Q2 2023 Digital Realty Trust Inc Earnings Call
Some of our second quarter.
First our customer value proposition continues to resonate we delivered yet another strong quarter of leasing in our zero to one megawatt plus interconnection segment and saw a healthy rebound in greater than a megawatt leasing.
And second this past quarter confirmed the continued inflection in fundamentals we have been speaking about for much of the past year supported by a strong pricing environment.
Re leasing spreads were the strongest in three years and stabilized same cash.
AOI grew by five 6%, marking the second consecutive quarter with positive growth and the best growth in almost nine years.
And third we bolstered our total liquidity, which now stands at more than $4 billion and further diversified our capital sources and reduced our leverage well off peak levels through more than $2 billion of dispositions and <unk> and over $1 billion of equity issued under our ATM.
With that I'd like to turn the call over to our President and CEO Andy.
Andy power.
Thanks Jordan.
Thanks to everyone for joining our call.
Against the backdrop of an extraordinarily dynamic first half of the year, we remain focused on advancing our strategic priorities and delivering on behalf of our 5000 plus customers.
Digital Realty made strong progress in the second quarter with <unk>.
Improved operational results.
<unk> on our funding plan and increased liquidity.
Continued organizational improvements.
An increasing recognition of the critical role that data centers will play in support of both digital transformation and artificial intelligence.
We posted sequential growth in revenue adjusted EBITDA and <unk> per share.
While improving development returns bolstering liquidity and Delevering the balance sheet.
During the quarter, we made progress on each of the three key strategic priorities that I laid out earlier this year.
First we strengthened our customer value proposition.
By enhancing our communities of interest with more connectivity options.
Posting record double digit interconnection revenue growth in the second highest quarter of new logo additions in company history.
Second we innovated and integrated.
Delivering enhancements designed to support high performance compute including AI.
By enabling data centers to support liquid cooling solutions, while also broadening our existing partnership with Nvidia with the certification of our first <unk> hundred <unk> data center.
And integrating with additional organizational enhancements designed to deliver a consistent structure and experience, while leveraging data to improve our effectiveness and efficiency.
Third we access diverse capital sources during the quarter, including the sale of a noncore asset in Texas, and an attractive four 4% cap rate and equity raised under our ATM.
Subsequent to the end of the quarter, we formed a stabilized Hyperscale data center joint venture with a new private capital partner that inquired in interest in two facilities in Chicago.
And today, we announced a similar joint venture transaction alongside a second new private capital partner for three stabilized Hyperscale data centers in Northern Virginia.
Just a little more than halfway through the year. We are now well ahead of the midpoint of our original funding plan for 2023.
And we remain focused on putting digital realty's balance sheet into position to support the growing opportunity that lies ahead.
The current state of the data center infrastructure landscape is very healthy.
There is widespread demand for our data center capacity across various regions and products.
However, there is limited new supply due to group decreased power availability and tight financial conditions.
The global expansion of cloud computing paired with continuous digital transformation of enterprises underscores the escalating importance of both data and AI and shaping demand.
Presently we are collaborating with numerous clients on AI focused request for proposals and implementations.
The initial surge as anticipated and power intensive training applications.
By a rise in inferencing applications, including access to private private datasets, which are expected to necessitate enhanced performance and reduced latency.
Additionally, the interest in nature of these models is necessitating larger capacity blocks, which aligns seamlessly with our extensive product suite.
As the global meeting place for data exchange and a full spectrum provider of data Center solutions Digital Realty stands at a strategic vantage point.
This allows us to cater to the needs of enterprises, facilitating their efficient integration of applications within their digital transformation journeys.
In the second quarter, we unveiled data gravity index to Lotto, which represents our extended commitment to data science. This tool is designed to assess the effects of enterprise data generation and consumption in both public cloud and private data centers offering enterprises as a framework to manage and drive insights from their data.
Moreover, our innovative approaches and data gravity and comprehensive data center architecture were recognized as we secured a patent for these.
Our patent further offers enterprises, a roadmap to ensure their architectures remain relevant in the future.
The evidence is clear we have shifted from a physical economy to a digital economy, which now is entering a new form the data economy.
Our research shows that the surge in server demand can be attributed to the rising needs of both public and private cloud infrastructure.
Further augmented by AI training and inference processes.
At the same time demand for storage devices is poised to grow due to data regulation.
Let's move to our second quarter results.
This quarter continued the inflection in the fundamental recovery, we've been highlighting in our core portfolio over the past several quarters.
Our pipeline remains strong during the quarter, helping to drive a sequential rebound in leasing volume, but also supporting strong pricing with re leasing spreads positive again across all product types and in all regions.
New leasing during the quarter was $114 million with continued strength in the zero to one megawatt plus interconnection leasing which represented 43% of total signings.
Greater than a megawatt increased by over 6% sequentially led by one of our strongest quarters ever in EMEA.
Strong demand trends and reduced availability along with growing recognition of our value proposition continues to be supportive of pricing and are enhancing our expected returns.
In the second quarter, we saw releasing spreads climbed nearly 7% on a cash basis, helping to drive the best in capital cash NOI growth that we've seen since I joined digital Realty in 2015.
During the second quarter churn remained low at one 5% and we added 133, new customers, our second best quarter ever and a nice continuation of the 100, plus new logos Street, we have going.
