Digital Realty Trust Inc (DLR) — Q2 2024 Earnings Call Transcript

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 megawatt 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 shell capacity that could support 3 gigawatts plus of incremental development, reduced leverage, and our growing and diverse array of capital partners. During the second quarter, we remain 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 integrated 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 to 1 megawatt plus interconnection segment with record new logos and near-record bookings in each of the 0 to 1 megawatt 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. And 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 sought submarket of London. With the acquisition of a densely connected enterprise data center campus, which we expect to be highly complementary to our existing co-location 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 Express Route Metro Service in the Amsterdam and Zurich markets. 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 the 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 15%. These two transactions together raised over $0.5 billion. 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 others from 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 the 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 and 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 on 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 and around the world. The wins this quarter include Global 2000 advanced engineering and research enterprises 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 all 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. And 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 rearchitecting their network on PlatformDIGITAL with a regional hub to improve efficiency, lower their network costs, and implement controls while eliminating the capital cost of maintaining their own facilities. And 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.

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 1 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 to 1 megawatt leasing and a standout $14 million of interconnection bookings. Our fourth consecutive quarter exceeding $50 million in our 0 to 1 megawatt 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 the 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%. Re-leasing 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 to 1 megawatt segment were up 3.8% in the second quarter, while the greater than 1 megawatt segment was up 3.9%. As a reminder, the 0 to 1 megawatt segment is the primary driver of our overall re-leasing spreads, given the heavier weighting of lease expirations in this category, which are typically shorter-term leases with inflationary or better escalators. 0 to 1 megawatt 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 greater than 1 megawatt side, renewals reflected the strong pricing environment with leases renewed at $159 per kilowatt compared to the $133 per kilowatt achieved on greater than 1 megawatt 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 up 2% as 3.6% growth in 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%. And as we have previously highlighted, same capital NOI 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 megawatts of new capacity across the globe for our customers in the quarter, while we backfilled the pipeline with 71 megawatts of new starts. The 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 the 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 were 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 €600 million bond that matured in April and a GBP250 million 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 5.3 times, 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 to $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 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.

Hi. I wanted to ask about the long-term pipeline you're seeing for the over 1 megawatt category. I think there are 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 in the current environment could last. Thank you.

Hi. Thanks, Richard. So I would say in the greater than 1-megawatt 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, trading ultimately inference, but also if they miss the measure, they can support their cloud computing needs as well. So we have not seen an easing in terms of the demand for those attributes in the market.

Sorry, I was muted. So I wanted to double-click on renewal rates. So, I guess, a couple of items stood out. One, in the Americas, the $146 per kilowatt monthly rate and for the greater than 1 megawatt segment, that marked a sequential decline. Similarly, you know 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?

Hi, thanks, Irvin. So I think the one big deal or the one market you were pointing to is just the North America greater than 1 megawatt. Now just a mix of composition of deals. This quarter, in particular, the Dallas market really led the way. It's had outside strength and this is actually a quarter where we didn't have any signings into our Northern Virginia market, which was not a lack of demand for that market, and we still have some great options for customers available at large capacity blocks in two parts of that market, but we just didn't pen anything in this particular quarter. So if you look more broadly, I think almost all the other, call it regions in both segments had an uptick in rates and that's always on apples-to-apples that the mix in the region could be different metros like that one example I just gave you, but that would be only outlier is the one that I just discussed.

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 is private investments in other data center assets?

Thanks, Michael. Maybe I'll kick it off and then Greg can expand upon this. So this topic is not new. I think we have embarked on this journey at least a year and a half ago and made great progress, call it accumulating north of $10 billion in hyperscale private ventures with numerous parties. You've seen that in a few places, which we called out in the prepared remarks, we've seen our fee revenue have a step up on 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 allow us to now pull forward some of these great projects in our land bank that's north of 3 gigawatts of runway of growth for our customers. And maybe I'll ask Greg just to give you a slightest preview of what's next in that evolution when it comes to our private strategic product accounting initiatives.

Yes. Thanks, Andy. Thanks for the question, Michael. I think the first thing I would say is consistent with as Andy said, we 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. And 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 that 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 three times and that includes AI hyperscale and non-AI hyperscale. So look, we think that the strategy that Andy laid out and that we embarked upon was the right strategy, but we're not done yet. And as we said, it's continuing to evolve. And when we have something to report on that front, we'll tell you.

