Q4 2024 Digital Realty Trust Inc Earnings Call
Speaker Change: Good afternoon and welcome to the Digital Realty fourth quarter 2024 earnings call. Please note this event is being recorded.
Speaker Change: During today's presentation, all parties will be in listen-only mode. Following the presentation, we will conduct a question and answer session. Callers will be limited to one question, and we will aim to conclude at the top of the hour.
Speaker Change: 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.
Jordan Sadler: Thank you, Operator, and welcome, everyone, to Digital Realty's 4th Quarter 2024 Earnings Conference Call.
Speaker Change: Joining me on today's call are President and CEO Andy Power and CFO Matt Mercier.
Speaker Change: 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 will be making forward-looking statements, including guidance and underlying assumptions on today's call.
Speaker Change: 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.
Speaker Change: This call will contain certain non-GAAP financial information. Reconciliations to net income are included in the supplemental package purchased to the SEC and available on our website.
Before I turn the call over to Andy.
Speaker Change: Let me offer a few key takeaways from our fourth quarter results.
Speaker Change: First, we posted a second consecutive quarter of record leasing in our zero-to-one megawatt plus interconnection segment, contributing to a record $1 billion of total leasing completed in 2024.
Speaker Change: The zero-to-one megawatt product continues to be a significant focus for digital realty and we are encouraged by the growing strength and momentum of our execution.
Speaker Change: Second, in the quarter, we raised over $2 billion of new debt and equity capital, as well as over $500 million of net proceeds from asset sales and JV contributions, boosting our liquidity to over $6 billion and reducing our leverage to 4.8 times at year end.
Speaker Change: And third, we posted 6% core FFO for shared growth in the fourth quarter, foreshadowing our expectations for 2025. 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.
2024 was a breakout year for digital realty.
Speaker Change: As we capitalized on the surge in demand for data center infrastructure, positioned the company for the opportunity that lies ahead, and continue to execute on the key strategic priorities that we outlined on this call two years ago to enhance our long-term sustainable growth.
Speaker Change: Back then, we said that we would strengthen our customer value proposition, and we are doing just that.
Speaker Change: The evidence from 2024 lies in over $8 billion of bookings.
Speaker Change: A convincing new record for us, with a few seminal hyperscale transactions.
Speaker Change: and nearly $250 million from the zero to one megawatt plus interconnection category. Another record.
Speaker Change: Not to be outdone by new bookings, we also saw a record lease for renewal activity in 2024, which also approached $1 billion, with cash rents rolling up 9% on average.
Speaker Change: We added a record number of new logos during the year, nearly 600, while expanding our connectivity-rich solutions.
Speaker Change: We expanded the capacity of our total portfolio by over 200 megawatts in 2024, while scaling our development pipeline by over 75 percent.
Speaker Change: to seven plus billion of projects underway that are 70% pre-leased in order to serve our customers' growing data center needs.
Speaker Change: I also talked about innovating and integrating across our unmatched global portfolio.
and we've rolled out new products and services.
such as high-density Colo 2.0
Speaker Change: cooling solution to support densities of up to 150 kilowatts per rack.
Speaker Change: The expansion of service fabric to 38 metros around the world.
Speaker Change: and Private AI Exchange, an open platform available through service backlink which enables enterprises to seamlessly integrate their data with AI capabilities and other technology solutions.
Speaker Change: Customers can count on Digital Realty to meet all of their data center needs.
Speaker Change: Finally, we vow to diversify and bolster our capital sources to expand our capacity to support our customers' growing requirements, improve capital efficiency, and reduce our leverage while increasing the return to digital realty shareholders.
Speaker Change: We've done this by adding to the menu of debt and equity capital options.
Speaker Change: and partnering with a diverse and high-quality list of private capital providers.
Speaker Change: Some of these activities have resulted in short-term headwinds to our results.
Speaker Change: but all of them have enhanced our operating momentum and financial position, enabling us to accelerate our bottom line per share growth. But there is still tremendous opportunity to be seized upon as we lead this dynamic and increasingly global industry.
Speaker Change: Demand for data center capacity remains robust both for larger AI oriented capacity blocks and to support growth in cloud and digital transformation while data center supply remains tight. Highlights for the fourth quarter include
Speaker Change: $100 million of new leases signed at Digital Realty Share, driven by a 16% sequential uplift in the 0-1 megawatt plus interconnection bookings, for a new record of $76 million.
Speaker Change: Unsurprisingly, greater-than-a-megawatt bookings dipped sequentially following last quarter's blowout, though the pipeline remained strong. Looking inside our zero-to-one-megawatt bookings, we experienced strong and balanced growth in both the Americas and in EMEA.
Both regions achieved new records in the quarter.
Speaker Change: We continue to see a growing healthy mix of various size deployments within our 0 to 1 megawatt business, reflecting how our full-spectrum strategy enabled digital to provide solutions for large and small deployments, along with everything in between.
Speaker Change: Some customers might simply need a network node to utilize that robust connectivity in a central city hub, while smaller enterprises might choose to locate a some 1-megawatt deployment for compute or storage requirements in a facility outside of the city center.
Speaker Change: Interconnection bookings were also strong at 15 million, nearly matching last quarter's record. Finally, the strength and breadth of data center demand and the progress of our go-to-market initiatives are also reflected in our addition of a record 166 new logos.
Speaker Change: hyperscalers drove a portion of this activity with our largest global customers driving record export activity to other regions around the world. AMEA exports were again at record levels with heightened transatlantic bookings with deployments landing in the Americas.
Speaker Change: Our record bookings in 2024 pushed our backlog of book-but-not-yet-billed leases up to roughly $800 million at year-end, providing strong revenue visibility for this year and beyond.
Speaker Change: As Jordan mentioned, we also continue to bolster our balance sheet and diversify our capital sources during the fourth quarter with support from asset sales, hyperscale development joint ventures, and highly successful debt and equity raises.
