Digital Realty is holding their fourth quarter 2023 earnings call and all parties will be placed in listen-only mode. The call will include a question-and-answer session with a limit of one question per caller. The call will be led by Digital Realty's Senior Vice President of Public and Private Investor Relations, Jordan Sadler, and joined by President and CEO, Andy Power, and CFO, Matt Mercier. Forward-looking statements will be made and non-GAAP financial information will be provided. The company had a strong fourth quarter and full year, with robust demand and healthy leasing numbers. They also added a record number of new logos.

Digital Realty had a successful year in 2023, with strong financial metrics and the announcement of new development joint ventures. The company also focused on enhancing its value proposition by adding connectivity-rich solutions and expanding its footprint in locations around the world. They also increased the number of direct access points to leading cloud and service providers and expanded their service fabric platform. Overall, 2023 was a milestone year for Digital Realty, as they positioned themselves to support the growing demand for data centers and new technologies like AI.

In 2023, Digital Realty experienced significant growth and innovation, adding 9,000 cross connects and strengthening their leadership team. They also adapted their product portfolio to support next-generation chips and added green energy solutions. Additionally, the company took action to strengthen their balance sheet and diversify their sources of capital. They successfully reduced leverage and increased liquidity, outperforming their goals and positioning themselves to meet the growing demand for data center capacity.

In the fourth quarter, Digital Realty announced three significant transactions, including two development joint ventures and the successful resolution of their relationship with Cyxtera. They also raised $1.2 billion in equity and expanded existing partnerships. The transactions included the sale of assets to Brookfield, the purchase of Cyxtera's leasehold positions, and the acquisition of a data center in London. In addition, Realty Income purchased an 80% interest in data centers under development and leased to a financial services company, reducing their funding obligations. The $7 billion development joint venture with Blackstone is their largest and will accelerate the monetization of a significant portion of their land bank.

The JV involves selling 80% interest in 500 megawatts of capacity across four campuses, with 20% being delivered through 2025. The company will retain a 20% interest and earn fees for developing, leasing, operating, and managing the facilities. The company also completed joint ventures and asset sales to reduce leverage and support customer needs. They also had a successful equity offering to support planned acquisitions. The company's results for 2023 were strong, with a focus on supporting increased demand for data center capacity. Leasing and renewal spreads remained healthy, with a record number of new logos and positive spreads across product types and regions.

The company continues to show strong growth in its capital cash NOI and low churn rate, despite some impact on occupancy due to vacant development capacity. The demand for scale and hyperscale capacity, as well as enterprise and connectivity-oriented demand, is driving interest in the company's inventory and new developments. Supply constraints and global supply chain delays are working in the company's favor, leading to increased pricing and demand. The company is well-positioned to meet this demand, with conversations with customers indicating potential for acceleration of leasing and development. Some markets, such as Northern Virginia, Santa Clara, and Paris, are experiencing particularly strong demand. The company remains disciplined in prioritizing locations that enhance Platform Digital's connectivity and connected campus communities. Collaboration with partners, such as Oracle, is also proving beneficial in fulfilling hybrid cloud requirements for enterprise customers.

In the fourth quarter, Platform Digital's high-density colo offering was utilized by an AI service provider to improve their time to market and expand their global cloud offering. A global service provider and partner also increased their connectivity on Platform Digital for their hybrid offerings. A material sciences company and a financial services company also chose Platform Digital for their data center needs. In Northern Virginia, there is currently over 100 megawatts available for lease and negotiations are ongoing for the remaining capacity. Platform Digital also made progress in their ESG initiatives during the fourth quarter.

In the fourth quarter of 2023, Digital Realty continued to be recognized for its strong ESG performance and was ranked second on Sustainability Magazine's List of top sustainable data center providers. They also improved their ranking on the US EPA's Green Power partnership and were named a top rated regional performer in North America by a leading global ESG ratings provider. The company remains committed to minimizing its impact on the environment while delivering sustainable growth for stakeholders. In terms of financial performance, they signed $110 million in new leases, with a backlog of $495 million at quarter end. They also saw positive renewal and re-leasing spreads, setting the foundation for future growth.

