Digital Realty Trust - Q2 2023

Transcript

Operator (participant)

Good afternoon, and welcome to the Digital Realty Q2 2023 earnings call. Please note this event is being recorded. During today's presentation, all parties will be in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question plus a follow-up, and we will aim to conclude at the bottom of the hour. I would now like to turn the call over to Jordan Sadler, Digital Realty's Senior Vice President of Public and Private Investor Relations. Please go ahead.

Jordan Sadler (SVP, Public and Private Investor Relations)

Thank you, operator, welcome everyone to Digital Realty's Q2 2023 earnings conference call. Joining me on today's call are President and CEO, Andy Power, and CFO, Matt Mercier. Chief Investment Officer, Greg Wright, Chief Technology Officer, Chris Sharp, and Chief Revenue Officer, Colin McLean, are also on the call and will be available for Q&A. Management may make forward-looking statements, including guidance and underlying assumptions on today's call. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC. This call will contain non-GAAP financial information. Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website. Before I...

Turn the call over to Andy, let me offer a few key takeaways from our Q2. First, our customer value proposition continued us to resonate. We delivered yet another strong quarter of leasing in our 0-1 megawatt plus interconnection segment and saw a healthy rebound in greater than 1 megawatt leasing. Second, this past quarter confirmed the continued inflection of fundamentals we have been speaking about for much of the past year, supported by a strong pricing environment. Releasing spreads were the strongest in three years, and stabilized same-cash NOI grew by 5.6%, marking the second consecutive quarter of positive growth and the best growth in almost nine years.

Third, we bolstered our total liquidity, which now stands at more than $4 billion, and further diversified our capital sources and reduced our leverage well off of peak levels through more than $2 billion of dispositions and JVs and over $1 billion of equity issued under our ATM. With that, I'd like to turn the call over to our President and CEO, Andy Power.

Andy Power (President and CEO)

Thanks, Jordan, and thanks to everyone for joining our call. Against the backdrop of an extraordinarily dynamic H1 of the year, we have remained focused on advancing our strategic priorities and delivering on behalf of our 5,000-plus customers. Digital Realty made strong progress in the Q2 with improved operational results, progress on our funding plan and increased liquidity, continued organizational improvements, and increasing recognition of the critical role that data centers will play in support of both digital transformation and artificial intelligence. We posted sequential growth in revenue, adjusted EBITDA and CFFO per share, while improving development returns, bolstering liquidity, and delevering the balance sheet. During the quarter, we made progress on each of the three key strategic priorities that I laid out earlier this year.

First, we strengthened our customer value proposition by enhancing our communities of interest with more connectivity options, posting record double-digit interconnection revenue growth, and the second-highest quarter of new logo additions in company history. Second, we innovated and integrated, delivering enhancements designed to support high-performance compute, including AI, by enabling data centers to support liquid cooling solutions, while also broadening our existing partnership with NVIDIA, with the certification of our first DGX H200 ready data center, and integrating with additional organizational enhancements designed to deliver a consistent structure and experience while leveraging data to improve our effectiveness and efficiency. Third, we accessed diverse capital sources during the quarter, including the sale of a non-core asset in Texas at an attractive 4.4% cap rate and equity raised under our ATM.

Subsequent to the end of the quarter, we formed a stabilized hyperscale data center joint venture with a new private capital partner that acquired an interest in two facilities in Chicago. Today, we announced a similar joint venture transaction alongside a second new private capital partner for three stabilized hyperscale data centers in Northern Virginia. Just a little more than halfway through the year, we are now well ahead of the midpoint of our original funding plan for 2023, and we remain focused on putting Digital Realty's balance sheet into position to support the growing opportunity that lies ahead. The current state of the data center infrastructure landscape is very healthy. There is widespread demand for our data center capacity across various regions and products. However, there is limited new supply due to decreased power availability and tight financial conditions.

The global expansion of cloud computing, paired with the continuous digital transformation of enterprises, underscores the escalating importance of both data and AI in shaping demand. Presently, we are collaborating with numerous clients on AI-focused requests for proposals and implementations. The initial surge is anticipated in power-intensive training applications, followed by a rise in inferencing applications, including access to private, private data sets, which are expected to necessitate enhanced performance and reduced latency. Additionally, the intricate nature of these models is necessitating larger capacity blocks, which align seamlessly with our extensive product suite. As the global meeting place for data exchange and a full spectrum provider of data center solutions, Digital Realty stands at a strategic vantage point. This allows us to cater to the needs of enterprises, facilitating their efficient integration of AI applications within their digital transformation journeys.

In the Q2, we unveiled Data Gravity Index 2.0, which represents our extended commitment to data science. This tool is designed to assess the effects of enterprise data generation and consumption in both public clouds and private data centers, offering enterprises a framework to manage and derive insights from their data. Moreover, our innovative approaches in data gravity and comprehensive data center architecture were recognized as we secured a patent for these. Our patent further offers enterprises a roadmap to ensure their architectures remain relevant in the future. The evidence is clear. We have shifted from a physical economy to a digital economy, which now is entering a new form, the data economy. Our research shows that the surge in server demand can be attributed to the rising needs of both public and private cloud infrastructure, further augmented by AI training and inference processes.

At the same time, demand for storage devices is poised to grow due to data regulation. Let's move to our Q2 results. This quarter continued the inflection in the fundamental recovery we have been highlighting in our core portfolio over the past several quarters. Our pipeline remained strong during the quarter, helping to drive a sequential rebound in leasing volume, but also supporting strong pricing, with re-leasing spreads positive again across all product types and in all regions. New leasing during the quarter was $114 million, with continued strength in the 0-1 MW plus interconnection leasing, which represented 43% of total signings. Greater than 1 MW increased by over 60% sequentially, led by one of our strongest quarters ever in EMEA.