Speaker Change: These activities helped to push leverage below five times. Matt will provide more details on these activities in just a few minutes. Over the past few weeks, we have seen commitments for data center spending continue to grow.
Speaker Change: The new administration announced a $500 billion effort to support American-based AI development, and others around the world are following suit.
Speaker Change: Earlier this week I was pleased to join French President Emmanuel Macron in Paris along with US Vice President J.D. Vance and many other heads of state and industry leaders for France's AI Action Summit.
Speaker Change: which was geared toward convening the international community to discuss the use of AI for the common good. As I highlighted two years ago on my first earnings call as CEO, technology begets technology.
Speaker Change: In the past, innovation has typically led to greater efficiencies that ultimately spur incremental demand.
Speaker Change: At the time, we noted that we were at the precipice of the next wave of innovation that we thought might drive the next decade of data center demand.
Speaker Change: In 2024, we signed data center leases that were 80% higher than in the next highest year, driven by steady growth in cloud and digital transformation, as well as a surge in AI-related use cases.
Speaker Change: Today, we see a similar dynamic playing out to what we've witnessed in the past.
Speaker Change: as the race renovation remains in full effect while recent efficiency gains appears poised to facilitate the proliferation of AI to the enterprise.
Speaker Change: We heard from Hyperscales earlier this reporting season, and none seemed ready to moderate their pace of investment.
Speaker Change: as data center infrastructure remains a critical resource to support AI innovation. Within our sales organization, we continue to see robust demand for data center capacity, including large capacity blocks driven by digital transformation, cloud, and AI.
Speaker Change: AI innovation is occurring on both the hardware and software side, and Digital Realty is pleased to support and enable this innovation.
Speaker Change: One of our wins this quarter was Ted Thornton, a developer of scalable AI accelerators for both cloud and edge computing.
Speaker Change: During the fourth quarter, Testora leveraged Platform Digital to host their R&D lab in a 2-megawatt high-density co-location suite in a new metro that addresses their stringent engineering and time-to-market requirements.
Speaker Change: As they develop their leading edge chips, Testora works with a number of partners.
Speaker Change: Consistent with our meeting place strategy, they improve their efficiency by interconnecting with their partners on platform digital.
Speaker Change: So, together, we partnered to deploy an AI-hosted desktop solution for AI model development and testing that included another Tenstor partner.
resulting in another new logo to Platform Digital.
Speaker Change: That's an example of the network effect of being the meeting place.
Speaker Change: Other key wins in the quarter include a Global 2000 International Banking Group expanding on platform digital to improve cloud connectivity and localizing data for hybrid cloud.
Speaker Change: A world-renowned research and cultural institution was brought to us by a partner as they upgrade their HPC infrastructure, supporting biology and physics research workloads by taking advantage of Platform Digital's high-density co-location capabilities.
Speaker Change: And the Global 2000 Insurance and Reinsurance provider is expanding their presence on platform digital to take advantage of robust networks and cloud ecosystems.
Speaker Change: Before turning it over to Matt, I'd like to touch on our global ESG progress.
Speaker Change: During the fourth quarter, CARICO, our South African affiliate, started construction on a 120-megawatt utility-scale solar power plant, the first time a data center operator will own and utilize a solar power plant to support its data center load.
Speaker Change: The plant is expected to begin generating power in late 2026.
Speaker Change: This project will upgrade existing transmission infrastructure and enable the plant to add renewable energy into the grid and to be distributed to Terracos campuses.
Speaker Change: and Kevin Terrico on course to meet its clean energy goals. In Chicago, we signed community solar agreements for a share of three separate solar projects totaling nearly 20 megawatts under the Illinois SHINES program.
Speaker Change: This new and local clean energy supply for our data centers in Chicago supports our 100% clean and renewable energy coverage there.
Speaker Change: Both actions in the fourth quarter add to Digital Royalty's leadership and commitment to renewable energy. We now have more than 150 data centers around the world that are matched with 100% renewable electricity.
Speaker Change: with more than 125 gigawatts of contracted solar and wind capacity.
Speaker Change: But sustainability is not just about renewable energy. We are also excited about our collaboration with Ecolab to deploy an AI-driven water conservation solution in 35 of our U.S. data centers to further enhance our water use efficiency.
Speaker Change: We expect this solution to reduce water use by up to 15% at those sites, while also extending the life of our equipment.
Speaker Change: Finally, Digital Realty was awarded NARIT's Leader in the Light Award for the eighth consecutive year. While our VP of Sustainability, Erin Binkley, will serve as Chair of NARIT's Real Estate Sustainability Council in 2025. Big congratulations to Erin.
Speaker Change: And with that, I'm pleased to turn the call over to our CFO, Matt Mercier. Thank you, Andy. As Andy noted earlier, 2024 was a transformative year for digital realty.
Matt Mercier: Over the past 12 months, we posted record leasing results and increased the capacity under development by over 75%, while at the same time reducing our leverage from 6.2 times to 4.8 times.
Matt Mercier: This achievement was a direct result of our strategy to bolster and diversify our capital sources.
Matt Mercier: By recycling capital out of stabilized, slower-growth hyperscale and non-core assets and bringing in private capital to support hyperscale development,
Matt Mercier: combined with the support of our public shareholders, we were able to simultaneously accomplish seemingly incompatible goals.
Matt Mercier: We dramatically ramped development to better serve the needs of our customers while de-leveraging the balance sheet below our long-term leverage target and, by the fourth quarter, meaningfully accelerating our bottom-line growth.
Matt Mercier: As we sit here today, with more than $6 billion of liquidity, below target leverage, and a broad and diverse array of capital sources, we are positioned to fund the investments that are underway and the attractive opportunities that we continue to see ahead.
Matt Mercier: Like on their challenges, this achievement took a tremendous amount of teamwork. So I want to thank my fellow digital realty teammates for their efforts in 2024.
