Q3 2024 Digital Realty Trust Inc Earnings Call
Speaker Change: Good afternoon and welcome to the Digital Realty 3rd Quarter 2020 4 earnings conference call. Please note this event is being recorded.
Speaker Change: During today's presentation, all parties will be in listen only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session. Collars will be limited to one question and we will aim to conclude at the top of the hour.
Speaker Change: I would now introduce a call over to Jordan Sadler, digital realities, senior vice president of public and private investor relations. Jordan, please go ahead.
Jordan Sadler: Thank you, operator and welcome everyone to Digital Realty's third quarter, 2024 earnings conference clock.
Jordan Sadler: Joining me on today's call are President and CEO Andy Power and CFO Matt Mercier. Chief Investment Officer Greg Wright and Chief Technology Officer Chris Sharp and Chief Revenue Officer Colin McLean are also on the call and will be available for Q&A.
Jordan Sadler: Management will be making forward-looking statements including guidance and underlying assumptions on today's call. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC.
Jordan Sadler: This call will contain non-GAAP financial information. Reconciliations and net income are included in the supplemental package furnished to the SEC and available on our website.
Speaker Change: Before I turn the call over to Andy, let me offer a few key takeaways from our third quarter. First...
Speaker Change: New leasing volume of 521 million at our share shattered our prior record and even our own expectations for the realm of possibility in a quarter.
Speaker Change: In fact,
Speaker Change: 3Q leasing was more than a full year's worth by previous standards, as activity in the quarter exceeded the leasing completed in all of 2023, pushing our backlog of signed but not commenced leases up to nearly $860 million.
Speaker Change: While greater-than-a-megawatt leasing was the primary driver, our zero-to-one-megawatt plus interconnection segment also posted record bookings in the quarter.
Speaker Change: Second, strong fundamentals translated into improved pricing for data center capacity, and this was evident across both new and renewed leases, with record rates on new greater-than-a-megawatt leases.
Speaker Change: 4% escalators on the majority of new leases and a record 15% uplift in cash renewal spreads in the quarter.
Speaker Change: And third, our development pipeline increased by nearly 50% sequentially to 644 megawatts under construction and is now 74% pre-leased at a 12% average expected yield as a result of successful leasing of shell and land capacity in North America.
Speaker Change: These results continue to move digital realty closer to management's objective to improve longer-term sustainable growth.
Speaker Change: With that, I'd like to turn the call over to our President and CEO, Andy Power.
Andy Power: Thanks Jordan and thanks to everyone for joining our call.
Andy Power: I don't often start this way, but this quarter was certainly one for the record books.
Andy Power: As Jordan noted, we posted record results across a broad array of metrics.
Andy Power: These results are the product of Digital Realty's team capitalizing on a favorable demand backdrop, but are also a testament to our efforts to enhance our value proposition and to drive long-term sustainable growth.
Andy Power: Demand for data center capacity remains strong.
Andy Power: both for larger capacity blocks in our core markets and to support continued growth in both cloud and digital transformation.
Andy Power: We are well positioned to take advantage of this favorable environment given our full-spectrum strategy.
Andy Power: Our global footprint across six continents and a robust land bank that can support three plus gigawatts of incremental development.
Andy Power: together with an investment-grade balance sheet.
Andy Power: That is complemented by a diverse group of capital partners
Andy Power: and the expertise to put it all together and operate these facilities on behalf of the world's leading technology companies and enterprises.
Andy Power: College for the third quarter were abundant and include.
Andy Power: 521 million new leases signed at Digital Realty Share, more than double our prior record in the first quarter of this year.
Andy Power: Greater-than-a-megawatt bookings in North America led the way, driven by large hyperscale deals in Manassas, Ashburn, and Chicago.
Andy Power: New leasing volume in this segment was up more than 75% from the 1Q record.
Andy Power: while pricing moved up nearly 30%.
Andy Power: Included in our greater-than-a-megawatt signings was a large lease in our hyperscale development venture in Manassas.
Andy Power: Like all of our JVs, we report these leasing results at our share, or 20% in this case.
Andy Power: The total leasing into our facilities at 100% share was in excess of $700 million in the third quarter, demonstrating the significant appetite for data center capacity.
Andy Power: Given the size of those numbers, it might be easy to overlook a very strategic and important milestone.
Andy Power: with a sizable record quarter in our zero to one plus interconnection business.
Andy Power: which sold more than 66 million of new bookings.
Andy Power: topping our prior record in this product category by over 20 percent.
Andy Power: with particular strength in small deals under half a megawatt which accounted for 80% of our zero to one megawatt leasing.
Andy Power: Not to be forgotten, new interconnection bookings also hit a record in the quarter.
Andy Power: We view these bookings very favorably as it further validates our full-spectrum product strategy.
Andy Power: and provides us with growing momentum in a segment with durable pricing power and steadily increasing customer demand.
Andy Power: Our strength in this category was also characterized by a record 149 new logos for the quarter.
Andy Power: Platform Digital offers our customers the convenience and simplicity to manage their global data center needs.
Andy Power: and it is reflected by record export activity in the third quarter, which were 50 plus percent higher year over year, with Americas to AMEA exports leading the way, followed by APAC into the Americas.
Andy Power: with a record $859 million backlog of favorably priced leases.
Andy Power: Largely commencing over the next two years.
Andy Power: We are positioned for accelerating top-line and bottom-line growth.
Andy Power: in support of our customers' growing requirements.
Andy Power: and all of the new leasing accomplished in the quarter.
Andy Power: We also substantially scaled our development pipeline in the third quarter, increasing the capacity underway by almost 50% to 644 megawatts under construction today.
Andy Power: And we maintain another 3 gigawatts of buildable IT load capacity in land and shell condition.
Andy Power: As we noted last quarter, we also strengthened our value proposition in Europe with the acquisition of a densely connected enterprise data center campus in Slough.
Andy Power: During the quarter, we also continue to bolster our balance sheet and diversify our capital sources through a combination of favorable debt and ATM issuances.
Speaker Change: Matt will provide more details on these activities in a few minutes.