This is a strong validation of the stability of enterprise it spend in digital transformation that we're seeing and the value that customers recognize and platform digital.
Our key wins included an innovative sustainability oriented infrastructure provider that taps into shredded energy to support module edge compute sites chose digital realty for AI applications utilizing platform digital network control and data hub solutions.
Data intensive workloads are being deployed on platform digital by a major U S Federal agency to reduce costs and improve sustainability, while interconnecting with their key ecosystem partners.
A leading European Bank chose platform digital to help simplify and secure their hybrid it strategy and compliance with data sovereignty regulations, while leveraging the available cloud connectivity.
A fortune 500 quick serve restaurant chain is updating their internal infrastructure on platform digital to improve reliability and security support existing systems and connect with key cloud to support the strong growth of their E Commerce business.
A global 2000 pharmaceutical sourcing and distribution services company is expanding to a new Mexico platform digital to ensure our global data governance compliance.
And a global 2000 auto manufacturer chose platform digital to upgrade their network architecture, and central Europe by adding key points of presence for the largest and most important production centers.
Moving over to our largest market in northern Virginia.
In the year since we learned of the power contracts in this market will continue to work constructively with the power provider to confirm the commitments that we've made to our customers and to provide growth capacity for our customers through new development and select churn opportunities.
Over the course of last several months with the support of our local utility partners. We've been able to identify nearly 100 megawatts of incremental billable capacity that we expect to be able to bring to market prior to 2026.
This includes 40 megawatts of available capacity underway within the current development pipeline.
And the potential to move forward on almost another 60 megawatts.
In addition to this ashburn focused capacity, we've made meaningful progress on our 192 megawatt development site in Manassas, which is now nearly and positioned to begin development.
We are optimistic about the near term potential to offer this availability to our customers.
Moving onto our investment activity as we outlined in February 2023 was poised to be an active year for our investments team and some of the fruit of their labor has been harvested since our last call.
During the second quarter, we acquired the land and shell associated with a previous release data center in Amsterdam, where we previously held a lease hold interest for $18 million.
And in a separate future proofing transaction, we purchased additional land adjacent to our highly connected schiphol campus in Amsterdam, which could support another 40 megawatts of potential load.
And ample runway for both enterprise and service provider growth.
We also closed on the first non core disposition of the year in mid May and a four 4% cap rate.
<unk> and $150 million of net proceeds to digital Realty.
This facility was previously leased as a powered shell and was sold to one of its primary occupants.
In July we saw a significant acceleration in our capital recycling initiatives closing on two separate stabilized Hyperscale joint ventures in Chicago and Ashburn. These.
These deals were executed at just over 6% cash cap rate on average and raised more than $2 billion of net proceeds for digital Realty.
These transactions are an important validation of our current strategy as we remain focused on delivering shareholder value through the development of new data centers in double digit unlevered returns and the monetization of stabilized hyperscale assets at a premium.
But equally as important we have.
Substantially bolstered and diversified our sources of private capital. So that we can execute on the operating opportunity that lies ahead without being overly reliant on any individual avenue of capital while also increasing the efficiency of our balance sheet.
While we've had remarkable traction on these transactions and all due credit goes to Greg Wright is top notch team and the rest of our platform for executing through a tumultuous capital markets environment.
We are not resting on our laurels.
We are well ahead of our plan on our stabilized Hyperscale joint venture plan, but we see ample demand for the Hyperscale development joint venture bucket that we have previously discussed and we will provide updates as appropriate.
Before moving on I'm also delighted to welcome Geo a reliance industries company as our newest partner to our joint venture in India.
The expanded partnership builds on the strong foundation laid by Bam digital Realty to.
The addition of Geos massive digital and connectivity ecosystem and strong enterprise relationships with 80% of large private enterprises in India.
Before turning it over to Matt I'd like to touch on our ESG progress during the quarter.
During the second quarter, we issued our fifth annual ESG report outlining our initiatives for 2022.
The report highlights the progress we have made toward our science based targets commitment to reduce our global carbon emissions by 68% by 2030.
We've enabled our success by contracting for renewable energy wherever possible. So that we have one gigawatt of solar and wind energy under contract in the U S.
This has enabled us to match 126 of our data centers with 100% renewable energy.
In the second quarter. We also received a certificate of adherence from the climate neutral datacenter pack.
As a founding member of the pack digital Realty work with independent auditors to certify that we are on track to meet the overarching goal of the pack for the industry to become climate neutral by 2030.
We remain committed to minimizing digital realty's impact on the environment, while delivering sustainable growth for all of our stakeholders.
With that I am pleased to turn the call over to our CFO , Matt Mercier.
Thank you Andy let me jump right into our second quarter results.
We signed $114 million of new leases in the second quarter with broad based strength across the zero to one megawatt plus interconnection segment in each region.
We leased approximately $50 million in the zero to one megawatt plus interconnection category accounting for 43% of total bookings and becoming a larger part of our overall bookings since last year.
Interconnection bookings were strong once again at over 12 million <unk>.
Concluding a record 12 months period.
Zero to one megawatt bookings, excluding interconnection were among our strongest ever at $37 million.
Digital Realty has come a long way over the past four years more than tripling our bookings in the zero to one megawatt plus interconnection segment through a combination of organic and inorganic growth.
These results demonstrate that our full spectrum strategy is working.
