction in our year end portfolio occupancy assumption To 84% to 85%, largely reflecting the greater than anticipated sales of stabilized hyperscale assets into joint ventures.

Speaker 3

Given the better than expected execution on our funding plan to date, we have also updated our guidance for dispositions in JV Capital. We now expect total disposition and JV Capital raise to fall within the range of our current $2,200,000,000 up to $3,000,000,000 We've also reduced the amount of long term debt financing needed to support our full year funding plan given the nearly 4,000,000,000 liquidity currently available as a result of asset sales JVs and ATM equity raised. This concludes our prepared remarks. And now we'll be pleased to take your questions. Operator, would you please begin the Q and A session?

Operator

We will now open up the call for questions. As a reminder, we ask participants to limit themselves to one question plus a follow-up. And our first question

Speaker 4

Congrats on the new JV deal. Just wanted to know if you could walk us through kind of what line of sight you have for the development JV pipeline? And then looking into 2024, Can you speak to how comfortable you are with the funding pipeline? And then secondly on the core business, you've had strong releasing spreads on the greater than 1 megawatt side. Just curious What your expectations are for this bucket heading into the second half of the year and into 2024?

Speaker 4

Thanks.

Speaker 2

Hey, thanks, Alex. I appreciate the kind words. I'm going to turn it to Greg to call to speak to where we're going next In terms of capital raising on development JVs, maybe tie in what's happening back half of this year into 2024. And I could pick Matt and I could

Speaker 5

pick it up on Sounds good. Thanks, Alex. Look, with respect to the development JV guidance, we're still comfortable with our Full year development JV guidance that we provided previously, that's roughly $750,000,000 give or take. And that's obviously The plug, if you will, between the $1,500,000 to $2,500,000 last time, which now becomes $2,200,000,000 to $3,000,000,000 Look, we remain engaged On these transactions over the second half of the year and what we're seeing out there just as with the stabilized joint ventures, there's strong demand Development joint ventures, particularly given that these JVs offer the highest returns and they have a lot of moving parts So given the strategic considerations here, these tend to take a little longer. So I'd say we remain optimistic and on track for those.

Speaker 5

With that, I'll turn it back over to Matt and Andy.

Speaker 2

Thanks, Alex. I think your second question was about, let's call it, the core operating results We saw in the quarter year to date and Kyle where we see in the back of the year if I'm correct. We're certainly pleased on multiple fronts On the value proposition and pricing power coming through, we saw that in our new lease signings and ROIs As well as our cash mark to markets and which flow through to our same store growth, we had a quite strong Quarter on those stats, and you saw that we updated our guidance for the full year. So as of right now, we think that these trends on the cash Market to markets and pricing power will continue into the back half of 2023. Yes.

Speaker 2

I might just add that Again, this quarter we saw all of our greater than megawatt renewals were in positive territory and that includes

Speaker 3

Across all regions as well.

Operator

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

Speaker 4

Great. Thank you very much for taking the question. Good job on the execution on the JV deal. I wanted to ask about The 8 megawatts where you had an uplift in rents, I know you talked about it, but I'm sorry, could you maybe break down like What kind of drove your ability to push those rents higher? And if you were to take that out, what were the rents per kilowatt hour in the greater than 1 megawatts in America?

Speaker 2

Thanks, John. So I'll walk through the dynamics. So let Matt quote that the actual rate on the new deal to give you a sense of the market, I mean this is obviously a market that is very tight on supply. And we've been working with our customer base, if anyone had capacity that was idle or they didn't see have near term need for. So hence, we were able to take back Capacity from a customer since we've let them out of a contract, and that contract was signed, call it, a year ago at a Much lower rate, and we are able to help a different customer, that had immediate needs, and we're able to sign that at a much higher rate.

Speaker 2

But Matt, why don't you walk through the stats?

