Q4 2022 Digital Realty Trust Inc Earnings Call
Good afternoon, and welcome to the digital Realty first quarter 2022 earnings call.
Please note this event is being recorded.
During todays presentation all parties.
Listen only mode.
During the presentation.
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.
I would now like to turn the call over to Jordan Sadler.
All key senior Vice.
Public and private Investor Relations George.
Please go ahead.
Thank you Andrea and welcome everybody to digital Realty's fourth quarter 2022 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.
Higher 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 risk related to our business see our 10.
K and subsequent filings with the SEC. This call will contain non-GAAP financial information reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.
Before I turn the call over to Andy Let me offer a few key takeaways from our fourth quarter.
First the combination of strong demand and tightening levels of supply are translating into broad based price improvement, which is reflected in the increased releasing spread expectations and the positive inflection stabilized NOI growth that we are forecasting for 2023.
Second we remain focused on achieving the highest potential returns on investment and some progress on this front is evidenced in the sequential improvement in our development pipeline yields.
And third as most of you already know we've made some changes to our management team since we last reported.
Andy and Matt both have a long history with digital and as expected. The transition has been seamless, but just as important they also bring fresh perspective and energy to their new roles and the team remains excited about the opportunity that lies ahead.
With that.
I'd like to turn the call over to our President and CEO Andy power.
Thanks, Jordan and thanks to everyone for joining our call.
Well my voice is probably pretty familiar to most of you. This is my first earnings call as CEO of digital Realty.
I'm honored to lead digital Realty's incredible global team and I'm really optimistic and excited as ever about the opportunity that lies ahead.
I want to thank both the board for their confidence in me.
And the support that they provide in executing our strategy and thank Bill Stein, who I first met in 2004 as we work together on Digital's IPO for his leadership over these many years.
Finally, I want to thank the numerous customers partners team members and shareholders. The kind words of support and encouragement that I've received over the past two months.
When I joined digital in 2015, we are primarily a north American scale data center provider.
Since then we've evolved the company to be a global provider of the full spectrum of scale Colocation and interconnection solutions to better serve the growing needs of our 4000 plus customers.
Today digital is the global data center leader with an unmatched footprint of over 300 data centers and over 50 metro areas in 28 countries on six continents.
Globally, our portfolio comprises of more than two three gigawatts of I T load and we have another 400 plus megawatts under construction.
I'm extremely proud of the success that we've had and the position that we're in but now is not the time to rest on our laurels as the past that has brought us to where we are today will not get us to where we wanted to be.
In that vein, we have swiftly taken action on a few fronts.
First we quickly backfill the role of CFO with my longtime finance partner, Matt for sure Matt.
Matt has played a leadership role across digital global finance organization for well over a decade.
Leading the successful integration of multiple platform acquisitions and the implementation of systems that will provide the foundation for our operations and evolving strategy.
Second we align and combined our strategy of business segments and investments team to assure that we have the right capabilities and are making the right investments in order to deliver the global meeting place for service providers and enterprises.
Third we moved to align all technology under our Chief Technology officer, including our CSO and our recently appointed Chief Information Officer, which will support the acceleration of our journey and identity as both a technology and a real estate company.
Recent product launches, including service fabric demonstrate the potential of bringing together innovation and technology to help drive our customers' growth.
Lastly, we further streamlined our global operations capabilities to maximize the potential of digital Realty's 300, plus data centers and our people under the trusted hand them, a long time digital leader with a track record of bringing global teams together.
And here's what's next on the agenda in terms of the top strategic priorities.
First as depicted on slide three we will demonstrably strengthen our customer value proposition through.
Through the continued execution of our medium play strategy by delivering sustainable connectivity rich solutions to our enterprise and service provider customers, which will translate into better organic growth over the medium and long term.
Along these lines yesterday, we announced a new AWS direct connect on Rabbit digital Realty's Ashburn campus.
And one of the highest consumption markets and adding coast to coast U S coverage to a robust existing portfolio.
AWS direct connect locations across EMEA.
And earlier this month, we advanced our commitment to sustainability with a new 10 year power purchase agreement for 116 megawatts of renewable energy supporting the construction of a new solar park in Germany.
Second we are integrating and innovating our capabilities across our entire unmatched global asset portfolio and the top the largest open network platform in the world.
Many of these integration and innovation efforts will benefit both our customers as they seek to deploy new and complex workloads on our leading data center platform and our own internal team unifying our ability to deliver value to the market.
Lastly, many of you are familiar with my many fishing poles in the water mantra and in this vein we plan to further diversify and bolster our sources of capital in order to support our customers rapidly growing digital infrastructure needs, while improving capital efficiency and returns for digital Realty investors.
<unk>.
The opportunity before us is tremendous.
We have all the key ingredients at our fingertips and a long runway for growth.
When I assess the digital infrastructure landscape today, including its fundamental prospects and then how digital Realty is positioned within this sector I'd say the following.
First demand for our product remains quite strong and well supported by ongoing digital transformation.
Migration to the cloud.
And the overall evolution towards centralized compute ASIC.
As it goes technology projects technology and the growth in high performance compute infrastructure had driven innovation that tends to spur. The next wave of growth in technology that in many respects advances productivity and hopefully overtime driving improvement to the overall quality of our lives.
While the demand drivers we have enjoyed over the last decade continue we may now be on the precipice of the next wave of demand that will drive our sector for the next decade.