Matt Mercier: Let's jump into fourth quarter results. We signed 100 million of new leases in the fourth quarter, led by a record 76 million of bookings in our 01 megawatt plus interconnection segment, which exceeded the prior quarter's record by 16%.
Matt Mercier: We also signed $23 million within the greater than a megawatt category.
Matt Mercier: which was mostly weighted toward EMEA and APAC following last quarter's outsized string in the Americas.
Matt Mercier: Pricing in our zero-to-one megawatt category was strong, led by transactions in APAC and Americas, while pricing in the greater-than-a-megawatt category reflected the modest sample size and market mix.
Matt Mercier: Importantly, nearly 60% of leases signed include annual rent escalators of 4% or greater, or are linked to CPI, which bolsters our objective to drive better long-term sustainable growth.
Matt Mercier: Looking ahead, of the nearly 400 million backlog that is scheduled to commence in 2025, about two-thirds is slated to commence by mid-year, with the balance starting in the second half.
Matt Mercier: Looking further out, we already have over $300 million scheduled to commence in 2026 and another $100 million slated to commence in 2027, setting a strong foundation for multi-year growth.
Matt Mercier: During the quarter, we signed $250 million of renewal leases and a blended 4.7% increase on a cash basis.
Matt Mercier: Renewals were fairly straightforward and largely consistent with the original four to six percent uplift in cash releasing spread in our original 2024 guidance provided one year ago.
For full year 2024, releasing spreads were 9%.
Matt Mercier: aided by package deals that we have highlighted on prior calls.
Matt Mercier: Excluding those deals, our full-year renewal spreads were still a healthy 5.2%, which is consistent with the guidance that we are issuing for 2025.
Matt Mercier: Breaking down renewals by product category, cash renewal spreads in the 0.1 megawatt segment were a healthy 4.9% in the fourth quarter, while releasing spreads in the greater than a megawatt segment were up by 3.7%.
For the quarter, churn remained well controlled at 2%.
Matt Mercier: In terms of earnings, we reported fourth quarter core FFO of $1.73 per share, up 6.1% year-over-year, reflecting continued healthy growth in revenue and adjusted EBITDA.
Matt Mercier: Data center revenue growth accelerated to 8% year-over-year as the combination of strong renewal spreads, rent escalators, and new lease commencements more than offset the drag associated with more than $1 billion of dispositions throughout 2024.
Matt Mercier: Adjusted EBITDA increased by 7.4% year-over-year, broadly consistent with our growth and data center revenues.
Matt Mercier: Normalized total revenue and adjusted EBITDA growth were 10% and 13% respectively in full year 2024.
Matt Mercier: Same capital, cash and LI growth increased by 1.4% year-over-year in the fourth quarter as two and a half percent growth of data center revenue was partially offset by higher property operating costs in the quarter.
Matt Mercier: For all of 2024, saved capital cash NOI increased by 2.8%, which was approximately 200 basis points higher when normalized for the outsized utility margin realized in 2023.
Matt Mercier: Moving on to our investment activity. During 2024, we spent approximately $3 billion on development CapEx on a gross basis.
Matt Mercier: In the fourth quarter, given the strong demand for data center capacity, we backfilled all of our deliveries with new starts, ending the year with the same 644 megawatts under construction.
Matt Mercier: More specifically, we delivered 42 megawatts of new capacity in the quarter, while we added another 42 megawatts of new starts.
Matt Mercier: The overall pipeline is 70% pre-leased, with average expected yields edging up to 12.1%.
Matt Mercier: Consistent with the third quarter's record bookings, almost all the development underway in the Americas today is pre-leased, with expected stabilized yields ticking up slightly to 13.7 percent.
Matt Mercier: Some development capacity remains available to both EMEA and APAC, with both currently expecting double-digit stabilized deals.
Matt Mercier: Turning to the balance sheet, we continue to strengthen our balance sheet in the fourth quarter, driving leverage below our long-term target and substantially enhancing our liquidity.
Matt Mercier: with nearly $3 billion of fresh capital raised since the end of September.
Matt Mercier: On the debt side, in November we successfully issued $1.15 billion of 1.875% five-year exchangeable notes and we repaid the remaining $500 million outstanding on our U.S. dollar term loan.
Matt Mercier: We also raised over $900 million of equity under our prior ATM program during the fourth quarter.
Matt Mercier: In January, we issued another €850 million of 3.875% notes during 2035, and then repaid €400 million in gilts at 4.25%.
Matt Mercier: This leaves us with only 650 million euros in maturing debt through the rest of 2025.
Matt Mercier: Our net debt to adjusted EBITDA ratio fell to 4.8 times by year-end 2024 and today we have over $6 billion of total liquidity available.
Matt Mercier: Moving on to our debt profile, at year-end, our weighted average debt maturity was over four years, and our weighted average interest rate ticked down to 2.7 percent.
Matt Mercier: Approximately 83% of our debt is non-US dollar denominated, reflecting the growth of our global platform and our FX hedging strategy.
Matt Mercier: Approximately 91% of our net debt is fixed rate and 96% of our debt is unsecured, providing ample flexibility for capital recycling.
Let me conclude with our guides.
We are establishing our core FFO guidance range.
Matt Mercier: for the full year 2025 at $7.05 to $7.15 per share on a constant currency basis.
along with
A substantial reduction in our overall leverage.
reflecting the strong underlying fundamentals of our business.
Matt Mercier: Same capital cash NOI is expected to grow three and a half to four and a half percent on a constant currency basis.
Matt Mercier: As for other guidance items, we expect a positive operating environment for data centers to continue.
Matt Mercier: Cash renewals are again expected to be up approximately four to six percent.
Matt Mercier: and Upside is partially mitigated by relatively high expiring rates and are greater than a megawatt portfolio.
Occupancy should improve by another 100 to 200 basis points.
