Q1 2023 Digital Realty Trust Inc Earnings Call
Good afternoon, and welcome to the digital Realty first quarter 2023 earnings call.
Please note this event is being recorded.
During todays presentation, all parties will be in 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 well we will aim to conclude at the bottom of the hour.
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.
Thank you operator, and welcome everyone to digital Realty's first quarter 'twenty to 'twenty three earnings conference call. Joining me on today's call are president and CEO , Andy power and CFO , Matt Mercier.
<unk> investment Officer, Greg Wright, Chief Technology Officer, Chris Sharp and Chief revenue Officer, Corey Dyer are also on the call and will be available for Q&A.
Management may make forward looking statements, including guidance and underlying assumptions on today's call forward looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially for a further discussion of risks related to our business see our 10-K and subsequent filings with the SEC. This call will contain certain non-GAAP .
Financial information reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website before I turn the call over to Andy Let me offer a few key takeaways from our first quarter.
First our customer value proposition is resonating as we delivered yet another strong quarter of nearly $50 million of leasing in our zero to one plus interconnection segment, including our second strongest quarter of bookings in EMEA and record interconnection bookings, helping to push interconnection revenue over $100 million in the quarter for the first.
Hi.
Second the first quarter delivered on the inflection in fundamentals, we have guided to for 2023 as demonstrated by four 5% re leasing spreads on renewals and a three 4% increase in stabilized portfolio cash NOI growth.
And third we remain confident in our funding plan for 2023, we are deeply engaged in the process with multiple institutional buyers, including new and existing partners.
Updating you on specifics once we finalize the transactions with that I'd like to turn the call over to our president and CEO Andy power.
Thanks, Jordan and thanks to everyone for joining our call.
Digital Realty remained focused on our customers and executing our strategic plan, while delivering a strong first quarter despite global uncertainties.
This included reaching another major milestone with our platform now supporting 5000 customers worldwide.
We posted strong sequential growth in revenue adjusted EBITDA and <unk>.
And remain focused on disciplined capital allocation, while benefiting from the strong secular trends supporting the data center industry.
Last quarter I identified strengthening our customer value proposition as one of our key strategic priorities let.
Let me expand on this a bit.
Digital Realty has been on a journey since 2015, when we acquired <unk> to expand our product offering and global footprint in order to provide the full spectrum of data center solutions to our customers.
At the time, we said that we were seeking to expand our product mix and presence in the attractive colocation and interconnection space.
When we announced that deal our annual Colocation revenues were about $88 million, which is less than the book as we posted in the last two quarters in the zero to one megawatt class interconnection segment.
Since 2015, we've expanded our colocation and connectivity capabilities, both organically and through acquisitions.
The <unk> portfolio interaction the Westin building Alton Lambda.
Lamb to helix medallion and Taro com.
Today, our zero to one megawatt segment revenues of well over 1 billion and represent 35% of total annualized rent.
Including a few colo and connectivity oriented organic new market additions that are currently underway.
And other important subsea cable landing station oriented facilities, we expect to soon have a presence in more than 30 countries across six continents.
Importantly, according to clouds in age to 2022 data Center ecosystem leader Board results, which ranked operators based on their data center footprint and performance.
With a focus on service providers and cloud on ramps within their ecosystem.
Digital Realty ranked in the top two slots within North America, Europe , and Latam will taken the top slot in the Middle East and Africa region.
Meanwhile, we've also shed noncore assets recycle capital lot of stabilized core assets and created joint ventures with some of the leading institutions around the world to own operate and develop data centers.
Along the way we've added connectivity related product capabilities, such as service exchange cloud connect and last summer service fabric.
We're targeting the additions of cloud on ramps and our data centers around the world.
These initiatives have meaningfully improved our customer value proposition and bolster our results within a colo and connectivity segment.
Since the end of 2015, our interconnection revenue has grown nearly 150%, while our KOL and connectivity bookings have increased almost 400% when that we now have 214000 cross connects across our portfolio an increase of over 250% over the same period.
But there is more to do.
Our vision is to serve a large and growing customer base that is focused on digital transformation and empowering their business through technological advancements and global scale today tomorrow and for years to come.
To do that we serve as the medium place offering the full spectrum of data center solutions globally.
Enabling our customers with the coal capacity and connectivity solutions to support their hybrid multi cloud deployments and also provided a line of sight to feature availability.
<unk> capacity and infrastructure advancements.
System with our strategic priorities to strengthen our customer value proposition. We are pleased to announce the hiring of Steve Smith as managing director of our Americas region.
Steve joins us fallen nearly eight years of course site, where he most recently served as chief revenue Officer.
Steve's experience expertise within the KOL in the connectivity segment in the U S will be invaluable as we love to accelerate enhances offering in our largest market.
We welcome Steve and the team and look forward to his upcoming start in July .
Let's move to our first quarter results.
This quarter marked an important inflection in our fundamental recovery, we've been anticipating in our core portfolio.
Re leasing spreads were positive across all products and in all regions and scheduled price escalations translated into a positive inflection in our stabilized same capital portfolio growth year over year.
New leasing during the quarter was $83 million led by a strong zero to one megawatt plus interconnection leasing represented 57% of total silence helped.
Helped by the best quarter of interconnection signings in company history.
We continue to over index towards CPI based escalators within our new leases with over 40% of the newly signed leases in the quarter containing inflation linked increases with fixed rate escalators on the balance.
During the first quarter churn remained low at one 1%.
And we added 122, new customers continuing the streak of 100, plus new logos that we've added each quarter since closing the interaction transaction.
Our key wins included.