For years, we have referenced new technologies like artificial intelligence and machine learning as potential drivers of demand, but there have been relatively few identifiable workloads, where specific infrastructure requirements tied to those specific technologies.
The launch of chat Gpt's read out, though is it's a seemingly important milestone Microsoft incorporation of chats GPT into big last week Google's coming launch of Bard and Baidu is earning bought all suggest that we're on the forefront of the broader introduction of AI, which could spawn a.
Wave of adoption and a proliferation of use cases, and ultimately drive demand for compute infrastructure at scale.
This is our domain expertise.
We are in the very early days of this technology and its potential and have yet to see the effects of its introduction in the data center sector, but we are well positioned to support our customers and partners and we are working diligently to understand how their requirements will evolve and making sure to incorporate these into our latest designs.
Importantly, as we experienced with the cloud.
Advent of new technology can play out over a very extended timeframe. We've built digital realty with these timeframes in mind and plan to be there to support our existing and growing customer base across the globe in the future.
Let's move to the quarter.
Our core <unk> landed within the implied guidance range that we provided last quarter as the turn that is taking shape in our core portfolio continued to gain momentum.
Copies off another record year of bookings new lease assigned moderated from the record we achieved in the prior quarter, but remains quite strong and were highlighted by a nice rebound in our zero, one megawatt segments and record interconnection bookings.
Demand was geographically broad based with strong contributions from APAC, the Americas and EMEA.
This demonstrates the breath and momentum that we're seeing in this business, which is a reflection of our ongoing effort to deliver the meeting place for our service provider and enterprise customers.
During the fourth quarter, we added 106, new customers continuing the streak of 100, plus new logos that we've added each quarter since closing the interaction transaction nearly three years ago.
One of our key wins during the fourth quarter was an expansion of our relationship with Avnet, a leading global technology distributor and solution provider and a member of the Fortune 500.
Having an integrated has standardized on platform digital for an initial three market deployment in northern Virginia, Dallas and Silicon Valley. This partnership enables high performance cost effective computing solutions that can be deployed quickly and digital realty facilities globally, while mitigating risk and complexity.
A major global automotive manufacturer deploying internationally chose platform digital leveraging digital realty's unrivaled global footprint and ability to manage complex deployments.
Four of the world's largest financial institutions, including three of the 10 largest in Europe selected platform digital seafood network oriented solutions, ranging from hybrid I T trading and market data support the high performance computing and more.
A leading global asset manager and service provider Leverages digital Realty's, HP Green like alliance to significantly reduce networking and I T infrastructure complexity.
Importantly, pricing on new leases signed increased yet again in the fourth quarter in each of our business segments, marking the fourth consecutive quarter of price improvements in 2022.
We also continued to add more CPI based escalators with approximately 25% of the newly signed leases in the quarter containing inflation linked increases with fixed rate escalators on the balance.
We also saw another quarter of positive leasing spreads on renewals in the fourth quarter, helping to support a positive inflection for the full year 2022.
While we acknowledge that the turn was driven by the strength in the zero to one megawatt renewals were bought beyond the point of excuses and call us and prefer to highlight the force rather than the trees and point to the overall inflection in market rents and re leasing spreads that took place in 2022 as a whole we expect market conditions to remain supportive.
This year and our guidance reflects a further inflection is positive trend as Matt will lay out in a few minutes.
Speaking of better pricing I'd like to provide an update in our largest market in northern Virginia.
We've continued to work constructively with the power provider in this market and we are now pleased to be in a position to say that we fully expect to be able to deliver on the commitments that we've made to our customers within our development pipeline.
So while conditions are far from business as usual in this market. We are encouraged by the progress made over the last 90 days and remain hopeful that we will continue to be able to work with the local utility provider to support the growing needs of our mutual customers.
Moving onto our investment activity.
During the fourth quarter, we sold a 25% interest in a data center in Frankfurt, Germany to digital core right. The facility was valued at nearly $500 million and the transaction generated about $150 million of proceeds for digital Realty.
We also acquired land in five different metros for future development, including two organic new market entries into Rome in Accra.
Rome is one of the largest cities in Europe by population, but it's been essentially ignored by international data Center providers.
We've acquired a parcel within 15 kilometers off the coast that will make it an ideal of interconnection point for future subsea cables that landed wrong.
Thereby enhancing our position in the Mediterranean, while serving as a connectivity hub in the middle of the country.
Before turning it over to Matt I'd like to reiterate my focus on ESG and share some of our recent progress with you.
We were recognized by a variety of organizations for ESG success, including.
For the sixth consecutive year digital digital was recognized by NAREIT with a leader in the Light award for data Center sustainability.
Sustained analytics recently included digital Realty in that in the 2023 top rated ESG Company list.
Newsweek recently named digital as one of America's most responsible companies for 2023 and once again digital is one of the just capital's most just companies.
In addition to these awards given the importance of energy security availability and sustainability digital remains keenly focused on supporting the development of renewable power projects.
During 2022, we've contracted for a total of 470 megawatts of renewable energy and in Green Dot just to the energy grid and we already added another 160 megawatts of solar power to our portfolio in 2023.
We are committed to minimizing our impact on the environment, while delivering sustainable growth for all of our stakeholders.
Before I turn it over to our new CFO to review our financial results, Let me introduce Matt Mercier to those of you who don't already know them Matt.
Matt joined digital in 2006, and it's been my right hand man, helping me run Digital's finance team.