Matt Mercier: CapEx net of partner contributions are expected to rise to between three and three and a half billion while gross CapEx will reach approximately four and a half billion with development yields expected to remain in double digits.
And we will also continue to recycle capital.
Matt Mercier: with $500 million to $1 billion of dispositions in JV capital expected this year.
Matt Mercier: This concludes our prepared remarks and now we will be pleased to take your questions.
Operator, would you please begin the Q&A
We will now begin the question and answer session.
Matt Mercier: In the interest of time and to allow a larger number of people to ask questions, callers will be limited to one question.
Matt Mercier: To ask a question, you may press star then 1 on your telephone keypad.
Matt Mercier: If you are using a speakerphone, please pick up your handset before pressing the key.
To withdraw your question, please press star then 2.
Matt Mercier: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Our first question today is from David Barden with Bank of America. Please go ahead.
Hey guys, thank you so much. I really appreciate it.
Speaker Change: I guess I'd like to start, maybe if Chris is available, to kind of get...
Chris, your perspective.
Speaker Change: on how, you know, again, we should be talking about deep-seek and a year.
Speaker Change: You referenced this roughly in some of the prepared remarks at the beginning.
Speaker Change: And I guess it would just be great to hear kind of how your conversations with the hyperscalers subsequent to their reporting and they're growing their CapEx outlooks.
Speaker Change: how this all fits together to make the outlook for digital realty better as opposed to maybe more concerning. Thank you.
Speaker Change: Thanks, Dave. I'll hand it to Chris in a second to talk through some of those elements, but I think you hit the nail on the head. We just, on the heels of the Deep Sea News, had the opportunity to listen from several of our top customers.
Yes, this is a great accomplishment.
Chris Sharp: This is a new player in the arena driving more efficiency to the model, but that doesn't take us off the course of the tremendous investment our top customers need to make.
Speaker Change: on building out their AI infrastructure. And I think the CapEx we tallied up is called more than $300 billion.
Speaker Change: compounding a tremendous rate year over year for now several years. And so we've heard that publicly on earnings calls like this and we've obviously heard it from our team who've had a lot of contact with our customers over the last several weeks pre-deep-seek certainly and post-deep-seek.
Speaker Change: So I don't think there's a wavering in the course here of overall demand.
coming today as well.
Speaker Change: But Chris, why don't you expand upon some more of the intricacies? Yeah, I appreciate the question, David. Essentially, I agree with you that tokens, watts, dollars is a good way and a good framework to look at the overall industry. I think we're going to continue to see AI being democratized, not only through software models such as DeepSeek, in which they represented the efficiencies.
Speaker Change: but also with like GPUs and there's going to be step functions that we'll continue to see in the industry, but you know this shift will drive higher and higher AI utilization to more and more customers, ultimately creating more and more demand for our facilities.
Speaker Change: And I would emphasize that a lot of our facilities, as we've talked about in the past, are AI-ready with HD-COLO and some of the elements that Andy mentioned in his prepared remarks.
Speaker Change: These will continue to, you know, be in a place where we can continue to support as inference comes to market or even private AI. And essentially at the end of the day, we believe Jevon's paradox will outpace Moore's law essentially.
Speaker Change: The next question is from Richard Ko with J.P. Morgan. Please go ahead.
Richard Ko: Hi, I wanted to ask about the cash renewal outlook. It was four to six percent for this year. That's where you started off last year, but you ended up at nine. Could we see a similar
Richard Ko: result or would that take more package deals to get there?
Richard Ko: Yeah, thanks for the question. So, as you noted, last year we started out our guidance, we were at that four to six percent, as you noted. We're in a similar
Richard Ko: position here for 2025 and our guidance today, and the reason we outperformed at 24, getting to that 9%, was we had package deals that we were able to pull forward from out-of-year expirations into 24.
Richard Ko: Our guidance does not assume that there's any of that within our 4-6% number for 2025.
Richard Ko: 24, you know, you're still seeing somewhat of an elevated rates, expiring rates in 25, so we're still seeing positive mark-to-markets there, but you're going to be seeing an improving mark-to-market environment as you go out into outer years.
Speaker Change: The next question is from Irvin Liu with Evercore ISI. Please go ahead.
Irvin Liu: Hi, thank you for the question. So I wanted to ask about your...
Your bookings expectation is looking ahead.
Irvin Liu: And I understand that bookings by nature is a very lumpy metric.
Irvin Liu: and that's not something that you necessarily, or you guide to, but you did do $1 billion this year or a little bit above that.
Thank you.
Thanks, Irvin.
Irvin Liu: I think you really got to divide these into the larger capacity blocks and everything else categories.
https://TheBusinessProfessor.com
Irvin Liu: We obviously got to a record billion dollars in new signs last year, which was close to two times our prior record.
Irvin Liu: that has really created a development pipeline now that calls for portability at 7% reduced at just over 12 ROI.
Irvin Liu: And you can see from our bookings backlog, it's starting to roll out in 2025, but then a lot more of it starts hitting our P&L in 2026 and 48 contributions coming thereafter.
Irvin Liu: We are on the larger capacity blocks. When you do so much leasing, the next batch of your leasing kind of goes into deliveries that are just further out.
Irvin Liu: and you can see that our unleased development pipeline, the megawatts in there, we call it about 40%, that is COLO megawatts, so they're not gonna get pre-leased all that far in advance.
Irvin Liu: We have 500 megawatts of shell, and they're already built and ready, which is fantastic, and that will be the next batch. But you can see our delivery schedule, they're not going to deliver until the end of the year, or into 2026.
Irvin Liu: So, we're not necessarily in a panicky rush to fill those. We need to make sure that they're procuring those to the right customers and the right outcomes to build thriving, diverse campuses.
Irvin Liu: help our customers wherever possible, and the sooner they deliver, the more precious they are to those customers.
Meanwhile, on the other end of the curve...
