The Digital Realty Second Quarter 2024 Earnings Conference Call began with an introduction from the operator and a welcome from Jordan Sadler. The management team, including President and CEO Andy Power, CFO Matt Mercier, and other executives, were present for the call. Forward-looking statements were made, and non-GAAP financial information was discussed. Key takeaways from the second quarter were highlighted, including strong demand and record leasing, improvements in occupancy and cash releasing spreads, and growth in interconnection revenue.

In the second quarter, Digital Realty experienced strong momentum with new leasing up over 100% compared to the same period last year. This was mainly driven by demand for larger capacity blocks in core markets and a strong performance in the 0-1 megawatt plus interconnection segment. The company remains focused on key priorities such as reducing leverage, developing new partnerships, and executing on its full spectrum product strategy.

Digital Realty had strong operating results in the first half of 2024, with 13% growth in data center revenue and 26% growth in recurring fee income. They also entered the London market through an acquisition and continue to innovate and integrate with the launch of their HD Colo 2.0 offering and new Microsoft Azure ExpressRoute services. They have also strengthened their balance sheet and diversified their capital sources with over $10 billion of private capital through new ventures and dispositions.

The company expanded their Chicago Hyperscale venture and sold stakes in data centers in Frankfurt, raising over $0.5 billion. They also raised $2 billion in equity and are well positioned to meet the demand for data center capacity driven by artificial intelligence innovation. According to Gartner, global spending on public cloud services is expected to grow significantly due to AI-related workloads. Digital Realty's modular data center design can accommodate these evolving requirements and the growth in demand is global.

Digital Realty is experiencing strong demand for data centers in North America and other global locations like London, Amsterdam, and Paris. However, this growth in demand is also accompanied by challenges, such as the environmental impact of energy-intensive facilities. To address these concerns, Digital Realty is focusing on sustainability and efficiency. The increasing use of AI and digital transformation is expected to drive further demand for data centers, and Digital Realty is well-positioned to benefit from this trend. The company has also seen a record number of new customers, with many being sourced through partnerships.

In the second quarter, Digital Realty had several wins, including partnerships with a Global 2000 advanced engineering and research enterprise, an AI-enabled SaaS provider, and a natural language speech synthesis leader. They also saw growth in their commitment to PlatformDIGITAL from a Global 2000 manufacturer and two leading financial services firms. The company also made progress on their ESG efforts, being recognized as one of the world's most sustainable companies and increasing their use of renewable energy and recycled water.

Digital Realty has launched a new supplier engagement program to promote sustainability in its supply chain. The company remains committed to minimizing its environmental impact while achieving sustainable growth. In the second quarter, Digital Realty signed $164 million in new leases, with a majority falling into the greater than megawatt category. The company also saw strong leasing activity in the 0 to 1 megawatt plus interconnection segment. The backlog of signed and not yet commenced leases remains robust, with over $175 million scheduled to commence this year and over $230 million next year. Renewal spreads were positive across products and regions, with a 4% increase on a cash basis and 8.2% year-to-date. Cash renewal spreads in the 0 to 1 megawatt segment were up 3.8% and the greater than 1 megawatt segment was up 3.9%.

The 0 to 1 megawatt segment drives the overall re-leasing spreads, as these shorter-term leases have reliable and predictable renewals. In the greater than 1 megawatt segment, leases renewed at a higher rate compared to last quarter. Churn remained low and the company reported strong earnings growth, despite the impact of deleveraging and capital-raising activities. Revenue and adjusted EBITDA also increased year-over-year.

In the second quarter, the company saw a 13% increase in rental and interconnection revenue and a 14% increase in adjusted EBITDA due to capital recycling. Same capital operating performance showed 2% growth in cash NOI, with 3.6% growth in data center revenue offset by flat rental property operating costs. Investment activity included $532 million spent on consolidated development and 72 megawatts of new capacity delivered for customers. The company also saw a 20 basis point decrease in blended average yield for development projects. In the first half of the year, over $1 billion was spent on development, in line with full-year guidance. The balance sheet was strengthened with the closing of two transactions in April, raising over $500 million in gross proceeds.

The company has sold 14.7 million shares since their last earnings report, raising $2 billion in net proceeds. They have a strong liquidity position and a low net debt to EBITDA ratio. Their debt profile is favorable with a long weighted average maturity and low interest rate. They have no remaining debt maturities for the rest of the year and their guidance for core FFO, total revenue, and adjusted EBITDA remains the same. They expect core FFO to increase in the second half of the year. The company is now open for questions.

The operator begins the Q&A session and the first question is about the long-term pipeline for deals over 1 megawatt. The company responds that they are seeing a continuation of trends, with large customers wanting contiguous capacity blocks and fungible markets. The next question is about renewal rates, specifically a sequential decline in the Americas and for greater than 1 megawatt segments. The company explains that this decline could be due to market and mix factors, but also mentions other industry dynamics.

The speaker discusses the company's progress in participating in private capital recycling, which has been ongoing for at least 18 months and has resulted in accumulating over $10 billion in hyperscale private ventures with various parties. This has led to a step up in fee revenue on a recurring basis in the company's P&L.

The company has made significant progress in its private capital initiatives, which has allowed them to shift from a defensive to an offensive posture and accelerate growth projects. The company's strategy for securing private capital continues to evolve and they will provide updates when available. The demand for hyperscale business is expected to triple by 2030, and the company is focused on bolstering and diversifying its private capital sources. The company is unable to provide specific details on the speed of delivery for new projects due to ongoing supply chain and access to resources challenges.