Matt has been intimately involved in nearly every fast facet of finance that digital capital markets M&A F. P. N a I R and all things global finance with that I'm pleased to turn the call over to our new CFO , Matt Mercier.
Thank you Andy I am privileged to succeed Andy as CFO and humbled by the opportunity to lead an incredible E capable team over.
Over the years I've had a chance to meet and spend time with many of you and I look forward to catching up with all of you over the course of the next several months at industry conferences and events that were slated to attend.
Let me jump right into our first quarter results.
We signed a total of $117 million of new leases in the fourth quarter highlighted by strong rebound in our zero to one megawatt segment and record interconnection signings, which accounted for 40% of total bookings.
Man, who is geographically diverse, particularly within the greater than a megawatt segment, which saw nearly even contributions across the Americas EMEA and APAC regions.
Nine of our 10 largest deals in the quarter landed outside of North America with strong contributions from Japan, South Africa, Latin America, and Europe , demonstrating the increasingly global nature of our footprint and customer base.
At the other end of the scale somewhat in contrast to the hesitation. We noted on our last call. We saw a nice bounce back within our smallest customer segment under 500 kilowatts, which delivered the second best quarterly leasing volume of 2022 at the highest average rates seen all year.
Geographically, our zero to one megawatt deals play to our strength in EMEA and the Americas with EMEA setting a quarterly record for zero to one megawatt plus interconnection bookings.
Importantly.
Pricing on new leases signed increased for the fourth consecutive quarter in each of our zero to one and greater than a megawatt segments, reflecting improving fundamentals and tightening conditions across our regions.
In the fourth quarter, we experienced nearly 90% customer retention and a further reduction in churn to just 0.8%, marking the lowest level in nearly three years as our customers digital infrastructure requirements continue to increase but the prospect of future availability is.
Decrease in <unk>.
Turning to our backlog on page nine the current backlog of signed but not yet commenced leases increased to a record $477 million at yearend.
Principally due to the inclusion of <unk> as other signings were largely offset by commencement.
The lag between signing and commencement moderated slightly in the quarter, but remained elevated relative to historical levels at nearly 15 months due to a few larger longer term leases that require build outs.
Approximately 60% of our record backlog is slated to commence throughout this year.
<unk> fairly evenly throughout the first and second halves.
Moving on to page 10, we signed $195 million of renewal leases during the fourth quarter with pricing increases of 0.8% on a cash basis.
For the full year, we renewed nearly $700 million of exist existing business and a one 8% increase on a cash basis, a touch better than our upwardly revised guidance of slightly positive for 2022.
Renewal rates in the fourth quarter for zero to one megawatt renewals remained strong across each of our three regions and were up four 1% overall, the strongest quarterly increase since adding interaction.
As Andy referenced we did see a three 6% decline on renewals in the greater than a megawatt category in the quarter entirely due to a single lease at a single asset.
However, we saw a better than anticipated improvement in market rents and an inflection in re leasing spreads in 2022.
More.
<unk> market conditions improved throughout the last year and our guidance for 2023 reflects this positive trend.
Turning to our results digital Realty delivered operating and financial performance in the fourth quarter, there was largely consistent with our expectations.
Highlighted by improving core operating performance progress toward enhancing our returns on investment and increased liquidity.
Let's jump into the metrics on page 11 in terms of earnings growth, we reported fourth quarter core <unk> per share of $1 65 consistent.
Consistent with the low end of our implied guidance range for the fourth quarter and down 1% on both a sequential and year over year basis, given a seasonal acceleration in operating expenses, a significant uptick in interest rates and a full quarter's dilution associated with the acquisition of <unk> on August one.
On a constant currency basis core <unk> was down 1%, 1% sequentially.
But it was up 2% year over year.
For the full year 2022, we reported constant currency core <unk> per share of $6 91 rep.
Representing 6% growth over 2021.
The improvement in operating performance is best gauge by our stabilized same capital portfolio.
Which was challenged in the first half of the year, but improved meaningfully in the second part.
Particularly in the fourth quarter, when stripping out the noise related to FX.
Focusing on topline data center revenue growth on a constant currency basis improved steadily throughout 2022 inch.
Increasing by 4% year over year in the fourth quarter compared to a one 8% decline in the first quarter.
Demonstrating the turn in our core operations that we flagged last quarter.
The sequential step up from <unk> was largely driven by an 80 basis point improvement in occupancy as commencements outpace churn as well as the benefit of positive releasing spreads and growing interconnection revenues.
Turning to our currency slide on page 12, 56% of our fourth quarter operating revenue was denominated in U S dollars with 20% in euros, 7% in British pounds, 6% in Singapore dollars and 2% in Japanese yen.
The U S dollar reversed course from the strength, we have we have seen throughout the first nine months of the year, removing the headwind on reported sequential growth.
Nevertheless, the dollar was meaningfully stronger than it was versus 2021 negatively impacting our reported revenue growth and adjusted EBITDA growth by approximately 500 basis points apiece.
Turning to the balance sheet on page 13, our reported leverage ratio at quarter end was six nine times, while fixed charge coverage was at four nine times.
Given the sharp recovery in the euro and the pound in the fourth quarter and the convention of how Leverages calculated with the average exchange rate used for calculated adjusted EBITDA and the spot rate used to mark our debt at year end, our net debt to adjusted EBITDA was inflated by approximately 0.2 turns.