Greater than a megawatt bookings totaled $61 million in the quarter, a meaningful bounce back from last quarters timing oriented pause.
EMEA was the standout including strong contributions from Johannesburg, Paris, and Marseille, while we also saw notable strength in northern Virginia and Tokyo.
We also continue to over index towards CPI based escalators within our new leases with 35% of the newly signed leases in the quarter contained inflation linked increases.
With fixed rate escalators on the balance.
Pricing has improved in many markets.
With our largest market northern Virginia see nearly a doubling of rates over the past year in response to supply constraints.
Illustrating the changing tide in ashburn during the quarter, we Opportunistically took back eight megawatts of lease capacity from an existing customer and released it to another customer at a substantial premium.
The original lease was signed in the first quarter of last year.
Accordingly.
Our new leasing for the quarter only represents the uplift in rent achieved versus the prior lease rather than the full annualized value of the new lease.
While we have previously tempered enthusiasm around the potential mark to market opportunity in Northern Virginia. We are encouraged by this recent transaction and our increased development potential and growing colocation and connectivity offering in this market.
Aside from the shift seen in northern Virginia, We have also seen an improvement in our rates across the Americas as well as in EMEA and APAC.
Looking forward, our demand funnel remains healthy with strength strength across product types and geographies.
We expect ongoing and newly approved development capacity to be an important contributor to our growth through next year.
Turning to our backlog slide the current backlog of signed but not yet commenced leases was $437 million at quarter end as commencement were once again, well over a $100 million balanced by new leasing.
We expect the remaining $150 million of Commencements in the second half of 2023 to be somewhat evenly weighted between the third and fourth quarters.
The lag between signings and Commencements in the quarter was 11 months as certain hyperscale customers await buildout completions.
During the second quarter, we signed $211 million of renewal leases with pricing increases of six 9% on a cash basis, our strongest renewal pricing in three years.
This strength was shared across both product segments and across our three regions continuing the broad based improvement we saw last quarter.
With renewal rates trending over 5% during the first half combined we are raising our full year guidance for renewal spreads to better reflect the success year to date and today's improved fundamental environment.
Renewal spreads in the zero to one megawatt category continued to decline for the sixth consecutive quarter to an increase of four 8% in the second quarter on $133 million of volume.
Greater than a megawatt renewals were even stronger in the second quarter as cash releasing spreads increased by considerable eight 7% on $73 million of renewals the largest increase within this category since the third quarter of 2019.
Turning to our operating results, our operating and financial performance in the second quarter was a bit better than our expectations highlighted by many of the same factors, we highlighted last quarter.
The continued improvement in our core operating performance.
Another record quarter of interconnection revenue and well controlled expenses.
In terms of earnings growth, we reported second quarter core <unk> of $1 68 per share, 2% better versus the prior quarter and consensus expectations on.
On a constant currency basis core <unk> was $1 69 per share relative to the $1 72, we reported in the second quarter of 2022.
Total revenue was up 20% year over year, and 2% sequentially year over year revenue growth was impacted by both the inclusion of <unk> This year and the significant volatility in utility costs and reimbursements, particularly in Europe over the past 12 months.
Most of these energy costs are directly passed through to our customers. Excluding utility reimbursements total revenue was up 12% year over year.
Critically our rental revenues in the second quarter included a 25 million onetime write off of noncash straight line rent and a 6 million bad debt reserve related to a tenant that declared bankruptcy during the quarter.
We also wrote off $3 million of noncash straight line rent related to the re leasing opportunity we executed in northern Virginia.
These write offs of noncash straight line rent of approximately $28 million combined are excluded from core <unk> per share.
Interconnection revenue was at a record level in the quarter.
Increasing by 12% year over year and 3% sequentially.
Excluding pterygote interconnection revenue was up 8% year over year, reflecting the ongoing organic strength in our core footprint.
Bookings were higher in all three regions and service fabric activations doubled in the quarter.
Other than utility costs expenses were well contained as rental property operating expenses and insurance were both flat sequentially, resulting in adjusted EBITDA growth of 14% year over year and 4% sequentially.
Improvement in our stabilized same capital operating performance continued in the second quarter with year over year cash NOI up five 6% and one 7% sequentially.
This marked the strongest year over year growth in our same capital pool since 2014.
Demonstrating the turn in fundamentals that we've been highlighting.
The improvement was driven by an 80 basis point increase in occupancy as commencements outpace churn with upside from rent escalators and stronger than expected re leasing spreads.
While we're very encouraged by the improvement we have seen to date in this metric.
And the trend does indeed appear to be our friend our enthusiasm for the second half of 2023 is tempered by the uncertainty related to a recent customer bankruptcy filing.
We expect to know more about the potential impact by the time, we report third quarter results.
Turning to the balance sheet.
As Andy outlined in his remarks as of this week. We are meaningfully ahead of the funding plan that we laid out for you in February we have already closed and approximately $2 2 billion of asset sales and stabilized joint ventures and expect to make additional progress on development joint ventures in the second half of this year.
Specifically early earlier in July we closed on the sale of a 65% interest in two stabilized hyperscale data centers on our Chicago campus, raising $743 million of gross proceeds.
And as announced this afternoon, we sold an 80% interest in three stabilized hyperscale data centers on our Ashburn campus raising another $1 3 billion of gross proceeds.