Speaker Change: Over the past few weeks, we've seen several examples of the lengths that some hyperscalers will go to reserve enough power for their fast-growing compute requirements.
Speaker Change: We've seen a deal to reactivate Three Mile Island.
Speaker Change: another hyperscaler partnering with an existing utility to develop small modular reactors, and a third executing power purchase agreements to purchase nuclear energy from multiple SMRs that have yet to be built.
Speaker Change: These agreements are similar in that they are seeking long-term carbon-free energy solutions to help power growing data center portfolios.
Speaker Change: and speak to the longer-term demand outlook for data center capacity.
Speaker Change: Yet each of these plants is still years away.
Speaker Change: from Beginning to Generate Power.
Speaker Change: underscoring the value of large capacity blocks today and perhaps for the next several years.
Speaker Change: And sourcing available power is just one piece of the data center infrastructure puzzle.
Speaker Change: Supply chain management, construction management, and operating expertise are all challenges that customers rely on digital realty to solve.
Speaker Change: and they are clearly a critical aspect of the overall value proposition that we bring to the table.
Speaker Change: While the large hyperscale deals get plenty of focus
Speaker Change: Customers and partners are recognizing the value that digital realty's meeting place can bring to their private cloud and hybrid IT applications around the world.
Speaker Change: We continue to see a meaningful share of our zero to one megawatt winds influenced by our partners.
Speaker Change: expanding our reach into more enterprises around the world.
Speaker Change: Our wins this quarter include
Speaker Change: a Global 2000 telecom provider who partners with one of our largest customers choosing platform digital to deploy a distributed cloud solution to alleviate geographic data gravity challenges.
Speaker Change: a leading healthcare provider, and a new logo for Digital Realty, which also came to us from a partner, modernizing its infrastructure to take advantage of the cloud connectivity available on platform digital, while maintaining data compliance for personal health information privacy.
Speaker Change: Another new logo, an international financial institution critical to global financial and monetary policy.
Speaker Change: chose Platform Digital to secure their cloud requirements while maintaining global access.
Speaker Change: A global 2,000 technology company is expanding their presence on platform digital in support of its autonomous driving solution.
Speaker Change: A top 20 Japanese electronics and semiconductor manufacturer is joining Platform Digital through another partner as part of an integrated tech refresh initiative where robust connectivity was a critical differentiator.
Speaker Change: and a global cloud optimization provider is deploying additional capacity on platform digital across two continents to support their expanding enterprise customer base who require access to rich and scalable connectivity solutions.
Speaker Change: Before turning it over to Matt.
Speaker Change: I'd like to touch on our global ESG progress during the third quarter.
Speaker Change: We continue to lead the industry in green building IT capacity.
Speaker Change: with 178 megawatts certified in the last 12 months.
Speaker Change: while our Swiss team achieved the first ever Swiss Data Center Efficiency Association Gold Plus certification for our data centers in Zurich.
Speaker Change: Digital Realty also continued to be recognized for ESG leadership including
Speaker Change: Broad Group's Data Cloud Global Awards 2024 for AI Data Center of the Year.
Speaker Change: The Tech Capital's Digital Infrastructure Action Global Award 2024.
Speaker Change: And, Frost and Sullivan recognized our Japanese joint venture, MC Digital Realty.
Speaker Change: with the 2024 Japan Data Center Services Company of the Year Award.
Speaker Change: Moving to green finance, where digital continues to be a leader in the data center industry. During the quarter we issued an 850 million euro green bond adding to digital's long history of support for linking its debt to sustainable projects.
Speaker Change: Additionally, we maintained a sustainability-linked pricing component on our new credit facility, further demonstrating the company's commitment to ESG.
Speaker Change: We remain committed to minimizing digital realty's impact on the environment while delivering sustainable growth for all of our stakeholders.
Speaker Change: With that, I'm pleased to turn the call over to our CFO, Matt Mercier.
Matt Mercier: Thank you, Andy. Let me jump right into our third quarter results.
Matt Mercier: We signed 521 million of new leases in the third quarter, of which 450 million fell into the greater-than-a-megawatt category and was heavily weighted toward the Americas.
Matt Mercier: We also signed 50 million of zero to one megawatt leases and 16 million of interconnection bookings.
Matt Mercier: Each of these figures were new records for digital realty.
Matt Mercier: Importantly, more than 75% of the dollar volume of leases signed include annual rent escalators of 4% or greater, which bolsters the growth profile associated with our portfolio of long-term hyperscale leases.
Matt Mercier: Our backlog at digital realty share increased by more than 60% sequentially to $859 million at the end of September, as new leasing dramatically outpaced $180 million of record commencements in the quarter.
Matt Mercier: To offer some perspective, the backlog now represents 20% of this quarter's annualized data center revenues.
Matt Mercier: And we expect more than 85% of these leases to commence by the end of 2026.
Matt Mercier: Looking ahead, $100 million of the backlog is scheduled to commence by the end of this year, with another $350 million scheduled to commence next year, and over $300 million already slated to commence in 2026.
Matt Mercier: setting us up for accelerating multi-year growth.
Matt Mercier: During the third quarter, we signed $258 million of renewal leases at a 15.2% increase on a cash basis.
Matt Mercier: driving year-to-date cash renewal spreads to 10.5 percent.
Matt Mercier: Similar to the first quarter, these robust releasing spreads were driven by a package deal that pulled forward a sizable renewal that was not scheduled to expire for several more years.
Matt Mercier: Excluding this package deal, overall renewal spreads were still a healthy 5.8 percent, which is more consistent with the 5 to 7 percent guidance we previously provided for 2024.
Matt Mercier: While the package deals demonstrate the levers available to capitalize on the current pricing environment and also reflect our customers' views of the overall market, they are less predictable in nature.
Matt Mercier: Breaking down renewals by product category, cash renewal spreads in the zero to one megawatt segment were up a healthy four and a half percent in the third quarter, while releasing spreads in the greater than a megawatt segment were up by over 30 percent.
Matt Mercier: Excluding the package deal, greater than a megawatt renewals, we're still up 8.6%.
Matt Mercier: For the quarter, churn remained low and well controlled at one and a half percent.
