Digital Realty Trust - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to the Digital Realty Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Jordan Sadler. Please go ahead.

Jordan Sadler (SVP of Public and Private Investor Relations)

Thank you, Operator, and welcome everyone to Digital Realty Second Quarter 2024 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 and A. Management will be making forward-looking statements, including guidance and underlying assumptions on today's call. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results that are material. For further discussion of risks related to our business, 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 second quarter. First, we continue to execute within a very favorable demand environment, with $164 million of new leasing executed in the quarter, again marking one of the top quarters in our history, which, together with last quarter's record leasing, drove a record first half of the year. Second, our operating momentum continued through the second quarter at a record level of commencements, translated into meaningful improvement in both total and same-capital occupancy, while cash re-leasing spreads remained firmly positive, and continued growth in cross-connects drove interconnection revenue to a new record in the quarter.

And third, through capital recycling and demand-driven equity issuance in the quarter, we reduced our leverage to 5.3x at quarter end, below our long-term target level, helping to position Digital Realty to the opportunity that we continue to see in front of us. 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. The momentum we experienced in the first quarter continued in the second quarter. In the first half of 2024, our new leasing was up over 100% from the activity we saw in the first half of 2023, with a strong and steady contribution from our 0-1 MW plus interconnection segment. Demand for data center capacity remains as strong as we've ever seen, especially for larger capacity blocks in our core markets. We are well positioned to take advantage of this favorable demand environment, given our track record of execution across six continents, a robust land bank and shelf capacity that could support 3+ GW of incremental development, reduced leverage, and our growing and diverse array of capital partners. During the second quarter, we remained focused on our key priorities.

We signed $164 million of new leasing in the second quarter, which excluded another $16 million of bookings within one of our newest hyperscale private capital ventures. While bookings in the greater-than-a-megawatt category were once again the primary driver, there was no contribution from our largest hyperscale market, Northern Virginia, as Dallas led the way in the second quarter. Importantly, we posted one of our strongest quarters ever in the 0-1 MW plus interconnection segment, with record new logos and near-record bookings in each of the 0-1 MW and interconnection categories. This leasing strength is a positive reflection of the value that our 5,000 and growing base of customers realize from our full-spectrum product strategy. We also delivered strong operating results, with 13% data center revenue growth year-over-year pro forma for the capital recycling activity completed over the last year.

In addition, we have enjoyed healthy growth in recurring fee income associated with our new hyperscale ventures. In the first half, fee income was up 26% over the first half of 2023, primarily reflecting the formation of almost $10 billion of institutional private capital ventures over the last year. We would expect this line item to continue to gather momentum. With the record commencements in the second quarter and the healthy backlog of favorably priced leases ready to commence in the second half, we are well positioned for accelerating top-line and bottom-line growth for the remainder of 2024 and into 2025.

Subsequent to quarter end, we also strengthened our value proposition in Europe through our entrance into the Slough submarket of London, with the acquisition of a densely connected enterprise data center campus, which we expect to be highly complementary to our existing colocation capabilities in the city and the Docklands. The new campus supports an existing community of more than 150 customers utilizing over 2,000 cross-connects. Consistent with our key priorities, we continue to innovate and integrate as we unveiled our HD Colo 2.0 offering in the second quarter, with advanced high-density deployment support for liquid-to-chip cooling across 170 of our data centers globally. In addition, just last week, we announced the deployment of a new Microsoft Azure ExpressRoute cloud on-ramp at our Dallas campus, along with the launch of the new Azure ExpressRoute Metro service in the Amsterdam and Zurich market.

We also bolstered our balance sheet and significantly diversified our capital sources, availing Digital Realty of more than $10 billion of private capital over the past year through our new hyperscale ventures and non-core dispositions. During the quarter, we expanded our existing Chicago hyperscale venture with a sale of a 75% interest in CH2, the remaining stabilized data center on our Elk Grove campus. We also sold an additional 24.9% interest in a data center in Frankfurt to Digital Core REIT, increasing their total position in the campus to just under 50%. These two transactions together raised over $500 million. Finally, we raised approximately $2 billion of equity since our last earnings call, including the $1.7 billion follow-on offering in early May and proceeds raised under our ATM.

These transactions, together with the others of the past year, have positioned our balance sheet to capitalize on this unique environment and construct the capacity that our customers demand. Artificial intelligence innovation is reshaping the global data center landscape. As new applications are developed and proliferate across industries and around the world, AI is driving an incremental wave of demand for robust computing infrastructure. According to Gartner, global spending on public cloud services is projected to grow over 20% to reach $675 billion in 2024. It is forecast to grow another 22% in 2025, with AI-related workloads driving a significant portion of this growth. Digital transformation, cloud, and AI are fueling demand for data center capacity worldwide.

Traditional data centers were already being pushed to their limits by demand for cloud and digital transformation, whereas demand for AI-oriented data center infrastructure is being accommodated in upgraded suites in our existing facilities and in newly built facilities. These AI workloads are taking place on specialized hardware with massive parallel processing capabilities and lightning-fast data transfer speeds. Fortunately, Digital Realty's modular data center design can accommodate these evolving requirements. The growth in demand is global. We're seeing strong demand across our North American metros first, but it is spreading beyond, with interest in locations like London, Amsterdam, and Paris in EMEA, and Singapore and Tokyo in APAC. Our global footprint is well-suited to capture this growing demand, whether it be for major cloud service providers adding to an availability zone, a major enterprise digitizing their business processes, or an AI model being trained or put into production.