Speaker 3

Yes, sure. So just to be clear, the deal that you're that we're talking about here It's not included in our renewal stats. What we are doing is showing just the net incremental revenue that we expect recognize within our signing stats and you'll see that more clearly when you look at page 8 of our supplemental, In particular in North America, the greater than a megawatt, you're going to see a deal you're going to see the $300 kw rate And that's because we're only showing the incremental revenue and not the associated megawatts attached to it. If you put that deal in at call it 100%, That $300,000,000 $300,000,000 $300,000,000 would come down to $148,000,000 But again, it was a substantial uplift from the in place lease. It was over 50% higher than what we had currently.

Speaker 4

I'm sorry, that's 148 on the 8 megawatt deal or 148 excluding the 8 megawatt

Speaker 3

Including that would be our blended rate if you look at Page 8 and our supplemental versus the 300.

Speaker 4

Okay. And then just one follow-up just to stick with Nova. So with the power constraints there, as long as nothing's changed, It seems like nothing new could really come online until 2026. Are you already seeing leasing demand for people that are wanting to sign leases and commit that far in advance?

Speaker 2

So John, the Nova market, the facts, I would say, remain the same in terms of Transmission lines and arrival of utility power, which has really created an environment of demand well outpacing supply. We are, I'd say, less right now focused on signings that don't commence till 2026 Based on the uncertainty of when in 2026 exactly that power arrives and quite honestly Making sure that we're maximizing the opportunity at hand for us. That market has had seen dramatic price improvement. We've signed deals in the larger categories, call it 140 or north of that per kilowatt. Again, that market was in the 70s So long ago.

Speaker 2

And the good news as we reported, given our breadth and history in that market, we'd be able to work with our utility provider And really cobble together incremental growth capacity for our customers across our campuses. If you add them all up Prior to the 2026 arrival, call it, by 2025, if not sooner, you're approaching, call it, 100 megawatts Of growth capacity in Ashburn, which is in addition to our growth capacity that we have in Manassas.

Operator

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

Speaker 6

Great. Thanks for taking the questions guys. To start, in recent months, we've seen the volume and size of deals increase. And to that There are many requirements on the market right now that are over 100 megawatts. As you consider the strategy moving forward, is it your intention to compete for these deals?

Speaker 6

And if so, are you willing to pursue these deals with or without a development JV lined up with the understanding that these projects will drive long term shareholder value? Then I have a follow-up.

Speaker 2

So I could tell you we didn't sign any 100 megawatt deals in this quarter. We are certainly around some of these opportunities. We're very focused on, call it, maximizing our footprint for its highest and best use in helping our customers the best way we can. Some of those deals obviously have lent itself towards the AI domain for training models that need that Large scales of contiguous capacity. I can tell you look at our footprint.

Speaker 2

We have extensive locations around the globe that we can help those types of customers. We are we've made great progress bolstering our capital sources. As you saw just in literally the month of July, Really got back into firmer footing to support our customers' growth. Adding to that a development partner, I think we'll put even more fuel to the fire to support that growth. So I think when it comes to bigger, bigger deals, we got to make sure that they land in the right locations For Digital Realty and make sure we're maximizing the opportunity in terms of our what I call is really precious capacity In our land bank, in our sales and in our inventory runway.

Speaker 6

Great. And then just to piggyback on that about maximizing the opportunity. If I go back to the Q3 of 2022, you guys were clear that you were sharpening the lens through which you Investments with the intention of driving a higher risk adjusted return. Now as we think about hyperscale deals which you would lease an entire building to a single hyperscaler on a turnkey basis. Could you give us a framework for thinking about what the appropriate spread Between your unlevered development yield and your cost of capital should be to make it worth it to lease it to the hyperscaler?

Speaker 6

Thank you.

Speaker 2

Thanks, Michael. I think Jordan is can see the future because he thought he was going to ask this question. But honestly, we haven't been thinking about that because we've been raising the bar and demand has been outpacing the supply where anything that even kind of feels are close to not just breaching our cost of capital, has not made it on to where we are investing our dollars. And you can see that in our development life cycle where you have the whole schedule of the 3 77 plus megawatts underway, north of 10% ROI, that includes the Americas region, North America that it's call it 9% and still weighted down by Projects that were called open book yield on cost projects, almost legacy in vein, that is weighing down those averages. I can tell you these opportunities we're seeing even for larger capacity blocks in these tight markets, Be it in Northern Virginia, be it in Singapore, be it in Frankfurt or elsewhere, we're certainly into the double digits Unlevered ROIs, which I think that well exceeds the risk adjusted of deploying capital it really is coming down more to supply demand dynamics than just call it premiums.