Yes, good afternoon. I wonder 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?

Thank you, Jon. We are continuously focused on delivering timely products to meet the needs of our end customers, especially in our enterprise colocation markets. This has become increasingly important for larger capacity blocks. This quarter, the timeframe to sign a commencement agreement extended to about 20 months due to one specific customer who had location-sensitive requirements and a radius restriction. Fortunately, we owned the land in that area and were ready to proceed, which led to an extended delivery timeline for that signing. Excluding that situation, our typical signing timeline is around 4.5 months. We remain committed to delivering new capacity and enhancing our offerings, from acquiring land to developing active suites while ensuring our production slots and vendor relationships are maintained across our more than 50 locations worldwide.

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

Sure, thanks, Jonathan. Regarding lease expirations, I can note that less than half of our leases over 1 megawatt have options with total fixed increases. However, a significantly smaller portion is typically renewed under these options. This happens for a few reasons. First, our customers need to notify us of their intention to renew within a specific timeframe, which doesn't always occur. Additionally, renewals generally have to be made without any changes. If there is any extra space or modifications to the term, it can affect the contract. As we've mentioned before, some customers end up churning as well. This situation allows us to market those contracts for the majority of what is up for renewal during a specific period. Regarding your second point on impairment, we did experience impairment related to some of our non-core assets that are included in our disposition plans and are situated in the secondary market. Additionally, it's important to note that we've generated over $1.3 billion in gains from our capital recycling efforts over the past year.

Thank you. 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% in 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 a broadening of demand?

Hi, 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 the development side of that as well as new markets?

Thank you for the question, Ari. I wouldn’t say we prioritize, but we certainly aim to emphasize a comprehensive platform and a complete offering. As Andy mentioned, our performance in the second quarter was particularly impressive, achieving over $50 million for the fourth consecutive quarter in the 0 to 1 category, which is the third highest ever for that segment. We believe this consistency stems from our capability to meet the diverse needs of our enterprise clients and service providers within the Global 5000 customer base. Additionally, our new logos were notably strong, with a record 148%, 40% of which originated from the indirect channel. The channel, as I previously noted, significantly contributed with more than 20% of bookings coming from the indirect side. We continue to see this segment as a vital part of our value proposition to clients. Many of the trends Andy discussed concerning digital transformation, cloud, and AI are also evident in the 0 to 1 segment across enterprises and service providers. Andy mentioned some key wins, including engagements with Fortune 5000 clients regarding their virtual desktop needs, as well as a substantial global manufacturing win on the enterprise side. I also want to emphasize the significance of the Microsoft ExpressRoute launch in Dallas, which we believe strongly represents our platform.

Thank you for taking my questions. Andy, you've previously mentioned that CapEx is like an accordion that you can expand and contract to achieve consistent bottom line growth. Considering your leasing success over the past two quarters and the potential in both hyperscale and enterprise markets, is now the right time to expand that accordion and maximize CapEx? If so, could you clarify what specific FFO per share you are targeting in this strategy? Thank you.

Thank you, Michael. To clarify, I would say that capital expenditures are central to our strategy and how we fund our initiatives. The emphasis on capital expenditures is being accelerated. We previously discussed enhancing our shell capacity, ultimately leading to a highly leased development pipeline with attractive returns. We are experiencing an increase in capital expenditure intensity, achieving great rates and returns for our business while supporting a variety of customers in different markets. Our balance sheet is in a stronger position now, not only in terms of leverage but also regarding liquidity and diverse capital sources. We aim to utilize both public and private capital to target mid-single-digit growth for next year and further accelerate beyond that. Our goal is to consistently compound growth over the coming years by leveraging both public and private capital to enhance our bottom line significantly within a structured framework.

Hi everyone. Thank you. I have two questions. Andy, last quarter you mentioned that about 50% of the record bookings were related to AI, but that has decreased sequentially. However, considering the lengthening delivery periods, it seems there are still some substantial customers reflected in this quarter's new leasing figure. Can you provide an apples-to-apples comparison of how the second quarter compared to the first quarter regarding AI versus non-AI new leasing patterns? Is there expected seasonality in this area? That would be my first question. For my second question, I looked back to 2019 when you generated $6.65 of core FFO, which aligns with your guidance for 2024. I understand there's an expectation for more significant growth in the upcoming periods. Additionally, you mentioned that your balance sheet has shifted from a defensive to an offensive stance. Historically, this offensive approach has resulted in dilution to secure future growth opportunities. Could you revisit the growth potential, focusing on how to translate the positive developments in the top line into bottom line growth? Thank you.