The speaker discusses the company's continuous effort to deliver timely products to meet the needs of their customers in the enterprise colocation market. They mention a recent signing that was delayed due to location restrictions, but overall the company is continuously adding new capacity and maintaining relationships with vendors. The speaker also addresses lease expirations for leases greater than 1 megawatt, stating that less than half of these leases have fixed renewal options and a small percentage are typically renewed. They also mention a $168 million impairment in the company's income statement, but do not provide further details on it.

The company's customers must provide notice of renewal within the proper period and without any changes. The company has seen some churn in customers, which allows them to bring contracts to the market. The company has also had some impairment associated with non-core assets, but has generated gains from capital recycling efforts. The company has had two strong quarters of leasing and the development pipeline is 66% leased, with a majority of that in the Americas. The company expects CapEx to trend positively and may consider adding new domestic markets due to a broadening of demand.

David Barden asks two questions to Andy Power in the earnings call. The first question is about the percentage of AI-related bookings, which was 50% last quarter but has now decreased. Andy explains that there are still large customers in the new leasing number and talks about the difference in AI versus non-AI bookings in the second quarter compared to the first quarter. He also mentions the possibility of seasonality in this pattern.

The speaker addresses a question about the company's expected growth in the future. He mentions that the company has recently had a strong quarter and is still seeing demand from traditional sources such as digital transformation and cloud computing. He also mentions a deal that may support AI in the future. The speaker clarifies that the company's focus on offense does not necessarily mean pursuing M&A opportunities.

The speaker discusses the success of converting a 3 plus gigawatt land bank into a profitable product for customers, resulting in strong returns on investment and pricing power. They also mention their focus on accelerating the bottom line and driving FFO per share growth. When asked about market rent growth, the speaker states that it is continuing to move in their favor and could potentially outstrip development costs, leading to even higher development yields.

The speaker discusses the current state of power constraints and supply environment in relation to their projects. They mention that there are various factors affecting the market, such as cloud computing, digital transformation, hybrid IT, and AI. They also mention that there are ongoing efforts to resolve these constraints, with some expected resolutions in the near future.

The speaker discusses potential delivery delays due to power constraints and other sustainability concerns in the data center industry. They mention that this is a multifaceted supply constraint that could potentially repeat itself in the future. They also mention that leasing spreads for larger data center spaces are improving and there is a positive outlook for market rent growth, but there is a risk of oversupply and excessive capital expenditures in the industry.

The speaker responds to a question about the current and future demand for data centers, specifically in regards to the impact of AI. They mention that they have signed long-term contracts with established technology companies and are focused on core markets with diverse customer demand. They believe they are insulated from the volatility of the AI industry due to their approach and the current supply constraints in the data center market. The speaker then asks Matt to comment on the outlook for leasing spreads and the exploration schedule.

The speaker discusses the company's leasing spreads and expects them to continue on a positive trajectory in the future. They also mention a focus on retail Colo over hyperscale and highlight strong performance in the 0 to 1 category in the second quarter.

The company's consistency is driven by its ability to serve a wide range of customers, including new logos and indirect bookings. The company's value proposition is strong and is supported by the digital transformation, cloud, and AI trends. The company has had significant wins in both enterprise and service provider segments, and the launch of Microsoft ExpressRoute in Dallas is a strong representation of its platform. The company is expanding its CapEx accordion to solve for consistent bottom line growth, and the explicit FFO per share is not explicitly stated.

The speaker clarifies that CapEx is the core of the company's funding and discusses the increase in CapEx intensity. They mention their strong balance sheet and diverse sources of capital, and their goal to use public and private capital to drive growth. The questioner asks about the company's high vacancy level compared to industry statistics, and the speaker explains that their portfolio is not solely focused on hyperscale and it may take time for their vacancy level to align with industry averages.

The speaker discusses the success of the hyperscale portion of their business, which can be fully leased in many buildings and markets. They mention their focus on increasing occupancy and converting vacant suites to support customer growth. They also mention a record number of new logos in the Colo side, and the potential for improved bottom line growth and leverage in the future.

Andrew Power and Matthew Mercier discuss the potential for dividend growth and investments in the business. They believe that using internally generated funds is the most cost-effective way to fund growth opportunities. They also plan to align dividend growth with the bottom line growth of the company. Colin McLean adds that the company is seeing a trend towards hybrid work and cloud services in their new logo base, with a mix of commercial and Global 5000 accounts showing interest in their platform. There is not yet a noticeable increase in density within this customer base.

The speaker discusses the value that a particular base of clients sees in the company's global platform and the success of their HD Colo 2.0 offering in meeting the increasing demand for higher-power density solutions in the market. They mention examples of industries with higher rack densities and the company's ability to support up to 150 kilowatts in under 12 weeks. A question is then posed about the early performance of HD Colo 2.0, with a potential uptick in the enterprise segment.

The speaker is asking about the company's guidance and why it has not been updated. They mention that there may be some factors such as foreign exchange and recent acquisitions that could affect the numbers. They also note that revenue needs to accelerate while adjusted EBITDA would need to decrease in order to hit the midpoint of the guidance. The speaker asks if the guidance is conservative and if there are any uncertainties or unusual expenses that could be affecting it. They ask for more clarification on this matter.

Digital Realty had a strong second quarter with record leasing and healthy pricing, indicating a high demand for data center infrastructure. The company is focused on innovation and integration, with the launch of HD Colo 2.0 and new cloud on-ramps to PlatformDIGITAL. They have also repositioned their balance sheet by diversifying their capital sources and reducing leverage.

The company is focused on improving growth and meeting customer needs. They are pleased with this quarter's results and optimistic about future demand. The speaker thanks everyone for joining and acknowledges the hard work of the team at Digital Realty. The conference is now over.

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