Speaker 2

And I think if you look at The great work our investments team did on transacting on some of the JVs and the new partners you brought in the fold and call it the 6th cap area, I think you're seeing a lot of value creation In our model.

Operator

The next question comes from John Atkins of RBC. Please go ahead.

Speaker 7

Thanks. A couple of questions. Wondered what how to kind of think you said you're not going to issue any more debt this year, but given some of the other moving parts Around possible asset sales and so forth, are there any more of those to come? And how can we think about the leverage trajectory of getting perhaps into the high fives or whatnot? Sorry of getting perhaps into the high fives or whatnot.

Speaker 7

And then secondly, I was curious just about India, is your partner contributing any assets prospectively going forward? Thanks.

Speaker 2

I'll let Matt speak to the funding in our sources and uses in the guidance and leverage And Chris and I can hand and egg the India piece. Greg?

Speaker 3

Yes. So thanks, Jonathan. There's a couple of aspects here I think are important. Want to reiterate, as of today, we've got $4,000,000,000 of liquidity, thanks to the execution of the broader team. If you look at where our funding needs are going forward, this year based on looking at our lifecycle, what's remaining to be spent, Yes, our guidance in terms of what's left to be spent, we're talking about somewhere in the 1.2 to 1.3 left to spend this year.

Speaker 3

So that gives us Pretty significant runway into 2024 to be able to fund the continued growth and opportunities that we see going forward. On top of that, as we also noted, we're not stopping in terms of the execution on asset sales as well as The potential that we're continuing to seek for development joint venture partners that will give us an even broader access to capital and be able to help us to fund not only some of that capital need into 2024, but also potentially This year as well, which rounds out into your question on leverage. We've made considerable Progress again on that front as well. As I noted in the prepared remarks, you look at us on a pro form a basis, We're at 6.3 now, so made considerable progress on that. You layer on top of that our expected view We've continued to grow our EBITDA as we've left that guidance line unchanged.

Speaker 3

Again, as well as Continue to seek development joint venture partners that will continue to help us on that deleveraging process. So we feel pretty good about progress to date on both liquidity and leverage. And I'll turn it over to Greg on the India JV topic.

Speaker 2

Just on India, just I mean, I think it's less about the assets. It's more obviously, they're going to share in development opportunity in a huge market with a lot of growth, but it's really about Great. Fantastic new partner to the partnership. And maybe Chris can touch on GEO and what we think they bring to the table here.

Speaker 8

Absolutely. I appreciate the Conversation, John. So it's a combination of expertise, right? Where Brookfield brings local investing expertise, digital really, we bring the data center expertise to that market. But I think What really Jio brings is that local operating expertise.

Speaker 8

And maybe many of you already know, but Jio is one of the largest mobile media platforms throughout India. And I think Their extensive reach and ability to interconnect critical enterprises or other destinations is something that's going to allow us not to deliver a like And I think Greg and I have been talking about this for many years and looking at the fact that we wanted to be able to differentiate our ability to Be successful within India and so that partnership with Reliance and DIO has really elevated our ability to service the broader enterprise customer base, Which quite frankly is unique in that it's a lot of our large hyperscale customers as well. So the amalgamation of that trio coming to market is something that we're We're still early innings, so you'll see it evolve over time, but pretty excited about the opportunity in India.

Speaker 7

If I could quickly add on interconnect trends and anything to expect going forward in terms of just the Any particular reason why it might see pressure because of grooming or acceleration because of new use cases? And does AI play a role at all in interconnect At this point, thanks.

Speaker 8

No, appreciate it, John. Just to further jump into that. Yes, interconnection, I think, is something that's evolving Rather quickly, I think artificial intelligence is definitely evolving and it's in its early stages to date. I think where we've been watching and what I think has shown through and we referenced in the prepared remarks is the fact that it's the highest 5 year growth, 2 straight quarters surpassing $100,000,000 I think that's very unique to us in the platform that we represent in the market. I would So say that some of the activities that we've been doing around service fabric, which quite frankly is tailored to streamlining the technical Kind of barriers that have been placed upon the customers to access all of these destinations where data resides, which at the Core of artificial intelligence where I think your question is at, you have to have access to data.

