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    Digital Realty Trust Inc (DLR)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (After Market Close)
    Pre-Earnings Price$147.37Last close (Jul 25, 2024)
    Post-Earnings Price$142.86Open (Jul 26, 2024)
    Price Change
    $-4.51(-3.06%)

    What went well

    • Record new leasing activity and strong demand: Digital Realty signed $164 million of new leases in Q2 2024, contributing to a record first half of the year, with over 148 new logos added. This reflects robust demand across all customer segments, including AI-related workloads, which comprised approximately 25% of Q2 signings. ,
    • Improved financial position and growth prospects: The company reduced its leverage to 5.3x, below its long-term target, positioning it well for future growth. Digital Realty expects accelerating bottom-line growth in the second half of 2024 and into 2025, maintaining its core FFO guidance of $6.60 to $6.75 per share for the full year 2024. ,
    • Significant capacity and focus on core markets: With a 3-plus gigawatt land bank, Digital Realty is well-positioned to meet future demand, particularly for larger capacity blocks and AI workloads. The company remains focused on its core markets, which continue to experience robust and diverse customer demand. ,

    What went wrong

    • Decrease in AI-related leasing from 50% last quarter to approximately 25% this quarter, suggesting a potential slowdown in AI-related demand.
    • Core FFO per share remains at $6.65, the same as in 2019, indicating a lack of bottom-line growth despite revenue growth, and raising concerns about the company's ability to convert top-line growth into increased earnings.
    • Recognition of $168 million impairment associated with non-core assets in secondary markets, which may reflect challenges in those markets and could impact future profitability.

    Q&A Summary

    1. AI Demand Outlook
      Q: How is AI affecting your leasing demand?
      A: AI contributed to about 25% of our signings this quarter, down from 50% last quarter, but we continue to see strong demand from traditional drivers like digital transformation and cloud computing. We're signing long-term contracts, some up to 15 years, with the largest technology companies, indicating sustained AI-related growth.

    2. Market Rent Growth
      Q: Are you seeing market rent growth continue?
      A: Yes, market rent growth is moving in our favor. Key markets like Northern Virginia are setting new rate records, and other North American markets are catching up. We expect market rent growth to outpace any inflationary cost increases, potentially improving development yields.

    3. CapEx Plans and Funding
      Q: Will you increase CapEx given leasing success?
      A: CapEx intensity is increasing as we pull forward development of highly leased projects with attractive returns. We're leveraging public and private capital to achieve mid-single digit per share growth next year and further acceleration thereafter.

    4. Lease Expiration Opportunities
      Q: Can you capture rent increases on expiring leases?
      A: Less than half of our over 1 megawatt leases have fixed renewal options, and even fewer are renewed under those terms. This allows us to bring most expiring contracts to market rates, which are higher. Average rates on expiring leases are around $140-$145 per kW monthly, stepping down to $111 by 2029, suggesting positive releasing spreads going forward.

    5. Dividend and FFO Growth
      Q: How will dividend policy align with growth?
      A: We aim to maximize cash flow to fund growth opportunities. As we grow bottom-line per share, we expect dividend growth to be in line with this growth, balancing investment needs and shareholder returns.

    6. Power Constraints Impact
      Q: Are power constraints affecting your projects?
      A: Power constraints are a pervasive issue, but we are approaching resolutions in markets like Northern Virginia by 2026. However, delivery dates may still face challenges due to the complexity of projects. This underscores the value of our offering in supply-constrained environments.

    7. Demand Pipeline Strength
      Q: How strong is your demand pipeline?
      A: We see a record pipeline driven by digital transformation, cloud, and AI. The greater than 1 megawatt category continues to see strong demand for large, contiguous capacity blocks, with no easing of demand. We also have a robust pipeline in the sub-1 megawatt segment, with consistent bookings.

    8. Occupancy and Vacancy Rates
      Q: Why is your vacancy higher than industry?
      A: Our portfolio includes both hyperscale and colocation assets. While hyperscale facilities can be nearly 100% leased, the overall vacancy reflects our diverse offerings. We increased same-store occupancy by 100 basis points quarter-over-quarter, and we're actively working to improve occupancy rates.

    9. New Customer Growth
      Q: Any changes in sub-1 MW customer trends?
      A: We had a record 148 new logos this quarter, evenly split between commercial and Global 5000 accounts. We're seeing continued demand across customer sizes, with no significant macro impacts affecting this segment.

    10. Guidance and Financial Outlook
      Q: Is your FFO guidance conservative?
      A: We are confident in achieving the midpoint of our core FFO guidance. While the first half included some pressure from capital recycling efforts, we expect acceleration in the second half as our deal backlog commences.

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