Irvin Liu: In our 0-1 Megawatt Interconnection category, we were delighted to put up a record in 3Q. We put up another record on 76 million in 4Q that was up 16% quarter-to-quarter, contributing to a record full year.
Irvin Liu: and that is a place where we have ample capacity to keep selling into and put incremental records on in 2025 as well.
Speaker Change: The next question is from Jonathan Atkin with RBC. Please go ahead.
Jonathan Atkin: Thanks. So you've been kind of messaging last year, the guide that you gave today, kind of in the mid-single digits, and you also had indicated that you do expect this trend to accelerate. So as we look forward, you know, beyond this year,
Speaker Change: you know, what sorts of, you know, acceleration curves should we accelerate, should we think about when it comes to core FFO per share, given the conversion of your significant, you know, bookings to billings over the next several quarters? Thanks.
Speaker Change: Thanks, John. I mean, I'll turn to Matt to give you much of the puzzle pieces for the call thereafter 2025.
Speaker Change: But we stand by what we said earlier in the year, and I think we see all that in the guidance here, which is called normalized growth at the top line, the EBITDA line in double digits.
Speaker Change: Floating down to a bottom line, mid-single digits, or even better, on a cost-to-currency basis. And Matt can give you some of the possible pieces of where we go from there from 2025 into 2026 with acceleration.
Speaker Change: We're delivering on the mid-single-digits growth in 2025, and we have a view toward, as we've noted before, continued improvement and growth in years beyond. And I think a lot of what we did in 2024 has really set the stage for that improving growth.
Speaker Change: When you consider we've got the inventory to do it, we've got 200 megawatts available under development today with 500 megawatts of shell behind it.
Speaker Change: And as I noted on a prior question, we've got an improving market-to-market outlook.
As we look ahead towards expiring leases, which
Speaker Change: is part of what you're seeing and also improving same store growth as well. So on top of that, we put ourselves in a position where we've got 6 billion of liquidity and below leverage targets. So I think all that puts together and then the mixing bowl to put us in a great position to continue to build on what has been improving bottom line growth and...
2425 and beyond.
Michael Rollins: The next question is from Michael Rollins with Citi. Please go ahead.
Michael Rollins: Thanks and good afternoon. Two topics. First, just digging a little bit more into the under one megawatt business. When you look at the improving performance and the back-to-back records that you've recorded on leasing, do you see that as...
A rising tide that's changing the course of history.
Michael Rollins: when you look at, is this a guy or a women real estate, just lifting all boats, including yours? Or do you see digital taking share and if you can expand on the characteristics within each of those? And then, just secondly, on the net debt leverage coming down as you look at the incremental capacity that you have, is this a bigger information?
Michael Rollins: solely directed at organic development opportunities, or are you preserving some flexibility for some potential inorganic activity at some point? Thanks.
Michael Rollins: In fact, Mike, so I'll hand it over to Collin, but maybe just in reverse order.
Michael Rollins: We are very focused on using our now very ample liquidity and strong balance sheet as well as numerous levers to continue to fund organic development activities.
So that is the main priority.
Michael Rollins: Broad based, we had worked on the number one quarter for Americas and EMEA in addition to a number one quarter overall
Michael Rollins: It had great diversity of wins on different size breaks. The price action was strong on the new signings. The price action was also strong, almost 5% on the renewals in that category.
Speaker Change: I'll let Collin speak a little bit about the diversity, the demand, and some of the challenges as well. Thanks, Michael, for the question and appreciate the comments on the corridor overall. Yeah, we were really pleased on the zero to one megawatt segment. That's really.
Speaker Change: I feel like it's manifesting well our strategy and how it comes off as the full spectrum of offerings to our clients. And I think our clients are really recognizing global reach and core markets and large continuous blocks really matter.
Speaker Change: And we saw that diversity of demand, you know, across the board. This was one of the larger, large enterprise segments of the business. We've seen over 50% of the 0 to 1 megawatt bookings came out of that segment. We also had a really strong service provider.
Speaker Change: So again, those two customer types play off each other so enterprises attract service providers and vice-versa. And we're also pleased with our focus on the channel side. So 2024 is the landmark year for channel and we expect that to continue into the future.
Speaker Change: The next question is from Matt Nicknam with Deutsche Bank. Please go ahead.
Matt Nicknam: Hey guys, thanks for taking the question. It's more of a clarification. As you think about growth for next year, you talked about sort of organic growth.
Speaker Change: 10% plus. I'm just wondering maybe for Matt if we can think through what's embedded in the 5.8 to 5.9 around FX headwinds, potentially lower utility reimbursements, and any other factors that may be mitigating some of the reported growth next year. Thanks.
Speaker Change: Yeah, so in terms of, I mean, you saw what we put in terms of our
Speaker Change: So, we're looking at, from an FX perspective, we're looking at roughly 200 basis points of headwind, probably from a P&L perspective. That winds its way down to a little less than a percent, down to core FFO. So that all leads into, I think what Andy mentioned, in terms of when you're looking at top line revenue.
Speaker Change: down to Adjusted EBITDA, you know, we're really looking at in 25, 10 plus percent on a normalized basis.
Speaker Change: And so that normalized basis is really comprised of two main elements.
Matthew Mercier, Jordan Sadler
Speaker Change: The next question is from Ari Klein with VMO. Please go ahead.
Ari Klein: Thank you. There's been a lot of talk within the industry around imprints, particularly post-deep-seek, and I was hoping maybe you can describe how you see that potential demand around imprints evolving.
Ari Klein: And whether you'd expect it to be more beneficial to your zero to one megawatt business or greater than one megawatt business. Thanks
Ari Klein: Thanks, Aria. I'll hand it back to Chris. I think that's a stat we didn't put in the repair remarks.
We forgot to call out, I think it was...
Speaker Change: Partly, what was it, 38% of the megawatts we saw during the quarter were AI-related.