Speaker 8

And so being able to be a part of 1 of the largest open platforms that quite frankly allows customers to access these data oceans of both public and private deployments. I think the platform is starting to pay off and I would say that, again early innings with AI, but we're very excited about what that Demand is going to represent inside of our portfolio. And as we evolved and we're stable stay of what we did in the foundation of cloud, You'll see us be able to be at a steady state with a lot of these customers evolving AI as well.

Operator

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

Speaker 9

Thanks. So looking at your development tables, you guys are developing assets at 10% stabilized yields and it feels like if that Stays, you can sell assets at 6 cap rates. That's a pretty healthy spread on the development profit margin. So I guess I was just wondering since you've already hit your disposition target that range you set out, why do you see the need to do more JV developments at this point? Why not just look to sell more stabilized assets?

Speaker 5

Hey, David, it's Greg here. Look, I think when you take a look as we laid out and Andy laid out at the beginning of the year, the reason for finding these development partners is, Look, when you look at this opportunity in the hyperscale business today, it goes well beyond our balance sheet even at $55,000,000,000 So when you look at that, what it tells you is you got to have 3rd party capital to meet the customers' needs within throughout the globe for that business. So as we sit here today, even though we have, as you said, we've exceeded our guidance on what we were going to do, we sit here and look at this strategically go forward and we think that's the best way to fund that business to create value for our shareholders. So that's why we're going to continue to fund it through development, and we think that's the most prudent way to move forward with it.

Speaker 9

Okay. And then maybe switching topics on the tenant bankruptcy, Matt, you were talking about, which I think is a former public data Company, can you walk us through what eventually happens to that space? Are you guys just waiting now to renegotiate with the tenants? And guess how soon if that's not the case, can you start releasing that space?

Speaker 2

Hey David, just to add on to the last question and I could Matt and I can hand the second part of your question. I think there's been Our balance sheet today has called north of 3 gigawatts of growth capacity around the world. And we see that expanding and having the balance sheet to be help funded alongside some great partners It's another part of becoming more efficient and more quickly driving returns and results to our bottom lines. In a market and an opportunity backdrop That keeps getting bigger. It was large to begin with.

Speaker 2

Cloud computing accelerated that with hyperscale demand and AI is just an incremental lift to this Wave of demand. Hence, we believe the best way to tackle this opportunity and support our customers, while driving results to the bottom line is in partnerships On the capital front, when it comes to the customer bankruptcy, obviously, This customer is in the middle of bankruptcy, so can't share too much. The typical playbook is the creditors Essentially have to run a process for the assets or the business. And as part of that, make decisions on either accepting We're rejecting leases. We have not to date had any leases rejected so far.

Speaker 2

While they have rejected other providers or landlord leases, I don't think you can assume that every one of our leases despite that fact Will be accepted, but from a strategic lens, this is why years ago we increased our capabilities And be able to expand into the Colocation Interconnection offering and support end customers. So when If and when reseller customers would have issues, we can essentially step in and support the end customers and have adequate financial outcomes End of the day given our capabilities. So there's a little bit of wait and see as this customer works its way through bankruptcy and I think we'll have more to report by the 3rd quarter call.

Operator

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

Speaker 9

Thanks and good afternoon. Just a couple of follow ups. So first, as you're looking at the portfolio, what's the value of data center assets That you own that could be considered for future joint ventures. So what's left in terms of opportunity for recycling? And then also can you just provide us an update on how you're doing and the opportunities to improve whether it's overall or same capital occupancy within the portfolio.

Speaker 9

Thanks.

