Q3 2023 Digital Realty Trust Inc Earnings Call
[music].
Good afternoon, and welcome to the digital Realty third quarter 2023 earnings call.
Please note this event is being recorded.
During todays presentation, all parties will be in a listen only mode.
Following the presentation, we will conduct a question and answer session callers will be limited to one question and 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 Jordan. Please go ahead.
Thank you operator, and welcome everyone to digital Realty's third quarter 2023 earnings conference call.
Joining me on today's call are president and CEO, Andy Power CFO, Matt Mercier, Chief Investment Officer, Greg Wright, Chief Technology Officer, Chris Sharp and Chief revenue Officer, Colin Mclean are also on the call and will be available for Q&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 further discussion of risks related to our business see our 10-K and subsequent filings with the SEC.
This call will contain non-GAAP financial information reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website.
Before I turn the call over to Andy Let me offer a few key takeaways from our third quarter.
First our customer value proposition continues to resonate leasing was strong across both our primary product category with record overall bookings in the zero to one megawatt plus interconnection segment and an acceleration in our greater than a megawatt segment.
Second we.
We saw further continuation of the improvements in our fundamental metrics strong demand and tight supply remains supportive of pricing and this is evident in our results.
Same capital cash NOI growth was the best in more than a decade at nine 4%, while cash re leasing spreads eclipsed 7% in the quarter, which caused us to raise full year guidance for these metrics for the second consecutive quarter.
Third.
We continued to diversify and bolster our balance sheet with almost $4 billion of capital raised to date, including two Hyperscale core joint ventures announced in July.
And another almost $200 million of noncore sales, bringing total dispositions to two and a half a billion dollars year to date.
The capital that we've raised this year has enabled us to increase our liquidity and delever, while expanding our investment and development that we expect to generate double digit unlevered returns.
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.
The third quarter marks nine months since being appointed to my current role as CEO.
And this marks the fourth official earnings call.
Well, there's been about as much volatility in a single year that I can recall from my 20 plus year career.
Been a privilege and honor to have the opportunity to visit and work with and to watch My digital Realty colleagues across the globe execute on behalf of our customers and stakeholders. During these extraordinary times.
At the outset of this year.
The three key priorities for our company.
While we've got two months left in the year I am very excited about our progress to date and look forward to finishing strong.
As you recall, our key strategic priorities are.
First to demonstrably strengthen our customer value proposition.
Which means that we are adding connectivity rich solutions and scale capacity to drive our global medium play strategy.
We are executing this through the addition, and launch of new on ramps and the expansion of our Cola capacity in markets.
And also by providing visibility into longer term hyperscale capacity and our largest core markets.
We are making strides and our customers are recognizing this by landing and expanding their I T infrastructure within our facilities.
For example over the past few months, we've added on ramps from a number of the largest cloud service providers, including AWS and Oracle.
Our second priority is to integrate and innovate.
For the first time recreating in Americas region, and formally organized the company into three regions to improve overall management and accountability.
In addition, we moved global operations under an experienced digital Realty leader, bringing the standardization and consistency across our global platform.
We also reorganized all things technology under our CTO organization.
Consistent with our aim to bring innovation to our customers and the market in the third quarter, we announced the launch of our first video D. G X each 100 ready datacenter in Osaka, Japan.
We also rolled out our new high density Colo offering across 28 global metros to support high performance compute infrastructure.
Dressed and data and AI related growth challenges.
We're also partnering with other leaders around the world to enhance our open platform.
In this vein, we recently added P T and looming tour service fabric platform, which connects our data centers globally, extending the reach of our customers and partners.
And we've made some nice progress on the sustainability front in the quarter, which I'll circle back to in a moment.
Finally, we set out to bolster and diversify our capital sources and to date, we've reduced leverage by 0.8 turns of EBITDA for the <unk> peak and increase liquidity to three plus billion, including 1 billion of cash on hand.
We executed on our funding plan that included the completion of two stabilized Hyperscale JV this quarter.
Tapping into some of the deepest pools of private capital.
And we remain confident in our ability to add to this progress with development JV is in the near future.
If we deliver on our key strategic priorities, we expect that this will translate into better long term sustainable growth for our customers team members and in turn our shareholders.
Digital real to continue to make progress in the third quarter.
With further improvement in our operational results highlighted by nine plus percent same capital cash NOI growth.
Strong leasing results with record zero to one megawatt signings.
The highest greater than megawatt pricing since 2016 record leasing in APAC.
With broad strength in the Americas and record interconnection revenue with the strongest growth since 2018.
The momentum across the data center infrastructure landscape is strong.
<unk> for our data center capacity remains broad based both geographically and by product as reflected in our leasing results.
New supply in our top markets remains constrained and is likely to remain so due to limited availability of power growing supply chain challenges and tighter financial conditions.
On the demand drivers we have enjoyed for the last several years, including cloud digital transformation and hybrid I T remain largely intact.
Applications have added a meaningful new later, which is just beginning to materialize in our leasing results this quarter and we are ready for it.
Well, Chris first started speaking publicly about AI and high performance compute at our Investor Day in December 2017, we were already in the process of architecture and design in our facilities to support evolving densities and our most innovative and leading edge customers.