Thanks, Dave. So obviously posted apples-to-apples from a 50% contribution last quarter to this quarter is probably closer to a quarter of our signings great contribution of both 0 to 1 and plus 1 megawatt, as well as a near record in interconnection signings. And that means we're still winning with the traditional demand drivers of digital transformation, cloud computing, and the like, though that demand is not nearly exhausted shelf 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-ink drawing, already thinking about evolving that capacity block or signed with them in towards what will ultimately be supporting AI down the road is my guess, which I think speaks to the modularity of design and how we're able to scale infrastructure to the demands of our customers as they needed. The second part of your question, let me clarify that I don't want to mix up the term offense with mergers and acquisitions. We haven't engaged in any significant mergers or external growth for several years. You could consider the resolution of the Cyxtera relationship, but that felt more like making the best out of a tough situation. When I refer to offense, I mean converting our substantial land bank of over three gigawatts, which we've built over time, into a valuable product for our customers to utilize and grow from, while achieving significant returns on our investment. You've witnessed this reflected in our returns on investment and development timelines reaching double digits. Our pricing power has improved, and our value proposition has resonated with all customer segments across our core markets. Furthermore, our focus is on enhancing the bottom line. That has been the direction of our strategy for the past 18 months, concentrating on our value proposition, integration, innovation, and diversifying our capital sources. All these efforts are aimed at ensuring we drive growth in funds from operations per share, which is accelerating and will continue to compound for years ahead. There has been no change in our confidence regarding what's next for the remainder of 2024 and what we've outlined for 2025.

I appreciate it. Thanks for taking the questions. 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 continues 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% to 12% development yields you have in your pipeline move even higher? Thank you.

Thanks, Eric. I mean, I would categorize 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. I see that there are waves of demand emerging from cloud computing, digital transformation, hybrid IT, and now AI, which are just starting to take off. These trends are substantial and dynamic, occurring against a backdrop of various supply constraints. As a result, we have been able to increase our rates consistently over several quarters, and I believe this trend will continue for at least three more quarters. Additionally, I expect these increases to potentially exceed any inflation-related costs associated with building, thereby maintaining our return on investments or even improving them slightly.

Good afternoon, and thanks for taking my question. On the topic of power constraints and supply environment you see relative to transmission. With the time horizon, let's say, 12 to 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?

Jim, I believe there are several things at play here. First, we are getting closer to resolving some of the constraints we've been dealing with for the past year. We are moving toward resolutions in locations like Northern Virginia, which we expect to address by 2026, as well as in Santa Clara and other international markets. However, as we near these power constraints, there's a significant risk that our delivery timelines may be impacted. These are complex projects that involve easements, substations, and construction work. Additionally, demand has not slowed down during this period of power limitations. The second trend we're observing is that the conversation is expanding beyond just Northern Virginia, as we are increasingly hearing about other markets. And lastly, I wouldn't attribute it solely to power. While there are broader generation issues in the economy related to making it more environmentally friendly, and there are challenges with transmission that involve municipalities and the delivery of substations, as well as transmission lines that are often unwanted in residential areas, there are additional factors to consider. These include sustainability concerns and moratoriums in certain regions. Therefore, I view this as a complex supply constraint, and even if these issues are resolved, history suggests that similar problems could arise again. Ultimately, I believe this will enhance the value proposition of what we provide to our customers.

Hi, good afternoon or evening. Thank you for the question. Looking at the bigger picture, you've mentioned that leasing spreads for over 1 megawatt are expected to improve over time due to the differences between what's expiring and the market. You also noted that market rent growth is improving significantly. Considering this and recent comments from hyperscalers about potential oversupply and excessive capital expenditures, could you outline the near-term opportunities for over 1 megawatt in terms of bookings and pricing? I'm curious if there's a risk that while spreads may theoretically improve, an excessive amount of supply is on the way.