Including proceeds from the sale of the noncore asset in Texas, We announced last month, we have raised over $2 billion in capital at a blended average cap rate of just over 6%. So far this year.
In addition to this capital recycling activity during the second quarter, we raised $1 1 billion in proceeds from the sale of 11 million shares of equity under our ATM.
Included in this total was approximately $3 5 million shares or $335 million that was structured as forward equity issuance.
These shares were settled earlier this week.
Our reported leverage ratio at quarter end was six eight times.
While fixed charge coverage was four two times.
Pro forma for the JV transactions and the settlement of the forward equity outstanding at quarter end leverage was six three times, putting us on track toward our near six time target by year end.
Moving on to our debt profile, our weighted average debt maturity is nearly five years and our weighted average interest rate is two 7%.
<unk>, 84% of our debt is non U S dollar denominated.
Collecting the growth of our global platform Approx.
Approximately 83% of our net debt is fixed rate.
And 97% of our debt is unsecured providing ample flexibility for capital recycling.
Finally, we have minimal near term debt maturities with only $100 million maturing during the rest of this year and a well ladder maturity schedule throughout the out years.
Lastly, let's turn to our guidance, we are affirming our full year revenue guidance range of five five to $5 6 billion and adjusted EBITDA guidance of $2 7 billion at the midpoint.
As the recent acceleration in capital recycling has been balanced by better than expected re leasing spreads and same capital cash NOI.
We are however.
Adjusting our core <unk> and constant currency core <unk> per share guidance ranges for the full year 2023 by <unk> <unk> per share to a new range of $6 55 to $6 65 to.
To reflect the following.
<unk> per share tied to the acceleration of our funding plan, including greater than expected stabilized joint venture sales and over $1 billion of equity issuance.
Five to seven per share for the write off of unpaid rent an additional near term uncertainty related to recent customer bankruptcy.
And about a penny per share of lower noncash straight line rent tied to the opportunistic termination and re leasing in northern Virginia.
Given the continued progress on the turn in our fundamentals during the quarter. We are also updating the organic operating metrics supporting our full year guidance, including <unk>.
Cash and GAAP re leasing spreads moving up to greater than 4% and greater than 8% respectively.
An increase in our same capital cash NOI growth guidance by 100 basis points to a revised range of 4% to 5% despite the.
Potential impact of the customer bankruptcy this quarter.
Partly balanced by a reduction in our year end portfolio occupancy assumption to 84% to 85% largely reflecting the greater than anticipated sales of stabilized hyperscale assets into joint ventures.
Given the better than expected execution on our funding plan to date, we have also updated our guidance for dispositions and JV capital. We now expect total disposition JV capital raise to fall within the range of our current $2 2 billion up to $3 billion.
We have also reduced the amount of long term debt financing needed to support our full year funding plan given the nearly $4 billion of liquidity currently available is.
As a result of asset sales JV and ATM equity raised.
This concludes our prepared remarks and now we'll be pleased to take your questions.
Operator would you please begin the Q&A session.
We will now open up the call for questions.
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 you 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 keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question comes from David Barden of Bank of America. Please go ahead.
Good afternoon, everyone. Thanks for taking my question do you have Alex waters on for Dave Congrats on the new JV deal just wanted to know if you could walk us through kind of what line of sight you have for the development JV pipeline and then looking into 2024 can you speak to how comfortable you are with the funding pipeline and then secondly on the core business you've had strong re leasing spread.
On the greater than one megawatt side just curious on what your expectations are for this bucket heading into the second half of the year and into 'twenty 'twenty four.
Thanks.
Okay. Thanks, Alex.
Please share the kind words, I'm going to turn it to Greg to call to speak to that.
Where we go next in terms of capital reason on development JV is maybe tie in what's happened in the back half of this year into 2024.
Matt and I can pick it up on the core portfolio sounds good thanks, Alex.
With respect to the development JV guidance were still comfortable with our full year development JV guidance that we provided previously.
750 give or take and that's obviously the plug if you will between the one of the half to two and a half last time, which now becomes two $2 billion to $3 billion.
Look we remain engaged on these transactions over the second half of the year and what we're seeing out there just as with the stabilized joint ventures Theres strong demand for development joint ventures.
Given that these jv's offer the highest returns.
They have a lot of moving parts, though so given the strategic considerations here these tend to take a little longer.
So I would say we remain.
Optimistic and on track for those with that I'll turn it back over to.
<unk>.
Thanks, Alex I think to your second question was about let's call. It the core operating results, we saw in the quarter and year to date, and where we see the back of the year from if I'm correct.
We're certainly pleased on multiple fronts on the value proposition pricing power coming through.
Saw that our new lease signings in our lives as well as our cash mark to markets in which flowed through to our same store growth.
We had.
Quite strong.
Quarter on those stats.
And you saw that we update our guidance for the full year silver.
Silver as of right now we think that these trends on the cash mark to markets and pricing power will continue.
In the back half of 2023.
Yes, Mike I might just add that.
Again this quarter we saw.
All of our granular megawatt renewals, where we are in positive territory and that includes <unk>.
Across all regions as well.
The next question comes from Jon Peterson of Jefferies. Please go ahead.
Oh, great. Thank you very much for taking the question good job on the execution on that on the JV deal I wanted to ask about the.
Eight megawatts, where you had an uplift in rents I know you talked about it but I am sorry could you can you maybe break down like what.