A global 500, pharmaceutical sourcing and distribution services company, who are exiting their legacy data centers and expanding on platform digital to ensure a European data governance and compliance.
A global 2000 insurance provider doing a campus migration from a competing provider.
A key differentiator for this new customer was improved resilience over the incumbent provider together with robust multi cloud connectivity and expansion capabilities.
One of the largest public power companies in the U S and a new logo for digital Realty is leveraging platform digital to modernize its infrastructure with network and control ups. This company is modernizing its infrastructure to embrace AI improve analytics and provide data to its BTB customers.
One of the largest financial services firms is building a new trading platform with digital Realty driving an entirely new ecosystem to capture global trading as it happens there.
Their requirements included low latency and high performance.
One of the largest global retailers also joined platform digital to support its local business presence diversified transit nodes and re architect their network topology.
Moving over to the power transmission issue in our largest market Northern Virginia.
We've continued to work constructively with the power provider in this market and last quarter. We were pleased to be able to confirm the commitments that we've made to our customers.
While the overarching conditions in this market have not changed we continue to work in partnership with the local providers to maximize potential availability within our 500 plus megawatt footprint and we remain cautiously optimistic that we uniquely we'll be able to provide growth capacity for our customer.
In this market through new development and select turn opportunities.
For now as.
<unk> remains highly constrained and pricing is reflecting the decreased availability of data center capacity.
Moving onto our investment activity.
During the first quarter, we acquired a three acre parcel of land in Osaka, Japan through our MTA digital Realty joint venture.
Future development.
We also monetize a 10% interest in a data center in Ashburn, Virginia in the quarter alongside our joint venture partner.
While the transaction was driven by our partner and Theres not a meaningful component of our capital recycling plan for 2023. It did indeed demonstrate the appetite well located data centers and strong valuations.
This asset was sold at a valuation of nearly 17 million per megawatt, which represents a substantial premium to our development cost today for new data centers in this market and significant value creation.
Given the ongoing process that we are undertaking to bolster our capital sources and increase the efficiency of our balance sheet, we remain confident in the institutional appetite to invest in data centers.
Notably over the course of the last few weeks, we have seen the announcement of the sale of the European Hyperscale data center platform to a well known global institutional investor at multiples that are consistent with where similar platforms have traded over the last few years.
And we have witnessed the recapitalization of another data center platform by what by other institutional investors.
We know that investors are eager to hear updates on our progress and we will provide those once we have a transaction to announce.
Yeah.
Since our IPO in 2004 concerns have been pure radically raised about various potential risk to data centers, including technology customers demand supply and obsolescence. This seems somewhat par for the course for a relatively nascent and growing asset class.
Over the last year or so we have witnessed the greatest misinformation campaign cast upon the data center sector, but those interested in seeing the price of our stock go down.
I'd like to clarify a few important points.
First we operate a global portfolio of carrier neutral and cloud neutral data centers to facilitate communication and the exchange of information and data among and between enterprises service providers and individuals all over the world.
While we are focused on building, what we call the meeting place for service providers and enterprise customers, who are in pursuit of hybrid multi cloud and state I T. Architectures. We're also facilitating the connectivity and communities of interest supporting latency sensitive applications and platforms.
These are things that cannot happen in a standalone on Prem data center and art serviceable by a single cloud service provider.
Second and conscious of the narrative that hyperscale or Sep force prices lower.
After a few years of negative same store growth the tightest termed.
As the supply of data center capacity in the low cost abundant capital environment that exists for much of the last 10 years has slowed meaningfully now that rates are higher and capital is more precious.
With continued robust demand strong net absorption is driven bacon suite, lower which has been supportive of data center rents accordingly, our releasing spreads have inflected positively.
As have our same capital core growth metrics, our team delivered on our objectives in the first quarter and we reiterated the recoveries we anticipate for these metrics for 2023.
Lastly, despite claims almost a year ago that hyperscale or would soon in source. Their data center requirements 2022 was a record leasing year for digital realty, partly driven by demand from Hyperscale customers.
We believe the demand from these other these and other customers within our pipeline driven by digital transformation and suite artificial intelligence remains robust.
Data center support the growth and evolution of technology that is improving our standard of living productivity and the overall quality of our lives we have not witnessed a meaningful and sustained pullback in demand in the nearly 20 years that we've been in business and we are not seeing a pullback today.
While an economic recession could slow capital spending.
Third party data centers also benefit from the trend towards outsourcing customer.
Customers, often make the decision to lease rather than build and the availability of capital tightens. We saw the same thing during the great financial crisis.
For many of our customers data centers can also help drive revenue growth or facilitate lower costs or even enhance overall productivity.
We are optimistic that our business will remain resilient in 2023 and for years to come.
Before turning it over to Matt I'd like to touch on our ESG progress during the quarter.
During the first quarter, a leading ESG ratings provider, including digital Realty and their 2023 top rated ESG companies list.
Noting that we are in the top six 5% of companies in the U S and Canada region.
In addition, digital Realty's continued its efforts to incorporate renewable energy resources.
We were named by the United States Environmental Protection Agency as one of the Epa's top twenty-five green power partners.
We furthered our commitment to sustainability by signing a 10 year power purchase agreement for 115 megawatt share of a new solar project in Germany to increase our total solar and wind power under contract to over one gigawatt of renewable capacity.
Subsequent to quarter end, we announced additional renewable to support our portfolio in Australia, while our business in Japan also announced renewable procurement for a portion of its portfolio.
We are committed to minimizing our impact on the environment, while delivering sustainable growth for all of our stakeholders.
With that I'm pleased to turn the call over to our CFO , Matt Mercier.
Thank you Andy let me jump right into our first quarter results.