However, this exponential growth in data center demand is not without its challenges. The environmental impact of these energy-intensive facilities is growing alongside the scaling of user requirements. According to the IEA, data centers consumed almost 2% of global electricity in 2022, a figure that could double by 2026, absent significant efficiency improvements. I will touch on Digital Realty's latest sustainability highlights in a moment. As we look to the future, the interplay between AI advancements and data center evolution will continue to shape the global technology landscape. IDC predicts that by 2027, worldwide spending on digital transformation will reach nearly $4 trillion, driven by AI, further accelerating the demand for data center infrastructure. We believe that the providers who can efficiently scale their capacity while addressing sustainability concerns will be best positioned to benefit from these three key drivers: digital transformation, cloud, and AI in the years to come.

Customers and partners are recognizing the value that Digital Realty can bring to their applications around the world. During the second quarter, we added 148 new logos, marking a new quarterly record. A growing number of these new logos are being sourced by our partners, who have officially expanded our sales team to reach into enterprises around the world. The wins this quarter include a Global 2000 advanced engineering and research enterprise developing a private AI sandbox on PlatformDIGITAL to enable experimentation and development by federal agencies and brought to us by one of our large connectivity partners, Lumen Technologies. Another partner brought a new logo that is an AI-enabled SaaS provider repatriating off-public cloud to save costs and enable growth. That same partner was also assisting two large financial institutions to increase their capacity on PlatformDIGITAL in APAC and North America.

Yet, another example of our growing partnerships: an AI SaaS provider and recognized leader in natural language speech synthesis is growing their commitment to PlatformDIGITAL with an expansion of current AI workloads where proximity is the driving requirement. A Global 2000 manufacturer is re-architecting their network on PlatformDIGITAL with a regional hub to improve efficiency, lower their network costs, and implement controls while eliminating the capital costs of maintaining their own facilities. Two leading financial services firms are both leveraging PlatformDIGITAL to extend their respective virtual desktop infrastructure environments to improve performance and user experience across their North American and EMEA employee base. Before turning it over to Matt, I'd like to touch on our ESG progress during the second quarter. We continue to make meaningful progress on ESG performance.

We were recognized by Time and Statista as one of the world's most sustainable companies of 2024. We also released our annual ESG report in June, highlighting our ongoing efforts to develop and operate responsibly. As described in our ESG report, we further increased our renewable energy supplies, with 152 data centers now matched with 100% renewable energy. We improved water efficiency and expanded the use of recycled water, which accounted for 43% of our total water consumption last year. We also launched a new supplier engagement program to drive sustainability and decarbonization through our supply chain. 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 second quarter results.

We signed $164 million of new leases in the second quarter, with two-thirds of that falling into the greater-than-megawatt category, the majority of which landed in the Americas, with healthy contributions from both EMEA and APAC. Not to be overlooked, however, was the $40 million of 0-1 MW leasing and a standout $14 million of interconnection bookings, our fourth consecutive quarter exceeding $50 million in our 0-1 MW plus interconnection segment. Turning to our backlog, we commenced a record $176 million of new leases this quarter, which was largely balanced by the strong second quarter leasing. As such, the $527 million backlog of signed and not-yet-commenced leases moderated by only 2% from last quarter's peak and remains robust at more than 9% of our total revenue guidance for full year 2024.

Looking ahead, we have over $175 million scheduled to commence through the remainder of this year, with over $230 million already scheduled to commence next year. During the second quarter, we signed $215 million of renewal leases at a 4% increase on a cash basis, driving year-to-date renewal spreads to 8.2%. Releasing spreads were once again positive across products and regions. Last quarter, we noted that the underlying renewal spread after stripping out two outliers was 3.4%. Our cash renewal spreads in the 0-1 MW segment were up 3.8% in the second quarter, while the > 1 MW segment was up 3.9%. As a reminder, the 0-1 MW segment is the primary driver of our overall releasing spreads, given the heavier weighting of lease expirations in this category, which are typically shorter-term leases with inflationary or better escalators.

0-1 MW deals renew reliably and predictably, making them track closer to market over time, thereby reducing the outsized movements that can come with larger or longer-term lease renewals. On the > 1 MW, renewals reflected the strong pricing environment, with leases renewed at $159 per kilowatt compared to the $133 per kilowatt achieved on > 1 MW renewals last quarter. The key difference between the quarters was the rate on the expiring leases. This quarter, leases in this segment expired at $153 per kW, while last quarter's leases expired at an average of $112 per kilowatt. For the quarter, churn remained low and well-controlled at 1.6%, and our largest termination was immediately backfilled at an improved rate.

In terms of earnings growth, we reported second quarter core FFO of $1.65 per share, reflecting continued healthy organic operating results, partly balanced by the impact of the meaningful deleveraging and capital-raising activity executed over the course of the last year. Revenue growth in the quarter was tempered by the decline in utility expense reimbursements, a comparison that is likely to persist throughout this year, given the decline in electricity rates in EMEA year-over-year, along with the impact of substantial capital recycling activity. Despite the deleveraging headwinds, rental revenue plus interconnection revenues were up 5% on a combined basis year-over-year. Adjusted EBITDA also increased 5% year-over-year through the first half and remains well on track to meet our 2024 guidance.