Ari Klein: and obviously we had a very much enterprise-heavy quarter given the record contributions in the 0.1 megawatt interconnection category.
So certainly starting to see more fair share of
Chris Sharp: AI coming to the core markets, coming to enterprises, certainly come to inference. But I believe we're still at the tip of an iceberg here, and I'll let Chris expand upon this. Yeah, definitely appreciate the question, Ari.
Chris Sharp: that these will be larger capacity blocks that may be larger than a megawatt, but just to kind of press upon...
Chris Sharp: the demands of inference, it will still have more and more proximity to the end consumer. I think that's the important piece that we always look at and where we apply our capital is that long-term durability of where that inference matures, because that's where the actual consumption or monetization of the AI will happen, and that's why we're very excited about how that's going to be maturing over time. I would also be remiss not to mention the other element of this that we're very excited about is private AI.
Chris Sharp: Right, so inference, you'll see that coming from a lot of the hyperscalers bringing their capabilities to market. But then on the averse of that, you're going to see a lot of private AI capabilities coming in where that, too, has an inference element to it. But we're very excited about our AI-ready capabilities in our facilities to support that broad spectrum of not only capacity blocks, but power density domains as well.
David Guarino: The next question is from David Guarino with Green Street. Please go ahead.
David Guarino: Thanks. I want to go back to that less-than-one-megawatt new leasing activity. Can you comment maybe on the majority of the deals signed? Were those in legacy assets, which will hopefully provide a much-needed boost to same-store occupancy when the leases commence? Or were the majority of those deals signed in maybe the newer construction assets that are better catered towards the current deployment requirements today?
Speaker Change: I mean, it's pretty broad-based. I mean, you look at the top markets for Northern Virginia, London, Los Angeles, Frankfurt, Chicago, globally. I can tell you...
Los Angeles and
Speaker Change: Richard D. Cermak, that's 600 West 7th, that's even El Segundo, our whole London portfolio, whether in the Docklands or Woking, we've had much more enterprise play there. We've not built a brand new asset in a long, long time.
probably until I started Digital Coast ten years ago.
Speaker Change: So, these are COLO, obviously, oriented use cases across numerous business segments, financial services, insurance, healthcare, you can quote a few.
along the way.
Thank you.
Speaker Change: So, and when I look at the overall quantity of signings, of signings that went into called first generation or second generation, that has been pretty consistent. It's a little higher to round out the year. You did bring up the point with the Safe Starox. You can see.
We did almost have...
Speaker Change: a little self-inflicted wound there with, I think, one of the remnants of a six-terror transaction converted from 100% of these PEV suite to...
Speaker Change: We have vacancies, not anywhere near full customers based there, but that creates an opportunity. And I know we are actively coding to refill that capacity obviously a much better economic outcome, along with biomass. Those are our core will providers and enterprise and customer base. However I think it is important for us toolve and even if you are deciding to add corporate government developments in future,
Speaker Change: The next question is from Frank Louthan with Raymond James. Please go ahead.
Speaker Change: Sorry about that. Thank you. Can you give us an idea going forward, sort of what percentage of your facilities you're going to set aside for sort of less than a megawatt? You know, where do you see that going? And within that less than a megawatt, you know, what percentage of that floor space are you building that is for high power density compute versus just regular machines? Thanks.
Speaker Change: Thanks, Frank. I mean, not just very recently, but for a long time now, the last couple of years, we have been prioritizing making sure our customers see enterprise colo capabilities.
Speaker Change: in network-oriented or private cloud or high-performance computing pushing the power densities have ample runway to grow within our portfolio.
Speaker Change: There are certain places that are clearly network-oriented, like 56 Marietta in Atlanta, for example. But on our campuses, we're building with the modularity and flexibility to span their power density needs. And we're often now moving towards...
Speaker Change: places where we can get this scaled and build a sizable building given how much success we have the category various markets
to have dedicated for those customers.
Speaker Change: and have a little bit less mix and matching within a building. So that's a priority. We've been doing more of that. You're going to continue to see us doing more of that. And that's how we're going to get this growth. We've been putting up 22-ish percent growth in that sign-in category just this last year and looking for further acceleration next year.
Speaker Change: The next question is from Jim Schneider with Goldman Sachs. Please go ahead.
Jim Schneider: Good afternoon. Thanks for taking my question. Andy, I think at the top of the script you mentioned the Stargate announcement. Some of your customers are directly or indirectly involved in that announcement, some of your largest customers in fact. So what conversations have you had with some of these customers since the announcement about their interest in sort of maintaining or expanding their relationship with digital realty in the future? And then maybe you can make a broader comment on
Jim Schneider: HyperSkillers and their willingness to look out even further into the future in terms of pre-leasing capacity. Do you think that's kind of on the margin a little bit greater or lesser than it was maybe three months ago? Thank you.
Thank you. Bye-bye.
Thanks, Jim.
The
Jim Schneider: The Stargate announcement, I would say twofold, really was a partial announcement of activity that transpired in the corners a month ago, and also I put it in the category of conviction from top customers to continue to deploy significant dollars towards infrastructure. So I don't think that some of that was transparent while we were signing with some of our biggest customers.
Jim Schneider: of the three quarters where we had record signings during the year, we had a different
Jim Schneider: And based on where I'm seeing things go this year, I think we could add a different customer to be the lead horse in any given quarter as we work into 2025.
I will say, at the same time,
Jim Schneider: The size of this demand is getting to a place where the spigot of demand is not running at full blast.
Jim Schneider: 24 hours a day, 7 days a week, 365 days a year. These packages with more expensive GPUs and infrastructure or larger capacity blocks are going up to the highest level of the big company's boards for approval and they don't do that every other week.
Jim Schneider: So, while the capacity we see continuing up in the right, there'll certainly be a week or two, a month, we'll see a lull, and then it came back, which is...