Well there are multiple high density workloads running in our portfolio since at least that time in the last quarter alone. We were able to accommodate a handful of high density compute deployments from one of our service provider customers and a 10 plus year old data center and one of our smallest markets.
We are currently supporting one of our customers AI infrastructure deployments that will incorporate 32000 and the video each 100 Gpus.
This doesn't mean that digital realty will be chasing large AI deployments far and wide as.
As we will continue to assess the longer term opportunity set of remotely located single tenant non differentiated data centers.
But it does mean.
There has been an increase in demand for our highly connected campuses in core markets.
Being thoughtful in how we approach these opportunities as.
As we consider leasing out capacity I expect that we will seek to support our long term engaged partners that'd become embedded within our meeting place community the value of our strategic locations and the connectivity of cross platform digital.
At the same time in certain markets, we will selectively support customers that have a differentiated product offering and we've always been at the forefront supporting leading technology companies as they push their infrastructure capabilities.
Let's move to our third quarter results.
This quarter continue to demonstrate the fundamental recovery that we've been highlighting throughout this year.
Leasing activity was strong and broad based across product types and reflected the pricing recovery, we have seen throughout our portfolio.
While we routinely lead with our headline leasing figures. It is important to point out the record posted in the zero to one megawatt plus interconnection segment in the quarter, which increased by more than 9% sequentially and nearly 20% over the prior year period.
Total new leasing during the quarter was $152 million with record zero to one megawatt signings representing just over a third of total signings.
Rather than a megawatt science moved higher for the second consecutive quarter led by the Americas region. Our team also put up a record quarter in APAC.
Pricing remains firm with notable highs achieved across the greater than one megawatt segment with strength in a zero one megawatt category.
Growing recognition of our value proposition, including our comprehensive product offering along with strong demand trends and reduced availability are supportive of pricing and are helping to drive better core growth and higher returns on investment.
In the third quarter, we saw re leasing spreads climbed to seven 4% on a cash basis contributing to the strongest same capital cash NOI growth and more than a decade.
During the third quarter churn remained low at one 1% and we added 117, new customers extending our string of 100, plus new logos per quarter to three and a half years.
Another strong validation of the value that enterprise customers around the world recognize and platform digital.
Our focus on deepening the value of our campuses has resulted in enhanced cloud access for digital Realty.
Recently.
Four out of five top P to be cloud providers complete a multi site on ramp and edge expansion to serve data intensive workloads on two continents via platform digital.
In addition, AWS announced a direct connect location in Seoul.
The first carrier neutral facilities in the market, while we announced the Oracle fast connect availability in Madrid to their EU sovereign cloud.
Other key wins during the quarter included.
Speech detects AI provider completed their second HD Colo deployment in six months on platform digital.
Multiple new logos in the health care vertical in the quarter two global 2000 health care companies deployed on platform digital one supporting data intensive AI workloads and the other implementing a two site data compliance solution.
And international Tier one telco added a multi metro expansion across two continents apart from digital to support their retail enterprise customers.
A global 2000 and bank is implementing multi site multi region network hub deployment now totaling 15 metros.
And a global 2000 insurance company is expanding a distributed data hub on platform digital to support M&A data compliance.
Moving over to our largest market northern Virginia more than a year since we learned to the power of our strength in this market. We are continuing to work constructively with the power providers 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.
As discussed in our last earnings call. We've identified almost 100 megawatts of development capacity in Loudoun County, and we expect to be able to bring to market. Prior to 2026. This includes 56 megawatts of available capacity under way within the current development pipeline.
And the potential to move forward on another 40 megawatts.
In addition, this ashram focused capacity, we continue to advance the ball on our 192 megawatt development and site in Manassas, and we are now officially underway and will soon be Pat ready to support construction of the first of two buildings on the site in early 2024.
We are very excited to be able to offer this availability to our customers.
Moving onto our investment activity.
Digital Realty's investment team has already had an extraordinarily productive here, including the $2 3 billion of Jbs and noncore asset sales completed in the third quarter.
Within the non core bucket, we sold two facilities during the quarter, including one in the U K and the other in Chantilly, Virginia totaling almost $200 million.
Including the 150 million noncore disposition in Texas that was completed last quarter, we're tracking well toward our $500 million target for the noncore asset sales in 2023.
We closed two separate stabilized Hyperscale joint ventures in July with the contribution of two assets in Chicago and three in Northern Virginia, raising $2 1 billion of proceeds.
We've also made substantial progress on the third bucket of our funding plan the development joint ventures, and we expect to have more to say about this in the fourth quarter.
Before turning it over to Matt I'd like to touch on our ESG progress during the third quarter.
We continue to make progress on our water conservation initiatives, including a water savings initiative for cooling towers, and our Syn 10 facility in Singapore.
Project won the inaugural Green innovations water Solutions award at the Singapore environment Counsels Environmental Achievement Awards.
The project is expected to save over $1 2 million liters of water each month and improved water usage efficiency by 15%.
Solution is now being a valid for wider rollout across our portfolio.
In the third quarter, we also announced that we were ranked in the top 10 on the U S. EPA as National Top 100 list of the largest green power users further from that Green power partnership.
The company also ranked seventh on the EPA is list across telecom technology and telecommunications providers.
We remain committed to minimizing digital relative to impact on the environment, while delivering sustainable growth for all of our stakeholders.