Using the average exchange rate to Mark our debt at year end, our leverage would be six seven times net debt to adjusted EBITDA.
Since our last call. We drew the remaining 500 million outstanding from our 2021 forward equity offering and tapped our 555% 2028 notes for an additional $350 million to bring the total amount raised on that bond to $900 million.
Since year end, we also closed a $740 million two year term loan with a one year extension option.
Also worth mentioning that our investment grade credit ratings were reaffirmed with stable outlooks by all three rating agencies since our last call.
While leverage is above our historical average and our long term target, we have bolstered our liquidity and we intend to reduce leverage towards our long term target over the course of 2023.
Our weighted average debt maturity is over five years and our weighted average coupon is two 7%.
Approximately 86% of our debt is non U S dollar denominated, reflecting the growth of our global platform.
Over 80% of our net debt is fixed rate to 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 lettered maturity schedule.
Lastly, let's turn to our guidance on page 14.
We have provided an initial core <unk> per share guidance range for the full year 2023 of $6 65 to $6 75.
Reflecting flat growth at the midpoint of the range as the recovery in our stabilized portfolio is balanced by the impact of higher interest expense and capital recycling.
Focusing in on the organic recovery, we forecast for 2023, we expect cash and GAAP re leasing spreads to improve to greater than 3%.
Same capital cash NOI growth of 3% to 4%.
And an 80 basis point uplift in total portfolio occupancy at the midpoint of our expected range by year end.
Importantly.
As Andy referenced at the outset, one of our key priorities is to further diversify and bolster our capital sources, which is geared towards increasing our capital efficiency and investor returns, while reducing leverage toward our long term target.
As reflected in this guidance throughout 2023, we expect to recycle capital from a combination of non core dispositions.
Joint ventures are core assets in joint ventures of scale development and select core markets.
In addition, we expect to benefit from high single digit adjusted EBITDA growth the retention of free cash flow and the moderation of recent currency headwinds.
This concludes our prepared remarks and now we'll be pleased to take your questions.
Operator would you please begin the Q&A session.
We will now begin the <unk>.
Question and answer session.
As a reminder, we ask participants to limit themselves to one question plus a follow up.
Are there to keep the call to an hour and to give all callers an opportunity to participate.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And our first question will come from Ari Klein of BMO capital markets. Please go ahead.
Thanks, and congrats Andy.
Yeah, maybe just starting on the balance sheet, the $2 billion in asset sales and JV is targeted for the year can you give us some additional color on the split between the two that the types of assets the timing and pricing, it's a pretty wide range at any anything you can add on that front.
Hey, Thanks already this is Andy.
I'll kick it off and I'll hand, it to Greg on valuations and what we're seeing in the broader.
Asset class. So it's 2 billion at the midpoint as our funding plan. As a reminder, this has been part of our playbook for several years I think we've either sold outright or joint ventured close to $4 billion of assets over the last handful of years.
The composition is really threefold.
One and called a rounding third base or completion or.
Our noncore asset disposition program selling outright.
Joint ventures around our stabilized assets.
Three joint ventures around our development program.
Rough ballpark numbers.
I would say the non core dispositions are probably in the 500 ish area and the other two buckets are taken up the majority of the 2 billion at the midpoint, Greg you want to touch on.
I mean on valuations and broader.
Yeah. Thanks, Ari look I think when you look at the let's look at first at the stabilized a JV isn't a development JV I mean, clearly you know we're seeing strong demand for those assets the private markets are.
We still have a strong bid for those assets given the quality of the assets.
Stability of the income stream.
Creditworthiness of the customer base and the fact quite frankly, that's a hard asset class with strong secular demand.
You know we've seen a really a significant rotation into the data center space from private capital over the last couple of years.
Not to mention a strong improvement in pricing and lower vacancies and all of our major markets have really gotten investors' attention in terms of growth potential. So you know on that front.
We still think pricing has held in there we've seen some transactions in the market recently.
There's been some smaller transactions. We're also aware of three sizable hyperscale platforms.
Where that pricing is.
Is it staying strong we understand but what it tells us is that the sellers and their.
Equity backers, who we think are sophisticated are seeing strong values. So simply.
Simply put money on the sideline is outweighing the investment opportunities.
And then on in terms of cap rates with respect to the noncore asset sales I mean, clearly theyre going to be they're going to be all over the place like we've seen in the past as you recall over the last few years, we've sold roughly $2 billion of these noncore assets and at some point, we talked about having roughly a 1 billion and a half left.
But look I think when you look at this it's important to understand that many of these assets are at different stages. So cap rates will end up in a range.
If you look at our range right now of zero to 10% and it clearly depends on specific conditions. For example, we saw land right that to zero cap rate. So there's a wide range there it depends on the asset.
Got it and then just maybe a follow up just on the leverage.
All of that so where do you think that gets you to exiting 2023.
Yeah, Hi, Irene this is Matt.
Thanks for the question so.
Yeah look I think with the way that we're looking at our plan. This year, you know as Greg and Andy mentioned in terms of.
$2 billion at the midpoint for asset sales and <unk>.
Joint ventures are.
Really being the bulk of funding for our developments.
The development spend that we have left and then if you look at you know we're looking at.
8% to 9% growth in our adjusted EBITDA, which I think will be a big part of our deleveraging plan also for this year. So you know without giving a specific number I would say, where we're gonna be well on our way to bringing leverage back down closer to six times by the end of the year.