Matt Mercier: In terms of earnings, we reported third quarter core FFO of $1.67 per share.
Matt Mercier: reflecting continued healthy growth in revenues and adjusted EBITDA.
Matt Mercier: Data center revenue grew by seven and a half percent year-over-year as the combination of improved renewal spreads, rent escalators, and year-to-date commencements more than offset the drag associated with the more than two and a half billion of capital recycling activities since the middle of 2023.
Matt Mercier: Pro forma for the transaction activity data center revenues were up 10% year over year
Matt Mercier: Adjusted EBITDA increased by 11% year-over-year, principally due to a near 200 basis points improvement in margin.
Matt Mercier: from the flow-through of Higher Data Center and Interconnection Revenues with Improved Pricing.
Matt Mercier: Same capital NOI growth increased by 0.8% year-over-year in the third quarter.
Matt Mercier: As 2.5% growth in data center revenue was offset by higher property operating costs and roughly 200 basis points of bad debt reserves in the quarter.
Matt Mercier: Year-to-date, same capital cash NOI has increased by 2.6 percent, which continues to be negatively impacted by about 200 basis points of power margin headwinds year-over-year, given the elevated utility prices in EMEA in 2023.
Matt Mercier: Moving on to our investment activity, we spent $651 million on consolidated development in the third quarter.
Matt Mercier: Gross development spend at 100% share was $855 million in the quarter.
Matt Mercier: Given the strong demand for data center capacity, we doubled our development underway in the Americas and added more projects in EMEA for an almost 50% increase in our pipeline, ending the quarter with 644 megawatts under construction.
Matt Mercier: More specifically, we delivered just 36 MW of new capacity in the quarter, while we backfilled the pipeline with another 244 MW of new starts at 100% share.
Matt Mercier: The overall pipeline is now 74% pre-leased, up from 66% at the end of 2Q, with an average expected yield of 12%.
Matt Mercier: Almost all the development underway in America is this pre-leased with an expected stabilized yield of 13.6 percent.
Matt Mercier: Thank you for watching!
Matt Mercier: Over the first nine months of the year, we spent $2.4 billion in development CapEx at 100% share.
Matt Mercier: which has been balanced by nearly 900 million of partner contributions.
Matt Mercier: keeping us on track and well within the range of our original full year spending expectations.
Matt Mercier: Turning to the balance sheet, we continue to strengthen our balance sheet in the third quarter with over 800 million of equity raised on the ATM.
Matt Mercier: On the debt side, we paid off 250 million guilds in July and added an 850 million euro green bond in September.
Matt Mercier: We also upsized and extended our credit facilities to $4.5 billion in September.
Matt Mercier: At the end of the third quarter, we had nearly $5 billion of total liquidity and our net debt to EBITDA ratio was 5.4 times.
Matt Mercier: Thank you for watching!
Matt Mercier: Moving on to our debt profile, our weighted average debt maturity is over four years and our weighted average interest rate is 2.8 percent. Approximately 85 percent of our debt is non-US dollar denominated, reflecting the growth of our global platform and our FX hedging strategy.
Matt Mercier: Approximately 89% of our net debt is fixed rate and 96% of our debt is unsecured, providing ample flexibility for capital recycling.
Matt Mercier: Finally, we have no remaining debt maturities until early 2025 and the maturities remain well-laddered through 2033.
Matt Mercier: Let me conclude with our guidance.
Matt Mercier: We are raising our core FFO guidance range for the full year of 2024 to $6.65 to $6.75 per share.
Matt Mercier: increasing the low end of the range by five cents per share and maintaining the high end.
Matt Mercier: The increase in our guide at the midpoint of the range reflects the strength in our year-to-date leasing and commencements and the benefit of stronger than expected renewal pricing.
Matt Mercier: partly balanced by the impact of customer bankruptcies in the second half of this year and balance sheet positioning to capitalize on the robust opportunity we are seeing.
Matt Mercier: We are also adjusting our total revenue guidance to reflect the impact of lower utility expense reimbursements and are increasing our adjusted EBITDA guidance to reflect better than expected leasing volumes and higher pricing.
Matt Mercier: Accordingly, we are also adjusting the
Matt Mercier: Reflecting our success on cash renewals today, we are increasing the FOIA range to 8 to 10 percent from 5 to 7 percent.
Matt Mercier: We are also tightening full-year same-store guidance to a range of 2.75% to 3.25%.
Matt Mercier: In terms of investing expectations for 2024, we tightened the range of our net share development spend to $2.2 to $2.4 billion and maintained our recurring maintenance CapEx ranges.
Matt Mercier: Lastly, on financing, the 850 million euro bond raise was completed slightly ahead of previous expectations but was mitigated by higher short-term rates than we anticipated at the beginning of this year.
Matt Mercier: Looking to the fourth quarter, core FFO per share remains poised to increase as the momentum from strong year-to-date leasing increasingly contributes to bottom line results.
Matt Mercier: Looking out in 2025 and beyond, digital realty's growth remains poised to accelerate for 2024 levels.
Matt Mercier: as the fundamental environment for data centers remains strong and our robust backlog commences.
Matt Mercier: This concludes our prepared remarks and now we'll be pleased to take your questions.
Matt Mercier: Operator, would you please begin the Q&A session?
Speaker Change: We will now open up the call for questions. In the interest of time and to allow a larger number of people to ask questions, callers will be limited to one question.
Speaker Change: To ask a question, you may press star then 1 on your telephone keypad.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
Speaker Change: Our first question is from Michael Rollins with Citi. Please go ahead.
Michael Rollins: Thanks, Tim. Good afternoon. When we were
Michael Rollins: together last in September, and you mentioned there could be another record before the end of the year. You know, this was bigger, so congrats to you and the team on this. Maybe the first question with respect to that is
Michael Rollins: How much of the demand, you know, is at a risk of maybe pulling forward what the natural opportunity for digital realty is and for the
Speaker Change: The capacity that's in the pipeline but not in development today, how much of that is power ready that's ready to sell into the market? Thanks.
Andy Power: and thanks Mike really appreciate it
Speaker Change: So, go to your questions, obviously, in a quarter of this magnitude.