I'm pleased to turn the call over to our CFO, Matt Mercier.
Thank you Andy let me jump right into our third quarter results we.
We signed a total of $152 million of new leases in the third quarter with broad based strength across each of our two primary product groups and geographic strength in the Americas and APAC.
We leased a record 54 million in the zero to one megawatt plus interconnection category accounting for 35% of total bookings.
This product segment remains a consistent and steady source of growth as we continue to execute on a global median pay strategy.
Interconnection bookings were strong once again at over $12 million as we added another 2000 cross connects in the quarter, finishing with 218000 total cross connects.
Greater than a megawatt bookings totaled $97 million in the quarter with outsized contributions from Portland, and Hong Kong.
This was our highest greater than a megawatt signings quarter since we discussed sharpening the lens with regard to capital allocation decisions one year ago.
Our greater focus and increased threshold have resulted in higher average returns in the greater than two megawatt category.
As implied by the growing expected stabilized returns in the Americas that we present on the development life cycle schedule in our supplemental.
Okay.
Pricing continues to improve across most markets globally with outsized pricing power experienced within the greater than two megawatt segment, which saw pricing on signed leases at the highest level since the first half of 2016.
Turning to our backlog slide the current backlog of signed but not yet commenced leases increased to a new record of 482 million at quarter end has.
As commencements of $110 million were more than offset by elevated new leasing volume in the quarter we.
We expect nearly 15% of the backlog to commence in the fourth quarter with a little over 50% commencing throughout 2024.
The lag between signings and commencements in the quarter ticked up to 12 months.
Driven by new development and build outs to support larger scale leases.
During the third quarter, we signed $156 million of renewal leases with pricing increases of seven 4% on a cash basis the.
The strongest re leasing spreads achieved since 2015.
While renewal pricing was strong across product segments and across our three regions. The overall result was upwardly skewed by a single transaction within our other category.
Excluding this outlier renewal releasing spreads in the quarter would have been up four 5% on a cash basis and six 4% on a GAAP basis.
We feel that this is more representative picture of the renewal spreads that we are seeing throughout the portfolio.
Which is consistent with the broad based improvement we've seen throughout this year.
With renewal rates trending higher over the first nine months of the year, we are raising our full year guidance for renewal spreads to reflect the success year to date in today's improved fundamental environment.
Renewal spreads in the zero to one megawatt category continued their steady climb with four 4% growth on a cash basis in the third quarter on $125 million of volume.
Okay.
Greater than a megawatt renewals continued to post strong results with cash renewals higher by five 6%.
On lighter volume of $19 million in the third quarter.
In terms of earnings growth, we reported third quarter core <unk> of $1 62 per share broadly.
Broadly consistent with consensus expectations, but down six cents per share versus the second quarter.
Primarily reflecting the impact of the asset sales and the equity raised in the quarter and the redeployment of capital into accelerated and increased development.
On a constant currency basis core <unk> was $1 60 per share relative to the dollar 67, we reported in the third quarter of 2020 two.
Okay.
Total revenue was up 18% year over year, and 3% sequentially. Despite the impact of the more than 2 billion of asset sales completed early in the quarter.
The benefits of improved pricing are starting to take hold.
Importantly year over year revenue growth also continues to be impacted by the significant volatility in utility costs and reimbursements, particularly in Europe.
Most of these energy costs are directly passed through to customers.
Excluding the impact of utility and other reimbursements total revenue was up 13% year over year.
Interconnection revenue of 107 million marked another quarterly record and was 12% higher than the year ago period, Excluding Terra co interconnection revenue was up 11% year over year, the highest interconnection growth since 2018 and reflects the ongoing organic strength in our core footprint.
Yeah.
Quarter over quarter interconnection revenue was up almost 3%. It's 2000, New cross connects were added increasing the total global installed base to 218000.
Moving over to the expense side utilities were seasonally high given the warmer summer months and off an already elevated 2023 base.
Rental property operating expenses remained essentially flat for the second consecutive quarter, partly reflecting the benefit of the removal of expenses related to the dispositions and joint ventures.
However, on the non controllable expense front.
Pretty taxes spiked higher quarter over quarter to $72 million.
Driven by an elevated reassessment on some of our properties in Chicago.
While these expenses will be largely passed onto our underlying customers. It will also be disputed over the coming years.
Net of this movement adjusted EBITDA increased 10% year over year.
One nonrecurring item worth noting in the quarter was 113 million noncash impairment charge related to the lower value of our holdings in digital core REIT stock.
The Singapore REIT IPO in December 2021, 88 cents per share. It was valued at 53 cents per share at the end of September driving the noncash adjustment in our carrying value of the investment.
Improvement in our stabilized same capital operating performance continued in the third quarter with year over year cash NOI up a strong nine 4%, but moderating by 1.5% sequentially due to the expected increase in utility bleed during the seasonally warmer months.
<unk>.
Even on a constant currency basis year over year cash NOI growth was strong at six 6%.
These results demonstrate the strongest period of organic growth in our same capital pool since 2014 and extends the turn in fundamentals that we have been highlighting throughout this year.
Turning to the balance sheet, we meaningfully strengthened our balance sheet during the third quarter.
Driven by the success that we've had on our funding plan.
This progress continues today and as a result, we have raised our full year capital raising target for the second consecutive quarter.