We signed a total of $83 million of new leases in the first quarter highlighted by a second consecutive quarterly record in interconnection signings and continued strength in the zero to one megawatt category, particularly in EMEA, which nearly matched the record level from last quarter.
Zero to one megawatt plus interconnection accounted for a robust 57% of total bookings.
Our greater than a megawatt bookings moderated to $35 million in the quarter.
Though this activity was broadly dispersed throughout our global portfolio with leases signed in Toronto, The U S, Mexico, Europe , and South Africa, but nothing in Northern Virginia.
These deals can be lumpy and the downtick in the greater than 10 megawatt leasing follows a record year in 2022, and which we signed more than $370 million and 288 megawatts of new leases.
Importantly, our demand funnel remains quite strong as a number of our highly strategic customers remain actively engaged and are seeking to add capacity across our global portfolio.
Of course, as we have discussed on our last few calls our largest scale market Northern Virginia is experiencing capacity constraints as a result of the power.
Transmission issues that emerged last summer.
Over the course of the last three years.
The second half of 2022 we signed approximately $20 million per quarter of new leases in northern Virginia versus $2 5 million of new leases signed in this market and <unk> 23.
As I'll expand on in a moment, we expect the ballast to lower new lease volume to show up in better pricing, including renewal spreads.
Turning to our backlog slide the current backlog of signed but not yet commenced leases was $434 million at quarter end as Commencements were once again, well over 100 million, partly balanced by new leasing we expect the remaining 200 plus million dollars of Commencements in 2023 to be somewhat evenly weighed.
Throughout the balance of the year.
The lag between signings and Commencements in the quarter was 16 months, principally due to a few larger long term leases that require build outs.
During the first quarter, we signed $155 million of renewal leases with pricing increases of four 5% on a cash basis, our strongest renewal pricing quarter since the early days of the pandemic.
The strength was shared across both products and also across our three regions. So we're off to a good start relative to our full year 2023 guidance.
Renewal spreads in the zero to one megawatt category continued accelerating up four 6% in the first quarter on a $118 million of volume.
Nearly 400 basis points faster than it was in the final quarter of 2021, but also more than 100 basis points better than full year 2022.
Greater than a megawatt renewals were similarly strong in the first quarter as cash releasing spreads increased by four 4% on $30 million of renewals.
We were also pleased to see 100% of the leases signed in the quarter rollout in this category and we remain optimistic about the potential for the rest of this year.
Turning to our operating results our performance in the first quarter was a bit better than our expectations.
Highlighted by the continued improvement in our core operating performance higher development returns.
And a record quarter in interconnection revenue.
In terms of earnings growth.
We reported first quarter core <unk> of $1 66 per share.
A penny better versus prior quarter, and a penny light relative to last year.
On a constant currency basis core <unk> was $1 69 per share relative to the dollar 67, we reported in the first quarter of 2022.
Total revenue was up 19% year over year and 9% sequentially as.
As discussed on our last call. This revenue growth is somewhat distorted due to the significant increases in utility costs and reimbursements as the impact of last year's energy price increases went into full effect in January .
As most of you understand the large majority of energy costs are directly passed through to our customers.
Excluding utility reimbursements.
Total revenue was up 13% year over year and 4% sequentially.
While reimbursements remained relatively consistent percentage of utility expenses at 92%.
Due to a decline in spot energy prices between the fourth and first quarters are topline revenue, including utility reimbursements from our customers was more than 40 million below our original forecast, but this was directly mirrored by lower than expected utility expenses.
Since these expenses are directly borne by our customers.
Interconnection revenue was up 5% sequentially.
Reflecting the ongoing improvement in our core operating performance.
Other than utilities expenses were well contained as.
As NOI margins, excluding utilities remained steady, resulting in adjusted EBITDA growth of 10% year over year and 4% sequentially.
On our last two calls we've highlighted the improvement in operating performance that started to emerge with our stabilized same capital portfolio, but was largely masked by FX headwinds.
These positive trends strengthened further in the first quarter, despite continued year over year currency headwinds.
Same capital cash NOI grew three 4% in the first quarter compared to <unk> 22, demonstrating the turn in our core operations that we have been discussing.
The step up was driven by a 90 basis point improvement in same store occupancy as Commencements outpace churn.
Upside from annual rent escalators and the benefit of positive re leasing spreads.
Turning to our currency slide 51% of our first quarter operating revenue was denominated in U S dollars with 25% in euros, 6% in British pounds.
5% in Singapore dollars.
3% and South African Rand and 2% in each of the Brazilian real and Japanese yen.
The weakening of the U S dollar in the first quarter provided a slight sequential tailwind.
But the dollar strength through much of 2022, resulting in a continued headwind to year over year results.
As a result, the dollar strength negatively impacted our reported revenue growth and adjusted EBITDA growth by about 300 basis points a piece on a year over year basis.
Whereas core <unk> per share saw just under 200 basis points headwind.
Turning to the balance sheet.
Our reported leverage ratio at quarter end was seven one times, while fixed charge coverage was four four times.
In January we completed a $740 million two year term loan with an initial maturity date of March 31, 2025, plus a one year extension option and an effective rate of five 6%.
Leverage remains above our historical average and our long term target and we intend to reduce our leverage toward our long term target over the course of 2023, our plan hasn't changed.
We're in active discussions on our asset sale and joint venture plants and remain confident in our ability to execute on these plans over the course of the year, so that our leverage moves back toward the six times area by year end.
Our weighted average debt maturity is at five years and our weighted average coupon is two 8%.
Approximately 82% 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 and 97% of our debt is unsecured providing ample flexibility for capital recycling.