Speaker 2

Sure. I mean, hyperscale is still a large piece of our business In terms of our installed base, it's certainly a lot of what's going into our current development pipeline as it stands. I think in conjunction with the creation of DigitalCore REIT, we came to an estimation of call $15,000,000,000 of value as a round ballpark In terms of things that would fit the bill, essentially it's similar to the transactions we just announced in the month of July, fully stabilized, Hyperscale oriented, long weighted average leads length. Honestly, core assets parts of our campus, but the slowest organic growers Of our portfolio, less interconnection rich, less customer rich. I think the more recent portfolios we sold had call it 10 Like the great partnerships we just announced and essentially be able to maintain 100 percent ownership on the highest growing Pieces of our puzzle.

Speaker 2

When it comes to the same store growth, Matt, why don't you pick that up in terms of the levers that we've been pushing hard to drive that?

Speaker 3

Yes. So I call out a couple of things. So first, I mean, we have been making what I would say It's good to great progress so far. If you look at it versus last year, we're up 80 basis points on our stabilized pool. We're going to continue, we think to improve that over the course of this year and the next year.

Speaker 3

And that's going to be a mix of Essentially twofold, spaces where we believe that there's opportunity for larger customers. We're going to continue Target that given density requirements and the growing need for capacity across a global portfolio that we have. We're going to find opportunities to fill that in. But I think part of it and part of why it's going to take a little bit more time to Continue to improve the overall occupancies that we're also looking where we can convert some of that space that we do have into product ties colo, We start over time because we see the growing need for enterprise demand and where we want to be able to capitalize that,

Operator

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

Speaker 10

Great. Thank you. Can you comment on the situation in Singapore, I guess, with the government allowing a few new players coming in? How do you think that affects the pricing There. And then looking at the capital recycling, kind of where do you go from here?

Speaker 10

I know you've continued to look at other diversification strategies. Is this kind to finish this out or what are some other areas of capital sources that you could look at to reach that goal? Thanks.

Speaker 2

On the first one on Singapore, I mean, I think what you're seeing is supply Still to get metered out at a very small and rational clips, when after years of no supply, The big unveiling is literally 4 different players getting 20 megawatt increments is relatively modest. I mean, our latest data center build in that market was I think almost double that size of a need. So And this is not only happening in Singapore. You're seeing power constraints, be it from transmission or generation, moratoriums, Broader NIMBYism, environmental concerns, just ratcheting and making the supply constraints be more rational. That's why we're quite pleased that we have on our balance sheet a long runway of growth for our customers with our campuses across 50 plus metros on 6 continents and the supply chain to support their growth.

Speaker 2

And this is all against a backdrop where that Demand is outpacing the supply. Greg, do you want to reiterate where we're going next on the capital recycling?

Speaker 5

Yes. Thanks, Frank. I think as we said, we're going to continue to focus our efforts on the remainder of this year on our development joint ventures we talked about. But to answer your question specifically, you asked about other sources of capital, how we think about it. Look, I think as a Capital, we're how we think about it.

Speaker 5

Look, I think as a whole, we've done a pretty good job so far. As we said, we have the dedicated core REIT in Singapore, so that's a public We've obviously just announced 2 transactions, what we would characterize as distinguished Blue Chip Investment Partners in both GI and TPG. And look, we continue to see strong interest across the board. So not just PE shops, but we see infrastructure funds, sovereign wealth funds, Pension funds, insurance companies and the like. So we're seeing a broad based demand here looking at transactions, both Stabilized core assets and development assets.

Speaker 5

So look, we're bullish on that. And when we look at that again, we think that's the prudent way to fund our growth go forward.

Operator

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

Speaker 4

Great. Thanks for taking the question. So Andy, I think you've talked about getting down to 5.5 times leverage longer term. So maybe you could just walk through The path to get there beyond this year and how much incremental capital recycling or JVs or other forms of capital you think You might need if we look past this year, and is the goal here to ultimately becoming more self funding so that you can share more of the economics yourself instead of Using development partners?

Speaker 3

Yes. So this is Matt. I'll take that. I mean, we do have our longer term This year, we'd look to be closer to that 6 times. You look at us based on what we've achieved and executed so far With the $2,000,000,000 from the joint ventures that we've done on stabilized assets, the $1,000,000,000 we've raised in equity so far to date, Which has come in, we're at pro form a 6.3%.