What kind of drove your ability to push those rents higher than if you were to take that out what were the rents per kilowatt hour.
The greater than one megawatts in America.
Thanks, John So I'll walk through the dynamics look Matt quota the actual rate on the new deal to give you a sense of the market I mean this was obviously.
A market that is very tight on supply.
And we were working with our installed customer base, if anyone had capacity.
That was idle or they didnt have near term need for so hence we were able to take back.
Capacity from a customer since about the amount of the contract.
And that contract was signed call it a year ago at a much lower rate and.
And we were able to help a different customer that had immediate needs.
And we're able to sign that at a much higher rate.
Matt why don't you walk through the stats.
Yes, sure. So just just to be clear the deals a year that we're talking about here is not included in our in our renewal stats.
What we are doing is showing just the net incremental revenue that we expect to that we expect to recognize within our signing stats and youll see that youll see that more clearly when you look at page eight of our supplemental.
In particular in North America, as a greater than a megawatt youre going to see a deal you're going to see the $300 a kw rate and thats because were only showing the incremental revenue and not the associated megawatts attached to it.
If you put that deal in at call it 100%.
You had that 300 300 kw would come down to $1 48, but again it was a substantial uplift from from the in place lease was over 50% higher than what we had what we had currently.
I'm sorry, that's 148 on the eight megawatt deal or $1 48, excluding the eight megawatt deal.
Including that would be our blended rate. If you look at page eight in our supplemental versus versus the 300 okay.
Okay, and then just one follow up just to stick with Nova.
So with the power constraints there as long as nothing has changed it seems like nothing nothing new can really come on line until 2026 are you already seeing leasing demand for people that are wanting to sign leases that commenced that far in advance.
So John the northern market.
The facts I would say remain the same in terms of transmission lines in arrival of utility power.
Which is really key.
<unk> environment.
Demand well outpacing supply.
We are I.
I'd say less right now focused on signings that don't commence until 2026.
Based on the uncertainty of when in 2026 exactly that power arrives.
And quite honestly, making sure that we're maximizing the opportunity at hand for us that market.
Had seen dramatic price improvement we've.
We've signed deals and the larger categories call, it 140 or north of that per kilowatt.
Again that market was in the seventies, not so long ago.
And the good news is we reported.
Given our breadth in history in that market, we've been able to work with our utility provider and really cobble together incremental growth capacity for our customers across our campuses.
If you add them all up prior to the 2026 arrival by 2025, if not sooner.
You're approaching call it 100 megawatts.
Of growth capacity in Ashburn, which is in addition to our growth.
Capacity that we have in Manassas.
The next question comes from Michael <unk> of TD Cowen. Please go ahead.
Great. Thanks for taking the questions guys.
In recent months, we've seen the volume and size of deals increase and to that point. There are many requirements on the market right now that are over 100 megawatts.
As you consider the strategy moving forward is it your intention to compete for these deals.
If so are you willing to pursue these deals with or without a development JV wind up with the understanding that these projects will drive long term shareholder value and then I have a follow up.
So.
I can tell you we didn't sign any 100 megawatt deals.
In this quarter.
We.
Certainly around some of these opportunities we're very focused on call it maximizing our footprint.
For its highest and best use and helping our customers the best way we can.
Some of those deals obviously of letters itself towards the AI domain for trading models the need that large scales of contiguous capacity I can tell you look at our footprint we.
Extensive locations around the globe that we can help those types of customers.
We are we are we made great progress bolstering our capital sources as you saw just in literally the month of July .
Really got back into a firmer footing to support our customers' growth.
Now, adding to that a development partner I think will put even more fuel to the fire to support that growth.
So I think when it comes to bigger and bigger deals we got to make sure that they land in the right locations for digital Realty and make sure we're maximizing the opportunity.
In terms of our what I call is really precious capacity in our land bank and our sales and in our inventory runway.
Great and then just to piggyback on that point about maximizing the opportunity if I go back to the third quarter of 2022, you guys were clear that you were sharpening the lens through which you looked at investments with the intention of driving a higher risk adjusted return as we think about.
As we think about Hyperscale deals in which you would lease an entire building to a single hyperscale or on a turnkey basis could you give us a framework for thinking about what the appropriate spread between your Unlevered development yield and your cost of capital should be to make it worth it to Lisa took a hyper scaler. Thank you.
Thanks, Michael.
Jordan as can see the future because we thought it <unk> going to ask this question because honestly, we haven't been thinking about that because we've been raising the bar and demand has been outpacing the supply.
There anything that even kind of field skinny or close to not just breaching our cost of capital.
Has not made it onto a where we're investing our dollars and.
And you can see that in our development lifecycle, where you have the whole schedule of the 377 plus megawatts underway.
With a 10% ROI.
That includes the Americas region in North America that call it 9% and still weighted down by projects that were call. It open book yield on cost projects.
Most legacy.
In vain.
That it's weighted down those averages.
I can tell you these opportunities were seeing even for larger capacity blocks.
In these tight markets be it in northern Virginia, Singapore bit of Frankfurt or elsewhere, we're certainly into the double digits Unlevered rois.
Which I think that.
Well exceeds the risk adjusted of deploying capital and it really comes down more to supply demand dynamics than just call. It premiums.
