The operator introduces the Digital Realty Third Quarter 2023 Earnings Call and turns the call over to the Senior Vice President of Public and Private Investor Relations. The call will include forward-looking statements and non-GAAP financial information. Key takeaways from the third quarter include strong leasing, improvements in fundamental metrics, and supportive pricing due to high demand and tight supply.

In the third quarter, the company saw strong financial growth and continued to diversify and strengthen their balance sheet through capital raised and noncore sales. The CEO, Andy Power, highlighted three key priorities for the company, including strengthening the customer value proposition, adding connectivity-rich solutions, and expanding colocation capacity and hyperscale capacity in core markets. He expressed excitement about the progress made so far and looks forward to finishing strong.

Digital Realty is experiencing growth and recognition from customers, with an increase in cloud service providers using their facilities. They have also reorganized their company and operations to improve management and innovation. They have launched new offerings and partnerships to support high-performance computing and sustainability efforts. Additionally, they have reduced leverage and increased liquidity through strategic funding plans.

Digital Realty is expecting long-term sustainable growth for its customers, team members, and shareholders if they deliver on their key strategic priorities. In the third quarter, they saw improvements in operational results, strong leasing results, and record interconnection revenue. The demand for data center capacity remains strong, with cloud, digital transformation, and hybrid IT driving growth. The addition of AI applications is just beginning to materialize in leasing results, and Digital Realty is prepared for it as they have been designing their facilities to support high-density workloads since 2017. They have already accommodated high-density compute deployments in one of their older data centers.

In the third quarter, Digital Realty saw an increase in demand for their highly connected campuses, particularly in core markets, due to the growing demand for AI infrastructure. They will be selective in leasing their capacity, prioritizing long-term partners and differentiated product offerings. Leasing activity was strong and broad-based, with a record in the 0-1 megawatt plus interconnection segment. Total new leasing for the quarter was $152 million, with 0-1 megawatt signings representing over one-third of the total. Greater than a megawatt signings also increased, led by the Americas region, and the APAC team had a record quarter.

In the third quarter, Digital Realty experienced strong pricing and demand for their products, resulting in higher returns on investment. Re-leasing spreads and same capital cash NOI growth were also at their highest in over a decade. The company added 117 new customers, reinforcing the value that enterprise customers see in Platform Digital. Digital Realty's focus on enhancing their campus has led to increased cloud access, with top B2B cloud providers expanding their presence on Platform Digital. Other key wins during the quarter include new customers in the healthcare and telecommunications industries, further demonstrating the value and versatility of Platform Digital.

Digital Realty, a Global 2000 Bank and insurance company, is implementing multi-site, multi-region network hubs and expanding their distributed data hub in Northern Virginia. They have identified 100 megawatts of development capacity in Loudoun County and are also advancing a 192-megawatt development in Manassas. The company has had a productive year with $2.3 billion in joint ventures and noncore asset sales completed in the third quarter. They have sold two facilities in the U.K. and Chantilly, Virginia, totaling almost $200 million and are on track to reach their $500 million target for noncore asset sales in 2023.

In the third quarter, Digital Realty closed two joint ventures and made progress on a third. They also made strides in their ESG efforts, including a water conservation project and being ranked in the top 10 for green power usage. CFO Matt Mercier then discussed the company's third quarter results, which included $152 million in new leases and strong performance in both product groups and geographic regions. The 0-1 megawatt plus interconnection category continues to be a reliable source of growth for the company.

In the third quarter, interconnection bookings were over $12 million and 2,000 cross-connects were added, bringing the total to 218,000. Bookings totaled $97 million, with strong contributions from Portland and Hong Kong. The company has sharpened its focus on capital allocation, resulting in higher returns in the greater than a megawatt category. Pricing has also improved globally, with the highest pricing power seen in the greater than a megawatt segment. The backlog of signed but not yet commenced leases reached a new record of $482 million. Renewal leases in the quarter had a pricing increase of 7.4% on a cash basis, the strongest since 2015. Excluding one outlier, renewal releasing spreads were up 4.5% on a cash basis and 6.4% on a GAAP basis.

The company is seeing an improvement in renewal spreads throughout their portfolio, leading to an increase in full year guidance. Renewal rates have been trending higher, particularly in the 0-1 megawatt category. The company reported third quarter core FFO of $1.62 per share, slightly lower than the previous quarter due to asset sales and capital redeployment. Total revenue was up 18% year-over-year and 3% sequentially, but this growth was impacted by utility costs and reimbursements. Excluding these costs, revenue was up 13% year-over-year. Interconnection revenue also saw a record high of $107 million, up 12% from the previous year.

Interconnection revenue, excluding Teraco, saw an 11% year-over-year increase, the highest since 2018. Quarter-over-quarter, interconnection revenue increased by almost 3%, with 2,000 new cross connects added. Expenses were higher due to seasonal factors and property taxes in Chicago. Adjusted EBITDA increased by 10%, but there was a noncash impairment charge of $113 million related to a lower value in digital core REIT stock. Stabilized same capital operating performance improved with a 9.4% increase in cash NOI year-over-year, but a 1.5% decrease sequentially due to seasonal factors. Even on a constant currency basis, cash NOI grew by 6.6%. This demonstrates the strongest period of organic growth in the same capital pool since 2014.

During the third quarter, the company successfully strengthened their balance sheet through their funding plan. They raised their full year capital raising target and generated over $2.6 billion in proceeds from various activities. This allowed them to reduce their leverage and increase their cash reserves. They also paid off a CHF 100 million debt and have a strong debt profile with a weighted average debt maturity of over 4.5 years and a weighted average interest rate of 2.9%. Their guidance for core FFO per share has been tightened to a range of $6.58 to $6.62 for the full year 2023.