Strong demand trends and reduced availability, along with growing recognition of our value proposition, continue to be supportive of pricing and are enhancing our expected returns. In the Q2, we saw re-leasing spreads climb to nearly 7% on a cash basis, helping to drive the best Same-Capital Cash NOI growth that we have seen since I joined Digital Realty in 2015. During the Q2, churn remained low at 1.5%, and we added 133 new customers, our second-best quarter ever, and a nice continuation of the 100-plus new logo streak we have going. This is a strong validation of the stability of enterprise IT spend and digital transformation that we are seeing, and of the value that customers recognize in PlatformDIGITAL.

Our key wins included an innovative, sustainability-oriented infrastructure provider that taps into stranded energy to support modular edge compute sites, chose Digital Realty for AI applications utilizing PlatformDIGITAL's network Control Hub and Data Hub solutions. Data-intensive workloads are being deployed on PlatformDIGITAL by a major U.S. federal agency to reduce costs and improve sustainability, while interconnecting with their key ecosystem partners. A leading European bank chose PlatformDIGITAL to help simplify and secure their hybrid IT strategy in compliance with data sovereignty regulations while leveraging the available cloud connectivity. A Fortune 500 quick-serve restaurant chain is updating their internal infrastructure on PlatformDIGITAL to improve reliability and security, support existing systems, and connect with key clouds to support the strong growth of their e-commerce business.

A Global 2000 pharmaceutical sourcing and distribution services company is expanding to a new mesh on PlatformDIGITAL to ensure global data governance compliance. A Global 2000 auto manufacturer chose PlatformDIGITAL to upgrade their network architecture in Central Europe by adding key points of presence for the largest and most important production centers. Moving over to our largest market, Northern Virginia. In the years since we learned of the power constraints in this market, we've continued to work constructively with the power provider to confirm the commitments that we've made to our customers and to provide growth capacity for for our customers through new development and select churn opportunities.

Over the course of the last several months, with the support of our local utility partners, we have been able to identify nearly 100 MW of incremental billable capacity that we expect to be able to bring to market prior to 2026. This includes 40 MW of available capacity underway within the current development pipeline and the potential to move forward on almost another 60 MW. In addition to this Ashburn-focused capacity, we've made meaningful progress on our 192 MW development in site in Manassas, which is now nearly in position to begin development. We are optimistic about the near-term potential to offer this availability to our customers. Moving on to our investment activity.

As we outlined in February, 2023 was poised to be an active year for our investments team, and some of the fruit of their labor has been harvested since our last call. During the Q2, we acquired the land and shell associated with a previously leased data center in Amsterdam, where we previously held a leasehold interest for $18 million. In a separate future-proofing transaction, we purchased additional land adjacent to our highly connected Schiphol campus in Amsterdam, which could support another 40 megawatts of potential IT load, providing ample runway for both enterprise and service provider growth. We also closed on the first non-core disposition of the year in mid-May at a 4.4% cap rate, resulting in $150 million of net proceeds to Digital Realty.

This facility was previously leased as a powered shell and was sold to one of its primary occupants. In July, we saw a significant acceleration in our capital recycling initiatives, closing on two separate stabilized hyperscale joint ventures in Chicago and Ashburn. These deals were executed at just over a 6% cash cap rate on average and raised more than $2 billion of net proceeds for Digital Realty. These transactions are an important validation of our current strategy as we remain focused on delivering shareholder value through the development of new data centers at double-digit unlevered returns and the monetization of stabilized hyperscale assets at a premium.

Equally as important, we've substantially bolstered and diversified our sources of private capital so that we can execute on the opportunity that lies ahead without being overly reliant on any individual avenue of capital, while also increasing the efficiency of our balance sheet. While we've had remarkable traction on these transactions, and all due credit goes to Greg Wright, his top-notch team, and the rest of our platform for executing through a tumultuous capital markets environment, we are not resting on our laurels. We are well ahead of our plan on our stabilized hyperscale joint venture plan. We see ample demand for the hyperscale development joint venture bucket that we have previously discussed and will provide updates as appropriate. Before moving on, I'm also delighted to welcome Jio, a Reliance Industries company, as our newest partner to our joint venture in India.

The expanded partnership builds on the strong foundation laid by BAM Digital Realty through the addition of Jio's massive digital and connectivity ecosystem and strong enterprise relationships with 80% of large private enterprises in India. Before turning it over to Matt, I'd like to touch on our ESG progress during the quarter. During the Q2, we issued our fifth annual ESG report outlining our initiatives for 2022. The report highlights the progress we have made toward our science-based targets, commitment to reduce our global carbon emission by 68% by 2030. We've enabled our success by contracting for renewable energy wherever possible, so that we have 1 GW of solar and wind energy under contract in the U.S. This has enabled us to match 126 of our data centers with 100% renewable energy.

In the Q2, we also received a certificate of adherence from the Climate Neutral Data Centre Pact. As a founding member of the pact, Digital Realty worked with independent auditors to certify that we are on track to meet the overarching goal of the pact for the industry to become climate neutral by 2030. We remain committed to minimizing Digital Realty's impact on the environment while delivering sustainable growth for all of our stakeholders. With that, I'm pleased to turn the call over to our CFO, Matt Mercier.

Matt Mercier (CFO)

Thank you, Andy. Let me jump right into our Q2 results. We signed $114 million of new leases in the Q2, with broad-based strength across the 0-1 megawatt plus interconnection segment in each region. We leased approximately $50 million in the 0-1 megawatt plus interconnection category, accounting for 43% of total bookings and becoming a larger part of our overall bookings since last year. Interconnection bookings were strong once again at over $12 million, concluding a record 12-month period. 0-1 megawatt bookings, excluding interconnection, were among our strongest ever at $37 million. Digital Realty has come a long way over the past four years, more than tripling our bookings in the 0-1 megawatt plus interconnection segment through a combination of organic and inorganic growth. These results demonstrate that our full spectrum strategy is working.