The next question comes from Eric <unk> of Wells Fargo. Please go ahead.
Oh, great. Thanks for taking the question I just wanted to touch base just on the general demand environment, It's nice to see a pick up in kind of some of the enterprise Colo bookings, maybe you could talk about what you see in the Hyperscale funnel. We obviously heard some couple of Hyperscale are talking about a bit of a slowing in revenue growth, but it seems like.
Demand remains pretty robust so maybe you could kind of touch on that for us.
Where do you want to hit on demand at all.
Demand overall, thanks, a lot for the question here.
Hello, good demand remains as strong as ever and we're more than happy with kind of what our pipeline looks like and whether or not we've got enough to support our demand on the on Hyperscale and in excess of just say thanks for the recognition on the improvement around enterprise and a sub one megawatt but on the enterprise, we're still seeing really strong demand.
Across <unk> and across the globe really the traditional large build but also some other interconnects in the Hyperscale is starting to come to us for their connectivity options. What are the advantages that are in our portfolio plays out for them what.
And we're seeing that continue to grow that demand from them utilizing our platform at the meeting place.
As they as they need to enhance their connectivity requirements.
So youre seeing that across both places.
And I will tell you that you also see the merits of our relationship around the opportunity to.
To build out from the activity perspective for them. When you think through the cost and the difficulty getting power that we have right now these hyperscale or in a relationship with them continues to evolve I think improved and the value that we continue to bring to them. We will continue to drive demand for Cynthia pipeline build across all of our regions. So really happy with where we are on that.
As well as the <unk> come back on the enterprise as well thanks, a lot here.
Great and just one follow up.
Wanted to touch base on the renewal spreads.
That you guided to this year.
Any kind of color you can provide on how those will shake out versus the the greater than one megawatt versus the sub one megawatt category and are there any markets I'm thinking northern Virginia, where supply is extremely limited where youre really starting to see material gradual improvements.
Throughout the year.
Sure I mean.
We've seen this.
We handle them on pricing move in our favor now for several quarters started to move at the beginning of 2022 gains.
Gain steam became more broad brushed.
And I think it was a combination of not only supply and demand for our value proposition really resonating with our customer base.
In a backdrop, where quite honestly its been never probably been harder to bring on capacity procure power as well as finance this asset class.
This is we ended the year overall in positive territory.
The less than a megawatt or which is becoming a much larger and larger portion of our revenue base.
Obviously led the way.
We had some positive quarters in the upgrade of the megawatt we had some slightly negative quarters. If you look at the greater than a megawatt again.
I know, we're really tired of making excuses. It takes one single deal just to pull it down just call to 3% in that category.
The predominance of deals are moving in positive territory.
This year is the first call overall inflection to positive territory in the cash mark to markets in several years.
Where we're guiding to for 2023 will.
It will be literally the best cash mark to market inflection.
And close to 10 years for our business and it's obviously it's.
Increasingly dramatic amount.
And I think it's all of those things I just mentioned in terms of our value proposition as well as supply demand moving in our favor ashburn.
Is or northern Virginia, excuse me is a prime example of it.
This quarter to 174 on a GAAP 50, almost 60 megawatts had almost nil ashburn signings in it.
And you could say last quarter did not have a.
Super large amount either due to call it the tightness of that market and the timing of our deliveries are bringing on.
More capacity. So we don't have a large statistical us set of data to point to but what we're seeing on the quotes going out the interactions with customers.
These rates are moving swiftly.
Well past the hundreds into the.
A much more firmer territory and still have ways to go in terms of one way.
The next question comes from Jon Atkin with RBC capital markets. Please go ahead.
Thanks, So I was interested in.
Big Picture you know your first conference call as CEO .
<unk>.
Kind of principles to underscore.
We are contemplating.
The action nuanced changes in overall operating practices changes and product focus strategy I think you already hit on capital allocation, but just any kind of big picture kind of items to call out and then secondly.
Maybe for Matt, but as we as we look at the <unk> per share guidance.
For the year.
What it does to the operating cabalistic.
Could identify that might get you towards the upper end of that range I think you've talked about renewal spreads.
<unk> kutter bubble up kind of hitting a bit quarter, maybe about the midpoint.
We are convinced and pipeline.
Yeah.
Pricing environments.
Thanks, John I'll tackle the first one on one but not tell you how we're going to beat the guidance, we just put out an hour ago.
And we'll touch on that one.
So I won't rehash, what was all throughout the script of what's taken place over the last 60 days, but I can tell you.
In that time.
<unk>.
I was able to see all three of our regions sits on a lot of time with customers the team.
Home for Valentine's day preschool.
And being able to put some preliminary thoughts together of top priorities, which I outlined.
In the prepared remarks, but just to rehash them, a little bit greater detail, obviously first and foremost is demonstrably strengthening our customer value proposition.
That is number one for an important reason, we've obviously have assembled an irreplaceable collection of digital infrastructure assets over the last several years, both inorganically and organically with what we're doing in the likes of Rome, Barcelona, Israel across Africa, Mexico City and even installed.
Harnessing the power of that platform to serve the full customer spectrum with this diverse array of capabilities is going to be key I firmly believe in delivering that to our customers with a.
A global scale and consistency yet with true local expertise and really become that meeting place for both the enterprise and service provider customers across 50, and growing metros north of 30 countries and six continents, all with the vein of accelerating our pricing power internal and organic growth.