Pro forma for the capital recycling completed since last July, rental plus interconnection revenue and adjusted EBITDA grew by 13% and 14% year-over-year, respectively, in the second quarter. Stabilized same capital operating performance saw continued growth in the second quarter, with year-over-year Cash NOI of 2% as 3.6% growth, and data center revenue was offset by a catch-up in rental property operating costs, which were flat last quarter. Year-to-date, same capital Cash NOI has increased by 3.5%. As we have previously highlighted, same capital and OI growth is expected to be impacted by nearly 200 basis points of power margin headwinds year-over-year, given the elevated utility prices in EMEA in 2023. Moving on to our investment activity, we spent $532 million on consolidated development in the second quarter, plus another $90 million for our share of unconsolidated JV spending.

We delivered 72 MW of new capacity across the globe for our customers in the quarter, while we backfilled the pipeline with 71 MW of new starts. Blended average yield on our overall development pipeline moderated 20 basis points sequentially to 10.4% as a result of a market mix shift of completions and starts in North America during the quarter. In the first half of the year, we spent a bit over $1 billion in development CapEx, tracking closely towards our full-year guidance, as the second half should see a ramp from newly commenced projects along with a typical seasonal uplift. Turning to the balance sheet, we continued to strengthen our balance sheet in the second quarter, with the closing of the two transactions in April that we disclosed during last quarter's earnings report and was referenced earlier by Andy.

Together, these two transactions raised just over $500 million of gross proceeds. Additionally, since our last earnings report, we sold 14.7 million shares, including a $12.1 million share follow-on offering in early May, and incremental ATM issuance, raising $2 billion of net proceeds, while using cash on hand to pay off a EUR 600 million euro bond that matured in April and a GBP 250 million sterling bond that matured last Friday. At the end of the second quarter, we had more than $4 billion of total liquidity, and our net debt-to-EBITDA ratio fell to 5.3x, which is below our long-term target. Moving on to our debt profile, our weighted average debt maturity is over four years, and our weighted average interest rate is 2.9%. Approximately 84% of our debt is non-U.S. dollar denominated, reflecting the growth of our global platform and our FX hedging strategy.

Approximately 86% of our net debt is fixed rate, and 96% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, after paying off the euro notes in April and sterling notes last week, we have zero remaining debt maturities through year-end. Beyond that, our maturities remain well laddered through 2032. Let me conclude with our guidance. We are maintaining our core FFO guidance range for the full year of 2024 of $6.60-$6.75 per share, reflecting the continued strength in our core business, partly balanced by the front-half weighted capital recycling and funding activity, which helped to reduce our reported leverage by a full turn to better position the company to fund development in 2024 and beyond. We are also maintaining our total revenue and adjusted EBITDA guidance ranges for 2024, as well as the operating, investing, and financing expectations that we have previously provided.

Looking forward to the balance of 2024, core FFO per share remains poised to increase in the second half as the backlog commences and the impact of prior deleveraging moderates. This concludes our prepared remarks, and now we will be pleased to take your questions. Operator, would you please begin the Q and A session?

Operator (participant)

Thank you. We will now open the call for questions. In the interest of time and to allow a large number of people to ask questions, callers will be limited to one question. 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. If at any time your question has been addressed and you'd like to withdraw your question, please press star, then two. Your first question comes from Richard Choe with JPMorgan. Please go ahead.

Richard Choe (VP and Executive Director)

Hi.

I wanted to ask about the long-term pipeline you're seeing for the over 1 MW category. I think there's some concerns that right now we might be in a kind of pull-forward or kind of elevated cycle, and just wanted to get your sense of how far out this pipeline of deals that you're looking at and the current volume it could last. Thank you.

Andy Power (President and CEO)

Hey, thanks, Richard. So I would say in the > 1 MW category, we're seeing a continuation of the trends we've been playing out for the last several quarters. The biggest customers are desiring, one, contiguous capacity blocks that are very large. Two, they want them right now or as soon as possible. And three, the desire of fungible markets, i.e., markets where they can service certainly GenAI workloads, training, and ultimately inference, but also if they miss the measure, they can support their cloud computing needs as well.

So we have not seen the pedal ease in terms of the demand for those attributes in the market.

Operator (participant)

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

Irvin Liu (VP)

Oh, sorry. I was muted. So I wanted to double-click on renewal rates. I guess a couple of items stood out. One, in the Americas, the $146 per kilowatt monthly rate for the > 1 MW segment. That marked a sequential decline. Similarly, we've seen rates on new leases decline sequentially as well. So can you help us understand what's driving the sequential declines versus a quarter ago? Was this step-down mostly a function of markets and mix, or were there other sort of industry dynamics that we should be thinking about?

Andy Power (President and CEO)

Hey, thanks, Irvin. So I think the one deal or the one market you were pointing to was just the North America > 1 MW.

Now it's just a mix of composition of deals. This quarter, in particular, Dallas market really led the way. It's had outside strength. And this is actually a quarter where we didn't actually have any signings into our Northern Virginia market, which was not a lack of demand for that market. We still have some great options for customers available in large capacity blocks in two parts of that market, but we just didn't have anything this particular quarter. So if you look more broadly, I think almost all the other regions, both segments, had an uptick in rates. And that's always not apples to apples because the mix in the region could be different metrics. One example I just gave you, but that was the only outlier is the one that I just discussed.