Greater than a megawatt bookings totaled $61 million in the quarter, a meaningful bounce back from last quarter's timing-oriented pause. EMEA was the standout, including strong contributions from Johannesburg, Paris, and Marseille, while we also saw notable strength in Northern Virginia and Tokyo. We also continued to over-index towards CPI-based escalators within our new leases, with 35% of the newly signed leases in the quarter containing inflation-linked increases, with fixed-rate escalators on the balance. Pricing has improved in many markets, with our largest market, Northern Virginia, seeing nearly a doubling of rates over the past year in response to supply constraints. Illustrating the changing tide in Ashburn, during the quarter, we opportunistically took back 8 megawatts of leased capacity from an existing customer and re-leased it to another customer at a substantial premium. The original lease was signed in the Q1 of last year.

Accordingly, our new leasing for the quarter only represents the uplift in rent achieved versus the prior lease, rather than the full annualized value of the new lease. While we have previously tempered enthusiasm around the potential mark-to-market opportunity in Northern Virginia, we are encouraged by this recent transaction and our increased development potential in growing colocation and connectivity offering in this market. Aside from the shift seen in Northern Virginia, we have also seen an improvement in rates across the Americas, as well as in EMEA and APAC. Looking forward, our demand funnel remains healthy, with strength, strength across product types and geographies. We expect ongoing and newly approved development capacity to be an important contributor to our growth through next year.

Turning to our backlog slide, the current backlog of signed but not yet commenced leases was $437 million at quarter end, as commencements were once again well over $100 million, balanced by new leasing. We expect the remaining $150 million of commencements in the H2 of 2023 to be somewhat evenly weighted between the Q1 and Q4. The lag between signings and commencements in the quarter was 11 months, as certain hyperscale customers await build-out completions. During the Q2, we signed $211 million of renewal leases, with pricing increases of 6.9% on a cash basis, our strongest renewal pricing in 3 years. This strength was shared across both product segments and across our 3 regions, continuing the broad-based improvement we saw last quarter.

With renewal rates trending over 5% during the H1 combined, we are raising our full year guidance for renewal spreads to better reflect the success year to date in today's improved fundamental environment. Renewal spreads in the 0-1 megawatt category continued to climb for the 6th consecutive quarter to an increase of 4.8% in the Q2 on $133 million of volume. Greater than a megawatt renewals were even stronger in the Q2 as cash re-leasing spreads increased by a considerable 8.7% on $73 million of renewals, the largest increase within this category since the Q3 of 2019. Turning to our operating results, our operating financial performance in the Q2 was a bit better than our expectations, highlighted by many of the same factors we highlighted last quarter.

The continued improvement in our core operating performance, another record quarter of interconnection revenue, and well controlled expenses. In terms of earnings growth, we reported Q2 core FFO of $1.68 per share, 2% better versus the prior quarter and consensus expectations. On a constant currency basis, core FFO was $1.69 per share relative to the $1.72 we reported in the Q2 of 2022. Total revenue was up 20% year-over-year and 2% sequentially. Year-over-year revenue growth was impacted by both the inclusion of Teraco this year and the significant volatility in utility costs and reimbursements, particularly in Europe over the past 12 months. Most of these energy costs are directly passed through to our customers. Excluding utility reimbursements, total revenue was up 12% year-over-year.

Critically, our rental revenues in the Q2 included a $25 million one-time write-off of non-cash straight-line rent and a $6 million bad debt reserve related to a tenant that declared bankruptcy during the quarter. We also wrote off $3 million of non-cash straight-line rent related to the re-leasing opportunity we executed in Northern Virginia. These write-offs of non-cash straight-line rent of approximately $28 million combined, are excluded from Core FFO per share. Interconnection revenue was at a record level in the quarter, increasing by 12% year-over-year and 3% sequentially. Excluding Teraco, interconnection revenue was up 8% year-over-year, reflecting the ongoing organic strength in our core footprint. Bookings were higher in all three regions, and ServiceFabric activations doubled in the quarter.

Other than utility costs, expenses were well contained as rental property operating expenses and insurance were both flat sequentially, resulting in adjusted EBITDA growth of 14% year-over-year and 4% sequentially. Improvement in our stabilized same capital operating performance continued in the Q2, with year-over-year cash NOI up 5.6% and 1.7% sequentially. This marked the strongest year-over-year growth in our same capital pool since 2014, demonstrating the turn in fundamentals that we have been highlighting. The improvement was driven by an 80 basis point increase in occupancy as commencements outpaced churn with upside from rent escalators and stronger than expected re-leasing spreads.

While we're very encouraged by the improvement we've seen to date in this metric, and the trend does indeed appear to be our friend, our enthusiasm for the H2 of 2023 is tempered by the uncertainty related to a recent customer bankruptcy filing. We expect to know more about the potential impact by the time we report Q3 results. Turning to the balance sheet. As Andy outlined in his remarks, as of this week, we are meaningfully ahead of the funding plan that we laid out for you in February. We have already closed an approximately $2.2 billion of asset sales and stabilized joint ventures, and expect to make additional progress on development joint ventures in the H2 of this year.

Specifically, earlier in July, we closed on the sale of a 65% interest in two stabilized hyperscale data centers on our Chicago campus, raising $743 million of gross proceeds. As announced this afternoon, we sold an 80% interest in three stabilized hyperscale data centers on our Ashburn campus, raising another $1.3 billion of gross proceeds. Including proceeds from the sale of the non-core asset in Texas we announced last month, we've raised over $2 billion in capital at a blended average cap rate of just over 6% so far this year. In addition to this capital recycling activity, during the Q2, we raised $1.1 billion in proceeds from the sale of 11 million shares of equity under our ATM.

Included in this total was approximately 3.5 million shares, or $335 million, that was structured as forward equity issuance. These shares were settled earlier this week. Our reported leverage ratio at the quarter end was 6.8x, while fixed charge coverage was 4.2x. Pro forma for the JV transactions and the settlement of the forward equity outstanding at quarter end, leverage was 6.3x, putting us on track toward our near 6x target by year-end. Moving on to our debt profile. Our weighted average debt maturity is nearly 5 years, and our weighted average interest rate is 2.7%. Approximately 84% of our debt is non-US dollar denominated, reflecting the growth of our global platform.