Jim Schneider: was exactly what we saw transpire in 2024. And I think we're very well positioned to obviously support those customers in some of the large capacity blocks, which you can see.
Jim Schneider: We have delivering caught significant phase capacity in our development pipeline, 500 megawatts of shell, and we just grossed up our land holdings with some near-term delivery opportunities to about over 3 gigawatts of growth.
Eric Lubchow: The next question is from Eric Lubchow with Wells Fargo. Please go ahead.
Eric Lubchow: I appreciate it. I just wanted to touch on the capital recycling or JV picture for the year. I know you talked about
Eric Lubchow: maybe touch a little bit on the potential mix of outright dispositions, JVs, and then new programmatic fund-like structures that you've alluded to in the past, how we think about the mix of that this year versus using other sources of capital like issuing equity. Thank you.
Speaker Change: Thanks, Eric. Why don't I, Matt, give you a quick breakdown of the numbers and then flip it over to Greg to give you a quick highlight of where we are on our strategic capital initiatives.
Yeah, thanks, Eric.
Speaker Change: I mean, simplistically, we're looking at, if you just break it down, we're looking at roughly 300 to 400 million of that is going to be associated with
Speaker Change: you know, continued efforts around our non-core asset disposition. And the remainder of that will be targeted towards, you know, the continued expansion of our private capital efforts. And for that, maybe I'll turn it over to Greg to give a little bit more color.
Greg Wright: Thanks, Matt. Thanks, Eric. Look, I think there's a couple things. One is...
Greg Wright: You know, Andy and Matt have told investors for some time now, as we look to diversify and bolster our capital sources,
as you mentioned.
Greg Wright: You know, a fund is clearly the next logical step in this progression. I think all we'd say at this point is it's going very well. And as we continue to make progress and have more to report, we look forward to talking to you about it. But again, we think it's...
Greg Wright: I think it is the next logical step, and I like the flexibility associated with it.
Greg Wright: The next question is from Eric Rasmussen with Stifel. Please go ahead.
Yeah, thanks for taking the question.
Greg Wright: So, you laid out mid-single-digit core FFO constant currency growth in 2025 and it sounds like there's a lot of momentum in the business for acceleration beyond that. But what are some of the factors that maybe could derail this thesis as you think about some of the things that might impact the business? Thanks.
Thank you. Bye. Bye.
If you look at our components here...
Most of the big signings are not flow-through to 2025.
Greg Wright: So any big science we do from here, which we intend to be doing, are really building our growth in 2026 and 2027.
Greg Wright: So, our near-term execution opportunity goes back to what we've been very successful recently and need to continue in the zero-to-one megawatt interconnection.
Greg Wright: filling that vacancy in our portfolio that does not have that pre-lease window of that scale.
Greg Wright: continue to execute our commercialization. We've delivered tremendous amount of value to our customers and obviously we need to make sure the commercials are adequately rewarding what you see through our cash market markets.
Greg Wright: continue to expand the value of property with our connection signings, which we had a strong fourth quarter, coming off a record third quarter, but continue on that.
Greg Wright: And then obviously, making sure we use these tools that we built over the last
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in terms of continuing to be able to spend.
Greg Wright: And they're accelerating $4.5 billion of gross CapEx, but use our own liquidity, retain capital, and obviously development private capital partnerships as well to make sure this all flows to the bottom line like we were guiding in 2025 and looking to do better than that in 2026.
Speaker Change: The next question is from Vikram Malhotra with Mizuho. Please go ahead.
Vikram Malhotra: evening. Thanks for the question. I guess I just want to clarify two things you mentioned.
Vikram Malhotra: So, one is just the rush or the velocity of deals.
Vikram Malhotra: that, you know, tenants are wanting to sign and you're wanting to engage in, you know, sounds like in the less than one megawatt segment, there's like a, I don't want to call it a renewed rush, but certainly an upward trajectory. And hopefully that continues. But in the larger than one megawatt, it's very lumpy, like you said. And I'm just wondering the combination of those two
Vikram Malhotra: Does that put like just hypothetically the next 2-3 years in a different zip code of the last year and size of your bookings? I'm not looking for a number. I'm just trying to think over the next 3 years versus the last, call it 7 years.
Vikram Malhotra: And then same question on pricing power. With all this velocity, can you expand a little bit on how you're viewing your own pricing power going forward? Thanks.
Vikram Malhotra: Thank you, Victor. A lot to unpack in there. Let me try to be succinct. Zero and MegaWatt Enterprise co-location and connection. We see a growing market where we're taking more and more share.
Vikram Malhotra: and we believe we'll continue to do that with a very compelling value proposition.
Vikram Malhotra: We have the Power Densities and Runway for Growth for our customers. Come in and expand with us.
Vikram Malhotra: across 50 metropolitan areas and the connectivity solutions for today and tomorrow for these customers. So I think you're going to continue to see that called stair-stepping of improvement.
Vikram Malhotra: well, walking and tackling in a positive robust backdrop, even before I think the days of efforts become tremendously robust with enterprises.
Vikram Malhotra: The other megawatt is certainly going to be lumpy, because when you sign a 100 megawatt deal, a 50 megawatt deal, in one quarter versus another, it swings it. The point I was just trying to make is...
Vikram Malhotra: Based on the deliveries of our inventory, timing, there isn't a panicky rush to trade off volume for commercials, right? So we're trying to curate to the right customers and the right financial outcomes for those prices and capacity blocks, because we've seen, as time goes by, the sooner the capacity delivers, the more valuable it becomes and helpful to those customers.
Vikram Malhotra: On the pricing power, I don't have a lot of data points given the composition of grids we may want to sign in the quarter, but I can tell you in our most large market we're still
Vikram Malhotra: call it 200-ish type rates for what we view is incredibly valuable to these customers. In the smaller 01 category, I think you can see our cash mark-to-marks are close to just under 5%, and our pricings help in there pretty firmly, on the backs of a big step up in volume in that category.