In 2024, the pricing environment is expected to remain strong and renewal spreads to stay positive due to a high percentage of lease expirations in the 0 to 1 megawatt segment. The company reported fourth quarter earnings within their guidance range, with a 11% increase in total revenue despite the impact of stabilized JV contributions and noncore asset sales. Energy dynamics were a positive factor in 2023 but are expected to moderate in 2024. Interconnection revenue increased by 9% year-over-year. Expenses decreased due to joint venture contributions and seasonal impacts, while operating expenses and property taxes saw increases. Adjusted EBITDA increased by 9% year-over-year. The company's stabilized same capital operating performance improved, with a 9.9% increase in cash NOI in the fourth quarter and a 7.5% increase for the full year.

In 2023, the company invested $3 billion in development and delivered 230 megawatts of new capacity. They also strengthened their balance sheet by selling equity and completing various transactions, resulting in a leverage ratio of 5.8 times. The company has significant cash on hand and a debt profile with a weighted average maturity of 4.5 years and a weighted average interest rate of 2.9%. They have minimal debt maturing in 2024 and beyond.

The company is providing a Core FFO per share guidance range for 2024, with expected growth in revenue and adjusted EBITDA. They anticipate positive re-leasing spreads and NOI growth, as well as an improvement in occupancy. The company also plans to continue recycling capital through noncore asset sales and joint ventures.

The company expects to use cash on hand, retained cash flow, and capital to fund its development program in 2024, representing a 25% reduction in development spend from the previous year. This is expected to result in a decrease in same-store cash NOI growth from 7.5% to 2% to 3% in 2024, mainly due to lower re-leasing spreads influenced by inflation and CPI in the 0 to 1 megawatt category.

The speaker discusses the impact of higher power prices on the company's budgeting and decision-making, noting that they are not experiencing the same dynamics as another company. They also mention that the benefits from power prices in 2023 will not be repeated in 2024, but this is expected to be a one-time event.

The speaker does not believe that buyer behavior has been significantly impacted by current market conditions. They attribute this to their business mix and hedging strategy. They mention strong performance in the enterprise colo connectivity segment and record new logos. The speaker also mentions a strong interconnection quarter and net absorption in that category. The speaker then asks for a single question per person and passes the question to Gregory Wright to discuss the components of the $1.25 billion guidance for data. The next question is about the demand pipeline and the speaker is asked to comment on its strength compared to last year's.

The speaker discusses the current state of supply and demand in the data center industry and how it is impacting pricing for new leasing. He mentions the growing demand for hyperscale and AI, as well as the tightening supply-demand dynamics that are favoring companies like Digital Realty. He also notes that there may be a ceiling on pricing, but the company is well positioned to capture a significant portion of the demand in major markets.

The speaker believes that there is a growing recognition among customers that having access to GPUs is crucial for their business success. The company's rental services play a small role in this equation, and the focus is on providing customers with the resources they need to launch their services quickly. The company has been successful in reducing leverage and plans to continue this trend by recycling capital and aiming for a leverage ratio of 5.5 times.

Andrew Power, speaking to Irvin, discusses the demand for large capacity blocks in key markets such as Nova and Silicon Valley. He notes that overall supply remains low in these markets, but specifically for his company, lower available capacity has not been a hindrance to their performance in signing deals over one megawatt. Power mentions that they have a unique opportunity in Northern Virginia, where they have available capacity in a market that is not accepting new power until 2026. He also mentions that they have similar opportunities in other markets such as Dallas, Santa Clara, Paris, Frankfurt, Amsterdam, Seoul, Japan, and their joint ventures in Latin America and South Africa. Power explains that they have taken a strategic approach by not rushing into deals for these capacity blocks, as they were still in the early stages of development. However, as 2024 has progressed, they have seen a growing interest from a diverse set of customers, and they are now ready to commence rent on some of their available capacity blocks.

