Digital Realty held an earnings call for the second quarter of 2023, with President and CEO Andy Power, CFO Matt Mercier, Chief Investment Officer Greg Wright, Chief Technology Officer Chris Sharp, and Chief Revenue Officer Colin McLean present. Jordan Sadler, Senior Vice President of Public and Private Investor Relations, outlined key takeaways from the quarter, such as the company's customer value proposition resonating and a strong pricing environment. The call contained non-GAAP financial information, and forward-looking statements were made, which involve risks and uncertainties.

Digital Realty saw strong growth in the second quarter, with improved operational results, increased liquidity, organizational improvements, and recognition of the importance of data centers. They posted sequential growth in revenue, adjusted EBITDA, and CFFO per share, while also improving development returns, bolstering liquidity, and reducing leverage. They also strengthened their customer value proposition with more connectivity options and record double-digit interconnection revenue growth.

Digital Realty has innovated and integrated to support high performance computing and AI, and has accessed diverse capital sources such as the sale of a non-core asset and equity raised under an ATM. They have also formed two joint venture transactions with new private capital partners for hyperscale data centers. Demand for their data center capacity is high, due to the global expansion of cloud computing and the digital transformation of enterprises, and they are collaborating with numerous clients on AI-focused requests and implementations.

Digital Realty stands at a strategic vantage point, allowing them to cater to the needs of enterprises and facilitate their efficient integration of AI applications. In the second quarter, they unveiled Data Gravity Index 2.0, a tool designed to access the effects of enterprise data generation and consumption, and secured a patent for their innovative approaches in Data Gravity and comprehensive data center architecture. This quarter continued the inflection in the fundamental recovery in their core portfolio, attributed to the rising needs of both public and private cloud infrastructure, further augmented by AI training and inference processes, as well as data regulation.

In the second quarter, Digital Realty saw releasing spreads climb to nearly 7% on a cash basis, helping to drive the best same capital cash NOI growth since 2015. Leasing volume was strong with $114 million in new leasing and 43% of total signings coming from zero to one megawatt plus interconnections. Churn remained low at 1.5% and 133 new customers were added, making it Digital Realty's second best quarter ever. Some of their key wins included an innovative sustainability oriented infrastructure provider, a major US federal agency, and a leading European bank.

A Fortune 500 quick serve restaurant chain, a global 2000 Pharmaceuticals sourcing and distribution services company, and a global 2000 Auto Manufacture have all chosen Platform Digital to improve their internal infrastructure, ensure global data governance compliance, and upgrade their network architecture respectively. In Northern Virginia, the power provider has identified nearly 100 megawatts of billable capacity that will become available prior to 2026, including 40 megawatts from the current development pipeline and the potential to move forward on almost another 60 megawatts. In addition, there is potential for 192 megawatts of development in Manassas. 2023 has been a busy year for investments, with some of the results already being seen.

Digital Realty acquired land and shell associated with a previously leased data center in Amsterdam for $18 million, purchased additional land to support 40 megawatts of IT load, closed on a non-core disposition resulting in $150 million of net proceeds, and closed on two separate stabilized hyperscale joint ventures in Chicago and Ashburn at a 6% cash cap rate, raising more than $2 billion of net proceeds. These transactions have diversified their sources of private capital, and the team is continuing to execute through a tumultuous capital markets environment.

Digital Realty issued their fifth annual ESG report in the second quarter, outlining their initiatives for 2022. The report highlights the progress made towards their goal of reducing global carbon emissions by 68% by 2030, and they have contracted for 1 gigawatt of solar and wind energy in the US, matching 126 of their data centers with 100% renewable energy. They have also received a certificate of adherence from the Climate Neutral Data Center Pack, and remain committed to minimizing their environmental impact. They also reported that they signed $114 million of new leases in the second quarter, with broad-based strength across the zero to one megawatt plus interconnection segment in each region.

Digital Realty has seen success in their full spectrum strategy, tripling their bookings in the zero to one megawatt plus interconnection segment over the past four years. This quarter, their bookings in this segment totaled $37 million, and greater than one megawatt bookings totaled $61 million. Pricing has improved in many markets, particularly in Northern Virginia, where rates have nearly doubled in the past year. Digital Realty was able to take back 8 megawatts of lease capacity from an existing customer and release it to another customer at a substantial premium, illustrating the changing market.