Approximately 83% of our net debt is fixed rate, 97% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, we have minimal near-term debt maturities, with only $100 million maturing during the rest of this year, a well-laddered maturity schedule throughout the out years. Lastly, let's turn to our guidance. We are affirming our full-year revenue guidance range of $5.5 billion-$5.6 billion, adjusted EBITDA guidance of $2.7 billion at the midpoint, as the recent acceleration in capital recycling has been balanced by better-than-expected re-leasing spreads and Same-Capital Cash NOI.

We are, however, adjusting our Core FFO and constant currency Core FFO per share guidance ranges for the full year 2023 by $0.10 per share to a new range of $6.55-$6.65 to reflect the following: $0.03 per share tied to the acceleration of our funding plan, including greater than expected stabilized joint venture sales and over $1 billion of equity issuance. $0.05-$0.07 per share for the write-off of unpaid rent and additional near-term uncertainty related to recent customer bankruptcy, and about $0.01 per share of lower non-cash straight-line rent tied to the opportunistic termination and re-leasing in Northern Virginia.

Given the continued progress on the turn in our fundamentals during the quarter, we are also updating the organic operating metrics supporting our full-year guidance, including cash and GAAP re-leasing spreads moving up to greater than 4% and greater than 8%, respectively. An increase in our Same-Capital Cash NOI growth guidance by 100 basis points to a revised range of 4%-5%, despite the potential impact of the customer bankruptcy this quarter, partly balanced by a reduction in our year-end portfolio occupancy assumption to 84%-85%, largely reflecting the greater than anticipated sales of stabilized hyperscale assets into joint ventures. Given the better-than-expected execution on our funding plan to date, we have also updated our guidance for dispositions in JV Capital.

We now expect total disposition in JV Capital raise to fall within the range of our current $2.2 billion-$3 billion. We've also reduced the amount of long-term debt financing needed to support our full-year funding plan, given the nearly $4 billion of liquidity currently available as a result of asset sales, JVs, and ATM equity raised. This concludes our prepared remarks, and now we will be pleased to take your questions. Operator, would you please begin the Q&A session?

Operator (participant)

We will now open up the call for questions. As a reminder, we ask participants to limit themselves to one question plus a follow-up, in order to keep the call to an hour and to give all callers an opportunity to participate. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from David Barden of Bank of America. Please go ahead.

Alex Waters (VP of Equity Research)

Good afternoon, everyone. Thanks for taking my question. You have Alex Waters on for Dave. Congrats on the new JV deal. Just wanted to know if you could walk us through kind of what line of sight you have for the development JV pipeline. Looking into 2024, can you speak to how comfortable you are with the funding pipeline? Secondly, on the core business, you've had strong releasing spreads on the greater than 1 megawatt side. Just curious on what your expectations are for this bucket, heading into the H2 of the year and into 2024. Thanks.

Matt Mercier (CFO)

Hey, thanks, Alex. appreciate the kind words. I'm going to turn it to Greg to kind of speak to, where we're going next in terms of capital raising, on development JVs, maybe tie in what's happened back half of this year into 2024.

Greg Wright (Chief Investment Officer)

I could pick, Matt, and I could pick it up on the core portfolio.

Chris Sharp (CTO)

Sounds good. Thanks, Alex. Look, with respect to the development JV guidance, we're still comfortable with our full year development JV guidance that we provided previously, that's roughly $750 million, give or take. That's obviously the plug, if you will, between the $1.5 billion-$2.5 billion last time, which now becomes $2.2 billion-$3 billion. Look, we remain engaged on these transactions over theH2 of the year. You know, what we're seeing out there, just as with the stabilized joint ventures, there's strong demand for the development joint ventures, you know, particularly given that these JVs offer the highest returns. You know, and they have a lot of moving parts, though. You know, given the strategic considerations here, these tend to take a little longer.

I'd say we remain optimistic and on track for those. With that, I'll turn it back over to Matt and Andy.

Andy Power (President and CEO)

Thanks, Alex. I think your second question was about, let's call it, the core operating results, we saw in the quarter year-to-date and kind where we see the back of the year, if I'm, if I'm correct. We're certainly pleased on multiple fronts on, on the value proposition and pricing power coming through. We saw that in our new lease signings and ROIs, as well as our cash mark to markets and, and which flowed through to our same-store growth. We had a, a quite strong quarter on those stats, and you saw that we updated our guidance for the full year. As of right now, we think that these trends on, on, on the cash mark to markets and, and pricing power will continue into the back half of 2023.

Matt Mercier (CFO)

Yeah, I might just add that, you know, again, this quarter, we saw all of our greater than 1 megawatt renewals were in a positive territory, and that includes across all regions as well.

Operator (participant)

The next question comes from Jonathan Petersen of Jefferies. Please go ahead.

Jonathan Petersen (Equity Research Analyst)

Oh, great. Thank you very much for taking the question. Good job on the execution on the JV deal. I wanted to ask about the 8 megawatts where you had an uplift in rent. I know you talked about it, but I'm sorry, could you, could you maybe break down, like, what, you know, what kind of drove your ability to push those rents higher? And if you were to take that out, what were the rents per kilowatt hour in the greater than 1 megawatts in America?

Greg Wright (Chief Investment Officer)

Thanks, John. I'll, I'll walk through the dynamics and let Matt quote the, the actual rate on the, on the new deal to give you a sense of the market. I mean, this is obviously a market that is very tight on supply, and we've been working with our installed customer base, if anyone had capacity that was idle or they didn't have near-term need for. Hence, we were able to take back capacity from a customer since it let them out of a contract, and that contract was out and signed, call it 1 year ago, at a much lower rate, and we were able to help a different customer that had immediate needs, and we were able to sign that at, at a much higher rate.