Speaker Change: Any one of those sizable deals that slip a quarter will really change the destiny of what a fourth quarter looks like. So I won't say there was zero pull forward, but at the same time we are far from anywhere near selling out.
Speaker Change: some of our largest
Speaker Change: signed during the quarter selling the capacity blocks that are literally adjacent to the most identically sized capacity blocks with nearing power deliveries in the various markets we highlighted. Manassas and Ashland being
Speaker Change: One and two and Chicago Green are terms of our top signings
Speaker Change: Those specific markets go to your second question.
Speaker Change: specific locations that comes next are not necessarily powered today but those deliveries are approaching rapidly and we have those in many markets be it Dallas, Santa Clara in the U.S., EMEA, we have Frankfurt, Paris.
Speaker Change: Amsterdam, Seoul, South Korea, as well as similar in South Africa and South America and those all aggregate to
Speaker Change: More to 3 gigawatts of capacity, including shell capacity, that we can activate quickly.
Speaker Change: So, and last but not least, we also, as you saw in some of the release, we've not been sitting idle. We've made some very attractive additions, including a parcel that will be adjacent to our Richardson campus in Dallas, that I think approaches 80 megawatts of growth capacity, and more to come.
Speaker Change: So I don't I don't I wouldn't call this as a massive pull forward quite frankly The scaling of demand we're seeing take place here. I think it's just overall restrained in from numerous factors
Speaker Change: Thank you for watching!
Speaker Change: The next question is from John Peterson with Jefferies. Please go ahead.
John Peterson: Oh, great. Thanks. Really impressive quarter. Good job, guys.
John Peterson: I wanted to ask, so clearly given the size of these leases, it seems like we're probably talking about AI use cases in some of the latest.
John Peterson: GPU technology out there. So maybe can you give us some more color on some of the design changes that are required to meet these power densities? And then also, you know, the rental rates were looked really impressive, but I'm kind of curious if the the build cost side of it is also higher on some of the leases that you signed this quarter.
Speaker Change: Thanks, John. Really a massive team effort from obviously the leadership team on the call, but the broader digital realty efforts.
Speaker Change: Globally contribute to this type of coerce.
Speaker Change: Go into the second and I'll hand it over to Chris and Colin to have an egg. The AI use cases and contributions from AI. Yes, we've seen some inflationary trends in billed costs.
Speaker Change: bringing more higher power densities has been part of our heritage and that requires incremental capex spend.
Speaker Change: But the size of that as a percentage of these bills is in the call closer to single digit percentile increases relative to what you've seen now in the rental rate movements that are well outpaced.
Speaker Change: those inflationary elements but maybe Colin you just give us a little color on
Speaker Change: You can find the complete transcript of this seminar series at byzantine.or.us
Speaker Change: The larger charge capacity, which obviously our heritage comes well supported from, is of real value in these use cases.
Speaker Change: These large capacity blocks are in high demand across our core markets.
Speaker Change: And so clients are certainly looking to take advantage of that. I would also say it's a growing part of our less-than-one-megawatt framework that Chris and team have rolled out.
Speaker Change: A substantial program in HC COLA, which he can probably highlight in just a moment, that really fits in the sweet spot of where we're taking
Speaker Change: our platform on the whole. So Chris. Yeah, no, I appreciate it and appreciate the question. This is something that, you know, we've been contemplating for many years. So we've seen a lot of the cloud infrastructure densifying, but then, you know, as artificial intelligence has come to market, just working on the data center design, and we've talked about this, about modularity and the modularity around cooling and being able to maximize the utilization of air. And I think a lot of us are starting to understand that liquid is coming into play, which is a core component that we've always anticipated and how we can retrofit in an efficient fashion to bring that liquid in to meet this demand on a case-by-case basis. And so I think that's one of the critical elements that we've always watched in the market. I think the other thing...
Speaker Change: is the capacity block. Just the sheer sizes that you just heard Andy walk you through, that's also very aligned to what a lot of the AI use cases are looking for. And I think one of the things we're always watching is how inference comes into play. And a part of the data center design is also the interconnectivity of that. And so how we allow those different types of AI environments, be it inference, be it different types of recursive models, where how these advanced solutions are coming to market, that's core to what we've been watching and understanding at a very granular level. And then to Colin's point, I think it's important for us to understand how that gets fitted out within the data center.
Speaker Change: So we've launched an offering called HD-COLO a while back and I think what's interesting about what we're able to do with HD-COLO across 30 markets, 30 metros, 170 facilities, within 12 weeks we're able to build in a capability that takes you to 150 kilowatts a rack.
Speaker Change: And what's important about that, to put a little context on it, is that supports 3 NVIDIA H100 systems within a single rack. And so that's what's really, we're seeing in a lot of the form factors coming to market. And I think the state of the play today is the latest GB200s from NVIDIA as well. We're constantly staying aligned to how we can support a lot of that infrastructure coming to market.
Speaker Change: Thank you for watching!
Speaker Change: The next question is from David Barden with Bank of America. Please go ahead.
David Barden: Hey guys, thanks so much for taking questions.
David Barden: Wow, okay, such a great quarter.
David Barden: But, Andy, I guess a couple questions, if I could.
David Barden: So, this quarter was so strong, you know, in the wake of a record quarter in 1Q, a far from record quarter in 2Q, it kind of, I think, scrambles
David Barden: people's expectations about how we think about what's the new normal.
David Barden: And when we were talking about the first half, we were saying, well, you know, it was a record first half. And the average of the first half was about 200 million in new bookings.
Speaker Change: And now we've got this crazy number in the third quarter. Could you level set people, you know, now that we've kind of rung the bell, about what is the new normal for this?
Speaker Change: Thank you.
Speaker Change: And then the second question was just related to I think what we just heard, which was that like the first quarter, record quarter, which was 50% AI bookings, the third quarter, record quarter, is also 50% AI bookings.
Speaker Change: Which suggests that we're having record everything else, too. And could you speak to what is driving that? Thank you
Speaker Change: Thanks, David.
Speaker Change: Maybe I'll try to tackle them in reverse.