Operator (participant)

The next question comes from Michael Rollins with Citi. Please go ahead.

Michael Rollins (Analyst)

Thanks, and good afternoon. Curious if you could talk about some of the ideas that you shared in the past around working on ways to participate in private capital recycling, whether it's trying to establish mechanisms to be able to react to when some of your private capital partners are going to hit their kind of maturity dates of those investments, what to do with those, as well as maybe other opportunities in the category where there's private investments in other data center assets?

Andy Power (President and CEO)

Thanks, Michael. Maybe I'll take it off, and Greg can expand upon this. So this topic is not new. I think we embarked on this journey at least 18 or at least a year and a half ago and made great progress called accumulating north of $10 billion of hyperscale private ventures with numerous parties.

You've seen that a few places, which we called out in the prepared remarks. You've seen our fee revenue having a step up of a recurring revenue basis in the P&L. Two, you've seen that in the balance sheet. Those private capital initiatives have obviously certainly moved our balance sheet from a defensive posture to an offensive posture and allowed us to now pull forward some of these great projects in our land bank that's north of 3 GW of runway of growth for our customers. And maybe I'll have Greg just give you the slightest preview of what's next in that evolution when it comes to our strategic private capital initiatives.

Greg Wright (Chief Investment Officer)

Yeah, thanks, Andy. Thanks for the question, Michael.

I think first thing I would say is consistent with what Andy said when he laid out a year ago, January, we're going to continue to bolster and diversify these private capital sources, and that's just what we're doing. As he said, we did a lot of transactions over the last 18 months. We're continuing to evolve that strategy. And when we have something to report, we will. I think it's important to note the importance of that capital because if you take a look at the demand profile for the business right now, the hyperscale business in and of itself between now and 2030 is expected to grow almost 3x, and that includes AI hyperscale and non-AI hyperscale. So look, we think the strategy that Andy laid out and that we embarked upon was the right strategy, but we're not done yet.

As we said, it's continuing to evolve. And when we have something to report on that front, we'll tell you.

Operator (participant)

The next question comes from Jon Atkin with RBC. Please go ahead.

Jon Atkin (Managing Director)

Yeah, good afternoon. I wondered about kind of the speed at which you can kind of deliver on your new starts that you've commenced recently, supply chain, access to energy, access to heavy equipment, and so forth. Any kind of color there?

Andy Power (President and CEO)

Thanks, Jon. So, I mean, we are. I can almost think of it as like a continuous conveyor belt of trying to deliver timely product for the customer's needs. That's certainly playing out in our enterprise colocation markets and now probably more than ever on the larger capacity blocks. This quarter, the book to sign the commence thing was elongated to about 20-ish months.

That was based on one particular customer that we serviced, and they had a very location-sensitive need. They had a radius restriction. The only thing we had in that radius was literally a land site. Luckily, it was on a campus where we owned the land, and we were ready to get moving on. That obviously elongated the delivery timeline for that particular signing. We excluded that. We were basically at sign to commence like 4.5 months. We're continuously, obviously, delivering capacity and adding new capacity, whether it's from land to shell, shell to active suites, and making sure we're maintaining our production slots and vendor relationships for that timely delivery in our 50+ metros around the world.

Operator (participant)

The next question comes from Jon Petersen with Jefferies. Please go ahead.

Jon Petersen (Managing Director and Head of US REIT Team)

Oh, great. Thank you.

I was hoping you could talk about some of the larger > 1 MW lease expirations that are coming up in the coming quarters. How many of those have fixed renewal options, and how much can be marked to market rents? And if I can sneak in a follow-up question, I think there's a $168 million impairment in the income statement. Just curious what that is related to.

Matt Mercier (CFO)

Sure. Yes. Sure. Thanks, Jonathan. In terms of lease expirations, what I'd say is less than half of our > 1 MW leases have options we call fixed increases on them. But I would call it that significantly less than that are typically renewed pursuant to those options. And that's generally for a few reasons. One, our customers must provide us notice of renewal within the proper period. That doesn't always happen. Two, renewals must come, in essence, without any changes.

So if there's any additional space, term, anything changes, that opens up the contract, I think, as we've talked about in the past. And third, some of those customers also end up turning. So that all gives us an ability to be able to bring those contracts to market for the majority of what ends up rolling within a given period. On your second point on impairment, yes, we did have impairment associated with a few of our non-core assets, which are part of our disposition plans, and those are all located in the secondary market. And I'd also put that in context to the fact that we've generated, well, we're close to, I think, over $1.3 billion of gains from the capital recycling efforts that we've done over the last year.

Operator (participant)

The next question comes from Ari Klein with BMO Capital Markets. Please go ahead. Thank you.

Ari Klein (Director of Equity Research)

I guess just the comments on the pipeline coming off two very strong quarters of leasing and with the development pipeline, 66% leased, including 80% of the Americas. How should we expect CapEx to trend from here? And then what's your appetite to add new domestic markets, given what seems like broadening of demand?

Andy Power (President and CEO)

Thanks, Ari. Why don't I first let Colin just speak to the pipeline overall, and then we can kind of talk about a little bit of the development side of that as well as new markets.

Colin McLean (CRO)

Yeah. Thanks, Ari. I appreciate the question. So you highlighted strong performance over 1 MW. Pipeline overall for 1 MW is trending positively below 1 MW, which we deem as important as heading in the right direction as well. Record pipeline driven from digital transformation, cloud, and AI.