Matt, why don't you walk through the, the stats?

Matt Mercier (CFO)

Yeah, sure. Just, just to be clear, the deal that we're talking about here is not included in our, in our renewal stats. What, what we are doing is showing just the net incremental revenue that we expect to that we expect to recognize within our signing stats. You'll see that, you know, you'll see that more clearly when you look at page 8 of our supplemental, in particular in North America, the greater than 1 megawatt, you're gonna see you're gonna see the $300 a kW rate, and that's because we're only showing the incremental revenue and not the associated megawatts attached to it. If you, if you put that deal in at, call it 100%, that 300, 300 kW would come down to 148.

Again, it was a substantial uplift from, from the in-place lease. You know, it was over 50% higher than what we had, what we had currently.

Jonathan Petersen (Equity Research Analyst)

I'm sorry, that's 148 on the 8 MW deal, or 148 excluding the 8 MW deal?

Matt Mercier (CFO)

Including. That would be our blended rate if you look at page 8 in our supplemental versus, versus the 300.

Jonathan Petersen (Equity Research Analyst)

Okay. Okay, just one follow-up, just to stick with Nova. With the power constraints there, as long as nothing's changed, it seems like nothing, nothing new can really come online until 2026. Are you already seeing leasing demand for people that are wanting to sign leases and commit that far in advance?

Greg Wright (Chief Investment Officer)

John, the Nova market, the facts, I would say, remain the same in terms of transmission lines and arrival of utility power, which has really created an environment of demand well outpacing supply. We are, I'd say, less right now focused on signings that don't commence till 2026, based on the uncertainty of when in 2026 exactly that power arrives. Quite honestly, making sure that we're maximizing the opportunity at hand for us. That market has seen dramatic price improvement. We've signed deals in the larger categories, call it 140 or north of that, per kW. Again, that market was in the 70s not so long ago.

The good news, as we reported, we've given our breadth and history in that market, we've been able to work with our utility provider and really cobble together incremental growth capacity for our customers across our campuses. If you add them all up, prior to the 2026 arrival, call it by 2025, if not sooner, you're, you're approaching, call it 100 megawatts of growth capacity in Ashburn, which is in addition to our growth for capacity that we have in Manassas.

Operator (participant)

The next question comes from Michael Elias of TD Cowen. Please go ahead.

Michael Elias (Senior Equity Research Analyst)

Great. Thanks for taking the questions, guys. to start, in recent months, we've seen the volume and size of deals increase. to that point, there are many requirements on the market right now that are over 100 MW. As you consider the strategy moving forward, is it your intention to compete for these deals? if so, are you willing to pursue these deals with or without a development JV lined up, with the understanding that these projects will drive long-term shareholder value? then I have a follow-up.

Greg Wright (Chief Investment Officer)

I, I can tell you we didn't sign any 100 megawatt deals in this quarter. We, we have, are certainly around some of these opportunities. We're very focused on, call it, maximizing our footprint for its highest and best use in helping our customers the best way we can. Some of those deals obviously have lent itself towards the AI domain for training models that need that large scales of, of, of contiguous capacity. I can tell you, look at our footprint. We have extensive locations around the globe that we can help those types of customers. We are, we are, but we've made great progress bolstering our capital sources. As you saw, just in literally the month of July, really got back into firmer footing to support our customers' growth.

adding to that, a development partner, I think will put even more field of fire to support that growth. I think when it comes to bigger, bigger deals, we got to make sure that they land in the right locations for Digital Realty and make sure we're maximizing the opportunity in terms of our, what I call, is really precious capacity in our land bank, in our sales, and in our inventory runway.

Michael Elias (Senior Equity Research Analyst)

Great. Then just to piggyback on that point about maximizing the opportunity. If I go back to the Q3 of 2022, you guys were clear that you were sharpening the lens through which you looked at investments with the intention of driving a higher risk-adjusted return. Now, as we think about as we think about hyperscale deals in which you would lease an entire building to a single hyperscaler on a turnkey basis, could you give us a framework for thinking about what the appropriate spread between your unlevered development yield and your cost of capital should be to make it worth it to lease it to the hyperscaler? Thank you.

Greg Wright (Chief Investment Officer)

Thanks, Michael. I, I think Jordan is, can see the future because he thought he was going to ask this question. Honestly, we haven't been thinking about that because we've been raising the bar and, and demand has been outpacing the supply, where anything that even kind of feels skinny or close to not just breaching our cost of capital, has, has not made it on to where we're investing our dollars. You can see that in our development life cycle, where you have the whole schedule of the 377+ MW underway, north of 10% ROI.

That includes the Americas region, North America, that it, it's call it 9%, and still weighted down by projects that were, call it, open book yield on cost projects, almost legacy in vain, that it's weighting down those averages. I can tell you, these opportunities we're seeing, even for larger capacity blocks, in these call it, tight markets, be it in Northern Virginia, be it in Singapore, be it in Frankfurt, or elsewhere, we're certainly into the double digits, unlevered ROIs, which I think that well exceeds the risk adjusted of deploying capital, and it really is coming down more to supply-demand dynamics, than just call it premiums.

I think if you look at the, the great work our, our investments team did on transacting on some of these JVs and the new partners we brought in the fold and called the sixes cap rate area, I think you're seeing a lot of value creation, in, in our model.

Operator (participant)

The next question comes from Jonathan Atkin of RBC. Please go ahead.

Jonathan Atkin (Managing Director)

Thanks. A couple of questions. Wondered, how to kind of think, you said you're not going to issue any more debt this year. Given some of the other moving parts around possible asset sales and so forth, are there any more of those to come? How can we think about the leverage trajectory of getting perhaps into the high fives or whatnot? Secondly, was curious just about India. Is your partner contributing any assets perspectively going forward? Thanks.