Speaker Change: Thank you for joining us this morning.
Speaker Change: I think it's very important what you just highlight there. We're estimating based on numerous data points we have in terms of infrastructure, customer references, applications.
Speaker Change: Estimation of AI today.
Speaker Change: That could be changing down the road. These customers, as you can see from all these terms, signing 10-, 15-year contracts, and we have the ability to retrofit our infrastructure along the way. But I think it's important.
Speaker Change: that the core demand fundamentals that pre-existed before Gen-AI came on the scene are still massive and growing, be it digital transformation for enterprise and hybrid IT and cloud computing.
Speaker Change: I'm hoping to get a lot more questions on the highlight of 66 million and 0.1 megawatt interconnection. That's up 20% over our prior record, nearly 150 new logos. So this has not just been about just big large capacity blocks.
Speaker Change: what we've been spending many years in the making and certainly our execution has been growing and the fall through that category has been a major contributor and more to come on that front. Going back to your definition of the new normal
Speaker Change: A couple of data points that we highlighted two quarters ago that I think are important. First quarter record was based on 10% more megawatts and 60% higher prices.
Speaker Change: This quarter record...
Speaker Change: is on top of that 70% more volume again on 30% higher prices versus the prior record. We just said
Speaker Change: So, both levers, the volume and the price, are contributing to this growth algorithm. When I look at it, I think there's two important other takeaways.
Speaker Change: We're not going to be able to put up a record quarter like this in Q4, especially in a quarter with so many holidays approaching us.
Speaker Change: There's no question like that. But if you look at our inventory blocks, we do have a runway to repeat this record down the road. There's no question. I don't think we've top ticked it for digital in any regard.
Speaker Change: A lot of these signings are really turning into long-term contracts with great escalations that are going to commence in late 2025 and 2026, and really hopefully translating into long-term sustainable growth that flows from the top line down to the bottom line. That's another big piece.
Speaker Change: of Composition, and lastly...
Speaker Change: I try not to focus necessarily on just the fluctuations in the science, but let's look at our backlog.
Speaker Change: After a record commencement quarter, during the quarter, we're at a record backlog that represents 20% of our revenue base.
Speaker Change: today and that is that record backlog not necessarily maybe next quarter but I think that record backlog has a lot of potential to keep growing and de-risking our revenue runway for years to come.
Speaker Change: The next question is from Jonathan Askins with RBC Capital Markets. Please go ahead.
Jonathan Askins: Thank you. So just given the strong backlog and inventory blocks that you've talked about, I'm just wondering if you could talk about the implications for future CapEx levels, given all the demand and delivery ahead, as well as balance sheet leverage goals. Thank you.
Speaker Change: Thanks Sean, I'm going to pass it over to Matt to walk you through those elements.
Matt Mercier: Sure, thanks. Thanks John. So look I think in terms of you know, I think in terms of CapEx
Matt Mercier: You know, we're sitting here today, our CapEx, you know, for 24...
Matt Mercier: We narrowed it down. We're still within the range, I think, for 25 as we look forward. I mean, we'll obviously get more specific guidance as we get to the fourth quarter. But, you know, just considering where we are in terms of the megawatts under construction.
Matt Mercier: I don't suspect that it will be lower than what we're seeing for 24. And again, we'll get more as we look ahead towards guidance at the start of the year.
Matt Mercier: But I think probably somewhat more important and going to your second point, you know, from a balance sheet perspective,
Matt Mercier: You know, we're sitting here today, you know, given all the things we've done.
Matt Mercier: to put the balance sheet back in place where we're already at our leverage targets.
Matt Mercier: We've got $5 billion of liquidity, and ultimately, I think we've got ahead of our plan. We prudently funded, I think, through 2025 with the view that we'll be able to stay within those leveraged targets as well.
Speaker Change: The next question is from Richard Cho with J.P. Morgan. Please go ahead.
Richard Cho: Hi. I wanted to follow up on these large package deals. You've done two of them now. How many more are out there that can be done and is that driving the 4% escalation in the large deals or is 4% kind of something that you're looking at for all deals that are being done?
Speaker Change: Thanks Richard. So, taking the escalation first.
Richard Cho: We have for some time now been looking to push on all the levers on our business and it's whether it's rates, returns, duration of contracts.
Richard Cho: And that was, I think, I believe we were a leader when CTI was escalating to try to bring more CTI causes.
Richard Cho: Go into your
Next, prior question on package deals.
Richard Cho: Listen, this is very episodic.
Richard Cho: I think the good news is that even if you take off our largest mark to market...
Richard Cho: We're still at cash market markets like close to 6-7%.
Richard Cho: call it the high-end of our guidance on the cash market market so one specific deal that you referred to done really the underlying deals were also great renewals as well
Richard Cho: In terms of more, this is again, it's a product of having a large installed customer base, which you can see from our top customer.
Speaker Change: Thank you.
Speaker Change: having customers in 20, 30, 40, 50, 60, 70 locations around the world.
Speaker Change: to help them.
Speaker Change: And in times like today, we're seeing some customers having real business needs and urgency around the requirements.
Speaker Change: and be able to come to the table with a holistic solution to help them.
Speaker Change: and it brings these patches to the table.
Speaker Change: Again, I can't promise them in any given year or any given quarter, but I think it speaks to breadth of relationships and using all the tools in our toolkit to maximize our growth formula.
Speaker Change: The next question is from Eric Lubko with Wells Fargo. Please go ahead.
Speaker Change: Great, appreciate you taking the question.
Eric Lubko: So just curious, I know you have about 3 gigawatts of land in Shell that haven't been developed yet, but given...
Speaker Change: Andrew Power, Matthew Mercier
Speaker Change: where you could extend your reach even further.
Speaker Change: And then separately, you touched on it a little bit on Northern Virginia. I think we've seen some reports there's as long as a seven-year wait time for power in parts of that footprint. I think you said you still have some capacity blocks in Manassas and in Ashburn, so maybe just an update on power delivery within your footprint would be helpful. Thank you.