The speaker believes that their prudence and approach allowed them to be lucky in the situation with Ashford running out of power. They sold capacity at the right time and now have the opportunity for high rental rates. There may be clauses in some contracts that limit their participation in the upside.

The speaker discusses the impact of market conditions on their business and how they have had to negotiate with customers to come to mutually agreeable outcomes. They also mention the potential for positive mark-to-market in the future and the expected growth in revenue and EBITDA in 2024. The question is then asked about the company's long-term growth potential beyond 2024.

The speaker discusses the impact of timing on transactions and close in 2023 and 2024, as well as the company's delevering efforts. They also mention expected growth in the stabilized same-store pool and development pipeline, and address a question about macro pressures on the enterprise business. The pipeline is described as robust and customers are actively engaged in growing their platform.

The speaker discusses the company's strong financial performance in the past two quarters, attributing it to their support for clients and successful acquisition of new customers. They also mention the launch of a new offering for high-density colocation and their pre-purchase of technology to support it. A question is asked about the company's dividend and potential investments or M&A in relation to their improved leverage ratio. The speaker defers to Matt for an explanation on how the dividend is determined based on taxable income and distribution.

The company has been active in M&A, with recent deals including resolving a relationship with Cyxtera and growing their platform in India. They have also disposed of noncore assets and added to their landholdings. They do not see any major opportunities for M&A in the future, but will continue to make strategic bolt-on acquisitions. The company also plans to continue growing their dividend as their cash flow and AFFO increase. In terms of taxable income, they expect to have less transaction-related income in 2024 but will still have enough cash flow to support their dividend. The company's long-term goal is to grow their dividend as their cash flow and AFFO grow.

The speaker discusses the mix of megawatt interconnections, with a focus on the 0 to 1 megawatt range. They state that their top priority is to continue accelerating this range, as it represents the largest volume of customers and offers the most value. While there may be fluctuations in the mix, they are confident in their execution and ability to serve both enterprise and hyperscale customers. They see both ranges as large and addressable markets with a competitive advantage.

Erik Rasmussen from Stifel asked about the demand patterns for AI workloads and the contribution of AI to the company's revenue. Andrew Power, the operator, responded by highlighting the company's expertise in hyperscale and colocation connectivity, as well as their success in winning AI-related contracts ranging from several hundred kilowatts to over 30 megawatts. He also mentioned a recent retrofit for a multinational financial services company and a live environment in Paris. Chris, another speaker, added that the company has been winning in various verticals and sees continued growth in the AI market.

Christopher Sharp, from Digital Realty, responds to a question about the training to inference dynamic in the AI industry. They are selective with training environments, focusing on long-term durable workloads. Many customers are currently doing training or inference inside their training due to availability of GPUs and time to market. However, they see the long-term value in inference and are also seeing an increase in demand for private AI. Digital Realty's versatile designs and focus on high power density allows them to support this need for hyperscale customers. Additionally, they are excited about the potential of embedding AI in existing infrastructure and workloads, as seen with Microsoft's CoPilot. They believe this will benefit from the data oceans within Digital Realty's infrastructure. This will be a focus for them in the coming year.

The speaker discusses a recent case study with KakaoBank, where private AI deployment was highlighted. They are excited about the potential for this in 2024. A question is then asked about the assumptions made for cash renewal spreads, with the response mentioning current market pricing and the impact of inflation on leases. The overall expected renewal spreads are estimated to be between 4% to 6%, with a difference between leases of 0 to 1 megawatt and those greater than 1 megawatt.

Digital Realty had a successful fourth quarter in 2023, marked by three key elements. First, they secured over $12 billion in new capital and commitments, which helped reduce their debt and prepare for the future. Second, they saw strong organic operating results, with the best same-capital cash NOI growth in almost 10 years, and are poised for increased demand. Third, they expanded their global presence and capacity with record deliveries in 2023 to meet the growing needs of their customers.

Digital Realty is grateful for the support of their customers in their efforts to provide IT solutions, such as AI and cloud, and assist enterprises in their digital transformation. The company thanks everyone for attending the presentation and acknowledges the hard work of their team in keeping the digital world running. The conference has now ended.

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