Finally, we have minimal near term debt maturities with only 100 million maturing in 2023, together with a well lettered maturities schedule.
Lastly.
Let's turn to our guidance.
We are maintaining our core <unk> and constant currency core <unk> per share guidance ranges for the full year 2023 of $6 65 to $6.75 in our first quarter results were consistent with this range.
We are also affirming our full year adjusted EBITDA guidance of $2 7 billion at the midpoint as the downward adjustment in our overall revenue guidance is purely due to lower utility expenses.
Driven by lower spot electricity rates that are passed on directly to our customers.
We are also modestly tweaking our euro two euro U S dollar exchange rate expectations for the year to reflect the relative appreciation of the euro year to date.
We also made meaningful progress on the turn in our fundamentals during the quarter.
Providing strong support for the organic operating metrics supporting our full year guidance, including cash and GAAP re leasing spreads over 3% same capital cash NOI growth of 3% to 4% and year end portfolio occupancy between 85 and 86%.
As I mentioned, a few moments ago, we remain confident in our funding plan for the year. So we have reiterated our guidance for dispositions and JV capital.
We have tweaked our debt financing cost expectation to be consistent with the move in rates seen since the banking sector fallout last month, which will be largely mitigated by the upside we saw versus our core off of expectation the first quarter.
This concludes our prepared remarks and now we were pleased to take your questions.
Operator would you please begin the Q&A session.
We will now begin the question and answer session.
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 keys.
To withdraw your question. Please press Star then two.
As a reminder, we ask participants to limit themselves to one question plus a follow up in order to keep the call to an hour and to give all callers an opportunity to participate.
Once again that was star then one to ask a question at this time, we will pause momentarily to assemble the roster.
And our first question will come from Nick del Deo of Moffett Nathanson. Please go ahead.
Oh, Hey, guys. Thanks for taking my questions first.
First I wanted to drill into the greater than one megawatt lease in a bit.
Obviously, that's been a bit below it below history in Q1, and you called out Ashburn as a driver of that.
I guess just thinking about some of the other drivers there maybe can you expand upon the degree to which that was the result of making conscious decisions to.
Maybe dial back a bit given the change in the cost of capital.
Versus market conditions or other factors.
And Amit.
Hey, thanks, Thanks, Nick.
So I'll kick it off and I'll hand, it to Cory I would say there was no conscious decisions in dialing back or waving off business necessarily.
You could see from our development lifecycle, we continue to raise the bar on our most strategic projects and.
Fine tuned capital allocations.
The I'd say it was it it was a little bit lower than prior run rates, but if you look at the prior year, which was a record had a record quarter in there in the third quarter.
I wouldn't say I think I went.
Over indexed to anything other than the call. It the typical lumpiness she may have in that category.
It was healthy in terms of pricing I don't think we have a single deal.
And below $100 per kilowatt.
Cory do you want to expand.
I'll tell you that thanks, Nick nothing fundamentally has really changed in our relationship our position with these hyper scaler in the greater than one megawatt.
Category.
Coming off as Andy mentioned, I think Matt maybe did in the prepared remarks, a record year and so I would tell you. This is probably just a one quarter timing issue. Our hyperscale demand remains really healthy and varies a little bit by country by a customer, but it's broad based across the globe Keith.
Keep in mind, we Didnt do ashburn deals on that this last quarter and I would say that theyre going through some digestion of their demand signals and maybe a little bit more scrutiny with the macro environment, but really confident in the macro demand our relationships to execute and keep in mind, we had our highest in our largest connectivity quarter with the Hyperscale. There's this last quarter.
And so I would just say that one quarter doesn't make a trend I would suggest you look at the multi quarter trends as well as as they expand in new markets new products like.
Yeah, I had been of AI in their edge nodes that we're winning and just new deployments across the globe, where really good position with them from a pipeline perspective and demand. Thanks Nick.
Okay. That's helpful. Thank you guys.
And I guess more generally obviously that the price environment is pretty pretty favorable for you right now I guess I'm interested in your thoughts on how you are balancing between raising prices on new space and renewal deals where market conditions allow it versus your kind of thinking holistically about your relationships with your top 10, or 15 or 20 customers EG.
Business week globally, and trying not to alienate them or hurt the relationships.
Sure. So I mean, where we all were always trying to take a holistic approach these relationships and as you can see from our top customer list.
Our largest customers can be with 2030 40 50 different locations.
At the same time.
The pricing is dynamic to overall supply demand dynamics.
And as inventory in various markets come more and more precious we've seen that penalty on pricing move in our favor.
We tried to be straight shooters with a customer we try to.
Britain all of the all everything to the table in a holistic fashion. We've done this before in terms of bringing renewals and new business expansions.
All in one holistic approach.
And I.
Uh huh.
This is this is not not new these are even these big hyperscale customers are seeing a.
Cost of doing business going up many of them self build themself and seen inflation in construction costs or labor.
So I think Oh.
The understanding that the pricing dynamic is shifting.
A little bit towards the providers.
It's playing out in a natural fashion.
The next question comes from Jonathan Atkin of RBC. Please go ahead.
Thanks So.
On Coreys response about about kind of the leasing volumes are.
I'm, telling you is to look at kind of the prior multi quarter trend.
It's about interconnection.
The trends going forward.
Given given kind of the strength there and.
Any any kind of mix shifts that you could kind of point to there, making it even more.
How are you targeting your customers, there's a lot of that coming from existing logos or you're reading your salespeople trying to focus on interconnect rich opportunities.
And then secondly, I guess on the on the competitive front given so many private we backed companies that are deploying a lot of capital into the sector does that affect your hyperscale sales pipeline at all.