In the third quarter, we generated over $2 6 billion of proceeds from JV closings noncore asset sales and settlement of the equity forward.
Roughly $1 billion was redeployed into our development program and a little over 500 million was used to repay higher cost U S. D borrowings on our credit facility.
The remaining amount was kept in cash earning interest at a rate in excess of the remaining borrowings under our credit facility.
As a result.
At quarter end, we had over $1 billion of cash on our balance sheet and our leverage fell to $6 three times net debt to EBITDA down from six eight times at the end of the second quarter.
And we are now within spitting distance of our near six times leverage goal that we set out to achieve by yearend.
Since the end of the quarter.
We paid off 100 million Swiss franc notes that matured in October and are confident in our ability to execute on additional asset sales and development joint ventures that are left in our upwardly revised funding plan.
Moving to our debt profile, our weighted average debt maturity is over four and a half years and a weighted average interest rate is two 9%.
Approximately 84% of our debt is non U S dollar denominated, reflecting the growth of our global platform and our FX hedging strategy.
Approximately 86% of our net debt is fixed rate and 97% of our debt is unsecured providing ample flexibility for capital recycling.
Finally, we have less than 1 billion of debt maturing in 'twenty 'twenty, four and beyond that our maturities remain well ladder through 2032.
Lastly, let's turn to our guidance.
We're tightening our core <unk> per share guidance range for the full year 2023 by three cents at the high and low ends to a new range of $6.58 to $6.62 per share maintaining the midpoint of $6 60 per share.
We are also tightening the range for full year adjusted EBITDA.
Affirming our full year guidance midpoint of $2 7 billion.
Our full year revenue guidance range has been adjusted down by about 1% at the midpoint to a new range of 5.4 75 to 5.525 billion to reflect the impact of lower pass through oriented tenant utility reimbursements.
Given the moderation in electricity pricing in EMEA.
Importantly.
You'll recall that last quarter's core <unk> per share guidance reflected a five cent to seven cents per share impact from a bankrupt customer, including two cents that was realized in the second quarter.
In the third quarter, we received all of the rent due from this customer across our portfolio, but we did incur a one penny write off related to unpaid utility expenses and we expect that we could see up to another two cents of dilution related to this customer in the fourth quarter.
In addition.
We could see up to a penny of drag related to the carryforward of increased Chicago property tax assessment, and one penny of drag related to the acceleration and the increase of development spend as we capitalize on the opportunities we are seeing in front of us.
With the continued improvement in our fundamentals during the quarter. We are also updating the organic operating metrics supporting our full year guidance, including cash and GAAP re leasing spreads of over 5% up from 4%.
Same capital cash NOI growth of 6% to 7%, representing a 200 basis points increase versus prior guidance and a reduction in year end portfolio occupancy to between 83, and 84%, reflecting the delayed timing of the sale of a vacant non data center asset in our portfolio.
Given the successful leasing executed in the third quarter and the increased level of demand embedded within our pipeline. We are increasing our full year development spend guidance to $2 70 to $2 9 billion for 2023, representing a $400 million increase at the midpoint.
Similarly, reflecting the continued execution on our funding plan to date.
<unk> also updated our guidance for dispositions and JV capital to 2.7 to $3 2 billion.
Representing a $350 million increase at the midpoint.
Which is in line with the increase in our expected development spend for this year.
Yeah.
While development has been an important driver of our growth for the last decade in the short term we are experiencing the headwinds from the sharp regime change in interest rates.
This year, we've sold assets at six caps and new borrowings on our line or at similar levels.
Whereas GAAP requires us to capitalize interest at our weighted average borrowing cost of less than 3%.
In other words, increasing our development spend today to capitalize on the growing opportunities. We are seeing is dilutive to near term earnings.
Projects underway or completed and incrementally higher yields and the relatively low rate of capital capitalized interest Burns off we expect development completions will become increasingly accretive to core <unk> per share.
The good news is that fundamentals are helping to mitigate a portion of this dilution.
This concludes our prepared remarks now we'll be pleased to take your questions.
Operator, please begin the Q&A session.
We will now open up the call for questions and the interest of time and to allow a larger number of people to ask questions callers will be limited to one question.
To ask a question. Please press star followed by one on your telephone keypad.
If you are using a speakerphone you will need to 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 the roster.
And our first question comes from Jon Atkin of RBC capital markets. Please go ahead.
Thanks.
So I was interested in the development JV that you alluded to.
It sounds like there's something relatively in an inch.
Or maybe a couple of the last couple of transactions can you.
0.2, the leverage reduction benefit that we should expect and then related to that give us a sense of the tailwind and headwinds that might affect core <unk> per share for for next year. Thank you.
Thanks, John well wondering Greg touch on his activities spin the tip of the spear on our development <unk> switch.
Unfortunately couldn't time, not just one but two announcements like last quarter, but we havent been idle and they're making some great progress, but probably won't you give us color yeah.
Thanks, John look I think as as Andy mentioned about glass last quarter, which we already announced we were we had our two stabilized joint ventures with a.
T P J in Northern Virginia, and obviously G I in Chicago.
Which generated about $2 $2 billion of proceeds and you know we sound that we found in that process was demand was very robust to invest in and data center assets in the private market and you know the same holds true we're continuing to see even more demand for stabilized assets and I.