To integrating and innovating is priority number two we've had years of M&A that is in the rearview mirror.
Just quite frankly, I think all the critical puzzle pieces when it comes to what we do have been taken off the board and we got more than our fair share we.
We need to we need to complete that integration work and are complete our own digital transformation, making it easier.
For our internal and external customers and also continued advancing our innovation both on our connectivity as well as the physical infrastructure front, you've seen at the likes of service fabric, which is just still in its infancy.
And Scott many great growth states to come you'll see that you'll see that on the space and power front or things like the direct connect we landed in such a high consumption market with AWS, just announced yesterday, along with pressing our sustainability leadership and making sure that we are lifting the bar for our industry and our asset classes and doing what's right for our customers.
And the World we live in.
All about that all all of that is about it's about elevating a data driven approach to all facets of our business last but not least again diversifying bolstering our capital sources.
It's about completing the noncore dispose, we've talked about and then expanding our private capital partnership programs.
<unk> as well as development Hyperscale assets with that in mind of enhancing capital efficiency accelerating growth and returns to our digital shareholders. So that's the the nuts and bolts of the three point plan and I'll, let Matt tackle your second question.
Yeah, maybe quickly just quickly.
If I could just the interaction on the third party funding the development pipeline.
You have not done that to the election at least reasonably stable.
They just did other particular challenges around governance is it.
The economics is it finding the right partner the right projects, what what are what are some of the kind of kind of factors domestic tickets.
You might need some sort of JV for your development pipeline.
Yeah.
I think you had six more questions in there Jon but well.
Okay.
As Greg touched on already this has been a dramatic rotation of capital in towards digital infrastructure and there's just not enough places to put it in.
In terms of assets built or are coming right now and we're a great partner for that we've we've have a history of partnership we've done versions of this in parts of the world be in Latin America or Africa.
And expanding that use of capital.
Two of them are call it more traditional markets.
To accelerate our capital efficiency.
And tap into the resources of our platform and monetize these long runways of growth we have from the Hyperscale is really the playbook.
So I don't think there's we're all about trying to piece this together in a simple.
Fiduciary in mind.
Playbook, eliminating conflicts out of the gates. So we're gonna be looking and already had been talking to <unk>.
<unk> that are like minded in that approach long term investors in this space that really appreciate the value we deliver for our customers day in day out.
Matt you want to quickly do that John's questions with just because I'm sure. We got a queue of others as well yeah. So so John look I think I think to be brief we feel pretty good about the fundamentals of the business I think that we've talked about.
A number of us have talked about.
Pricing and demand feel good and therefore that leads us to have strong conviction on our on our same capital cash NOI growth and the associated Mark to markets that are going to help to help drive that.
And then on top of that in terms of continuing to lease up our development pipeline that goes back to again feeling strong about where we are in the demand cycle and our ability to capture that so what that leaves remain I would say is there's timing around.
You know when the dispositions and the joint venture capital.
To close and maybe last you know I know, we talked about FX a lot last year right now we're assuming that FX is neither a headwind nor a tailwind, but thats also something we can't control that could could have influenced next year based on where we are in the economy.
The next question comes from Michael <unk>.
<unk> of Cowen and co. Please go ahead.
Great. Thanks for taking the questions. My first question for you is you've talked about establishing this global interconnection platform and you've taken steps to do that with telex interaction and then also telco.
As we think about the next steps for you guys. I mean, what are the most meaningful steps you could take to accelerate your traction on the interconnection front is it adding more cloud on ramps.
Is it building platform capabilities.
What is that and then my second question for you would be you know in the past you've talked about doing $1 5 billion of noncore asset dispositions over.
The coming quarters and now it sounds like we're at 500, just wondering what changed in terms of your view on that on the dispositions is it just timing or was the cap rate environment not supportive of you getting valuations that you wanted.
So why don't we take them in reverse order, Greg why don't you hit on the program versus what gets done in calendar 2023 sure.
Thanks, Michael I hope, you're well look I want to I want to be clear first of all we talked about the day and a half estimate of non core assets previously.
We made it clear that's what was remaining so we sold $2 billion and we said whether it was a quarter or two ago that we had another $1 billion of half lab. We didn't suggest that we're going to sell that all over the next several quarters and we wouldn't suggest that but instead, we said overtime. So as you look at that billion $5 and how it is going to start to run off.
Yeah.
We've earmarked roughly 500 of that 423, and if you look back at our level of activity, whether it was 'twenty to 'twenty one 'twenty, there's obviously different volumes in those years and its never perfect things rollover from one year to the next quite.
Quite frankly from my perspective, whether it's may or July I don't think it really matters to say, whether it's front half of the year in the back half of the year.
But look that that has not changed and again just as our cap rate range. This year zero to 10. It was the same last year and the volumes haven't changed so again, it's I would say you know we're continuing to execute upon that program that we articulated to the market a couple years ago actually it's been three plus years ago, now and look I'd like to thank <unk>.
Done a pretty good job with it some of.
On that front.
And then Michael on your second question listen I think.
I would look at it as a coming together of numerous puzzle pieces here one we've been.
Adding the critical locations around the world that our customers need for a full platform solution grow to north of 50 metropolitan areas 30, plus countries across six continents, and really I would say demonstrably leading coverage in some of the hardest parts of the world with irreplaceable platform capabilities.
Hum.
