The Digital Realty First Quarter 2024 Earnings Call began with an introduction from the operator and a reminder that the call is being recorded. Senior Vice President Jordan Sadler then welcomed listeners and introduced the company's President and CEO, CFO, and other executives who would be available for Q&A. Management made forward-looking statements and discussed risks related to the business. The first quarter saw a record-breaking increase in leasing activity, driven by improved pricing and a strong customer value proposition.

In the first quarter of 2024, Digital Realty experienced strong momentum with record leasing results and strong operating performance. This was driven by a focus on strategic priorities and meeting the demands of their expanding customer base. The company also made progress on their 2024 funding plan and saw a decrease in leverage. President and CEO, Andy Power, highlighted the success of the company's multifaceted AI opportunities and the high demand for their capacity in core markets.

In the first quarter, the company continued to innovate and expand ServiceFabric through the launch of a service Directory marketplace and Private AI Exchange. They also focused on improving their balance sheet and diversifying their capital sources. The company saw encouraging results in their core data center revenues, with growth in adjusted EBITDA and core FFO per share. Bookings and renewals also reached new records, reflecting strong demand and limited new capacity.

The company had a strong quarter, with record leasing and high rates in the IT load capacity segment. They also saw growth in the 0 to 1 megawatt segment and had positive same capital cash NOI growth. Demand for data centers is being driven by cloud, digital transformation, and AI, with McKinsey forecasting double-digit growth through 2030. The company announced two strategic AI deals during the quarter.

Digital Realty has been selected to host one of the world's most powerful AI supercomputers and has strengthened its collaboration with Oracle to accelerate the growth of AI among enterprises. They have also added over 128 new logos, including a Fortune 500 AI component maker, a global cloud computing and content distribution provider, and a global manufacturing company, all utilizing Platform Digital's connectivity and infrastructure for their AI projects.

In the first quarter, a leading French cloud service provider, a Fortune 500 technology distributor and IT service provider, and a Fortune 500 health benefits provider have chosen to deploy on platform digital to support their enterprise customers' hybrid infrastructure needs. In Northern Virginia, the company leased 80 megawatts of capacity in the constrained market and is working with Dominion Energy to address power supply issues. They have 80 megawatts of remaining capacity in their first building and 200 megawatts available for development on their Manassas campus.

In the first quarter, Digital Realty made significant progress in their ESG efforts, including switching to 100% renewable energy in certain locations and receiving recognition for their sustainability efforts. They also announced partnerships and expansions in the use of cleaner fuels to power their operations. The company remains committed to minimizing their environmental impact while achieving sustainable growth. CFO Matt Mercier then reported a record $252 million in new leases and a backlog of $541 million in signed leases, with new leasing outpacing commencements during the quarter.

The company's backlog of projects is expected to continue to grow, with many slated to begin in the remainder of 2024. The first quarter saw record renewal leases and positive releasing spreads, particularly in the Americas. However, the company cautions that the reported spreads may be skewed by outlier transactions and early renewals, and that excluding these would result in a more moderate increase in spreads. The company's focus remains on the 0 to 1 megawatt segment, which typically sees lower spreads compared to larger segments.

In the first quarter, we reported strong core FFO of $1.67 per share, driven by organic operating results. However, there was some dilution from asset sales and JV contributions. Our revenue grew by 7% year-over-year, but this was partially offset by a decline in utility expense reimbursements. Our normalized adjusted EBITDA increased by 9% and our stabilized same capital operating performance saw a 4.7% increase in cash NOI. In terms of investment activity, we spent $550 million on consolidated development and delivered 32 megawatts of new capacity. Our development spending decreased by approximately $300 million due to contributions from our development JVs and other timing-related factors.

In the first quarter, we focused on strengthening our balance sheet by closing several previously announced transactions and completing new ones. These actions, along with the sale of land in Sydney and an easement agreement, reduced our reported leverage to 6.1 times. In April, we continued to recycle capital by selling two assets, raising nearly $400 million, and using cash on hand to pay off maturing euro notes. Pro forma leverage is now at 5.8 times. We have significant cash on hand and a strong debt profile with a weighted average debt maturity of over four years and a weighted average interest rate of 2.9%. The majority of our debt is non-U.S. dollar denominated, reflecting our global platform and FX hedging strategy.

The company's net debt is mostly fixed rate and unsecured, providing flexibility for capital recycling. They have $316 million of debt maturing through 2024 and their maturities are well spread out through 2032. The company is maintaining their core FFO guidance for 2024, but increasing their cash releasing spreads and same capital cash NOI growth expectations due to strong leasing and fundamental conditions. However, there will be a slight drag from the recent capital recycling completed in April.

The company is only a third of the way into the year and there is still potential for development spend and asset sales to reach the high end of their guidance. The interest rate outlook and curve have changed since guidance was provided, adding uncertainty for the rest of the year. The $6 billion development pipeline is expected to become increasingly profitable in 2024 and 2025. The expected yield on the stabilized pipeline has increased due to higher yielding projects. The company has enhanced their development life cycle schedule to provide more transparency. The call is now open for questions, with the first one asking about the leasing done in joint ventures, specifically the Blackstone joint venture.

The speaker discusses the yield on development in Northern Virginia and North America, which has increased by 200 basis points to 12.3%. They mention that the majority of this growth is not from any joint ventures, and they are seeing traction on projects with strategic capital partners. The speaker also mentions that they have significantly improved the ROI on projects in North America, with some projects now reaching over 12%. They attribute this improvement to the current rate environment. A question is then asked about next year's core FFO per share growth rate, but the speaker does not provide a specific answer.