I would go as far as to say, it's even greater investor.
Investor demand when you look at the development Ah you know potential development Jv's.
All I can tell you is we're working hard and we hope we have something here you know in relatively short order to to report, but right now.
No more guidance to that other than that our demand remains strong and we remain encouraged.
The next question comes from David Barden of Bank of America. Please go ahead.
Hey, guys. Thanks for taking the question I guess I wanted to talk a little bit on the second part of Jonathan's question, which was thinking about 2020 for you know when we began 2023 we were looking at.
Same store cash NOI growth in the mid threes and now it's pushing towards 7%.
We're talking about you know decade level improvements in interconnection and sub megawatt lease thing and a greater than one megawatt leasing Andy you frequently talked over the year about how.
Re leasing and greater than one megawatt you couldnt confidently say it would be greater than zero in and here. We are and then you know we've lapped the first year, if the <unk> acquisition, which was supposed to be dilutive.
And your one you know neutral in year two accretive in year three so outside of some accounting issues. It kind of feels like all the needles are pointing up into 2024 and before I get too excited tell me where I'm wrong.
Thanks, David we appreciate that the kudos there.
Before I hand off to Matt to give you a 'twenty 'twenty four guidance on this call.
I can tell you we weren't prepared for all I'll just chime in with.
Just some color so.
Youre right. The the trend has been our friend on multiple fronts and I think we tried to signal. This at the outset of the year and we were a bit of a show me story, but we saw our value proposition resonating.
We saw the pricing environment firming.
And continue that momentum, whether it's asking rates are rois on our development pipeline at.
At cash Mark to markets and both product sets.
And.
I would say that environment is continuing.
But.
Before Matt takes the air out of the balloon without no no early guidance I mean, they're obviously headwinds and Matt can talk to that we're still working through but not once you because your thoughts yeah sure. Thanks, David I mean, I think we kind of talked about this a little bit towards the end of my prepared remarks, but.
I think as you know we've been one we've been a.
Pretty pretty clear about a desire to deleverage, which we've made substantial progress on you know we started the year close to seven we're at six three.
We're making progress on that like we like you know like I stated at the start of the year and we're doing that through.
Cat level of capital recycling your asset sales that are going to have an impact.
Not only on this year, but we'll have some follow through into next year and we're doing it at a time also where we're looking to take advantage of what we see as a great opportunity in the market, where the supply demand fundamentals are about as strong as they've been and we see opportunities to deploy capital.
That capital has come is it's coming at a higher cost today than it was and therefore, it's it's it's dilutive near term until until that capacity comes online.
And we think it's the prudent thing to do but that's that's part of the dynamic that we're dealing with.
The next question comes from Michael Elia F. T D. Cowen. Please go ahead.
Great. Thanks for taking the questions.
First could you help us think about the.
The sources of funding and really what I mean by that is you raise equity at $97 a share but you didn't raise equity when your stock was at 130 Bucks, presumably the cost of that equity would have been lower than selling assets at call. It a 9% cap rate just wondering how youre thinking about the use of equity as you March towards that call. It five five times leverage target next year.
And then I have a follow up thank you.
Yeah.
Thanks, Michael so.
George guys, playing by new rules make sure everyone got at least one question on the call. So we got one question, but we'll try to hit you on the next round for your follow up.
I think our actions are speaking louder than our words hopefully here whereby.
We had tremendous success.
In the first half of your dribbling into the month of July when they both noncore dispose hauled by major Hyperscale stabilized assets.
And the fact that we haven't moved forward.
With any additional equity issuance of common stock I think this speaks to our conviction.
On the next leg of private capital reasons with development joint venture or joint ventures being the next leg of the stool.
And I think those are those are things that will are strategic and different for our company.
And relative to prior experience, where we're going to share the non cash flow period of these projects that are large massive capital intensive and long term projects.
And allow some of these great fundamentals, we've seen flow through to the bottom line.
That doesn't mean, we're 100% adverse to ever issue equity.
At the right time, the right quantum of the right price.
But I think we believe we've got some incremental milestones or wins to put on the board here.
That are in the not so distant future before we'd be ready and this is on the back of tremendous progress we've taken the balance sheet down what 0.8 turns of EBITDA.
Only in two quarters worth of reporting so.
And so I am pleased with the progress and I would say that we do have we have more we have more good news to come before it.
One last thing I'm going to hand over to Greg you made a comment on the noncore dispose. It just I think that we should clarify what that really means to US yeah. Thanks, Andy Hey, Michael look I don't think it's right to say, 9%, you're selling an asset at a 9% cap rate versus what your implied multiple ways.
On your company.
In our minds from a capital allocation perspective, those are two very different things.
One is you know the assets, we sold noncore assets right ones in Watford once and should tell you Chantilly and you know what does that mean to us I mean these are non campus assets with limited connectivity right and when you look at you know Chantilly wild to Nova it's neither of the major markets of loud in the Manassas right and so when you look at the.
These assets. They are older. They are standalone assets now this is a very very small portion of our of our business, but you know we called these assets out. So I don't think we can we can sit here and assess a cap rate on one or two noncore assets versus things versus selling equity in the.
These are assets that are not part of our core business going forward and you know non strategic to us that's a very different analysis. So I would I would just caution folks to say hey, Here's a couple assets that were noncore that were signed as of nine therefore, that's not the right cost of capital play or the right capital allocation because I think it is.