Greg Wright (Chief Investment Officer)

Jonathan, Matt, Matt can speak to the funding and our, and our, and our sources and uses, and the guidance and leverage. Then Chris and I can ham and egg, ham and egg the India piece. Go ahead.

Matt Mercier (CFO)

Yeah. Thanks, Jonathan. There's a couple aspects here I think are important. You know, one, one, to reiterate, you know, as, as of today, we've got $4 billion of liquidity, you know, thanks to the, thanks to the execution of, of the broader team. If you look at, if you look at where our funding needs are going forward this year, based on looking at our life cycle, you know, what's remaining to be spent, you know, our guidance in terms of what's left to be spent, you know, we're, we're talking about somewhere in the $1.2 billion-$1.3 billion left to spend this year. That gives us, you know, pretty significant runway into 2024 to be able to fund the continued growth and opportunities that we see going forward.

You know, on top of that, as we, as we also noted, we're not stopping in terms of, you know, the execution on, you know, asset sales as well as, the potential, that we're, we're continuing to seek for development joint venture partners that'll, that'll give us an even broader access to capital and be able to help us to fund not only some of that, capital need into, into 2024, but also potentially this year as well. Which rounds out into your question on, on leverage. You know, we've, we've made considerable progress again on, on that front as well. As, as I noted in the prepared remarks, you look at us on a pro forma basis. We're at 6.3 now, so made considerable progress on that.

You layer on top of that, you know, our expected view of continuing to grow our EBITDA as we've left that guidance line unchanged. Again, as well as, continuing to seek development joint venture partners, that'll continue to help us on that deleveraging process. We feel pretty good about progress to date on both liquidity and leverage, and I'll turn it over to Greg on the India JV topic.

Chris Sharp (CTO)

Yeah, just, just on India. Just to-- I mean, I think it's less about the assets, it's more-- obviously, they're going to be sharing the development opportunity in a huge market with a lot of growth, but it's really about a great, fantastic new partner to the partnership. Maybe Chris can touch on, on Jio and what we think they bring to the table here.

No, absolutely. I appreciate the conversation, John. It's a combination of expertise, right? Where Brookfield brings local investing expertise, you know, Digital Realty, we bring the data center expertise to that market. I think, you know, what really Jio brings is that local operating expertise. Maybe many of you already know, but Jio is one of the largest mobile media platforms throughout India. I think, you know, their extensive reach and ability to interconnect critical enterprises or other destinations is something that's going to allow us not to deliver a like-for-like product. I think Greg and I have been talking about this for, for many years and looking at the fact that we wanted to be able to differentiate our ability to be successful within India.

That partnership with Reliance and Jio has really elevated our ability to service the broader enterprise customer base, which, quite frankly, is unique in that it's a lot of our large hyperscale customers as well. The amalgamation of that, you know, trio coming to market is something that we're excited about. We're still early innings, so you'll see it evolve over time, but pretty excited about the opportunity in India.

Jonathan Atkin (Managing Director)

If I could quickly add, on interconnect trends, and anything to expect going forward in terms of just the trajectory, any particular reason why it might see pressure because of grooming or acceleration, because of new use cases? Does AI play a role at all in, in the interconnect at this point? Thanks.

Colin McLean (CRO)

No, appreciate it, Jon. Just to further jump into that, yeah, interconnection, I think, is something that's evolving rather quickly. I think, you know, artificial intelligence is definitely evolving, and it's in its early stages at to date. I think, you know, where we've been watching and what I think has shown through, and we referenced in the prepared remarks, is the fact that, you know, it's the highest, you know, 5-year growth, two straight quarters, surpassing $100 million. I think that's very unique to us in the platform that we represent in the market.

I would also say that, you know, some of the activities that we've been doing around ServiceFabric, which, quite frankly, is tailored to streamlining the technical, you know, kind of, barriers that have been placed upon the customers to access all of these destinations where data resides, which at the core of artificial intelligence, where I think your, your question is at, you have to have access to data. Being able to be a part of one of the largest open platforms that, quite frankly, allows customers to access these data oceans of both public and private deployments, I think the platform is starting to pay off. I would say that, again, early innings with AI, but we're very excited about what that demand is going to represent inside of our portfolio.

You know, as we evolved and we're you know, stable stay of what we did in the foundation of cloud, you'll see us be able to be at a steady state with a lot of these customers evolving AI as well.

Operator (participant)

The next question comes from David Guarino of Green Street. Please go ahead.

David Guarino (Senior Analyst)

Hey, thanks. Looking at your development tables, you guys are developing assets at 10% stabilized yields, and it feels like if that stays, you can sell assets at 6 cap rates. That's a, a pretty healthy spread on the development profit margin. I guess I was just wondering, since you've already hit your initial disposition target, that range you set out, why do you see the need to do more JV developments at this point? Why not just look to sell more stabilized assets?

Greg Wright (Chief Investment Officer)

Hey, David, it's Greg here. Look, I think when you take a look, as, as we laid out and Andy laid out at the beginning of the year, you know, the reason for finding these, development partners is. Look, when you look at this opportunity in the hyperscale business today, it goes well beyond our balance sheet, even at $55 billion. When you look at that, what it tells you is you got to have third-party capital to meet the customer's needs within, you know, throughout the globe for that business. As we sit here today, even though we have, as you said, we've exceeded our guidance on what we were going to do, we sit here and look at this strategically go forward, and we think that's the best way to fund that business, to create value for our shareholders.

You know, that's why we're going to continue to fund it through development, and we think that's the most prudent way to move forward with it.

David Guarino (Senior Analyst)

Okay. Then maybe switching topics. On the tenant bankruptcy, Matt, you were talking about, which I think is a former public data center company, can you walk us through what eventually happens to that space? Are you guys just waiting now to renegotiate with the tenants? I guess, how soon, if that's not the case, can you start re-leasing that space?