Sure. Thanks, John on the on the first question.
Sharpie and I'll tag team that I mean.
I think I look at a few things one.
It's a holistic approach these customers there's a lot of good results in this quarter, whether it's the new logos, inflicting up 15% quarter over quarter, which was a high for several quarters, whether it was the overall interconnection plus less than a megawatt signings the regional contributions.
Including a standout interconnection quarter.
And I'd also mentioned that this is a building momentum that's been building over time for several quarters now I think that's the power of the platform coming together servicing.
Our customers across 50, plus metros on six continents.
It's the great work Kory and the team Tom on the go to market.
And I I still would say that we got.
Even further progress in an even better results to deliver overtime. This particular quarter. It did have a let's say a lumpier when the call put it into the number one category interaction site.
Connection signings, so I'm not sure that's necessarily repeatable next quarter with another record.
But the some of the work that we're doing with service fabric that Chris can touch on I think that's going to continue to build that momentum.
Chris picked it up from there.
Yeah appreciate it Andy and thanks for the question John .
A couple of dynamics here, where I think we've led by.
By our core existing product. So I take your direct question to you is it is it new logos versus existing it's boats right I really want to emphasize the fact that you know the physical cross connects reaching 214000 and growing it it's something that we constantly looked at and Andy referenced this earlier growing the platform investing in and making sure that.
<unk> know how to access one another to get further value out of an appointment is absolutely important to us and so just really watching how that evolves over time and with the advent of the service fabric and bringing that to market, what that's being able to do for our customers. We're just starting to see you know, it's early innings, but future growth around virtual right, where it's going to be married.
To where now they're gonna be able to access multiple destinations.
In a more simplistic fashion because of that product being purpose built in a way that we brought it to market. It really removes a lot of that technical complexity that has precluded other customers from getting the full value out of their deployments, but you know you know one of the things I'm just very pleased about is the customer labs and balanced approach that we've been doing.
Even new markets inside of Europe , we've talked about in the past, we're just bringing you know the value or the pricing closer to parity with some of these markets. We see you know really strong growth within Germany, and France, where you know, making sure that we're delivering those capabilities to those customers and all of these critical markets around the globe and I would just.
Lastly, I'm pleased with the fact that you know Digital's mail dried you know one of the greatest quarters of interconnection signings in the company's history and that's just really representative of the value, we're bringing to the customers.
And then John just around your second question about competition from private backed one that's not a new phenomenon, we've been competing against private players for some time now and the ones that have been taken private they've been private for multiple years for some of them.
I think what's changed is.
The ability to deliver this business for our customers has just gotten harder and harder.
And at a global scale and whether its power constraints staffing supply chains.
And certainly cost and access to capital.
It has certainly not been a friend of some of our competitors and I think our largest customers in the Hyperscale arena.
<unk> turned to us given our permanence in our space, we're not we're not here gone tomorrow.
We've invested for the long run we're future proofing their growth.
Constantly building.
For that growth and with our suppliers and I think all those things.
Probably make it leave it a little bit more advantageous versus some of those.
Private bank names in an environment like today.
The next question comes from Jon Peterson of Jefferies. Please go ahead.
Oh, great. Thank you I was hoping we could talk about the leverage target you guys reiterated getting down to six times leverage and I know you're you're working through.
These various transactions, but I guess, if you do complete the $2 billion of transactions I mean does that get you to six times like can you just give us the moving pieces on.
On getting to that target.
Yeah. Thanks.
So.
The simple answer is yes, so our capital plan I think as we laid out last quarter and really hasnt changed coming into this quarter is.
Is based on you know call it two plus billion of capital recycling from our joint venture.
Joint venture opportunities as well as the potential for non core dispositions and add that a couple of as that capital comes in as well as our expected growth in EBITDA. This year, which is a little shy of 10% we believe that by the end of the year.
Largely those two items will get us back towards that six times area.
Yeah this year.
Okay, Great and then if I could just ask on developments I'm curious given the shift in cost of capital like what's the minimum development yield or maybe you could just talk broadly about how much those requirements for you guys have moved you know.
In the last year or so like what does it take for you guys to started development today in terms of return expectations.
Hey, Thanks, John .
We do it incredibly granular market by market assessment here.
So it really depends on the market and the relative risk free rates and risk premiums.
I would just by and large and this is not something that just showed up in our.
<unk> approached this quarter.
Three quarters go almost.
We basically took a posture that we needed to raise the bar on capital allocation and prioritize our most strategic projects call. It highest return, but not only highest return, but also projects to generate the highest long term growth.
As well.
So I don't have a single number answer to get to give you there, but I think you'll see that come through our development returns a table as as those numbers are engine.
Into higher territory and I can tell you more strategic long term growth projects.
Great. Thank you.
The next question comes from Michael Rollins of Citi. Please go ahead.
Thanks, and good afternoon.
I wanted to go back to the capital recycling topic and just when we look at the guidance page, there's a wide range of outcomes and what would be a good outcome for digital in terms of the yield and you know what would the scenario in which you may just decide there is alternative forms of capital better.
Better.
Then recycling it and then just the second topic, but related if I could take a step back as I think about the comments you've made about considering both stabilized assets and development.
For monetization.
Curious if theres a more profound change in business strategy and financial model that investors should be mindful of in terms of how this business over the next couple of years might look different in terms of the quantum of investment any given year.
And the level of financial performance that Youre driving off of those investments just following.
Following on the comments you just made thanks.
So Mike.
But a good outcome as we essentially.
Get the call it $2 billion of funding completed and the range is wide, but the majority of that capital. The range is not that why the wide range is due to some of the noncore asset sales as well as the development, which is call. It 25% of the 2 billion right, but if you look at the majority of the 75% which is stabilized joint ventures.