Yeah.
Okay.
Yeah.
The next question comes from David Garage of Green Street. Please go ahead.
Hey, Thanks for taking the question.
Page nine of your presentation, you put out today it feels like there's new leasing bars. They just keep rates into the Sky you think there's a sustainable pace of activity for digital Realty and maybe even broadly is at a sustainable pace for the industry as a whole or is there a risk maybe that that that dirty word digestion phase starts to come back and sort of Academy Larry again.
Hey, Thanks, David So I.
I mean, what's.
What's great about this quarter is not just the size of that bar, but just what really went into it and as I said in the prepared remarks, we usually caught or historically led off with the top line number but I think it was even more important to start with a tremendous foundation.
Less than a megawatt interconnection signings that granular of a quantity of customers broad based across the regions.
Including interconnection was at a record it was up dramatically not just year over year close to 20%, but 9% quarter over quarter and.
And that is that flywheel of success that we've been investing in and starting to see more and more harvesting the fruits of our labor.
On the bigger portion of that it was not one single deal is our largest deals not even a third of the total signings.
It was broad based across the Geos as well.
And I.
These are playing to a continuation of demand trends.
That had been here for a little while but certainly not exhausted when you look at the pace of how fast the cloud is growing digi.
Digital transformation hybrid I T.
Look at our new logo contribution largely enterprise based 117.
From around the globe.
And artificial intelligence, which is something we've had a hand in supporting for many years and high performance compute power densities.
That is just starting to blossom.
In our numbers and I think that is just an incremental tailwind of demand where it doesn't feel like the digestion period.
Is there anywhere.
Coming to the.
The amount of capacity demands, we're seeing for the industry overall.
The next question comes from Eric Loop core of Wells Fargo. Please go ahead.
Oh, great. Thanks for the question. So I wanted to touch on kind of your outlook for renewal spreads, which have been pretty strong. The last couple of quarters. So if I look at your expiration schedule. It looks like your in place rents really start to look even more attractive.
Further out you look so maybe you could talk about kind of the near term outlook.
Is it going to be a little more subdued as you worked through some of these higher in place rents.
And then maybe are there any of your larger footprint contracts would have any contractual terms that may limit your ability to push rents as high as you would like thank you.
Sure. Thanks.
So I think first off I think it was a note you know we feel we feel pretty pretty confident about the pricing environment right. Now that are I think we demonstrated that with the.
Continued increase in releasing spreads that we put into our guidance, where we said greater than greater than 5%.
And we've had you know we've called out some items this year that have been.
We'll call it slight outliers, but will we still see a strong pricing environment that we're in we expect that to continue into the fourth quarter, where we expect a positive renewal spreads across all of our product types.
I think you know.
Going into next year again, not giving guidance what I would say is come back to the environment that we're in I mean, there's nothing that suggest that pricing won't continue to be robust and strong across all of our major markets.
Where things might be different you know again that you were alluding to is the basis against which those strong pricings are are compared against them. We have not seen the same.
I still expect that we'll have positive renewal spreads next year, but.
We'll be able to provide more granularity in terms of the level.
That is once we once we give guidance next quarter.
The next question comes from Frank Louthan of Raymond James. Please go ahead.
Great. Thank you.
Guys are having conversations with a customer that's primarily looking at in a in a ideal when you're winning a ideal what is it that they're coming to you for versus maybe some of the less expensive campuses, you're kind of in the middle of nowhere that we've heard about in that sort of thing.
Yes.
Are you winning in AI and what is it that they're they're looking to get from from digital versus some of your peers or some of the private players.
Hey, Thanks, Frank I'm going to toss it to call him in a second but I just.
Theres, many shapes and forms of AI and I want to reiterate this is still early innings of what's gonna be a vast buildout.
Required infrastructure.
Our intersection of supporting AI is called in the single megawatt or two for enterprise are adjacent to the existing workloads.
Expansion into multiple many many megawatts of contiguous capacity.
And everything in between.
And we're in a world right now where.
It's about large language model training, where obviously the inference that dawn of inference and the implications.
Hopefully a 0.2 incremental locational agencies sensitive needs.
It feels like coming in our favor but.
Once you speak to some of your your experienced frontline with the customers sure. Thanks, Andy and Frank I. Appreciate the question Yeah, I would just amplify what Andy was saying as the demand principles are not monolithic I'm, you're talking about a wide gamut of requirements across the customer platform, which really plays well to our broad based portfolio.
I think we do as good a job as any to support broad based requirements and contiguous capacity, but also having mixed dynamic.
Dynamic requirements in terms of densities and so we try to do is to map that right customer to REIT market to write workload and again across 300, plus data centers I think we can serve that you know pretty well, we also feel pretty strongly that core market orientation.
E proximity to eyeballs and GDP is still going to remain a core requirement for much of this AI workload.
So we feel like that maps really well to our core set of assets across the globe.
The next question comes from Ivan <unk> of Evercore ISI. Please go ahead.
Hi, Thank you for the question So Greg mentioned the strength in demand for both stabilized and development G P's, but in light of a more volatile rate environment, especially in recent weeks have you sensed any meaningful shifts in the appetite for J B's when you were discussing with potential partners.