Vikram Malhotra: The next question is from Simon Flannery with Morgan Stanley. Please go ahead.
Thank you very much. Good evening.
Vikram Malhotra: I wonder if you could just talk a little bit on the supply chain side of things. What's the latest situation with getting power to your new developments? Any other items in the supply chain? Are you generally able to hit your timelines, hit your cost per megawatts, and any color around that would be great.
Speaker Change: Thank you, Simon. I mean, the supply chain, in my opinion, first and foremost with power, remains incredibly tight and everybody wants something sooner than it can usually get delivered in almost all markets.
Thank you.
Speaker Change: We are using our relationships, we're using our scale, we're being creative to find out ways to accelerate solutions for those customers wherever possible. But my sense is that more power will be delivered to where we have.
Thank you everyone for joining us today.
Speaker Change: which kind of ties, first ties back into, I mean, we have today owned.
Speaker Change: and own 3.5 gigawatts or 3.6 gigawatts of land and shell.
Speaker Change: We're not going to look for that dilute. That is on our balance sheet, much of that's been on our balance sheet for quite a while now. It's not like we just tied it up and have to work a super front-end permitting or getting pad ready.
Speaker Change: which puts us in a great position to make sure that we're able to keep delivering. Our supply chain is, I think, with the vendors, it's on the tight side as well. And we'll see what happens when.
Speaker Change: The talk of tariffs comes to data center land in terms of impact, but our current read of that outlook is we look like we're pretty well insulated, given how we've gone ahead in terms of supply chain procurement.
Speaker Change: The next question is from Nick Del Deo with Moffett Nathanson. Please go ahead.
Hey, thanks for taking my question.
Speaker Change: Your development yield in the Americas is almost 14% now. That stepped up pretty nicely last quarter. You're sort of in the 10 to 11% zone in EMEA and APAC. Should we expect to see the development yields in EMEA and APAC, you know, start to move up and narrow that gap some versus the Americas? Or do you see there being factors that restrain where you can get in those regions?
Thanks, Nick. So, I mean...
Speaker Change: That's a product of America's region having the most accentuated, well outpacing supply on the larger capacity blocks.
Speaker Change: Now, we do have a sizable COLA footprint in EMEA, which is obviously a higher ROI piece of our business. But when you look at the MEGWAT, it's those loading capacity blocks that right now are swinging rates and returns.
Speaker Change: I believe that you're going to see AI globalize. I don't know if it will be the same extent.
Speaker Change: growth and build out you've seen or will see in the United States.
Speaker Change: but based on including meetings I was part of this week.
Dialogue with customers.
Speaker Change: I think that you're going to see and kind of follow in the footsteps of cloud and data sovereignty and cloud to cloud.
Speaker Change: You're going to see that go up. And I can tell you...
Speaker Change: That does come to fruition. It's going to come to fruition in markets that have the same issues as the United States in terms of power transmission and other supply chain elements
Speaker Change: The next question is from Michael Elias with C.D. Cowan. Please go ahead.
Michael Elias: You know, if I ask you to put your prognostication hat on, where do you see development yield and as part of that, spot market pricing for hyperscale data center deals going, particularly in light of where the private market is clearing deals? I think all of that would be great. Thanks.
Thanks for coming.
Speaker Change: I'm sure there is a private market competitor that will settle for a lower development yield than we have in our North America schedule as we speak.
Speaker Change: We're very blessed that we have numerous private capital partners to have some good intelligence on this.
Speaker Change: I think we're being able to outshine that just because we're essentially picking our spots.
Speaker Change: We're not just chasing volume at the detriment of price and return, which has allowed us to keep our returns.
Probably over.
Speaker Change: A couple hundred base points higher than the average Joe Davidson competitor.
Speaker Change: The next question is from Brandon Nispell with KeyBank. Please go ahead.
Brandon Nispell: Yeah, thanks for taking the question. Quick question for Matt. What type of core FFO contribution do you expect from the JV portfolio in 25? And then I saw you recently closed Blackstone phase two. Maybe could you give us an update on how you're expecting that JV to impact?
The JVMetrics in 25. Thanks.
Brandon Nispell: Sure, so in terms, I'll answer it in terms of like the broader...
Brandon Nispell: Disposition, JV Capital, so we're not expecting that to have a material impact on our bottom line core FFO growth in 2025.
Brandon Nispell: That's a mix of, you know, call it timing, size, and when things might come to fruition. So, there's some variability there. So, we're not including material impact there.
Brandon Nispell: As it relates to, I think, maybe to your point on the broader...
Brandon Nispell: Joint Venture Private Capital, you know, you've seen I think where you see that, you know come through is you're seeing our fee income line pick up
Brandon Nispell: You saw that in the fourth quarter, which was largely tied to the closing of our black zone phase two.
Brandon Nispell: and the fees that we got from that, more from the development side. We also closed on an acquisition within our SREs, so that had some impact with our fee income as well. And as we now have the full Blackstone closed,
Brandon Nispell: Transition from development fees to more asset management, property management type recurring fees. So that's how we're taking a look at that for this year.
Brandon Nispell: That concludes the Q&A portion of today's call. I'd now like to turn the call back over to Andy Powers for his closing remarks. Andy, please go ahead.
Thank you, operator.
Brandon Nispell: Digital Realty had a remarkable 2024, reflecting strong demand for cloud, digital transformation, and AI.
Brandon Nispell: Digital Realty is ready to support these customers' requirements as well as private AI and a potential avalanche of AI inference demand we anticipate around the world.
Brandon Nispell: He set a number of new records throughout our business, executed our key priorities, and positioned the company for an acceleration of bottom line growth in 2025 and beyond.
Brandon Nispell: I am extremely proud of how our team executed to deliver this year's results, and I am excited about the future and remain focused on seizing all the opportunity at hand.
Brandon Nispell: I'd like to thank everyone for joining us today, and we'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.