You saw that trending positively in our results, both directly and indirectly. Indirect executions just picked up for the last quarter, and we're now at 23% of our pipeline being indirect, which we think is a positive sign to the value proposition there. One of the things that Andy highlighted is the key value of metros with a demand cycle. We're seeing enterprises and hyperscalers alike see real value in proximity, and the metro play that we have in key metros across the globe being particularly important. Finally, the ability, both for enterprises and hyperscalers, to grow and scale in capacity is of key value, really, across the spectrum of low and above a megawatt.

Andy Power (President and CEO)

Then, Ari, on the second part of the question, I would say we remain very focused on our core markets, north of 50 of them around the world, nearly 30 countries on six continents.

Those markets, we continuously see robust and diverse customer demand. I'm talking cloud compute from numerous CSPs, enterprise hybrid IT, and service providers, and markets where we see really long-term barriers. And speaking to our actions on those, a sizable piece of our activation in shells, moving from our 3+ GW land bank into shells and ultimately to be delivered in suites, is all in those same core markets.

Operator (participant)

The next question comes from David Barden with Bank of America. Please go ahead.

David Barden (Managing Director)

Hey, guys. Thanks. So I guess two, if I could. Andy, I guess last quarter, you talked about how 50% of these record bookings were or roughly 50% were AI-related. It obviously stepped down sequentially. But to your point about the lengthening of the delivery period, it seems like there's still some very large customers in what was the new leasing number this quarter.

Could you kind of revisit, on an apples-and-apples basis, how 2Q unfolded versus 1Q from an AI versus non-AI type of new leasing pattern? And how do we think about this? Is there going to be a seasonality to this sort of thing? That would be kind of my first question. And then the second question is, I was just going back to 2019. You guys generated $6.65 of core FFO, which is kind of what you're guiding to for 2024. And I know that you've laid out a hope that there will be growth, more meaningful growth in the forward-looking periods. Also, you said that your balance sheet is now less in a defensive and more in an offensive position. And historically, when you've been offensive, it's meant dilution to secure future growth opportunities.

So I was wondering if you could kind of, Andy, revisit the bull case for growth to take all these great things that are happening at the top line and turn them into bottom-line growth. Thank you.

Andy Power (President and CEO)

Thanks, Dave. So I would say closer to apples-and-apples from a 50% contribution last quarter to this quarter, probably closer to a quarter of our size, we would say we really pin on AI use cases. But I would caveat that in a few ways. One, that's in a quarter that's not our record quarter, but I think the top four quarter overall signings, great contribution of both 0-1 and +1 MW, as well as a near record in interconnection signings. And that means we're still winning with the traditional demand drivers, digital transformation, cloud computing, and the like, that that demand has not nearly exhausted itself or played out.

I would also say that there was certainly a deal that I didn't count in the category of AI that is certainly pushing the envelope on power density and post-infrastructure, already thinking about evolving that capacity block. We're signing with them into what will ultimately be supporting AI down the road is my guess, which I think speaks to the modularity of our design and how we're able to scale infrastructure to the demands of our customers as they need it. The second part of your question, first off, I don't want to confuse the word offense with M&A. I think we've not done any real M&A or external growth for several years now. You can maybe say the resolution of their Cyxtera relationship, but that was, I think, making lemonade out of lemons more than anything.

When I use the word offense, I mean that's converting this 3+ GW land bank, which we've assembled over the years, i.e., we didn't just go buy that yesterday, and turning that into a great product for our customers to land and expand in great returns on our investment. You've been seeing that play out now with our ROIs and development schedule, crescendoing into the double digits. You've seen that in the pricing power, and you've seen our value proposition really resonate in all of our customer segments across our core markets. Lastly, our eye is on the prize of accelerating bottom line. That's where we reoriented our strategy 18 months ago about our value proposition, integrating, innovating, bolstering, diversifying our capital sources.

And all those things were about making sure we're driving per-share FFO, per-share growth that is accelerating, and it's going to be continuously compounding for years to come. So there's been no divergence in that conviction of what comes next for the rest of 2024 and what we've said about 2025 next year.

Operator (participant)

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

Eric Luebchow (Director and Senior Equity Analyst)

I appreciate it. Thanks for taking the question. So, Andy, could you maybe comment on what type of market rent growth you're seeing right now in some of your key metros on an apples-to-apples basis relative to last year, and whether that's continued to evolve as this year has progressed? And then as you look out into the future, do you see an opportunity for market rent growth to continue to outstrip your development costs?

And we can see the kind of 10%-12% development yields you have in your pipeline move even higher. Thank you.

Andy Power (President and CEO)

Thanks, Eric. I mean, I would couch that market rent growth is continuing to move in our favor. You've seen two elements happening. The most precious capacity blocks in the key markets, like in Northern Virginia, continue to set new records in terms of rates. And you've also seen a catch-up phenomenon where other markets in North America or outside of the U.S. are catching up a fair bit in terms of their trajectory of growth. Listen, I look at this. You've got these waves of demand, cloud computing, digital transformation, hybrid IT, and now AI that are just getting going in some of these. They're large and dynamic, and it's happening in a supply constraint backdrop from numerous avenues of supply constraint.

Those elements are ultimately resulting in the increases in rate that we've been able to execute on for several quarters, and I believe will be quarters to come. I also believe they will likely outstrip whatever inflationary costs we see in terms of build costs and at least maintain these ROIs, if not continue to notch them up slightly higher.