Speaker 3

And we see the path going forward to getting back Even further down is as we have backlog and continue to execute on leasing that comes online, our EBITDA continues to grow And we execute on these development joint ventures. We believe those are going to be 2 of the major components, Which are going to help us get down to that 5.5 times target as we start to look through 2024. But we're not in a position At this point in time, we give 24 guidance yet, but I think those are the 2 main levers that we're going to be looking at to continue to drive And improve our balance sheet and our leverage position.

Speaker 4

Okay, great. And then just one follow-up. I think you still had some non core Portfolio is out in the market today. And I guess given how successful you've been with capital recycling so far, is that kind of Becoming less of a priority as you look forward or do you still plan to transact on some of those markets that are out there today?

Speaker 5

Look, Eric, as you said, we've been fortunate. We've had good demand and good execution this year. And look, we're already we're 30 And we have other transactions we're working on. But as we always said in the past, the good news for us is these non core assets Very, very, very small piece of our portfolio. So we have the benefit of being disciplined Making sure we get what we think is fair value.

Speaker 5

So we're going to continue with that approach like we have historically, and continue to pursue them. But again, we're seeing demand for those assets as well. So we'll continue to work on it and we'll continue to post you as we have things to talk about.

Operator

The next question comes from Ervin Liu of Evercore ISI. Please go ahead.

Speaker 4

Hi. Thank you for the question. I have one and a follow-up. So, within your improved bookings this quarter, are you able to call out whether There was any sort of contribution from AI or any AI related deployments from your customers?

Speaker 2

Hey, Irvin, that's a great question. I'm going to turn it over to our CRO who really grabbed the Tom and ran through the finish line strong. Colin McLean to talk to what we saw on the AI front and maybe just give a little bit more color on the quarter in terms of bookings and new customers.

Speaker 11

Thanks, Andy. Appreciate the question, Ervin. Yeah, certainly AI is becoming a growing part of our conversation in pipeline overall. Just to revert back a bit on the overall pipeline dynamics we're seeing, I would say describe it overall, the pipeline It's strong, healthy and diverse across the board, particularly strong in the 0 to 1 megawatt side and growing part of that. AI is We've had some strong contributions on that front.

Speaker 11

Yes. So overall, we really feel like both the results and the pipeline itself, the demand to be a testimony to validation really of our pivot To serve in the entirety of the client needs, network enterprise and hyperscalers. So I would say both on the AI front and frankly the cloud and In hybrid IT, we're seeing some really growing success and growing conversations with clients. So we remain optimistic And serving both the pervasive needs of clients as well as AI. And I think that's going to be a growing part of our portfolio as we move forward.

Speaker 4

Got it. Thank you for the color there. So my second question is on the strong pricing that you saw over the past 2 quarters. Can you just share with us how pricing trended quarter to quarter and the overall linearity of pricing trends that now that were 1 month into Q3?

Speaker 2

I would call this a continuation of the commentary that We've been saying now for several quarters and that the pendulum on supply demand fundamentals It has been called wind at our back and growing. Our value proposition with our customers has been more and more well received. That's from our installed base who's been growing with us. Majority of our signings were from the existing customer base. That's also from I think it was our highest new logo quarter of 133 new logos or new customers, and that's been broad based, As Matt mentioned across regions and product types.

Speaker 2

In the less than a megawatt category, it's been more steady Eddie, but obviously inflecting Call it like for like increases. And on the greater than megawatt, it's been a little bit more volatile, but in a positive fashion As demand has remained intact, if not further increased, and precious large capacity blocks have become fewer and fewer between

Operator

That 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.

Speaker 2

Thank you, Andrea. Digital Realty had a strong second quarter. Our results demonstrate that our meeting place value proposition is resonating with customers. Just since our last call, we raised over $3,000,000,000 of new capital, Positioning the company for the tremendous opportunities that lie ahead. We posted strong organic operating results with the results confirming the continued inflection our core data center business.

Speaker 2

I'd like to thank everyone for joining us today and recognize our dedicated and exceptional team at Digital Realty

Operator

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

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Earnings Conference Call
Digital Realty Trust Q2 2023
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