This paragraph discusses the improvement in rates across the Americas, EMEA, and APAC, as well as the healthy demand funnel across product types and geographies. The backlog of signed leases was $437 million at the end of the quarter, with $150 million expected to be evenly weighted between the third and fourth quarters. The lag between signings and commencements was 11 months. Renewal leases were signed with pricing increases of 6.9%, the strongest renewal pricing in three years. Renewal spreads in the zero to one megawatt category also increased for the sixth consecutive quarter, reaching 4.8% in the second quarter. Overall, the success of the improved environment has led to a raise in the full year guidance for renewal spreads.

In the second quarter, the company reported a record level of interconnection revenue and well-controlled expenses, resulting in core FFO of $1.68 per share. Total revenue was up 20% year-over-year, excluding utility reimbursements, total revenue was up 12% year-over-year. Interconnection revenue was up 12% year-over-year and 3% sequentially, and excluding Teraco, interconnection revenue was up 8% year-over-year. The quarter also included a $25 million onetime write-off of noncash straight-line rent and a $6 million bad debt reserve related to a tenant that declared bankruptcy.

In the second quarter, bookings and ServiceFabric activations increased, resulting in 14% year-over-year and 4% sequentially growth in adjusted EBITDA. Cash NOI also increased 5.6% year-over-year and 1.7% sequentially, the strongest growth since 2014. This was driven by an 80 basis point increase in occupancy. However, the potential impact of a customer bankruptcy filing could affect results in the second half of 2023. The company is ahead of its funding plan, having closed $2.2 billion in asset sales and stabilized joint ventures, and expects to make further progress on development joint ventures in the second half of the year.

The company has raised over $2 billion in capital at a blended average cap rate of 6%, as well as $1.1 billion from the sale of 11 million shares of equity. Leverage ratio is 6.8 times, with a fixed charge coverage of 4.2 times. 84% of debt is non-US dollar denominated, 97% is unsecured, and only $100 million is due for the rest of the year. Revenue guidance is $5.5-$5.6 billion, and adjusted EBITDA guidance is $2.7 billion.

Core FFO and constant currency core FFO per share guidance for the 2023 full year has been adjusted by $0.10 per share to a range of $6.55 to $6.65. This is due to an acceleration of the funding plan, write-off of unpaid rent, lower noncash straight-line rent, and near-term uncertainty related to customer bankruptcy. Organic operating metrics have also been updated, including cash and GAAP re-leasing spreads of greater than 4% and 8%, respectively, and same capital cash NOI growth guidance of 4% to 5%. Total dispositions in JV capital are now expected to range from $2.2 billion to $3 billion, and long-term debt financing needed to support the full year funding plan has been reduced due to asset sales, JVs, and ATM equity raised.

Andrew Power and Gregory Wright answer a question from Alex Waters of Bank of America regarding the development JV pipeline and the funding pipeline for 2024. Wright states that they are still comfortable with the full year development JV guidance and that there is strong demand for these JVs due to their high returns. He also notes that due to the strategic considerations, these transactions can take longer. Power then takes over to discuss the core portfolio.

Andrew Power explains that the company was able to take back capacity from a customer and sign a new contract at a higher rate due to the tight supply market. Matthew Mercier adds that the new deal was successful, with all greater than megawatt renewals in positive territory across all regions.

Matthew Mercier and Andrew Power discussed the stats and leasing demand for NOVA. The 300KW rate was only showing the incremental revenue and not the associated megawatts. The power constraints in NOVA have created a demand for leasing that outstrips the supply. However, they are less focused on signings that don't commence until 2026 due to the uncertainty of when exactly that power will rise.

Andrew Power states that the company has not signed any 100 megawatt deals in the quarter, but they are looking at these opportunities to maximize their footprint for the best use. They have extensive locations around the globe to help customers with large-scale needs and have made great progress in securing capital sources to support customer growth.