Speaker Change: Thanks Eric. I'll take the second part first and hand it over to Greg to speak to what he's been spending a lot of time on this year. In northern Virginia, I highlighted those were two major, those markers were two of our largest capacity signs went into
Speaker Change: and in those markets we have adjacent buildings literally identical sizes.
Speaker Change: So, almost a hundred megawatt IT load in both our digital dollars
Speaker Change: and then a similar one in Manassas. And they're coming on short order, not necessarily called early 2025, but one of the two, I think, can be brought into late 2025, potentially, certainly 2026.
Speaker Change: Thereafter, we've got another 230-ish in the next series of buildings.
Speaker Change: We're actually the power of, it will be delivered via the Mars substation, and it's really called substation components on our end that will push those deliveries closer to 2027.
Speaker Change: So, that starts tipping away and call up getting, when you add that all up, closer to call up 400 to 450 additional fellows and round it up to 200 megawatts in total in Manassas.
Speaker Change: which leaves us another half a gigawatt at least at digital deltas, another couple another hundred megawatts not at digital deltas in northern Virginia. So long runway of growth and I would say capacity blocks as their deliveries keep getting nearer and nearer and time goes by and just keeps getting more and more precious.
Andy Power: Greg, why don't you speak to a little bit of what we've been doing on the adding to that on the other end of our supply chain. Yep, thanks Andy and thanks for the question Eric.
Greg Wright: Eric, I think the first thing to highlight is Andy's point about our buildable capacity on balance sheets. So, clearly within existing markets, we have over 3 gigawatts of buildable capacity. So, I think when you think about the context of where new growth is going to come from,
Greg Wright: That's pretty sizable. I think there's probably very few that have that kind of pipeline that we can bring to service in a relatively short period of time.
Greg Wright: So, look, I guess I would summarize it as we're buying land primarily in our existing markets.
Greg Wright: You know, buying land, purchasing power and the like, and really across the globe, whether it's North America, South America.
Greg Wright: Europe, particularly in the flat markets, Africa, particularly South Africa, Johannesburg and Cape Town.
Greg Wright: and then throughout the major markets and APEC.
Greg Wright: That strategy hasn't changed. We still think that's the best risk-adjusted return.
Greg Wright: on our capital. And with that said, we're selectively looking at new markets, but that will not be the primary driver of our growth on the development front.
Speaker Change: The next question is from Frank Laughton with Raymond James. Please go ahead.
Frank Laughton: Great, thank you. So you've talked to us earlier about looking at some markets where you've seen a lot of data center demand popping up and the long-term visibility is...
Frank Laughton: A little bit less clear and you're kind of avoiding some of those as you're looking at looking at some of these larger deployments Are you still holding to that and and how should we think about that? And then how are you set up for funding for these developments and thoughts on capital for the next 12 months? Thanks
Speaker Change: Thanks Frank. So I think this dovetails well with Greg's answer.
Speaker Change: See ya!
Speaker Change: What we're doing is continuing to focus on markets that we believe have robust and diverse demand.
Speaker Change: That is called Enterprise Digital Transformation Hybrid IT Demand, Service Provider Demand, Cloud Demand, as well as various stages of AI Demand.
Speaker Change: We believe that certainly exists and has for some time in our called 50 metropolitan areas where we're operating today.
Speaker Change: And we are, I think that...
Speaker Change: Don't tell Greg's point. We're expanding into markets where we're operating today but maybe now at a bigger scale with bigger presence, i.e. markets we're looking at where we are the major player in the connectivity hubs.
Speaker Change: or have a strong enterprise hand but a much smaller scale or hyperscale plan and looking at those and adding to our footprint in those markets. What we're not doing, which I think is even more relevant,
Speaker Change: is chasing demand for demand's sake to markets that we just don't believe are there for the long term. I'm not suggesting data centers and demand won't be in some of those markets.
Speaker Change: and there'll be opportunities for one-off builds and contracts with customers but we've been a company now for just reaching our 20 years of public company
Speaker Change: We've been through cycles before, and we're looking to generate long-term sustainable growth. Within a key element, when it comes to that, is having robust and diverse customer demand. So when renewals do come, you can maintain your pricing power and generate that sustainable growth.
Speaker Change: Thank you for watching!
Speaker Change: The next question is from Irvin Liu with Evercore ISI. Please go ahead.
Irvin Liu: Hi, thank you for the question and congrats on the strong bookings
Irvin Liu: You indicated that you were positioned for acceleration multiple times in your prepared remarks.
Irvin Liu: And if I recall correctly, you previously also said that 2025 growth should be somewhere closer to mid-single digits.
Irvin Liu: But is it safe to assume that based on what your commencement schedule looks like today, there is potential for upside versus this growth expectation? And if so, how should we be thinking about your medium-term growth algorithm?
Speaker Change: Thanks, everyone. I'll ask Matt to unpack the 2025 and the financial algorithm from there.
Matt Mercier: Yeah, thanks everyone. I feel like I, I think I lost the bet because I thought for sure the growth question would come before the first, first 15 minutes. So, but thanks. So, look, I think...
Matt Mercier: I think a few things. I've been pretty consistent, I think, all year in terms of our
Speaker Change: Andrew Power, Matthew Mercier, Matthew Sadler, Andrew Power, Matthew Mercier, Matthew Sadler,
Speaker Change: We continue to focus on our objective to improve the company's long-term sustainable growth profile. You've seen that in the results we put up.
Speaker Change: Some of those things accrue to the bottom line a little faster than the others. Obviously, our renewal spreads in the zero to one comes into the financials a little bit sooner. The greater than a megawatt takes a little bit longer, and you see most of that in terms of our backlog.
Speaker Change: which is already at $350 million for next year, and I think even more importantly is at $300 million for 2026. So, which if you looked at that same stat a year ago, in terms of where that would have been,
Speaker Change: kind of in a two-year forward view, it's 200 million more. So again, this quarter really de-risked the plan to achieve
Speaker Change: The goals that we set out, which would provide a solid foundation for accelerating growth, not only in 25, but even further beyond that. And I would say we were confident in what we said before about that, and we're even more confident now.
Speaker Change: The next question is from Jim Schneider with Goldman Sachs. Please go ahead.