And I think if you look at the great work our investments team did on transacting on some of the JV and the new partners. We brought in the fold and coffee Six's cap area I think you've seen a lot of value creation.
In our model.
The next question comes from Jon Atkins of RBC. Please go ahead.
Thanks couple questions wondered.
What.
How to kind of think you said youre not going to issue any more debt this year.
But given some of the other moving parts around possible asset sales.
And so forth are there any more of those to come and how can we think about the leverage trajectory of getting.
Can you perhaps into the high fives or whatnot.
And then secondly, I was curious just about India.
As your partner contributing any assets prospectively going forward.
Thanks.
Mark can speak to the funding.
And our sources and uses in the guidance and leverage.
Listen I can him and Ham and egg the India piece right yes.
Yes. So thanks, Jonathan there is couple of aspects here I think are important one wanted to reiterate.
As of today, we've got $4 billion of liquidity.
Thanks for the thanks for the execution of the broader team.
If you look at if you look at where our funding needs are going forward. This year based on looking at our lifecycle whats remaining to be spent or guidance in terms of what's left to be spent we're talking about somewhere in the one two to one three left to spend this year. So that gives us pretty significant runway into 'twenty four to be able to.
<unk>.
The continued growth and opportunities that we see going forward.
On top of that as we as we also noted we're not stopping in terms of.
The execution on asset sales as well as the potential.
That were continuing to seek for development joint venture partners that will that will give us an even broader access to capital and be able to help us to fund not only some of that capital need into into 'twenty, four but also potentially this year as well.
Which rounds out into your question on leverage.
We made considerable progress again on on that front as well.
As I noted in the prepared remarks, you look at us on a pro forma basis. We're at 63 now also made considerable progress on that you layer on top of that are expected.
View of continuing to grow our EBITDA as we've we've left that guidance line unchanged again as well as continuing to seek development joint venture partners.
That will continue to help us on that deleveraging process. So we feel pretty good about progress to date on both liquidity and leverage and all I'll turn it over to Greg on the India JV topic or.
Just on India.
I think it's less about the assets, it's more obviously theyre going to share in development opportunity is a huge market with a lot of growth, but it's really about great fantastic new partner to the partnership.
Maybe Chris touch on <unk>, and what we think they bring to the table here absolutely I appreciate the conversation John So it's a combination of expertise right, where Brookfield brings local investing expertise.
Digital really we bring the data center expertise to that market, but I think what really Geo brings is that local operating expertise.
Many of you already know, but <unk> one of the largest mobile media platforms throughout India, and I think their extensive reach and ability to interconnect critical enterprises or other destinations is something that's going to allow us not to deliver like for like product and I think Greg and I have been talking about this for many years and looking at the fact that we wanted to be able to defer.
<unk>, our ability to be successful within India, and so that partnership with reliance from Geo has really elevated our ability to service the broader enterprise customer base, which quite frankly is unique in that it's a lot of our large hyperscale customers as well so the amalgamation of that trio coming to market is something that we're excited about we're still early innings. So.
You'll see it evolve over time, but pretty excited about the opportunity in India.
If I could quickly add.
On the interconnect trends.
To expect going forward in terms of just the trajectory any particular reason why it might see pressure because grooming or acceleration because of new use cases, and as AI play a role at all in an interconnect at this point thanks.
No I appreciate it John just to further jump into that yes, interconnection I think it's something that's evolving rather quickly I think.
Artificial intelligence is definitely evolving and its in its early stages, but to date I think where we've been watching and what I think has shown through in and we referenced in the prepared remarks is the fact that you know.
It's the highest five year growth two straight quarters, surpassing $100 million.
I think that's very unique to us and the platform that we represent in the market I would also say that some of the activities that we've been doing around service fabric, which quite frankly is tailored to streamlining the technical barriers that have been placed upon the customers to access all of these destinations where data resides which.
At the core of artificial intelligence, where I think you or your question is that you have to have access to data and so being able to be a part of one of the largest open platforms that quite frankly allows customers to access these data oceans of both public and private deployments I think the platform is starting to pay off and I would say that.
Again early innings with AI, but we're very excited about what that demand is going to represent inside of our portfolio and as we evolved and worse.
Stable state of what we did in the foundation of cloud Youll see us be able to be at a steady state with a lot of these customers evolving AI as well.
The next question comes from David Carano of Green Street. Please go ahead.
Hey, Thanks, SaaS and then looking at your development tables.
And at 10% stabilized yield.
And you can sell assets at a six cap rate.
<unk> had a pretty healthy spread on the development profit margins, so I get that.
Just wondering since you've already hit your initial disposition target and range you set out why do you see the need to do more JV developed at this point why not look to sell more stabilized assets.
Hey, David It's Greg here look I think when you take a look as we laid out and Andy laid out at the beginning of the year. The reason for finding these development partners is look when you look at this opportunity in the Hyperscale business today, It goes well beyond our balance sheet, even at $55 billion.
So when you look at that what it tells you is you've got to have third party capital to meet the customers' needs within throughout the globe for that business. So as we sit here today, even though we have as you said we've exceeded our guidance on what we were going to do.
Sit here and look at this strategically go forward and we think that's the best way to fund that business to create value for our shareholders. So that's.
Why we are going to continue to fund it through development.
We think thats, the most prudent way to move forward with it.
Okay, and then maybe switching topics on the tenant bankruptcy, Matt you were talking about which I think is that one of our public data Center company can you walk us through what eventually happens to that space.