Adding to that.
Legacy magnetic destinations or customers and next generation versions of those magnets.
And you've seen many of those press released across multiple categories, others cut less notoriety, but ensuring the broadest attractiveness for our customer base based on our curation.
Of our meeting place for community.
He is bringing technology to bear internal technology, I talked about we've been eating our own.
When it comes through digital transformation.
And tying this together for our internal team members, which ultimately provides better experiences for our customers.
It removes the friction in their procurement and their business and lastly, external innovation, which we've been doing with the likes of evolving from service exchange to service fabric tying together a connectivity platforms and then harnessing all of that in one platform offering essentially that has the best of both worlds a global.
Platform 50, plus billion dollar enterprise.
Serving the largest customers to the most local customers.
And doing that scale and expertise combined with true on the ground local experience, but Chris can maybe add on some of the technology elements.
As well and I appreciate it Andy.
Thank you Michael for the question, Yes service fabric I mean, it's something that we've talked about for some time now it's a purpose built product that enhances the customer experience and we've been aligning with our customers to remove that complexity and quite frankly, it facilitates an easier process of deployment for our customers and just to underpin Andy is.
Position around the broader reach I think one of the thing Thats also driving a lot of traction in value to both our enterprise and our hyperscale customers as an open ecosystem.
Really accelerates the growth of the enterprise and that can solve more use cases and more markets on platform digital and I think that's the key element that we're highlighting.
And quite frankly, you are starting to see even yesterday with the announcement of the on ramp coming in the Ashburn. That's one of the largest cloud operators aligning to one of the largest markets for digital Realty today, and I think just to underpin a couple of metrics. That's 25 data centers with 500 plus megawatts. So if you slow down and you think about that the value that's going to be created and to be fair.
Other created in that market is demonstrable and so the underpinning of why we brought service fabric to market, where we have purpose built software developers really removing that complexity in the last pieces and investing in our in our customers. We don't want to compete with them. So you'll see the likes of further set of press releases coming out with bare metal security, it's the full culmination of.
Enterprises are looking to do on that hybrid it enablement, which is core to a broad swath of customers that we're servicing today and quite frankly that will be servicing in the not too distant future.
The next question comes from Michael Rollins of Citi. Please go ahead.
Thanks, and good afternoon I just wanted to also extend my congratulations to Andy and Matt on the new roles.
If I could ask two financial questions.
Just looking at slide 14 from the deck.
So the first question is if you look at the mid point of revenue growth guidance.
For revenue and EBITDA can you break out.
Organic portion of the growth relative on revenue Youll have energy and you'll have.
Acquisitions, and divestitures kind of a mix of stuff that <unk> been recycling assets.
Investing in new ones and then for EBITDA, just a split between.
Three new organic and the M&A impacts.
And then the second question.
As you look at the EBITDA growth and you look at the core <unk> per share growth.
What is holding back the piece parts holding back core <unk> per share growth and what are the opportunities for digital realty to unlock that in the future and get back to a more consistent relationship.
Of.
The EBITDA growth relative to what that core profit per share growth should do.
<unk>.
Sure sure Mike So, let's let's talk about revenue because I think that's the one that's got.
A little bit more to unpack it for when you know when youre looking year over year. So I think as most of US know power's been a big topic.
We expect to be continue to be a topic. We are we are like other operators are seeing increases in power costs, particularly in EMEA.
So if you look at that growth is around 23% from 22 to the mid point of 23 roughly 14%.
All of that is tied to utility reimbursements correlated to higher higher expected power costs.
Just a reminder, we expect the.
I would say the majority of our contracts are our full pass through and even those contracts that are not full pass through we have for the majority of those we have the ability to pass on price increases, which we either have done or we'll do we'll do soon so.
We are not expecting.
Any or very minimal bottom line impact.
Two our results in 2000 <unk> from higher power costs. So that also when you when you net that down Youre talking about.
Roughly speaking 9%.
Growth in our in our rental and interconnection revenue driven driven by the business, which also coincides with the growth in adjusted EBITDA.
Youll see there if you do.
As you've done the math as well.
<unk>.
In terms of you know in terms of then having that flow down to core <unk>.
Look I think part of that is what's in the plan. This year is to set us up for being able to do that going forward being able to continue to.
Leverage you know the.
The fundamentals that are continuing to improve and accrue to our favor as demonstrated by the growth of the stabilized portfolio.
When when we get our leverage down and balance sheet in a stronger position, we should be able to see that going forward in 'twenty four.
And does that mean nationally.
Haricot deal.
Recycling divestitures that you did so those are kind of a neutral impact on the revenue and EBITDA growth rates for 2023 over 2022.
So.
I guess I'll answer that in terms of like we are obviously timing is a factor but are are the disposition call. It joint venture capital plan that we've laid out.
The range takes into consideration those those potential dispositions.
Our next question comes from Matt <unk> of Deutsche Bank. Please go ahead.
Hey, guys. Thanks for squeezing me in Andy Matt Congrats both on your new roles.
I had a question about supply chain I was just wondering with supply chain constraints loosening or you seeing maybe some of your larger customers moving slower or less actively engaged in procuring space state need maybe several several years out given shortening lead times and then if I could just sneak in one more I wanted to ask about the dividend we're talking a lot about.
Funding the business through divestitures and whatnot, but I'm, just wondering how maybe Matt or even Andy youre thinking about dividend per share optimal payout levels.