Or development <unk>.
Development those are zero yielding projects on.
Stabilized joint ventures.
I think the cap rates are in the low single digits type care category based on what we're seeing called six ish.
Type territory.
In and I think that's based on not what we see externally by third party transactions.
What we've seen on recent transactions with partners that we can recapitalize within.
Our portfolio and through our progress on these capital recycling joint venture efforts.
Holistically more longer term here.
We are looking to become more balance sheet efficient.
We are not new is called finishing out the noncore dispose, what's not new is joint venturing majority stakes in stabilized hyperscale oriented projects that have lower long term growth rates due to the credit quality and size of the.
Customers be it through rent bumps or pricing power.
What is new is sharing a piece of both of our.
North America and.
Development as it relates to Hyperscale projects, and we're doing that with the view that these problems just keeps getting larger and larger and larger.
That incumbent Nonincreasing Bragg dragged.
It remains a headwind even though it is significant significant long term value creation and we believe there is.
Ample partners.
To work with us on those projects.
Which will ultimately make us our balance sheet more efficient and more rapidly accelerate.
Revenue and EBITDA drop to our bottom line.
The next question comes from Michael Elia of TD Cowen. Please go ahead.
Great. Thanks for taking the questions here I guess first just to double click on what you said about balance sheet efficient efficiency just as it relates to the development JV aside from recouping. The previously spent capex is the intention of that JV to structurally reduce the on balance sheet Capex for digital or is the intention to keep capex more or less the <unk>.
Same while being able to increase the set of opportunities you can pursue and then I have a follow up.
Okay.
The simply answer Michael is we're looking we're looking to partner around large scale development projects, where there'll be incremental spend that.
We and our partner will jointly fund overtime. So that it will we're looking for these are large projects large swath of acreage large quantities of megawatts.
Hence the quantity of capital our spend is not the entirety or near the entirety of where the project ultimately will be overtime. So they would fund alongside side us.
The coming quarters.
Okay, maybe just.
Shifting gears, a little bit earlier on the call today, you really emphasizing the steps you've made on the Colo Slash enterprise side today, you also announced.
Steve Smith, clearly a focus on accelerating Colo and connectivity I mean my question for you would be.
As we consider the path ahead, what are the changes that you feel need to be made internally in order for you to really accelerate on that call. It zero to one megawatt side. Thanks.
So Michael I mean, again I think this ties back to the first of three strategic priorities I laid out in a prior call about really strengthening demonstrably strengthen our customer value proposition.
We took a took advantage of this call to remind folks that this is not something we started.
With me, becoming the CEO .
Four months ago. This is something that's been in the works for.
Roughly eight years through both inorganic and organic measures.
Putting it another critical puzzle pieces.
Expands expanding across the globe in terms of where the customers need our capacity, adding key connectivity hubs and innovating and bringing more to our customers.
Adding we've changed up our go to market motion over over time.
Where we go from here is again accelerating from that success.
A piece of that.
Lighted to have Steve Smith on board.
To lead our essentially newly created America's region, Steve comes with a tremendous background of really.
Driving.
One of the only U S only focused interconnection niccolo platforms.
Prior previously a very formidable competitor.
And I think he's gonna be very added to that our team our leadership table.
Incremental things that we're doing.
In terms of continuing to innovate and bring more value to our customers Chris touched upon service fabric, which I would still characterize as just just out of the bar in terms of where we're going in terms of bringing more partners onto that platform and drilling more value to our customers.
We are.
There's a whole host of things that I'd say, we're doing behind the scenes to continue to accelerate our growth and I think the fruits of our labor are continuing to build each and every quarter.
In terms of success. So I think there's multiple angles that we are moving towards.
That endeavor to be.
One of our very short list of global interconnection Colo providers and I think the industry demands in the broader competitive backdrop also or our wins and our sales and then Andy just one thing to add from a go to market perspective.
We've had a ton of success around that channel, we're continuing to grow the channel I think.
Last quarter, 38% of our new logos were from the channel. Prior years. It was 31 were continue to build on that success, we see the channel as being a huge advocate and a partner through their their lens with all the enterprises. So we're going to see that continue to build so we're doing a lot of functional and strategic operational items that we need to do.
We're also continuing to tweak and evolve our go to market. We think is going to continue to add value.
The next question comes from Frank Louthan of Raymond James. Please go ahead.
Great. Thank you.
On the on the re leasing spreads thinking about greater than a megawatt in particular, but kind of with all of them is there anything you see coming up in the year that could possibly push those spreads back negative.
Largely negotiations and then what is sort of the longer term outlook with the bookings down a little bit, but pricing doing better what sort of yield or are we looking at going forward versus say you got in the last couple of years with when the booking for higher.
I'll kick it off and re leasing spreads and then we can taxing sort of a long term piece.
Yeah, So Rick Thanks, Frank.
I think one first I'd I'd reiterate where you know, we're obviously off to a great start here with the.
Positive releasing spreads again, not only across all product types, but across all regions.
I will say, where we feel we feel confident that.
That this positive pricing environment that we're in is sustainable and it's here to stay.
I'm not going to necessarily speak about <unk>.
Every single quarter, but again I'd come back and reiterate that where we're at.
Off to a great start.
We see and we see that.
For full year that we expect to be positive for the full year not only in the zero to one megawatt category, but also in the in the greater than a megawatt category.
Which I think is again something we haven't seen in a few years and.
And reflects the positive environment and turn in fundamentals that we're seeing not only from that but then down into our stabilized state.
Stabilized portfolio as well.