Operator (participant)

The next question comes from Jim Schneider with Goldman Sachs. Please go ahead.

Jim Schneider (Senior Equity Analyst)

Good afternoon, and thanks for taking my question. On the topic of power constraints and supply environment you see relative to transmission, with a time horizon of, let's say, 12-18 months, do you think the outlook for power availability is getting more constrained, less constrained, or staying about the same relative to new projects you have either under development or contemplating?

Andy Power (President and CEO)

Jim, I think that there's a few phenomena happening.

One, we're getting close. I mean, some of these constraints popped up now a year or years in the rearview mirror, and we're obviously inching our way close to destinations of resolutions, be it in Northern Virginia, which I think 2026 is supposedly a bogey, or in Santa Clara, and there's other non-U.S. markets as well. At the same time as we approach the power constraints, there's obviously a good potential that the delivery dates may not deliver on time. These are multifaceted projects that require easements, substations, construction projects. At the same time, the demand didn't stand still while the power was constrained. The second phenomenon I think you're seeing is this is becoming a more pervasive topic. It was very focused on one called Center of the Universe Market with Northern Virginia, and we're hearing more and more about other markets.

And lastly, I wouldn't pin it just on power. Yes, the power has got broader generation issues in an economy that we're trying to green. It's got transmission issues that navigate municipalities and substation deliveries and transmission lines cutting through the backyards of folks that we'd rather not have them not there. But there are also other elements of sustainability concerns, moratoriums in certain parts of the world. And so I think that this is a multifaceted supply constraint, which I would also mention that even if it does get fixed, it has a propensity that history could repeat itself here. So I think this is going to make our value proposition with what we deliver to our customers even more compelling and valuable in the end of the day.

Operator (participant)

The next question comes from Vikram Malhotra from Mizuho. Please go ahead.

Vikram Malhotra (Managing Director)

Good afternoon or evening.

Thanks for taking the question. I guess just bigger picture, you've talked about leasing spreads in the > 1 MW improving over time, given the differential of what's expiring versus, I guess, market. But you also referenced market rent growth improving quite a bit. So with that and just some recent comments from hyperscalers just talking about the risk of oversupply or just too much CapEx, can you sort of just frame the near-term opportunity set in the > 1 MW from a maybe bookings, but more so pricing standpoint versus the puts and takes over time just from a demand-supply? I'm just wondering, is there a risk that you see the spreads theoretically improve, but there's a lot of supply coming down the pike?

Andy Power (President and CEO)

I'll take the maybe the second part of your question. And I'll ask Matt

to comment on our outlook on leasing sprints is really kind of to talk about the stair step in our expiration schedule, which does become even more attractive in these coming years. I think, Vikram, I think the heart of your second question is the broader AI theme question you're hearing more in mainstream media of, is AI overdone? Is this a bubble? What could come next? I think some of that is not necessarily 100% germane to what we're seeing. And the reason I say that is, in our business, when it comes to AI, we are signing long-term contracts. I'm talking 15 years with some of the largest, most established technology companies ever. Two, and I mentioned before, we're doing that. We're not chasing this out to unproven territories.

We're focused on core markets with robust and diverse customer demand, where traditional use cases, being cloud computing from numerous CSPs, enterprise hybrid IT, and service provider demand, are continuing to grow over time, even if the AI has peaks and valleys. We're doing it in markets that we believe have real term, real long-term supply constraints. Lastly, all this is happening probably in the most supply-constrained moment in the last 20 years of data centers. So I'm not sure or convinced that even if AI takes a breather on its long-term innovation trajectory. I think that volatility, we are somewhat insulated in our sector from that volatility based on how we're perceiving it. But Matt, once you hit on the leasing expiration.

Matt Mercier (CFO)

Sure.

So what I call it is if you look at the > 1 MW leases that are expiring called in the next 18 months, the average rate on that's in the $140-$145 area. But then it steps down pretty gradually to as low as $111 by the time you get to 2029. And so I think you're going to see a continued positive trajectory on our releasing spreads, not only in the > 1 MW category, but I think also across all categories. So I think you'd also recall within our 0-1 MW spreads have been positive. I think throughout our history, those are typically more regular, steady inflationary type increases or better.

So I think this puts us in, I think, in a good position, considering where market rates are, where some of the supply constraints are, to where we'll see market rates now continue to remain positive and grow and continue to accrue benefits to our releasing spreads as we go through time.

Operator (participant)

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

Frank Louthan (Managing Director of Communications Services)

Great. Thank you. So in talking before, you mentioned you're prioritizing retail colo over hyperscale. How should we think about that practically and kind of track that? Is that part of the reason the sub-a-megawatt bookings have remained a little bit elevated? How should we think about that trend going forward?

Andy Power (President and CEO)

Colin, why don't you—that's a great question because we're obviously spending a lot of time on the bigger deals right now.

But Colin, why don't you give a walkthrough on the highlights of the quarter?

Colin McLean (CRO)

Sure. Yeah, thanks for the question. I'm not sure how to use the word prioritize. We definitely want to emphasize a full platform to have an offering set. So as highlighted in Andy's opening remarks, performance in Q2 is particularly strong on the zero to one, fourth consecutive quarter over $50 million, which I think was also the third highest ever from 0-1 MW. We think this consistency is really driven from our ability to serve the full spectrum of requirements for our enterprises and service providers across the Global 5000 focus of customers. New logos are also pretty strong as well, most solid ever in terms of 148, with 40% of that coming from the indirect side.