Greg Wright (Chief Investment Officer)

Hey, David, just to add on to, to the last question, and Matt and I can handle the, the second part of your question. Our balance sheet today has call it more than 3 gigawatts of growth capacity around the world. And we see that expanding and having the balance sheet to be help funded alongside some great partners is another part of becoming more efficient and more quickly driving returns and results to our bottom lines. In a market, in an opportunity backdrop that keeps getting bigger, it was large-

... It was large to begin with. Cloud computing accelerated that with hyperscale demand, and AI is just an incremental lift to this wave of demand. Hence, we, we believe the best way to tackle this opportunity and support our customers, while driving results to the bottom line, is in partnerships, on the capital front. When it comes to the, the customer bankruptcy, obviously, the, this customer is in the middle of bankruptcy, so can't share too much. The, the typical playbook is, the creditors, essentially have to run a process for the assets or the business, and as part of that, make decisions on either accepting, or rejecting, leases. We have not, to date, had any leases rejected so far, while they, while they have rejected other providers' or landlords' leases.

I don't think you can assume that every one of our leases, in despite that fact, will be accepted. From a strategic lens, this is why years ago, we increased our capabilities and be able to expand into the colocation or connection offering and support end customers. When, if and when we sell, the customers would have issues, we can essentially step in and support the end customers and have adequate financial outcomes end, end of the day, given our capabilities. That's, there's a little bit of wait and see as this customer works its way through bankruptcy, and I think we'll have more to report by the Q3 call.

Operator (participant)

The next question comes from Mike Rollins of Citi. Please go ahead.

Mike Rollins (Managing Director)

Thanks. Good afternoon. It's just a couple follow-ups. First, as you're looking at the portfolio, what's the value of data center assets that you own that could be considered for future joint ventures? What's left in terms of opportunity for recycling? Then also, can you just provide us an update on how you're doing and the opportunities to improve, whether it's overall occupancy or same capital occupancy within the portfolio? Thanks.

Greg Wright (Chief Investment Officer)

Sure. I mean, hyperscale is still a large piece of our business, in terms of our install base, and certainly a lot of what's going into our current development pipeline, as it stands. I think, in conjunction with the creation of Digital Core REIT, we came to an estimation of call it, $15 billion of value as a round ballpark, in terms of things that would fit the bill of essentially, it's similar to the transactions we just announced in the month of July. Fully stabilized, hyperscale-oriented, long weighted average lease length. Honestly, core assets, parts of our campus, but the slowest organic growers of our portfolio. Less interconnection rich, less customer rich. I think the more recent portfolios we've sold had called 10 plus or minus customers in them.

We're supporting 5,000 customers here at Digital Realty. We still think that there's an opportunity to continue to build on these partnerships, like the great partnerships we just announced, and essentially be able to maintain 100% ownership on the highest growing pieces of our puzzle. When it comes to the same store growth, Matt, why don't you pick that up in terms of the levers that we've been pushing hard to drive that?

Matt Mercier (CFO)

Yeah. I, I, I call it a couple of things. First, I mean, we, we have been making, what I would say is, is, is, is good to great progress so far. If you look at it, if you look at it, you know, versus last year, we're up 80 basis points on our, on our stabilized pool. You know, we're gonna continue, you know, we think, to improve that, you know, over the course, over the course of this year into next year. That's, you know, that's gonna be a mix of, you know, essentially twofold, spaces where, you know, we believe that there's, opportunity for larger customers. We're gonna continue, continue to target that, given, given density requirements and, and the growing need for, for capacity across, you know, a global portfolio that we have.

You know, we're gonna, we're gonna find opportunities to fill that in. I think part, part of it and part of why it's gonna take a little bit more time to continue to improve the overall occupancy, is that we're also looking where we can convert some of that space that we do have into productized colo. Lease that over time because we see, you know, the growing need for, for enterprise demand and where we want to be able to capitalize that, which is a higher return and, and a market that we want to be able to penetrate and grow even further from where we are today.

Operator (participant)

The next question comes from Frank Louthan of Raymond James. Please go ahead.

Frank Louthan (Publishing Analyst)

Great, thank you. Can you comment on the situation in Singapore, I guess, with the, the government allowing a few new players coming in, how do you think that affects the pricing there? Then looking at the, at, at the capital recycling, kind of where do you go from here? I know you've continued to look at other diversification strategies. Does this kind of, sort of finish this out, or what are some other areas of, of, of capital sources that you could look at to, to reach that goal? Thanks.

Greg Wright (Chief Investment Officer)

Sure. On, on the first one, Singapore, I mean, I think what you're seeing is supply still to get metered out at very small and rational clips. After years of no supply, the big unveiling is literally four different players getting 20 MW increments, is relatively modest. I mean, our latest data center build in that market was, I think, almost double that size of a need. This is not only happening with Singapore. You're seeing power constraints, be it from transmission or generation, moratoriums, broader nimbyism, environmental concerns, just ratcheting, and making the supply constraints be more rational.

That's why we're quite pleased that we have, on our balance sheet, a long runway of growth for our customers with our campuses across 50-plus metros on six continents, and the supply chains to support their growth. This is all against a backdrop where the demand is outpacing the supply. Greg, do you want to reiterate where we go next on the capital recycling?

Yeah, thanks, Frank. Look, I, I think, as we said, we're gonna, you know, we're gonna continue to focus our efforts on the remainder of this year on our development joint ventures we talked about. To answer your question, specifically, you asked about other sources of capital, we're so, you know, how, how we think about it. Look, I think as a whole, we've done a pretty good job so far. As we said, we have the, you know, the dedicated, core REIT in Singapore, so that's a public vehicle. You know, we, we've obviously just announced, two transactions, what we would characterize as distinguished blue-chip investment partners in both GI and TPG. Look, we continue to see strong interest across the board.

Chris Sharp (CTO)

Not just PE shops, but we see infrastructure funds, sovereign wealth funds, pension funds, insurance companies, and the like. We're seeing a broad-based demand here, looking at transactions, both, you know, stabilized core assets and development assets. Look, we're bullish on that, and when we look at that again, we think that's the prudent way to fund our growth go forward.