I will address the first and second parts of your question. I'll have Matt discuss our outlook on leasing spreads and elaborate on the next steps in our exploration schedule, which are set to become even more appealing in the coming years. However, I believe the core of your second question relates to the broader theme of AI that you are hearing in mainstream media, such as whether the hype is excessive or if we might be facing a bubble. I think some of this may not be entirely relevant to our situation. I say this because, in our business concerning AI, we are entering into long-term contracts, around 15 years, with some of the largest and most established technology companies. We are pursuing this without venturing into untested areas. We are concentrating on our key markets that show strong and varied customer demand, where traditional use cases like cloud commuting from various cloud service providers, enterprise solutions, hybrid IT, and service provider needs continue to grow. This growth occurs even in the face of fluctuations in AI. We are engaging in markets that we consider to have genuine long-term supply constraints. Additionally, this is all taking place during what is likely the most supply-constrained period in the last two decades for data centers. Therefore, I am not entirely sure that, even if AI experiences a slowdown in its long-term innovative progress, we will be significantly affected by that volatility due to the way we are approaching our strategy. Matt, why don’t you address the question?

Sure. Looking at the leases over 1 megawatt that will be expiring in the next 18 months, the average rate is around 140 to 145. However, this rate will gradually decrease to as low as 111 by 2029. I believe we will continue to see a positive trend in our leasing spreads, not just within the greater than 1-megawatt category, but across all categories as well. Additionally, the spreads in the 0 to 1-megawatt range have also remained positive. Historically, these spreads usually reflect steady inflationary increases or better. This situation positions us well considering the current market rates and supply constraints, suggesting that market rates will continue to rise positively and benefit our leasing spreads over time.

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 that sub 1 megawatt bookings have remained a little bit elevated? How should we think about that trend going forward?

Colin, that's a great question because we are obviously spending a lot of time on the bigger deals right now. Why don't you walk through the highlights of the quarter?

Sure, Frank, thanks for the question. I wouldn't say we're prioritizing anything. Our goal is to emphasize a comprehensive platform with a complete offering. As Andy mentioned in his opening remarks, our performance in Q2 was particularly impressive for 0 to 1, marking the fourth consecutive quarter over $50 million, which is also the third highest ever for 0 to 1. We believe this consistency comes from our ability to meet the diverse needs of our enterprise clients and service providers among the Global 5000 customers. Additionally, we had a strong influx of new logos, achieving 148%, with 40% of that from indirect channels. Channel also which I highlighted earlier was a particularly strong point with over 20% booking contribution from the indirect side overall. So we view this segment as continuing on 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 0-1 segment across enterprises and service providers. And Andy highlighted a couple of those key wins on opening remarks, namely Fortune 5,000 clients, excuse me, offering their virtual desktop requirements and the global manufacturing win we had 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 presumably strong representation of our platform.

Thank you for taking the questions. Andy, in the past, you've mentioned that CapEx can be adjusted to achieve consistent bottom line growth. Considering your leasing success over the past two quarters and the market opportunities in both hyperscale and enterprise, is now the right time to increase that CapEx? If so, could you clarify the specific FFO per share that you are targeting as part of that strategy? Thank you.

Thanks, Michael. To clarify, I would say CapEx is the core funding, which aligns with the concept in your question. The CapEx intensity is being pulled forward. We discussed increasing shell capacity, ultimately resulting in a highly leased development pipeline with attractive returns. So, we are observing an increase in CapEx intensity. We are achieving excellent rates and returns for our business while also supporting valuable customers across various markets. Our balance sheet is stronger, not only in terms of leverage but also with improved liquidity and diverse capital sources. Our goal is to leverage both our public and private capital to target mid-single-digit growth next year, with the potential for further acceleration beyond that.

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 Realty's portfolio resembles more like the industry?