You guys just waiting now to renegotiate with your tenants.
I guess, how soon that not the case.
Can you start re leasing that space.
Hey, David.
Just to add onto that last question Matt.
Matt and I can hear me.
Second part of your question.
I think this is Ben.
Our balance sheet today.
Let's call it north of three gigawatts of growth capacity around the world.
And we see that expanding and having the balance sheet to be helped funded alongside some great partners.
<unk> is another part of becoming more efficient and more quickly driving returns and results to our bottom lines.
In a market and an opportunity backdrop that keeps getting bigger it was large it was.
Large to begin with cloud computing accelerated that with Hyperscale demand and AI is just an incremental lift to this wave of demand. Hence we believe the best way to tackle this opportunity and support our customers while driving results. The bottom line is in partnerships on the capital front.
When it comes to the customer bankruptcy.
Obviously this customer is in the middle of bankruptcies, we can't share too much.
The typical playbook is.
The creditors essentially have to run a process for the assets or the business and as part of that make decisions on either accepting or rejecting leases.
We have not to date had any leases rejected so far.
While they have rejected other providers or landlord leases.
I don't think you can assume that every one of our leases.
Slide the effect will be accepted.
But from a strategic lens.
This is why years ago.
Increased our capabilities in.
And be able to expand to the colocation interconnection offering and support and customers. So when if and when we sell our customers would have issues, we can essentially step in.
And support the end customers that in half.
Liquid financial outcomes.
Given our capabilities. So this is a little bit of wait and see is this customer works its way through bankruptcy and I think we'll have more to report.
<unk> third quarter call.
The next question comes from Michael Rollins of Citi. Please go ahead.
Thanks, and good afternoon.
Just a couple of follow ups, so first as youre looking at the portfolio.
The value of data center assets.
That you own that could be considered for future joint ventures. So so what's left in terms of opportunity for recycling.
And then also can you just provide us an update on how you are doing and the opportunities to improve whether it's overall occupancy or same capital occupancy within the portfolio.
Sure.
Sure.
Hyperscale is still a large piece of our business in terms of our installed base. It's certainly a lot of whats going into our current development pipeline as it stands.
I think in conjunction with the creation of a digital core right. We came to an estimation of call. It $15 billion of value is around ballpark.
In terms of things that would fit the bill since essentially.
Similar to the transactions, we just announced in the month of July fully stabilized.
Our hyperscale oriented long weighted average lease length.
Honestly core assets parts of our campus, but the slowest organic growers.
Our portfolio less interconnection rich less customer rich I think the more recent portfolios. We've sold have call. It 10, plus or minus customers in them, we're supporting 5000 customers digitally digital realty. So.
We still think that there's an opportunity to continue to build on these partnerships like the great partnerships, we just announced.
And essentially.
Ill be able to maintain 100% ownership on the highest growing pieces of our puzzle.
When it comes to the same store growth, Matt why don't you pick that up in terms of the levers that we've been pushing hard to drive that.
So.
I call it a couple of things.
So first I mean, we have been making what I would say is as good to great progress. So far if you look at if you look at it versus last year were up 80 basis points on our on our stabilized pool.
We're going to continue we think to improve that over the course over the course of this year into next year and that's that's going to be a mix of essentially twofold.
Spaces, where we believe that there's opportunity for larger customers. We're going to continue to continue to target that given given density requirements and the growing need for for capacity across.
Our global portfolio that we have we're going to we're going to find opportunities to fill that in but I think part part of it and part of why it's taken it takes it's going to take a little bit more time to continue to improve the overall occupancies that were also looking where we can convert some of that space that we do have in the product types Colo leased out over time because we.
We see the growing need for enterprise demand in our end, where we want to be able to capitalize that which has a higher return in a market that we want to be able to penetrate and grow even further from where we are today.
The next question comes from Frank Louthan of Raymond James. Please go ahead.
Great. Thank you can you comment on the situation in Singapore, I guess with the government, allowing a few new players coming in and how do you think that affects the pricing there.
And then looking at the at the capital recycling kind of where do you go from here I know you would continue to look at other diversification strategies as this kind of sort of finish this out or what are some other areas of.
Capital sources that you can look at to to reach that goal. Thanks.
Sure on the first one on Singapore.
<unk>.
I think what Youre seeing is supply still to get.
Metered out at <unk>.
Small and rational clips.
When after years of no supply.
The big unveiling is literally for different players getting 20 megawatt increments.
Is relatively modest.
Our latest data center build in that market was I think.
Double.
Size of the needs so.
And this is.
This is not only happening in Singapore, Youre seeing power constraints.
From transmission or generation auditoriums broader nimbyism environmental concerns.
Just ratcheting.
Making the supply constraints be more rational.
That's why we're quite pleased.
That we have on our balance sheet, a long runway of growth for our customers with our campuses across 50, plus metros on six continents, and the supply chain to support their growth.
And this is all against the backdrop, where demand is outpacing the supply.
Greg do you want to reiterate where we are going to go next on the capital recycling. Yes. Thanks, Frank look I think as we said we're going to we're going to continue to focus our efforts on the remainder of this year on our development joint ventures, we talked about.
But to answer your question specifically you asked about other sources of capital.