Channel, also, which I highlighted earlier, was a particular strong point with over 20% booking contribution from the indirect side overall. So we view this segment as continuing our value proposition out to our client set. And a lot of the drivers Andy talked about around digital transformation, cloud, and AI are also playing out in the 0-1 MW segment across enterprises and service providers. And Andy highlighted a couple of key wins on opening remarks, namely 14,500 clients, 14,000 clients, excuse me, offering their virtual desktop requirements and the global manufacturing one we have on the enterprise side. I also want to highlight the particular highlight of the Microsoft ExpressRoute launch into Dallas, which we feel like is a really strong representation of our platform.

Operator (participant)

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

Michael Elias (Director)

Great. Thanks for taking the questions, guys.

Andy, in the past, you've talked about CapEx being an accordion that you expand and contract to the end of solving for consistent bottom line growth. So as I'm thinking about it, given the leasing success that you've had over the last two quarters, and also as part of that, the market opportunity in both hyperscale and enterprise, is now the time to be expanding that accordion and really hitting the gas on CapEx? And if so, I just want to be clear, what is the explicit FFO for share that you growth that you guys are solving for as part of that algorithm? Thank you.

Andy Power (President and CEO)

Thanks, Michael. So just to clarify, I wouldn't say CapEx is the accordion. I think it's how we fund it, which I think is the same concept you're outlining in your question. The CapEx intensity is being pulled forward, right?

We talked about this in terms of releasing more shell capacity and ultimately suites in a highly leased, pre-leased development pipeline at very attractive returns. So we're seeing the CapEx intensity increase. We're investing at great rates, great returns for our business, supporting great customers in numerous markets. And we've now positioned ourselves at a balance sheet position of greater strength, not only just from our leverage standpoint, but from our liquidity and our diverse sources of capital. And what we're trying to do is essentially use the levers of using our public capital and our private capital to get back to a mid-single digits, call it floor to our growth next year, and then further acceleration on top of that, and do that in a consistent year method of compounding that growth for numerous years to come.

So it's really those levers of using public and private capital to drive that bottom line to new levels and on a consistent framework.

Operator (participant)

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

David Guarino (Managing Director)

Thanks. I appreciate the industry statistics you guys included in your investor presentation. And I wanted to ask specifically about the declining global vacancy you highlighted, which is around 6%. But when I look at your stabilized portfolio, the vacancy level is about three times higher than that. So I guess first, why is it so much higher? And then second, given the record demand we're seeing across the industry, how long do you think it's going to take before Digital's portfolio resembles more like the industry is?

Andy Power (President and CEO)

I think you've got to remember that our portfolio is not all just called hyperscale.

The hyperscale portion of business can literally be 100% leased in many buildings or markets, right? My gut is that chart, which I think Data Center Hawk—which they're doing the best they can—is very much about more of a hyperscale lens. I was actually pretty pleased on the occupancy front. We're up 100 basis points in the same-store sequential quarter-over-quarter. We have a big same-store pool. It's not nothing. We're also actively taking it one step backward sometimes on occupancy to take two, three, four steps forward when vacant suites come back online, and we convert those to colo and be able to support our customers' colo growth as well. This was the year we said that with occupancy, we're going to be moving the needle, and we have been moving the needle.

We got more to do in that arena. So I think you're going to see it move up. And if you look at, you can also look to get more apples to apples. If you look at the occupancy we show by markets, there are certain markets of way less than 6%-8% vacancy that are just very much heavily weighted towards our hyperscale business. They just have a much smaller colo footprint. Like Northern Virginia, if you parse through it, especially on a megawatt basis, I wish I had that type of vacancy to sell right now, and we just don't.

Operator (participant)

The next question comes from Matthew Niknam with Deutsche Bank. Please go ahead.

Matthew Niknam (Director of Equity Research)

Hey, guys. Thanks for getting me on. Two follow-ups. First, on the colo side, so you cited the record new logos 148 this quarter.

I'm just wondering, from a macro perspective, any change in terms of macro impacts across different customer sizes within that sub-1 MW base? And then secondly, you talked about leverage getting back under 5.5 turns, the prospect of improving bottom line growth next year. How do you think about the dividend and the potential for forward growth in the dividend relative to some potential incremental investment in the business?

Andy Power (President and CEO)

Thanks. Matt, you hit the dividend question first and Colin, and I can hit a little bit on what we're seeing in the enterprise demand piece of the puzzle.

Matt Mercier (CFO)

Yeah, sure. So thanks, Matt. So in terms of the dividend, look, I think it's back to kind of what we've said historically. I think we've got a unique opportunity here to take advantage of what we see as tremendous growth opportunity throughout our global portfolio.

One of the easiest and cheapest forms of capital within that is internally generated funds. So we continue to look to try to maximize our cash flow as part of our funding strategy on that front. On top of that, I think as we've also mentioned throughout this call, we're keenly focused on growing the bottom line and accelerating that growth in outer years. As we grow the bottom line, which is going to benefit and accrue benefits to not only core FFO, but then down to AFFO, we then look to keep our dividend growth in line with that bottom line per share growth as well.