Jim Schneider: Good afternoon, thanks for taking my question. I was wondering if you could maybe talk a little bit about the complexion of the bookings in the quarter and roughly, you know, how many customers kind of were contributing to the sort of the 60% or 50% or 80% mark of that, meaning the concentration of customers in that book. And can you maybe talk to any of the, whether any of those customers of substantial size were in fact new customers in the quarter?
Speaker Change: Thanks, Jim. So while I ask Colin to kind of walk through some of the highlights, maybe Colin, you can try to break it down into two categories.
Colin McLean: Thanks for the questions, I appreciate it. Obviously a successful quarter, a lot of impact across the board, both new customers, existing customers and growth. We had about 1,000 customers.
Speaker Change: within the platform in Q3. A good chunk of those 149 were new logos. This predominantly came at the commercial segment. We think about the segmentation of customers within global large enterprise.
Speaker Change: and commercial, the large number of new logos come out of that commercial basis, but we're putting more and more focus on large enterprise.
Speaker Change: And so in that 66 million of bookings, we had about 52% of that at a large enterprise, which is an all-time high. So again, that's a growing segment with our business.
Speaker Change: Again, I think that references to what Andy's talking about, the diverse demand that's hitting.
Speaker Change: platform digital across digital transformation, cloud, and AI. So we continue to see that characteristics in our pipeline. Current pipeline for Q4 aggregate all-time highs, particularly key strong characteristics in the 0 to 1.
Speaker Change: megawatt variety, maybe a little bit more context as to as to what we're seeing across the platform and just double down on one of the questions that proximity matters.
Speaker Change: Our core networks in terms of bookings, variety, 80 plus percent. We're in our primary markets, our top 20 markets.
Speaker Change: So we continue to see strength there, continue to see indirect.
Speaker Change: focus so about 26% of our bookings for indirect future pipeline about 30% of that's going to continue to grow and frankly our flexibility to support the various density and scalability requirements for our clients.
Speaker Change: will continue to be a big value proposition for our clients. So this adds up to pretty robust, quarter of a year robust in terms of number of customers, new logos, and types of customers, planning up on the table.
Speaker Change: The next question is from Michael Elias with TD Cowan. Please go ahead.
Michael Elias: Great, thanks for taking the question and congratulations to the whole digital realty team on a really exceptional quarter. I want to switch focus and actually talk about the enterprise.
Michael Elias: You know, the great bookings in the enterprise segment. What I'm curious about is...
Michael Elias: What changed there from the prior run rate of bookings where you were on?
Michael Elias: Was it that the enterprise backdrop got better for you guys or was it something that you shifted in terms of your go-to-market? And just as part of that,
Michael Elias: What are you seeing in terms of the ability to price up enterprise customers, i.e., what are you seeing on the renewal spread side with them? Are we getting past some of that price hike fatigue? Those are my questions. And again, congratulations to you guys.
Speaker Change: Thank you, Michael. Colin touched a little bit on this in his last question, but before I turn it back to him, going back to your pricing question, and this kind of dovetails with, I think, maybe Frankie asked about spreads and bumps. I mean, we've been looking at making sure we have a strong value proposition for our customers.
Speaker Change: This has been many years in the work and building momentum and you've seen the success grow And certainly this is a milestone quarter But I don't I definitely this will not be a record in that category. We're going to build on that record That is a incredibly important strategic priority to this company given the long-term value we can provide to the customers and the growth it provides
Speaker Change: You're looking at your one megawatt signings category. We've been flagged on the cash market markets. They're up on four and a half percent on LTM basis. I think they're up about 70 basis points, just quarter over quarter.
Speaker Change: You can see the asking rates as well.
Speaker Change: I think we'll have more we have more opportunity to go on the interconnection side in terms of
Speaker Change: continue to make sure our value we bring to the customers is appropriately commercialized and that's even with a record interconnection sign-ins quarter.
Speaker Change: So we're looking at all levers and again it's about giving more value to the customer. It's about their infrastructure and their power density. It's about helping them connect and all pinpoints. It's about being their one-stop global shop.
Speaker Change: from no matter what side of the deployment or workload.
Speaker Change: Peace.
Speaker Change: Enterprise Hybrid IT, Cloud, or certainly AI, which is starting to percolate in that category. Collin deserves a tremendous amount of credit as well.
Colin McLean: and I'll turn it over to him to kind of walk through what his insights on the inflection this quarter as well. Thanks, Andy. I appreciate it. I think one point to make is this is not one quarter in the making. This is a multi-year transformation of platform-oriented company servicing service providers and enterprises. And the way that you do that is you make your platform more attractive. So we announced a couple of on-ramps this quarter.
Colin McLean: One in Dallas, we did a couple in Europe, in Zurich and Amsterdam. That's material in attracting enterprises.
Andy Power: Andy mentioned that the digital transformation is now in full steam, but we still think it's early innings
Andy Power: So we think that our platform will continue to grow because enterprises see value in platform digital. One key metric that I'll leave you with, that's a really good sign of a platform-oriented approach, our exports were a record 43 percent, 0 to 1 megawatt. That's material that shows customer sustained value that they're expanding across the platform and to other geos.
Andy Power: So again, strong contribution across the board for the team to bring this to fruition.
Speaker Change: The next question is from Georgi Dinkov with Mizuho. Please go ahead.
Georgi Dinkov: Hey, thank you for taking my question and congrats on the strong results. So I just noticed the development yields are now 12%, which is higher compared to the second quarter. And given the strong market trend growth, can we see development yields move even higher? And is there a cap on how high they can go? And also, can you just provide more color on what the contracts on the development pipeline look like in terms of land and caps on the renewals? Thank you.
Speaker Change: Thanks, Jordi. So...
Speaker Change: Again, this goes back to the accelerated development CapEx.
Speaker Change: Sizably 50% higher and we did that based on demand So you can see overall we're set closer to 75% pre-leased
Speaker Change: in North America who were 97% pre-released.
Speaker Change: Some of the signings...
Speaker Change: in North America in particular, actually I've called on the law and order I've assigned to convince me.
Speaker Change: So they were, we signed in the capacity that the shell is just getting delivered.