<unk>.
Practice has your phone been ringing in the letter.
No look it's a it's a good question, but the answer is no member you know when when investors are out there, making investments in different sectors right everything's on a relative basis and I think when investors look at data centers today and they look at you know the quality of the facility the quality of the customer base.
The term of the lease.
<unk> organic growth in the business today.
It's the best place for them to invest in fact, I would argue that over time youre going to continue to see datacenters, becoming more mainstream investing rather than a niche play investing.
When you look at the level of demand out there, whether it's through pension funds endowments sovereign wealth funds and the like.
So no I mean, there's also an interesting is there's pockets of capital.
That you know are driven we will do this unlevered, so they're willing to be patient and wait for leverage and wait for rates to come back down.
And I think that also to your point I mean, I think that's what I mentioned earlier, there's even an outsized demand on the development side I think the fact that we're in a higher rate environment is driving more demand if you will towards towards development. So.
But now we have not in fact I would go the other way I would say that we've seen an acceleration in demand.
For a development JV.
Okay.
The next question comes from Michael Rollins of Citi. Please go ahead.
Thanks, and good afternoon, when you take the demand that you're seeing the backlog and the target for the development joint ventures can you give us a bit of a preview.
On the range of development capital.
It all will place on balance sheet in 2024.
Hey, Thanks, Michael So I mean.
This isn't new news and I think I frame. This in some of the investor meetings, we've had through the fall or even going back to NAREIT.
Listen we are a large.
The largest global player in this space here.
And we are taking a strategic change to how we're funding the business was one of my three top priorities.
And while we're not going to do is tie ourselves to a partner for all time.
And reduce our flexibility.
But we're gonna be looking at targeted large scale projects. These are projects that are supporting.
We'll support customers, we believe in and their growth campuses multiple megawatts.
So not noncore at all like things that we would invest 100%.
If we werent looking to change our funding strategy to drive more bottom line growth.
And I think you could think the concentration of those type of projects to date are mostly in North America and Europe, given our business is already in a shared an adventure in Latin America and were a little bit smaller in APAC.
And I think that's going to be very targeted trying to find the right capital source that is like minded in terms of their vision for the asset class and looking for a partner that wants to really invest alongside we think is the best in class in this industry.
The next question comes from Matt nickname of Deutsche Bank. Please go ahead.
Hey, guys. Thanks for taking the question just one on cash flow. So the accounts receivable it looks like it increased another 167 million sequentially and it's been a drag of over 400 million year to date, just wondering if theres any color you can share on what's driving this and then maybe how to think about the prospects for any sort of reversal and up.
Coming quarters. Thanks.
Yeah. Thanks, Matt. This is this is Matt as well.
So yeah, we've had a.
The important points are that I'd call out here are two things one the majority of the increase that we've seen over.
Over the last couple of quarters in our accounts receivable has been tied to actually VAT receivables as a result of the increase construction that we've had particularly over internationally in EMEA.
When you look at our trade payables, which are.
It really only actually roughly half or a little over half of that balance.
We have increased our trade payables over the period, but it's also been fairly much in line with our increase in revenue as well.
And we've we've actually been able to bring down our amount of trade payables in the last couple of quarters as well, but again it doesn't it doesn't appear that way when the total receivables balances increase but again I think the two salient points are only roughly only half of our that balance is tied to what I called trade receivables.
Or actual rents and other.
Billings that are sent to customers a good chunk is related to VAT receivables tied to our construction, which has been the part that's been growing more substantially which also has a liability offset as well.
The next question comes from Ari Klein of BMO capital markets. Please go ahead.
Thanks.
Following up on the JV question, but fundamentals are really strong sales like you believe there's a lot of runway there.
Obviously, they are funding considerations, but have you rethought, perhaps pursuing a JV versus going at it on your own and essentially keeping the upsides to yourself.
Hey, Thanks already so I don't I think consistent what I've shared reiterated on this call.
We believe that this opportunity when it comes to our space digital transformation cloud computing hybrid it and now the advent of artificial intelligence really coming to fruition is.
So large long term capital intensive.
That really tap in to both private and public capitals and different measures is the right way to maximize value for our shareholders.
And we are certainly experiencing a inflection in our operating fundamentals that has built upon.
Good results through the throughout the year.
We are we've been doing tremendous amount of deleveraging this year will be call. It round and the third piece on the deleveraging next year is getting back to the targets mats laid out.
And we also have headwinds when it comes to call. It some.
A modest amount of debt coming due in terms of refinancing, but we view that as a development joint venture remains to be the right move.
Move to drive more to the bottom line.
And again as I said in a question or two ago, we're not tying ourselves to this strategy and partner for all time right. This is allow us to accelerate those earnings and then have be able to throttle the levers here as to how much we share it in terms of development joint ventures with partners.
Down the road.
The next question comes from Simon Flannery of Morgan Stanley. Please go ahead.
Thanks, a lot good evening.
If I could just checking on the development Capex point again, you raised the guidance $400 million at the midpoint for this year, we're probably just got a couple of months left here.
Could you just go through a little bit what we're seeing that increase being spent on as that higher cost per megawatt coming through on some of your existing projects youre pulling stuff CT from loss from next year.
What else might be contributing to the increase thanks.
Okay.
It's not it's not.