Colin McLean (CRO)

Great. On the new logo question, a couple of trends just maybe to highlight in that question. First, we really believe this is a hybrid world.

So we're seeing that continued trend in the new logo base, hybrid work, cloud, data, that our new logo requirements really are served well across our global platform. Number two is the mix of that 148, was very much split between commercial and global 5,000 accounts. So we're seeing continued interest in the platform across the larger customers who buy with more frequency in the smaller end of the spectrum. Not sure that we can necessarily point to a growing density in that particular base of client base or capacity, but I can tell you this particular base of clients sees real value, as I mentioned, in our global platform, which really serves well across their requirements.

Andy Power (President and CEO)

And just one, Chris, why don't you just chime in on the early reads on the HD Colo through our analysis? I would say an uptick in the enterprise segment.

Chris Sharp (CTO)

Absolutely.

I think I agree with Andy on the macro trend of what we're doing with HD Colo. It's just really aligning the right capability to cool some of these higher power density requirements coming into the market. And so you see a lot of the capabilities that we've brought in across 170 facilities. We can execute these higher density solutions in 12 weeks or less. And I think what's interesting about that is the capacity blocks are getting larger, but the capabilities that customers are trying to bring to market are definitely challenging for a lot of your traditional colo offerings where we've really started to see that come to market about six to seven months ago. And so we've been able to pre-procure a lot of these capabilities to get ahead of that challenge.

But just kind of current rack densities in the market today are 6 kW-8 kW. And I think one of the things I think you're really hitting on is what are some of these new requirements coming in? And so healthcare, we're seeing 10 kW a rack. I think gaming, you're seeing 15 kW a rack this last quarter. And then some of the AI software capabilities, 40 kW. But at the end of the day, we can meet a customer requirement of 150 kW. So we have a lot of runway with that. And to put a little context to it, in the most recent state-of-the-art NVIDIA GB200, we can support that requirement in an under 12-week fashion with our current HD Colo offering. So definitely seeing a lot of growth in that market.

Operator (participant)

The next question comes from Anthony Hau with Truist Securities. Please go ahead.

Anthony Hau (VP of Equity Research)

Great.

Thanks for taking the question. I noticed that the way average commencement period for new leases is 20 months away. I'm assuming most of these leases are probably for 2026 deliveries, but are customers looking to sign leases for 2027? If they are, what type of customers are looking to take up space this far out?

Andy Power (President and CEO)

Thanks. So I mean, customers, especially when it comes to larger capacity blocks, they're really trying to future-proof, and that's where our 3 GW of growth comes in handy. So certainly, the nearest term deliveries are precious, but they're thinking years ahead. Now, that particular example, as I mentioned, the 20 months was elongated because that customer, one particular customer, had very much their eyesight on a particular market, and they had reduced restrictions about where they could grow and where we could support their growth. We were literally at layout capacity.

So we were able to deliver as fast as we could, but it certainly elongated. Excluding that one outlier, we're close to 4.5 months. And I think I wouldn't count on those outliers consistently popping up. There'll be more sporadic.

Operator (participant)

The next question comes from Brandon Nispel with KeyBanc Capital Markets. Please go ahead.

Brandon Nispel (Director and Equity Research Analyst)

Thanks for taking the question. Question for Matt. Can we talk about not updating the guidance at all? Maybe there's some moving pieces from FX and the recent acquisition that you call out. Just as I was looking at it, if you look at the first half of the year and annualize it, revenue really needs to accelerate while just EBITDA would need to move backwards actually to hit the midpoint of your guidance. So I guess the question is, is the EBITDA FFO guide just conservative?

Are there some uncertainty in terms of timing of commencement, unusual expenses? Hoping you could just unpack that for us. Thanks.

Matt Mercier (CFO)

Sure. Look, I would, again, I'd probably focus kind of on the bottom line. If you look at where we are halfway through the year, we're a little less than halfway through the midpoint of our core FFO guidance. And we talked about we expected this quarter would have a little bit of pressure because of the capital recycling efforts that we've concluded with closing CH2 and having the related income from that come out this quarter. And so look, what we're going to see is in the second half, growth we're expecting to improve and accelerate as the backlog of deals and signings come online.

As we expect, as we haven't changed the guidance, we've obviously given a wide range, but if you look at, I think, where we are this year and the expectations for accelerating in the back half, which I think will set us up very nicely for 2025, we feel pretty good about the midpoint of guidance and being able to achieve that.

Operator (participant)

Thank you. That concludes the Q and A portion of today's call. I'd like to now turn the call back over to President and CEO Andy Power for a closing remark. Andy, please go ahead.

Andy Power (President and CEO)

Thank you. Digital Realty posted another strong quarter in 2Q with record leasing in the first half, demonstrating how Digital Realty is positioned to support the elevated level of demand we continue to see for data center infrastructure.

Fundamental strength continued through the second quarter with robust leasing volume, healthy pricing, and record commencements, poised to drive an acceleration in bottom line growth. We continue to innovate and integrate with the rollout of HD Colo 2.0 and the addition of new cloud on-ramps to PlatformDIGITAL in the quarter. And we have repositioned the balance sheet by recycling capital out of stabilized assets, diversifying our capital sources, and reducing our leverage. All this was done with an eye toward improving our growth profile while supporting our customers' growing needs. We are excited about this quarter's results and remain optimistic about the outlook for data center demand and our position in the market. 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.

Operator (participant)

The conference is now concluded.