Frank do you want non repeating that second part of your question just to make sure we hear it correctly.
Yes, leasing you're down a little bit obviously better pricing what is the yield look like now versus say the last couple of years ago with bookings were higher and so forth and all how long do you think this is sustainable.
What sort of yields are you seeing coming in now even though the absolute bookings are a little bit lower.
Try that direct due to our development.
Table discount and see the progression of yields.
There is.
It's I would say the yields are improving in our favor the pricing dynamic is outpacing the inflationary pressures.
Not an overnight phenomenon.
But we're moving into better territory.
You're I mean, you can look at episodic things like Ashburn, Virginia, where quite frankly, the rates pretty much doubled.
In a pretty short time from.
From deals in the called low Seventy's to know on the call at market.
Market rates of call it $1 40.
And that's flowing to the bottom line and then enhancing those yields dramatically.
So I think that table is a work in progress in our sub because it's got a lot of pre leasing some of which was signed prior to some of this price progression.
But as we continue to add more projects to that.
They are not pre leased or we fill out the leasing on the on the available capacity.
I think there's ability to raise those yields and I would also say.
The North America piece of that has a large project in it.
That is an open book build to suit.
Two a very high highly rated <unk>.
Financial institution on a triple net lease basis, so and it's it's.
It's a it's an apple to the Orange is there and a good way it's been dramatically derisked in terms of its build and in terms of its ongoing.
Revenue in an EBITA stream.
Yet at the same time lowering our Americas yields.
Okay, great. Thank you very much.
Yeah.
The next question comes from David Guarino of Green Street. Please go ahead.
Hey, Thanks, Andy in the press release, you were quoted as saying that you're seeing broad based demand and reduced data center availability. I was just wondering why do you think that given and translating into outsized growth in rental rates like we've seen across other commercial real estate sectors like industrial or self storage it it.
Definitely feels like the pendulum swung back to the landlord, but data center rents just aren't rising might be seen elsewhere.
I would say I mean, it's a new phenomenon in terms of recent history of the data centers, which is still I would call a Nissan asset class, but we are seeing it.
If you look at call it are less than a megawatt signings.
The Americas region, or EMEA region, where there's critical consistent massive new signings the rates have been up call. It four quarters in a row.
And the example, I gave you in Ashburn, Virginia from rates going from $70 plus $140 plus C that is quite a run.
And.
I know I'm picking out one particular market there an example.
But it is the largest and most diverse market out there.
Our largest market as well.
And it's it's flanks to the east coast with a powerful stream problem, but the the west coast is having the same one with Santa Clara now having power constraints that likely outpace when power comes online in Virginia.
And I think this phenomenon is going to continue in other parts of the world not just the U S and I think you're going to continue to see.
Those those rates move more and more of our favor and David I know, you're a student of the traditional real estate asset classes. I mean, it was a good 20 years, where industrial had no rate growth before its had the Renaissance that's been experienced the last few years and I'm not I'm, not saying that that's going to happen.
Data centers.
But it feels like we're teeing ourselves up for a healthier pricing environment for the incumbents.
And so that's encouraging to hear and then maybe kind of sticking with that theme you said.
Been hearing some similar chatter and also about difficulty securing power and some other markets that for Chicago come on the radar and possibly even Hillsboro now. So you know given just it feels like these are popping up everywhere across the industry. What do you think that means for your pace of new leasing activity going forward. I mean are the things we saw in the years past probably unlikely to.
And just given the powder constraints.
Yeah.
You looked at our.
And the answer is we've got a sizable amount of contiguous land capacity and available power thats committed to us outside of these zones.
Zones of disruption.
But longer longer term eventually that where we will exhaust that in and.
You could have that phenomenon at the same time when youre doing business at twice the rates you want to sell half the kilowatts in certain markets. So.
I'm not sure.
I'm not sure the top line pacing on our new signings will be all that disrupted near term based on what we have.
In the stable in terms of capabilities.
And committed power.
But I agree with you this assessment and its going to continue the other thing.
Emphasize is.
We are actively managing our platform and our capabilities and we're essentially always looking to reprivatize for higher better use when applicable. So if we have churn, which this has done is totally static business.
It provides opportunity to re lease that capacity.
At higher rate opportunities and often higher better use it towards some of our granular enterprise colocation oriented customers.
On a big company like digitally you probably don't see that its not tops the waves, but that's happening.
Terms of how we manage our footprint.
Great. Thank you.
The next question comes from Nick <unk> of Deutsche Bank. Please go ahead.
Hey, guys. Thanks for squeezing me in here just.
Just two if I could first on the capital recycling not to beat a dead horse, but you did talk about being deeply engaged in the process I'm. Just wondering if there's any more color you can share on the progress made thus far across the different buckets that you've laid out and then maybe.
Switching gears on AI I mean, we've heard so much about this over the last several months I'm. Just wondering how is the increased focus on AI impacted your customer leasing plans and your conversations with them as they think about deployment plans over the next year. Thanks.
Yeah. Thanks, Matt I don't have Greg tackle the first one and then sharpening I can tackle the second one.
Thanks, Matt look I'd say look with respect to our capital initiatives I'd say, we're still on track with the plan we outlined in our earnings call in early February which as you recall that was the $500 million of the non core dispositions call. It roughly 750 from core Jbs and 752 development Jb's.
I would characterize it without saying too much is that we're making good progress on these transactions.
And we have received significant interest from multiple institutional partners, whether it's sovereign wealth funds infrastructure funds PE real estate.
<unk> funds pension funds insurance companies and alike.
So the way I'd characterize it as we're executing on plan.
And we feel good about where we are in each of these processes.
Sure.