Budget overruns or anything like that it is called conviction and the demand landscape.
I mean, we can back and running through it but I think that the biggest pieces, Northern Virginia, which goes back to our success.
Freeing up call it 100, plus megawatts in the Loudoun County pinch point.
And now activating that but Matt anything else I'm missing there no I think Andy you you hit it I mean, the the majority of our you know our development pipeline increased Oh, roughly 60 megawatts. We had 100 megawatts of new starts the vast majority of that was in North America and in Northern Virginia.
Specifically, our if you look at our supplemental quarter over quarter, our cost per megawatt I think broadly globally has been roughly roughly flat. So it's just a it's just a view of.
New new development starts I'm looking to get those completed as quickly as possible. So we can deliver on time for our customers and take advantage of the market that we're in.
Yeah.
The next question comes from Nick del Deo of Moffett Nathanson. Please go ahead.
Hey, Thanks for thanks for talking my question.
Andy you've talked about being more disciplined about returns in the sort of deals you accept do you feel like you're successfully winning your targeted share of higher value or more strategic deals at your desired returns for each product.
And kind of along those lines do you feel like customers perceptions of what you have to offer and where you add value is consistent with how youre trying to reposition the company's assets.
Thanks, Nik so.
I could tell you just yesterday.
My team and I were on a call it recurring check in with one of our top cloud.
Cloud customers.
And that dialogue was.
Multifaceted.
It was obviously concentrated on how we can support their growth and their availability zones.
How can we can commence faster there's operational elements it range across all the theaters and it.
Also had how we can drive greater consumption to their cloud and their services from our 5000 existing customers from the 100, plus we added this quarter in the next quarter.
How are how we're integrating them onto our service fabric natively.
And so I think we are in.
I think youre seeing.
Those results paying dividends and that customer appreciation.
And youre seeing that in the litany of call it magnetic destinations be it the on ramps, we announced around the world.
As well as the pickup in the demand that we characterize as less a megawatt interconnection accelerating.
So I do see a connection there.
I think we deliver a tremendous amount of value to our customers improving their top line and the bottom lines and this safe secure fashion.
And when obviously I think some of your question was dovetails also to some of the larger customers.
I think that we're just being transparent and honest with these customers that we're really trying to build a durable business that stands the test of time.
And that doesn't mean, we would try to win 100% of our hyperscale as market share, but if 450 metropolitan areas, There's probably 25 or 30, where we have something that they really need and we can really help them like no other.
And that's through our supply chain, our large campuses are future proof their growth operational excellence and other value adds and just being a one stop shop for all their needs. So.
I think that's a long long winded answer to yes.
Okay.
The next question comes from Erik Rasmussen of Stifel. Please go ahead.
Yeah. Thanks for taking the question.
Just getting back to the development JV.
We shouldn't missing piece in your capital recycling efforts.
But and.
And I saw that you raised.
Disposition guidance for the year is 750 is still a good range for this and then I guess from your commentary it seems like this one one more than one deal.
The skin.
This can represent.
Hey, Eric This is Greg the Answer's, Yes, 750 is still a good deal and yes, we are working on more than one.
The next question is a follow up from Michael Elia of TD Cowen. Please go ahead.
Great. So I wanted to ask about the Unlevered return environment, particularly for Hyperscale I think earlier on the call you mentioned something to the effect of <unk>.
Double double digit unlevered yields when you're thinking about doing some of these larger footprint deals with your top customers I was just curious where you're seeing those deals clear.
And as part of that where you think that this could evolve to over call. It the next year. Thanks.
Yeah, Thanks, Michael so.
Well, it's I think I'd point, you to our development schedule, which.
It has now been in the double digits category across the board for the whole portfolio, including an increase in call it 65 megawatts quarter over quarter.
North America, where I would say is the current home to the largest deals.
Is it a double digit by itself.
And has moved up.
Dramatically.
I don't.
When we look at the risk reward there is obviously episodic scenarios where returns for big.
Deals with Hyperscale orders could go higher but.
I think the.
I think that once you kind of send into the double digits given the current state of call it cost of capital in general.
Think you're in the proverbial end zone.
In terms of creating value.
On many ways, so I wouldn't bank on incremental stair steps of shifts beyond that but I.
I think we're in a time in the world, where the demand remains robust and diverse outpacing supply that dynamic does not feel to be abating and I think we've got a great hand to.
Support tremendous customer growth.
Around the globe.
And create a lot of value for a lot of stakeholders.
Okay.
That concludes the question and answer portion of today's call I'd now like to turn the call back over to President and CEO Andy power for his closing remarks. Please go ahead.
Thank you Andrea.
Digital Realty had a strong third quarter our results demonstrate that our value proposition is resonating with our customers.
We posted another quarter of strengthening organic operating results with record zero to one megawatt bookings strong releasing spreads and our best same capital cash NOI growth in over a decade.
During the first nine months of the year, we've raised over $3 5 billion of new capital, enabling us to meaningfully delever, while reinvesting to support our customers' growing needs.
We are not done yet.
I'd like to thank everyone for joining us today and express my personal gratitude to our dedicated and exceptional team of digital Realty to keep the digital world spinning.
We look forward to updating you on our progress and meeting with many of you. Many of you at NAREIT in L. A and a few weeks.
Yeah.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
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Okay.
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