Operator (participant)

The next question comes from Eric Luebchow of Wells Fargo. Please go ahead.

Eric Luebchow (Senior Analyst)

Great. Thanks for taking the question. Andy, I think you've talked about getting down to 5.5x leverage longer term. Maybe you could just walk through the path to get there beyond, beyond this year and, you know, how much incremental capital recycling or JVs or other forms of capital you think you might need if we look past this year. And is the goal here to ultimately, you know, becoming more self-funding so that you can, you know, share in more of the economics yourself instead of using development partners?

Matt Mercier (CFO)

Yeah. This is Matt. I'll, you know, I'll take that. I mean, you know, we, we do have. You know, our, our longer-term plan is to get down closer to 5.5 times. Again, I think we've, we've done a considerable amount of work. We said this year, we'd look to be closer to that 6 times. You look at us based on what we've achieved and executed so far, with, with the $2 billion from the joint ventures that we've done on stabilized assets, the $1 billion we've raised in equity so far to date, you know, which has, which has come in. You know, we're at pro forma at 6.3.

We see the path going forward to getting back, you know, even further down is, as, as we have backlog and continue to execute on leasing that comes online, our EBITDA continues to grow, and we execute on these you know, development joint ventures. You know, we believe those are gonna be two of the, two, two of the major components, which are gonna help us get down to that 5.5x target, you know, as we start to look through, through 2024. You know, we're not, we're not in a position necessarily, you know, at this point in time, to give 2024 guidance yet, but I think those are the two main levers that we're gonna be looking at to continue to drive our, our, and, and improve our balance sheet and, and our leverage position.

Eric Luebchow (Senior Analyst)

Okay, great. Then just, just one follow-up. I, I think you still had some non-core portfolios out in the market today. I guess, given how successful you've been with capital recycling so far, is that kind of becoming less of a priority as you look forward? You know, do you still plan to transact on some of those markets that are out there today?

Chris Sharp (CTO)

You know, look, Eric, as you said, we've been fortunate. We've had, we've had good demand and good execution this year. Look, we're already we're 30% of the way through, and we have other transactions we're working on. As we always said in the past, the good news for us is these non-core assets are all a very, very, very small piece of our portfolio. You know, we have the benefit of being disciplined and making sure we get what we think is fair value. We're gonna continue with that approach like we have historically, and continue to pursue them. Again, we're seeing demand for those assets as well. You know, we'll continue to work on it, and, you know, we'll continue to post you, as we have things to talk about.

Operator (participant)

The next question comes from Irvin Liu of Evercore ISI. Please go ahead.

Irvin Liu (Equity Research Analyst)

Hi, thank you for the question. I have one and a follow-up. Within your improved bookings this quarter, are you able to call out whether there was any sort of contribution from AI or any AI-related deployments from your customers?

Andy Power (President and CEO)

Hey, Irvin, that, that's a great question. I'm gonna turn it over to our, our CRO, who really grabbed the baton and, and ran through the finish line strong, Colin McLean, to talk to what we saw on the AI front and maybe just give a little bit more color on, on the quarter in terms of bookings and new customers.

Colin McLean (CRO)

Yeah. Thanks, Andy. Appreciate the question, Irvin. Yes, certainly, AI is becoming a growing part of our conversation in, in pipeline overall. Just to revert back a bit on the overall, pipeline dynamics we're seeing, I would say, describe it overall, the pipeline is, is strong, healthy, and diverse across the board. Particularly strong in the 0-1 megawatt side, and growing part of that. AI is definitely a part of not just the, the hyperscale piece of business, but also the 0-1 megawatt, and we've had some, some strong contributions on that front. You know, so overall, we, we really feel like both the results and the pipeline itself, the demand to be a testimony to validation, really, of our pivot, to serving the entirety of the, the client needs, network, enterprise, and hyperscaler.

I would say, you know, both on the AI front and frankly, the cloud and, and hybrid IT, we're seeing some really growing success and, and growing conversations with, with clients. We remain optimistic and, and serving both the, the pervasive needs of clients as well as AI, and I think that's gonna be a growing part of our portfolio as we, as we move forward.

Irvin Liu (Equity Research Analyst)

Got it. Thank you for the color there. My second question is on the strong pricing that you saw over the past 2 quarters. Can you just share with us how pricing trended quarter to quarter and the overall linearity of pricing trends that, now that we're 1 month into Q3?

Greg Wright (Chief Investment Officer)

The, I would, Irvin, Andy, I would call this a continuation of the commentary that we've been saying now for several quarters. That the pendulum on supply-demand fundamentals has been called wind at our back and growing. Our value proposition with our customers is being more and more well received. That's from our installed base, who's been growing with us. Majority of our signings were from the existing customer base. That's also from, I think it was our second highest new logo quarter of 133 new logos or new customers. That's been broad-based, as Matt mentioned, across regions and product types. In the less than a megawatt category, it's been more steady Eddie, but obviously inflecting call it like-for-like increases.

On the greater than megawatt, it's been a little bit more volatile, but in a positive fashion. As demand is remained intact, if not further increased, and precious large capacity blocks have become fewer and fewer far between, and the, and the future, of, of, of that supply bottlenecks really, changing course does not seem to be, near term whatsoever.

Operator (participant)

That concludes the question and answer portion of today's call. I'd now like to turn the call back over to President and CEO, Andy Power, for his closing remarks.

Andy Power (President and CEO)

Thank you, Andrea. Digital Realty had a strong Q2. Our results demonstrate that our meeting place value proposition is resonating with customers. Just since our last call, we raised over $3 billion of new capital, positioning the company for the tremendous opportunities that lie ahead. We posted strong organic operating results, with the results confirming the continued inflection in our core data center business. I'd like to thank everyone for joining us today and recognize our dedicated and exceptional team at Digital Realty, who keep the digital world turning. Thank you.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.