Turning to your second question for just one quick thing before I turn it over to Chris GPT to.
Okay to give his view on AI.
The.
I think a misnomer here is that in my opinion that everyone's things every data center has been turned into <unk>.
One that's going to be supporting artificial intelligence. The use cases, the applications of workloads that exist today are still going to be thriving within the global data center footprint and digital.
Yes, we have many datacenters that lend themselves towards supporting the increasing power densities and cooling environments that will be required and we're doing a lot of that in.
As we speak.
I look at more the bigger picture around AI is that this is an incremental <unk> <unk>.
A major wave of long term demand.
That will certainly need to have proximity to the major data that sits today.
And the first two waves of demand of moving from on Prem locations to multi hybrid hybrid locations in the second wave of growth.
Multi cloud haven't even hit the shore yet while this next wave of demand is falling behind it but Chris why don't you speak a little your view on AI.
Yeah, no absolutely I appreciate the question a couple of pieces victory, yet reiterate what Andy said the.
The existing cloud infrastructure, we have today.
He is cloud adjacent because of a lot of the application that's empowering and the way that customers are bringing it to market. It's something we've been watching for many many years and I think one of the pieces I always try to emphasize that a lot of the R&D from the hyperscale or something from the technological providers, that's been happening within digital which has allowed us to evolve our infrastructure with it.
Demand and I would reiterate also that there are pockets of AI, there, we're able to support rather efficiently and I think this is something that's unique to digital designs in the R&D work that we've been doing with some of the cooling technologies. It's it's really important for us to continue to support the broader spectrum of the customer.
So not only their traditional type of digital transformation, but we are seeing more and more customers show up with AI specific requirements in association with that digital transformation and then the last one is you know really emphasizing that.
So the customer base to design early and understand the implications of not only the power, but the interconnectivity and just to circle.
Circle back to.
Why we believe the value our platform Digital's differentiator is the ability to interconnected and open fashion with the right partners in a very simplistic manner is what's making a lot of these AI deployments successful and so that's the core of how we continue to focus on AI and bringing that to market in a very repeatable fashion.
And so youll see some recent sales tools, we will start talking about publicly to visualize how you tie together this infrastructure on a global basis. So very exciting about this additive demand coming to market and you'll see more and more of the use cases and case studies coming out on the success that our.
Customers are having within platform digital.
The last question comes from Eric <unk> of Wells Fargo. Please go ahead.
Hey, Thanks, guys for squeezing me in.
I wanted to touch base on an aspirin it sounds like a transmission line has been approved in service by late 2025 near digital dollars. So.
When do you think you might be able to start additional development in that market and do you think you are seeing any spillover impact in terms of other markets or submarkets, where.
What are you seeing additional activity levels because of the tightness in Ashburn and I guess just.
Related to that on the pricing front I think you mentioned that youre seeing rents as high as 140 minutes.
I think a lot of your rent mashburn are rolling at 80 or $90. So just wondering if you have any color on what you've seen.
On the leasing spreads across that market and what you expect going forward. Thank you.
Thanks, Eric so.
And we have to touch a little bit on this in the prepared remarks.
The.
The good news is that the powers that be in the region are sorting out.
Our ways to bring incremental power to the region by 2026.
Thank the from there I think you'll see a much more rational.
Providing a power to.
To that market.
And I do think it's going to behoove, our self to be our history and track record working that region is going to keep us top of Q.
When when power becomes more freely between now and then.
We last quarter had the good fortune.
Having worked with the local power providers to be able to deliver on all of our customer commitments.
Which is fantastic.
We do believe that.
We will be able to bring on incremental growth capacity in this market between now and 2026.
Through called some development as well as some churn.
We are working through all the resources, we have in terms of excess power at sites.
Customers that may not be using their their suites and be able to.
Go to spare some capacity.
So I don't have a fine point of quantity.
But I don't believe our shelves that digital will be bearing that we will be able to support our customers certainly our co location customers and some of our hyperscale customers.
We'll be able to grow with digital in ashburn in the coming years and as we get a finer point on the quantities.
Probably in lockstep with leasing of that capacity.
We'd be happy to share some of the spillover effect.
The spillovers real Manassas, I think is front and center of a spillover market.
Two the Loudoun County, a pinch point.
I would say that we've seen the greatest spillover effect, but there is always potential some of the non northern Virginia markets will continue to be an option.
But I don't think I don't I don't see anyone packing their wagons and leaving Ashburn due to this I think.
The momentum has been building for years, and it's called out escape velocity.
In terms of its criticality.
To the data center industry and its customers.
Great. Thank you.
This concludes the question and answer portion of today's call I'd now like to turn the call back over to President and CEO Andy power for his closing remarks, Andy. Please go ahead.
Okay.
Okay.
Thank you Andrea.
Digital Realty is off to a strong start to the year.
Our results demonstrate that our value proposition is resonating with customers, which was confirmed by record interconnection signings.
<unk> strength in the zero, one megawatt category and strong new logo additions, we expect that our operating momentum will continue through the year and that the steps, we're taking will further accelerate our progress.
We also remain confident in our funding plan and I look forward to updating you with further developments on this front at the appropriate time.
We are very excited to bring together our customers and partners on may 24th and 25th and our marketplace Live 2023 event. The theme. This year is the crossroads of the digital world. The data meeting place the entire digital Realty community from around the World will come together virtually to network gain inspiration in Britain.
Our digital strategies to life. Please join US you can register at marketplace live Dot com.
I'd like to thank everyone for joining us today and say a special thank you to our hard working and exceptional team of digital Realty to help keep the digital world running thank you.
Yes.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Alright.
Yes.
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