How we think about it look I think as a whole we've done a pretty good job. So far as we say we have the dedicated core REIT in Singapore, So thats a public vehicle.
We've obviously just announced.
Two transactions, where we have characterized as distinguished Blue chip investment partners in both Gi and TPG and look we continue to see strong interest across the board. So not just P shops that we see infrastructure funds sovereign wealth funds pension funds insurance companies and alike. So we're seeing a broad based demand here looking at transactions.
Stabilized core assets and development assets so.
We're bullish on that and when we look at that again, we think that's the prudent way to fund our growth go forward.
The next question comes from Eric Loop call of Wells Fargo. Please go ahead.
Great. Thanks for taking the question so Andy I think you've talked about getting down to five five times leverage longer term. So maybe you can just walk through the path to get there beyond beyond this year and.
How much incremental capital recycling or JV or other forms of capital you think you might need if we look past this year and.
And is the goal here to ultimately becoming more self funding.
Sure and more of the economics yourself instead of using development partners.
Yeah, So I'll.
I'll take that I mean.
We do have are our longer term plan is to get down closer to five five times again I think we've.
We've done a considerable amount of work we said this year, we'd look to be closer to that six times you look at US based on what we've achieved and executed so far.
With the $2 billion from the joint ventures that we've done on stabilized assets. The billing we've raised in equity so far to date.
Which is which has come in we're at pro forma at six three.
And we see the path going forward to getting back even further down as as as we have backlog and continue to execute on leasing that comes online. Our EBITDA continues to grow and we execute on these development joint ventures, we believe those are going to be too.
Two of the major components, which are going to help us get down to that five five times target as we start to look through through 'twenty four but we're not we're not in a position.
At this point in time to give 24 guidance, yet, but I think those are the two main levers that we're going to be looking at to continue to drive our our <unk> and.
And improve our balance sheet and our leverage position.
Okay, Great and then just just one follow up I think you still had some noncore portfolios out in the market today, and I guess, given how successful you've been with.
Capital recycling, so far is that kind of becoming less of a priority as you look forward or do you still plan to transact on some of those markets that are out there today.
Eric as you said, we've been fortunate we've had we've had good demand and good execution. This year and look we're already where 30% of the way through and we have other transactions, we're working on but as we always said in the past the good news for US is these noncore assets are all very very very small piece of our portfolio.
We have the benefit of being disciplined in making sure. We get we think is fair value. So we're going to continue with that approach like we have historically.
And continue to pursue them, but again, we're seeing demand for those assets as well. So we'll continue to work on it and we will continue to post you as we have things to talk about.
The next question comes from Evan Lisle of Evercore ISI. Please go ahead.
Alright. Thank you for the question of one and a follow up so within your improved bookings. This quarter are you able to call out whether there were there was any sort of contribution from <unk>.
AI or AI related deployments from your customers.
That's a great question I'm going to turn it over to our CFO , who really grabbed the baton and ran through the finish line strong call Maclean to talk to what we saw on the AI front and maybe just give us a little bit more color on the quarter in terms of bookings new customers. Yes. Thanks, Andy I appreciate the question Irvin.
Yes, certainly AI is becoming a growing part of our conversation and pipeline overall.
Just to revert back a bit on the overall pipeline dynamics, we're seeing I would say describe it overall the pipeline is as strong healthy and diverse across the board, particularly strong in the zero to one megawatt side.
And growing part of that AI is definitely part of not just the hyperscale piece of the business, but also the zero to one megawatt and we've had some some strong contributions on that front.
So overall, we really feel like both the results and the pipeline itself the demand to be a testimony to and validation really of our pivot.
To serve in the entirety of the client needs network enterprise and Hyperscale or so I would say.
On the AI front, and frankly, the cloud and hybrid it receipts really growing success.
And growing conversations with clients. So we remain optimistic.
And serving both the pervasive needs of clients as well as AI and I think that's going to be a growing part of our portfolio as we as we move forward.
Got it. Thank you for the color there. So my second question is on the strong pricing that you saw over the past two quarters can you just share with us how pricing trended quarter to quarter and the overall linearity of pricing trends now that we're one month into Q3.
The <unk>.
This is Andy I'll call. This a continuation of the commentary.
We've been saying now for several quarters and that depend alone one on supply demand fundamentals.
Has been caught wind at our back.
In growing our value proposition proposition with our customers has been more and more well received is from our installed base has been growing with us.
Or any of our signings were from the existing customer base Thats also from I think it was our second highest new logo quarter of 133, new logos or new customers.
And that has been broad based as Matt mentioned across regions and product types.
And the less than a megawatt category, it's been more steady Eddie but obviously inflected call it like for like increases.
And on the greater than megawatt, it's been a little bit more volatile, but in a positive fashion.
As demand has remained intact if not further increased.
And precious large capacity blocks have become fewer and fewer and far between.
And the future of that supply bottlenecks really changing course does not seem to be near term whatsoever.
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.
Thank you Andrea.
Digital Realty had a strong second quarter.
Our results demonstrate that our meeting place value proposition is resonating with customers.
Just since our last call, we raised over $3 billion of new capital positioning the company for the tremendous opportunities that lie ahead.
Posted strong organic operating results with the results confirming the continued inflection in our core data center business.
I'd like to thank everyone for joining us today and recognize our dedicated an exceptional team of digital Realty, who keep the digital world turning.
<unk>.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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