Digital Realty is looking to maximize the opportunity of their land bank, sales, and inventory runway by investing in bigger deals and driving higher risk-adjusted return. They are raising the bar for investments and demand is outpacing the supply, with projects yielding north of 10% ROI. This includes the Americas region, where North America yields 9%, while legacy projects are weighting down the averages.

Andrew Power and Matthew Mercier answer a question from Jonathan Atkin of RBC about debt and asset sales. Matthew Mercier explains that there is currently $4 billion of liquidity and the remaining spending for the year is estimated to be between $1.2 and $1.3 billion. This provides a significant runway into 2024 to continue growth and take advantage of opportunities. Chris and Andrew Power then discuss India and if their partner will contribute assets going forward.

Brookfield and Jio have partnered to create a joint venture in India to combine Brookfield's local investing and data center expertise with Jio's mobile media platform and operating expertise. This will allow them to create a unique product and provide access to capital. Brookfield has also made progress on liquidity and leverage, with their pro forma leverage at 6.3%.

Andrew Power is discussing the growth of interconnection and the role of artificial intelligence in the market. He notes that interconnection is evolving quickly and artificial intelligence is still in its early stages. He also references the ServiceFabric platform, which is designed to streamline technical barriers for customers to access data, which is essential for AI.

Digital Realty is continuing to pursue joint venture development in order to meet customer needs in the hyperscale business and to create value for shareholders. Despite having already exceeded their initial disposition target, the company believes that this is the best way to fund the business.

Andrew Power explains that the company has a balance sheet of 3 gigawatts of growth capacity and they are looking to fund it through partnerships to become more efficient and drive returns. When it comes to the tenant bankruptcy, creditors typically have to run a process for the assets or the business and make decisions on accepting or rejecting leases. The company has not had any leases rejected so far, but they cannot assume that every one of their leases will be accepted. As a result, the company has increased their capabilities to expand in the colocation interconnection offering and support end customers.

Digital Realty has estimated that its hyperscale assets are worth around $15 billion, and these assets are the focus of the company's development pipeline. Core assets are the slowest organically growing parts of the portfolio, as they are less interconnection-rich and customer-rich than the more recent portfolios. Digital Realty has partnered with other companies to maintain 100% ownership of the highest growing pieces of its puzzle.

Matthew Mercier explains that the same-store growth is up 80 basis points due to targeting larger customers and converting some of the space into productized co-lo leases. Andrew Power then comments on the situation in Singapore, where the government is allowing a few new players, but the supply is still being metered out at small and rational clips. Lastly, Frank Louthan inquires about capital recycling and other diversification strategies.

The demand for data centers is outpacing the supply, causing power constraints in many markets. In response, the company has a long runway of growth with campuses across six continents. They are also looking into capital recycling and have already announced two transactions with blue chip investment partners. They are also seeing strong interest from a variety of sources, such as infrastructure funds, sovereign wealth funds, pension funds, and insurance companies.

Michael Elias outlines the company's plan to get down to a 5.5 times leverage ratio by 2024, which will be achieved through joint ventures and equity raises, and the growth of EBITDA from leasing. He also notes that noncore portfolio transactions are becoming less of a priority as the company has been successful with capital recycling.

Gregory Wright and Andrew Power discussed how their company has had good demand and execution this year, and they are pursuing noncore assets while remaining disciplined in getting fair value. Colin McLean added that their pipeline is strong and diverse, with AI playing an increasingly important role in both hyperscale and smaller deals.

Andrew Power discussed the success of the company's pivot to serving all client needs, from network to enterprise to hyperscalers, both in AI and cloud and hybrid IT. He reported that pricing trends have been positive, with a steady increase in the less than a megawatt category and more volatility but in a positive direction in the greater than megawatt category. Demand has remained intact and large capacity blocks have become fewer.

Digital Realty had a successful second quarter, raising over $3 billion in new capital and posting strong organic operating results. CEO Andrew Power thanked everyone for attending the conference and recognized the hardworking team for their dedication. The conference concluded with the operator thanking everyone for attending.

This summary was generated with AI and may contain some inaccuracies.