Is that even a lever you'd be willing to consider to poll.
In order to maybe to help fund the business and Delever faster. Thanks.
Hey, Thank you again, so on supply chain.
I think that I'd say, there is a loosening, but I would say we're not back to normal.
The production slots.
That become available seem to get gobbled up quickly, so and I'm not I wouldnt say that theres been a correlation between customer buying behaviors through too.
Our supply chains.
I mean, quite frankly, which is a contributor too.
The pricing.
No.
Survival is been that the demand has remained quite firm across the board.
For both enterprise and Hyperscale business.
And it's outpacing.
Supply and supplies.
And that I don't think that I think that disconnect is in many many markets is going to continue for some some time.
You've got things like power shortages, you've got municipalities, you've got permitting environmental impact there's a whole host of reasons why it's a lot harder today to bring on capacity efficiently.
Efficiently and effectively.
We in our platform.
Stand out above many given our expertise or our time doing in business our relationships our consistency.
But its definitely helping on the overall pricing dynamic and I don't think I've seen a correlation to.
A customer is feeling the luxury of time when they are buying.
Especially the larger customers I wouldn't say.
Are taking a wait and see due to that whatsoever, Matt you want to handle the dividend question sure.
Look ultimately the dividend is a board level decision.
You know I would what I would add onto that is that.
<unk>.
And where we are we would we would you know our objective is to maximize our free cash flow available to us to fund the business.
And then in relation to the dividend, we want to make sure that we're paying out 100% of our taxable income we want to make sure that we have an appropriate payout ratio and then on top of that we need to consider some of the.
Some of our plans which include potential for dispositions that could generate capital gains that.
That could also be part of that part of that analysis.
Yes.
The next question comes from Frank Louthan of Raymond James. Please go ahead.
Great. Thank you walk if you can a couple of questions on on Ashburn, If you could walk us through through the available power entirely assurance that you had.
Megawatts will be there when you need them and then kind of a follow up on that are you seeing any changes in the buying patterns of your customers are they are they re architect and deployment. So that they can push more things outside of ashburn.
Avoid some of these issues in the future any of that kind of activity would be helpful.
Sure. Thanks, Frank so.
I mean, ashburn I would say.
Overall the story remains the same of what transpired at the end of last summer.
And the power incremental power deliveries into the largest most robust and diverse market quite frankly in the world is going to be restrained greatly for several years.
Last quarter, I, basically said I can't guarantee it but I have confidence that we working with the power providers will be able to deliver on our customer commitments, which represents the lion's share of the just shy of 80 megawatts, we have under development cycle today.
Today as you heard in my prepared remarks.
We are good to go we're be able to deliver for those customers.
And there's no concerns about the power being available.
What comes next is still.
To be determined.
So I cant again, similar similar song and dance as I described last quarter I can't promise you. This I can't guarantee it but I do have a strong amount of confidence.
That the tools in our toolkit digital Realty.
Given our experience in region are critical strategic landholdings, our breath of infrastructure and our relationships.
We'll be able to be creative in terms of bringing on some incremental power deliveries in this bottleneck period.
On top of what I would say is obviously ashburn in our largest market.
I just looked at the 2023 explorations, while we're we certainly have a higher retention lower churn year expected relative to prior years.
A large portion of our expected churn happens to be in Ashburn, which is a blessing give.
Given the ability to remarket that space.
Higher.
Higher and better uses.
So.
All of these with the Ashford story or saga continues.
Broadly it is greatly improving the pricing dynamic to much more healthier.
For digital and other providers in the market in terms of buying patterns.
Just the tremendous amount of infrastructure.
Across this part of Northern Virginia.
There is not really shifting a large scale demand to other locations to any great steaks.
So folks are still clamoring for available capacity.
Staying where they are with us we're in market.
And we've not seen a title shift on this market.
And it will take a few years, but the calories supposedly coming with new powertrain brought into the region from the south and the north.
Okay, great. Thank you very much.
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. Please go ahead.
Yes.
Thank you Andrew.
In my earlier remarks, I did mentioned something we didn't talk about on <unk>.
The Q&A, but I do think there is an incremental.
Tailwind of demand for our industry and digital Realty as it relates to AI related applications that we believe is on the precipice of driving incremental wave of demand.
As a result.
Just recently asked chats GPT, how AI would impact demand for data centers.
Here's a summary of the response and I quote the impact of artificial intelligence on the demand for data centers is likely to be significant in the coming years as AI continues to gain traction and more and more businesses adopt AI powered solutions.
Man for data storage and processing is expected to increase significantly AI also has the potential to create new data intensive applications, such as autonomous vehicles virtual reality and personalized medicine further driving demand for data centers in short impact of AI on the demand for data centers is expected to be substantial and <unk>.
Companies operating in this space are well positioned to benefit from this trend and quote.
Obviously self serving.
But when you see some of the innovation that's playing out here.
And just the general media in the news.
AI trend is certainly coming to fruition.
And while this AI is certainly still in its development phase.
Royalty agree and excited and excited by the forecast.
The chat GBT just provided.
In closing digital Realty had a strong 2022, we believe we're making the appropriate adjustments here and now in 2023 to position us to take advantage of the incredible opportunity that lies before us I'd like to thank all of our dedicated and exceptional team members of digital Realty and everyone on this call for joining us today. Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
[music].
Okay.
[music].
Yes.
Okay.
[music].