The company is adjusting their full year guidance for adjusted EBITDA and revenue, citing lower tenant utility reimbursements and the impact of a bankrupt customer. They also expect to see a decrease in FFO per share due to these factors and increased property tax assessments and development spend. However, the company is seeing improvement in their fundamentals and is updating their organic operating metrics, including higher leasing spreads and NOI growth. They are also increasing their development spend guidance for 2023.

The company has updated its guidance for dispositions and JV capital, which has increased by $350 million at the midpoint. This is in line with the expected increase in development spend for the year. However, the company is facing headwinds from interest rate changes and the dilution of near-term earnings due to increased development spend. The company expects development completions to become increasingly accretive to core FFO per share as projects are completed at higher yields and the rate of capitalized interest decreases. The company also mentions the potential for development JVs and the potential for leverage reduction and tailwinds and headwinds affecting core FFO per share for the next year.

The speaker is addressing a question about the company's progress and growth. They mention that there has been strong demand for investing in data center assets and they are working on potential development joint ventures. They also discuss the significant improvement in same-store cash NOI growth and interconnection and leasing metrics. The speaker notes that they have surpassed their initial expectations and have successfully integrated the Teraco acquisition.

The speaker acknowledges the positive trends in the company's performance and the impact of their value proposition and pricing environment. However, they also mention potential challenges, such as accounting issues and headwinds, that could affect their progress. The company is focused on deleveraging and capital recycling, but also sees opportunities for growth despite the higher cost of capital.

The speaker believes that their company's actions speak louder than words, as they have had success in selling non-core assets and major hyperscale assets. They have not issued any additional equity, but are considering strategic joint ventures for future capital raisings. They are open to issuing equity in the future if the timing and conditions are right.

The speaker believes that the company has made significant progress and has more good news to come in the near future. They clarify that the assets being sold are non-core and not representative of the company's overall value. Another analyst asks a question about the sale.

The speaker, Andrew Power, is responding to a question about the sustainability of Digital Realty's leasing activity. He points out that the company had a strong quarter, with a record number of interconnection signings and a broad base of customers. The demand for data centers is driven by trends such as cloud growth, digital transformation, and artificial intelligence, and there is still a high demand for capacity. Therefore, it does not seem like the industry is entering a digestion phase anytime soon.

Eric Luebchow of Wells Fargo asks about the outlook for renewal spreads and the potential impact of higher in-place rents and contractual terms on pushing rents higher. Matthew Mercier responds by expressing confidence in the current pricing environment and expecting positive renewal spreads in the fourth quarter and next year, but notes that more specific guidance will be provided in the next quarter. Frank Louthan of Raymond James is the next questioner.

Frank Louthan asks about how the company is winning AI deals and what customers are looking for from digital services compared to other providers. Andrew Power and Colin McLean explain that AI comes in many forms and the demand for it is constantly changing, but the company is well-positioned to support a wide range of requirements with their portfolio. They also mention the importance of supporting both large and small scale needs for AI.

The company focuses on mapping the right customer to the right market and workload, utilizing their 300-plus data centers. They believe that proximity to eyeballs and GDP is important for AI workloads, which aligns well with their global assets. There has been no significant shift in the appetite for joint ventures despite recent volatility in the rate environment, as data centers are seen as a strong and mainstream investment opportunity. There is also strong demand for development projects, with some investors willing to wait for lower rates.

The speaker notes that the current high interest rate environment is driving demand for development joint ventures, and that there has been an acceleration in this demand. They also mention a strategic change in funding strategy, targeting large-scale projects in North America and Europe, and seeking partners with a similar vision for the industry. The speaker does not provide a specific estimate for the amount of development capital that will be placed on the balance sheet in 2024.

The speaker, Matthew Mercier, responds to a question about the increase in accounts receivable and explains that the majority of the increase is due to VAT receivables from increased construction in EMEA. He also mentions that only half of the total receivables balance is tied to trade receivables, and the rest is related to VAT receivables with a corresponding liability offset. The next question is about the potential for joint ventures, and the speaker mentions that while the fundamentals are strong, there are funding considerations to take into account.

The speaker believes that tapping into both private and public capital is the best way to maximize value for shareholders in the digital transformation and cloud computing space. They are experiencing an inflection in operating fundamentals and have been deleveraging throughout the year. They plan to continue with their development joint venture strategy to drive more to the bottom line, but are open to adjusting it in the future. The next question from a Morgan Stanley analyst asks about the increase in development CapEx, which has been raised by $400 million at the midpoint for the year. The speaker is asked to explain where this increase will be spent.

The speaker discusses the company's efforts to be more disciplined about returns and to target higher value deals at desired returns. They mention a recent conversation with a top cloud customer, indicating that the company's efforts to reposition their assets are being noticed by customers.

The speaker discusses a recent meeting focused on supporting customer growth and increasing cloud consumption. They mention the success of their efforts and the importance of building a durable business. They also mention a development JV and an increase in disposition guidance for the year.

Gregory Wright confirms that $750 is still a good price range for the deal and they are working on multiple deals. Michael Elias asks about the unlevered return environment for hyperscale deals and Andrew Power points to their development schedule, which has been in the double-digits category and has seen a dramatic increase in North America. He also mentions that once returns reach double-digits, there may not be further increases due to the current state of cost of capital. However, demand remains strong and they have the potential to create value for stakeholders.

The operator concludes the question-and-answer portion of the call and turns it over to President and CEO, Andy Power, for his closing remarks. Power thanks everyone for joining and highlights Digital Realty's strong third quarter results, including record bookings and growth. He also mentions the company's success in raising new capital and expresses gratitude to the team. The call is now concluded.

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