I think you should keep in mind that our portfolio is not solely focused on hyperscale. In fact, the hyperscale segment of our business can be fully leased in many buildings or markets. My intuition is that the chart, which I believe Data Center Walk is trying to address, mainly reflects a hyperscale perspective. I was actually quite satisfied with our occupancy numbers. We've seen a 100 basis point increase in same-store occupancy quarter-over-quarter, and we have a substantial same-store portfolio. It's not insignificant. We're also sometimes taking a step back on occupancy to take multiple steps forward when vacant suites come back to life, allowing us to convert those to colo and better support our customers' colo growth. This year, we committed to making progress on occupancy, and we indeed have made progress. We have more work to do in that area, and I expect to see it improve. If you evaluate it, we can look at various comparisons. When examining occupancy, we have data by markets, and there are specific markets with vacancy rates of less than 60% that are significantly focused on our hyperscale business. These areas have a much smaller footprint, like Northern Virginia, where if you examine it closely, especially on a megawatt basis, I wish I had that level of vacancy to sell right now, but we currently do not.

Hi, guys. Thanks for getting me on. I had two follow-ups. First, on the Colo side, so you cited the record new logos of 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 megawatt base? And then secondly, you talked about leverage getting back under 5.5 turns, the prospect of improving bottom line growth from next year. How do you think about the dividend and the potential for forward growth in the dividend relative to some potential incremental investments in the business? Thanks.

Matt, why don't you hit the dividend question first and Colin, I can hit a little bit on what we're seeing in the enterprise demand piece of the puzzle?

Yes, certainly. Regarding the dividend, I believe we are in a position that allows us to leverage what we view as a significant growth opportunity across our global portfolio. One of the most effective and inexpensive sources of funding for this is internally generated funds. Therefore, we are focused on maximizing our cash flow as part of our funding strategy. Additionally, as we have discussed during this call, we are dedicated to enhancing our bottom line and accelerating that growth in the upcoming years. As we improve our bottom line, which will positively impact both core FFO and subsequently AFFO, we aim to align our dividend growth with the growth of earnings per share.

Great. On the new logo question, a couple of trends just maybe to highlight in that question. So first, we really believe it's in the 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 5000 accounts. So we're seeing continued interest in the platform across the larger customers who buy with more frequency in the smaller area of the spectrum. Not sure that we can necessarily point to a growing density in that particular base of clients yet 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.

And Chris, could you share your insights on the initial feedback regarding HD Colo 2.0 and the increase in the enterprise segment?

No, so I think I agree with you, Andy, on the macro trend of what we're doing with HD Colo is just really aligning the right capability to cool some of these higher-power density requirements coming into the market. And so we see a lot of the capabilities that we brought in across the 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 like 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 to 8 kilowatts. And I think one of the things I think you're really hitting on is like what are some of these new requirements coming in. And so healthcare, we're seeing 10 kilowatts of rack. I mean, gaming, we're seeing 15 kilowatts of rack this last quarter. And then some of the AI software capabilities, 40 kilowatts. But at the end of the day, we can meet a customer requirement of 150 kilowatts. 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.

Great. Thanks for taking my question. I noticed that the weighted average commencement period for new leases are 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 pick up space thus far out?

Thank you. Customers are particularly focused on larger capacity blocks, aiming to future-proof their needs, which is where our 3 gigawatts of growth is beneficial. While the upcoming deliveries are important, I believe that in the coming years, we'll see more development. For instance, the 20-month timeframe was extended because one specific customer had their sights set on a certain market, along with various restrictions on their growth potential. We are effectively their capacity solution.

Hi, thanks for taking the question. Question for Matt. Can you talk about not updating the guidance at all? Maybe there are 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 adjusted EBITDA would need to be backward, actually to hit the midpoint of your guide. So I guess, the question is, is the EBITDA FFO guidance is conservative? Are there some uncertainty in terms of timing of commencements, unusual expenses? Hoping you could just unpack that for us. Thanks.

Sure. I would focus on the bottom line. Looking at where we are halfway through the year, we are slightly below the midpoint of our core FFO guidance. We anticipated some pressure this quarter due to the capital recycling efforts that concluded with the closing of CH2 and the related income coming out this quarter. In the second half, we expect growth to improve and accelerate as the backlog of deals and signings comes online. We haven't changed our guidance, and we have provided a wide range. With our expectations for acceleration in the second half of the year, we believe this will position us well for 2025. We feel good about achieving the midpoint of our guidance.

Thank you. Digital Realty posted another strong quarter in Q2 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. Then we have repositioned the balance sheet by recycling capital out of stabilized assets, diversifying our capital sources, and reducing our leverage. All of this was done with an eye towards 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 today and would like to thank our dedicated and exceptional team at Digital Realty, who keep the digital world turning. Thank you.