Andrew Power and Matt Mercier discuss the company's performance in terms of market rates, leasing results, and FFO trajectory. They mention robust demand trends in the 0 to 1 megawatt and greater than megawatt categories, as well as supply constraints. They also highlight the successful leasing execution in the first quarter and a shorter sign to commence lag, which sets the company up for accelerating growth. Overall, they expect to see a plus 4% growth related to the company's stabilized same-store portfolio.

The company expects to see a 2% increase in yields from delivering developments in their operating portfolio, but this may be offset by higher rates and debt refinancing. The company also discusses the Northern Virginia market, including an update on the Dominion transmission upgrades and the timing of bringing more capacity into the market. They mention that the market is highly dynamic and that they have benefited from increased rates. The company also mentions some of their recent signings in the Northern Virginia market, as well as in London and Copenhagen.

The speaker discusses the improving market rates in the data center industry and the remaining capacity at Digital Dulles and Manassas campus. They mention that rates in both locations are converging and are in the range of 165 to 180 on a cash basis. The next question is about how AI is contributing to the business, and the speaker mentions that it is present in the greater than 1 megawatt category, although the data points are smaller in the enterprise sector. They also mention a partnership with a global manufacturing company on their AI journey in Europe.

In the quarter, the company had a significant win with Nova Nordics and their NVIDIA backed chips, as well as a large AI win with a hyperscaler. The company's platform allows them to capture this demand and they are also seeing growth in private AI deployments. The company's modular design and long-term planning has allowed them to bring a large capacity block design to market, with plans to support even higher power densities in the future.

The company believes that being able to support high densities is crucial for their modular designs and their team's global heritage allows them to effectively meet with customers. They see a growing demand for hyperscale AI, both in the public and private sector, and believe it will have a positive impact on their 0 to 1 megawatt segment. However, they are cautious about expanding into unproven markets.

The speaker discusses the rise of new players in the AI market who are eager to obtain data and are willing to take on challenging locations in order to do so. They also mention the importance of placing algorithms near data, and how their company is working to provide infrastructure to support this. They also mention the increasing demand for inference and how their company is well positioned to support it.

During a recent conference call, Richard Choe asked about the pull forward of leases in Northern Virginia and whether there were similar conversations happening in other parts of the portfolio. Andrew Power clarified that the Northern Virginia activity was not a pull forward, but rather a result of customers' urgent need for capacity blocks. He also mentioned that there were similar opportunities in other regions such as Santa Clara, Dallas, and New Jersey, as well as in Europe and Asia Pacific. Colin McLean added that their pipeline reflected a diverse mix of bookings, with a significant portion being for AI. He also noted that London saw a significant increase in bookings during the quarter.

The speaker discusses the growth of the digital transformation and IT spend, enabled by channel partners, and the increase in new logos this quarter. They also mention the mark-to-market for the portfolio and the expected duration for achieving it, with a focus on the greater than megawatt category and rates in different markets.

The company is seeing a continued trend of growth in both retail and wholesale colocation, and is focused on both segments across different markets. The Americas accounted for 80% of leasing, but the company is also expanding in Europe and Asia Pacific, with a focus on AI and new markets such as Copenhagen.

Andrew Power and Matthew Mercier discuss the company's recent record results in the Americas and strong performance in Europe and Asia. They also mention the potential for AI to globalize like cloud technology. On the topic of leverage, they note that the company has made considerable progress in reducing its leverage over the past year.

The speaker discusses their team's success in bringing in $500 million in proceeds and increasing EBITDA, as well as their goal to reduce leverage. They also mention a potential risk to one of their major customers, but advise against jumping to conclusions and highlight the strength of their contracts with other hyperscale customers.

The speaker discusses the current state of supply chain constraints and pricing in the data center industry. They mention that while some issues have been resolved, there are still hindrances to supply, such as power transmission and sustainability concerns. They also highlight the value that can be provided to customers in this environment.

The speaker believes that despite historical preferences and DIY practices, customers are increasingly turning to trusted global outsourcing partners with experience in digital services. This trend is especially evident in the Northern Virginia market and is a growing phenomenon globally. When asked about potential M&A activity, the speaker states that the company's appetite for acquisitions is not great at the moment, as they already have a strong presence in most markets. They may consider smaller strategic acquisitions in the future, but there are currently not many opportunities available.

The speaker discusses the company's strategy of focusing on supporting workloads in markets with robust demand and diverse applications. They mention that the cloud has not expanded to every city, but rather to locations with strong economic and population factors. The company is open to adding new markets to their strategy, but only if they meet certain criteria.

The speaker discusses the company's strong performance in North America, particularly in the greater than 1 megawatt category, which was driven by AI technology. They expect this trend to continue throughout the year, with strong quarterly bookings and new logo contributions. The speaker also mentions that this marks a consecutive record for the company.

Digital Realty had a strong first quarter, with record results driven by the growing impact of AI on the business. The company saw healthy growth and strong leasing spreads, and continues to innovate with new products and designs to accommodate high-power workloads. They have also closed several transactions to bring in private capital and meet customer demand. The demand drivers of AI, cloud, and enterprise digital transformation are expected to continue, and Digital Realty is well positioned with a large number of data centers in key markets around the world.

The speaker thanks everyone for attending the conference and expresses gratitude for the Digital Realty team who play a crucial role in keeping the digital world functioning. The operator then ends the conference and thanks everyone for participating.

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