Speaker Change: and the other is Mary Watt Dale in the land state, so they're close to two years, so they elongated, so that means we didn't sell just the nearest term capacity blocks, we sold what the customer needed given the facts and circumstances.
Speaker Change: We're doing everything we can to maintain, if not improve, our yields. That's a product of...
Speaker Change: making sure we're scaling our infrastructure and our economies of scale and where we deliver and obviously seizing upon the right rates and trailing to better returns as products in that development lifecycle often roll up.
Speaker Change: Market, we're looking to have, again, all the levers of the commercials are in the discussion. Rates, escalations, real estate, tax, big stops.
Speaker Change: and certainly renewal options. We're not entertaining a cult capping when those contracts come to.
Speaker Change: Thank you for watching!
Speaker Change: The next question is from Matt Nicklin with Deutsche Bank. Please go ahead.
Matt Nicklin: Hey guys, thanks for squeezing me in. Congrats on the quarter. I will keep it to one question, and I know that was specified up front. On the AI front, I know you mentioned there was about half of your bookings.
Speaker Change: Is there any contribution from enterprise or sovereign players, or is it primarily traditional hyperscalers and newer AI model builders? Thanks.
Speaker Change: First off, Matt, thank you for being a role follower. I really appreciate that. Chris, why don't you give a little percentage, 50% overall, of how much in the enterprise
Chris: and then give us a little more color on some of the AI demand that we've seized upon in the horror and also within the pipeline. Yeah, no, appreciate the question, Matt.
Speaker Change: There's a lot happening across AI, which I think is at the core of your question. So it's not just about the hyperscalers. And I think it's pretty important to understand that the demand is pretty broad across all of the segments. And one just to particular and highlight, and I don't speak about any customer specific details. But one of the things that we have great history with NVIDIA, right? And so we've been DGX certified, one of the leading providers, 30 plus data centers already pre-certified. But what's important to us is just yesterday we were able to host Jensen Wang, CEO of NVIDIA at a kickoff of the largest DGX supercomputer in Europe. And so it's just very exciting to support Novo Nordisk Foundation and that overall effort. And one of the things that I think is pretty interesting that highlights it is that Jensen quoted that it was the factory.
Speaker Change: Thank you for watching!
Speaker Change: The next question is from David Guarino with Green Street. Please go ahead.
David Guarino: Thanks. On your greater-than-1-megawatt new leasing in the Americas, rents on a gap basis were almost $2.25 a kilowatt this quarter.
David Guarino: I'm guessing Manassas and Chicago, you called out, were below that number. But does that suggest that hyperscale rental rates in Ashburn are pushing close to that 225 or maybe even 250 kilowatt number?
David Guarino: Just any color you could share on the relative spread between markets would be helpful.
Speaker Change: So, um...
Speaker Change: Ashburn, we have multiple customers.
Speaker Change: I call it phase rates in the cult of 175 or 200 or higher, just slightly over 200, and call it 8 megawatts or higher type of capacity blocks.
Speaker Change: Where we go from here, I'm not sure you're going to see this repeat itself immediately, but these other markets have been catching up and I think will continue to catch up.
Speaker Change: over time, certainly the comparables in the Chicago, the Dallas's that have always trailed the Ashburn, certainly trailed by the Santa Clara and now trailing an Ashburn. And I do think you're just going to see more and more markets coalesce at these higher rates over time.
Speaker Change: Thanks.
Speaker Change: The next question is from Nick Del Dio with Moffitt & Nathanson. Please go ahead.
Speaker Change: Hi, thanks for suiting me in. You've obviously got a ton of development work underway that's going to grow. Can you talk a little bit about the steps you're taking to ensure that you're able to deliver all that on time, on budget, without hiccups?
Speaker Change: Thank you for watching!
Speaker Change: Thanks, Nick.
Speaker Change: First off, it's really important that we just didn't call it
Speaker Change: See the day I didn't come in and just get out yesterday. This is the company...
Speaker Change: have been solely focused on
Speaker Change: on this business for 20 years now and we've been in these markets that I touched on we've been consistently operating, assembling land, building and delivering for our customers for many many years and ingrained in the communities with the utility providers.
Speaker Change: As we saw this opportunity evolve, I think scaling certainly came to mind, and that is what we did. That was scaling our supply chain.
Speaker Change: Our teams have great relationships with their vendors.
Speaker Change: and making sure that we are future-proofing those supply chains.
Speaker Change: and being very collaborative with our partners. If a utility needs some switchgear that we have in one market, we can bring it to another market. We're bringing those economies to scale.
Speaker Change: scaling our team as well operationally.
Speaker Change: We're delivering a lot of capacity for our customers, and we're investing in our systems and actually the training and development of our team along the way.
Speaker Change: And then lastly, the capital, massively capital intensive business and the great work of our organization over the last year to supplement
Speaker Change: our use of public equity with some great private investment partnerships.
Speaker Change: both on the stabilizing development.
Speaker Change: We see a really fantastic runway of capital-intensive growth here. If you're seeing the fruits of our labor in terms of the rates and the returns bearing fruit, we've seen this playing out for years to come, and we want to make sure that we have stable partners to help fund this business to generate long-term growth for our customers and our shareholders.
Speaker Change: That concludes the Q&A portion of today's call. I'd now like to turn the call back over to President and CEO Andy Power for his closing remarks. Andy, please go ahead.
Andy Power: Thank you. Bye.
Andy Power: Thank you, Gary.
Speaker Change: Digital Realty posted a remarkable quarter in 3Q reflecting the strong demand environment
Andy Power: and demonstrating how digital realty is meeting the challenge to support our customers around the world.
Andy Power: We set a number of records throughout our business, raised guidance, and positioned the company for accelerating growth in 2025 and beyond.
Andy Power: I am extremely proud of how our team executed to deliver this course results.
Andy Power: We are excited about the outlook for data-centered demand and our position in the market. But most importantly, we remain focused on the opportunity at hand.
Andy Power: I'd like to thank everyone for joining us today and I'd like to thank our dedicated and exceptional team at Digital Realty who keep the digital world turning. Thank you.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: [music]
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