DIGITAL-REALTY-TRUST Earningcall Transcript Of Q2 of 2024
Andrew P. Power -- President and Chief Executive Officer Thanks, Jordan. Thanks to everyone for joining our call. The momentum we experienced in the first quarter continued in the second quarter. In the first half of 2024, our new leasing was up over 100% from the activity we saw in the first half of 2023, with a strong and steady contribution from our zero-to-one-megawatt plus interconnection segment. Demand for data center capacity remains as strong as we've ever seen, especially for larger capacity blocks in our core markets. We are well-positioned to take advantage of this favorable demand environment, given our track record of execution across six continents, a robust land bank Page 2 and shelf capacity that could support three-plus gigawatts of incremental development, reduce leverage, and our growing and diverse array of capital partners. During the second quarter, we remained focused on our key priorities. We signed 164 million of new leasing in the second quarter, which excluded another 16 million of bookings within one of our newest hyperscale private capital ventures. All bookings in the greater-than-a-megawatt category were once again the primary driver. There was no confirmation from our largest hyperscale market, Northern Virginia, as Dallas led the way in the second quarter. Importantly, we post one of our strongest quarters ever in the zero-to-one-megawatt plus interconnection segment with record new log-ins and near record bookings in each of the zero-to-one-megawatt and interconnection categories. This leasing strength is a positive reflection of the value that our 5,000 and growing base of customers realize from our full spectrum product strategy. We also deliver strong operating results with 13% data center revenue growth year over year pro forma for the capital recycling activity completed over the last year. In addition, we have enjoyed healthy growth in recurring fee income associated with our new hyperscale ventures. In the first half, fee income was up 26% over the first half of 2023, primarily reflecting the formation of almost 10 billion of institutional private capital ventures over the last year. And we would expect this line item to continue to gather momentum. With record commensurates in the second quarter and the healthy backlog of favorable price leases ready to commence in the second half, we are well-positioned for accelerating top-line and bottom-line growth for the remainder of 2024 and into 2025. Subsequent to quarter-end, we also strengthened our value proposition in Europe through our entrance into the Slough submarket of London with the acquisition of a densely connected Enterprise Data Center campus, which we Page 3 expect to be highly complimentary to our existing colocation capabilities in the city and the Docklands. The new campus supports an existing community of more than 150 customers utilizing over 2,000 cross-connects. Consistent with our key priorities, we continue to innovate and integrate as we unveiled our HD colo 2.0 offering in the second quarter with advanced high-density deployment support for liquid to chip cooling across 170 of our data centers globally. In addition, just last week, we announced the deployment of a new Microsoft Azure ExpressRoute Cloud On-Ramp at our Dallas campus, along with the launch of the new Azure ExpressRoute Metro service in the Amsterdam and Zurich market. We also bolstered our balance sheet and significantly diversified our capital sources, availing Digital Realty of more than 10 billion of private capital over the past year through our new hyperscale ventures and noncore dispositions. During the quarter, we expanded our existing Chicago hyperscale venture with a sale of a 75% interest in CH2, the remaining stabilized data center on our Elk Grove campus. We also sold an additional 24.9% interest in our data center in Frankfurt to Digital Core REIT, increasing their total position in the campus to just under 50%. These two transactions together raised over half a billion dollars. Finally, we raised approximately 2 billion of equity since our last earnings call, including the 1.7 billion follow-on offering in early May and proceeds raised under our ATM. These transactions, together with the others of the past year, have positioned our balance sheet to capitalize on this unique environment and construct the capacity that our customers demand. Artificial intelligence innovation is reshaping the global data center landscape. As new applications are developed and proliferated across industries and around the world, AI is driving an incremental wave of demand for robust computing infrastructure. According to Gartner, global spending on public cloud services is projected to grow over 20% to reach $675 billion in Page 4 2024. It's forecast to grow another 22% in 2025, with AI-related workloads running a significant portion of this growth. Digital transformation, cloud, and AI are fueling demand for data center capacity worldwide. Traditional data centers were already being pushed to the limits of demand for cloud and digital transformation, where a demand for AI-oriented data center infrastructure is being accommodated in upgrade suites in our existing facilities and in newly built facilities. These AI workloads are taking place on specialized hardware with massive parallel processing capabilities and lighting fast data transfer speeds. Fortunately, Digital Realty's modular data center design can accommodate these evolving requirements. The growth in demand is global. We're seeing strong demand across our North America metros first, but it is spreading beyond with interest in locations like London, Amsterdam, and Paris in EMEA, and Singapore and Tokyo in APAC. Our global footprint is well-suited to capture this growing demand, whether it be for major cloud service providers adding to an availability zone, a major enterprise digitizing their business processes, or an AI model being trained or being put into production. However, this exponential growth in data center demand is not without its challenges. The environmental impact of these energy intensive facilities is growing alongside the scaling of user requirements. According to the IEA, data centers consumed almost 2% of global electricity in 2022. I figure they could double by 2026, absent significant efficiency improvements. I will touch on Digital Realty's latest sustainability highlights in a moment. As we look to the future, the interplay between AI advancements and data center evolution will continue to shape the global technology landscape. IDC predicts that by 2027, worldwide spending on digital transformation will reach nearly 4 trillion, driven by AI, further accelerating the demand for data center infrastructure. We believe that the Page 5 providers who can officially scale their capacity while addressing sustainability concerns will be best positioned to benefit from these three key drivers: digital transformation, cloud, and AI in the years to come. Customers and partners are recognizing the value that Digital Realty can bring to their applications around the world. During the second quarter, we added 148 new logos, marking a new quarterly record. A growing number of these new logos are being sourced by our partners, who will officially expand our sales team to reach into enterprises around the world. The wins this quarter include, a Global 2000 advanced engineering and research enterprise developing a private AI sandbox on PlatformDIGITAL to enable experimentation and development by federal agencies and brought to us by one of our large connectivity partners, Lumen Technologies. Another partner brought a new logo that is an AI-enabled SaaS provider repatriating off public ground to save costs and enable growth. That same partner was also assisting two large financial institutions to increase their capacity on PlatformDIGITAL in APAC and North America. And yet, another example of our growing partnerships, an AI SaaS provider and a recognized leader in natural language speech synthesis, is growing their commitment to PlatformDIGITAL with an expansion of current AI workloads where proximity is the driving requirement. The Global 2000 manufacturer is rearchitecting their network on PlatformDIGITAL with a regional hub to improve efficiency, lower their network costs, and implement controls while eliminating the capital costs of maintaining their own facilities. And two leading financial services firms are both leveraging PlatformDIGITAL to extend their respective virtual desktop infrastructure environments to improve performance and user experience across their North American and EMEA employee base. Before turning it over to Matt, I'd like to touch on our ESG progress during the second quarter. We continue to make meaningful progress on ESG performance. We were recognized by Time and Page 6 Statista as one of the world's most sustainable companies of 2024. We also released our annual ESG report in June, highlighting our ongoing efforts to develop and operate responsibly. As described in our ESG report, we further increased our renewable energy supplies with 152 data centers now matched with 100% renewable energy. We improved water efficiency and expanded the use of recycled water, which accounted for 43% of our total water consumption last year. We also launched a new supplier engagement program to drive sustainability and decarbonization through our supply chain. We remain committed to minimizing Digital Realty's impact on the environment while delivering sustainable growth for all of our stakeholders. With that, I'm pleased to turn the call over to our CFO, Matt Mercier. Matt Mercier -- Chief Financial Officer Thank you, Andy. Let me jump right into our second quarter results. We signed 164 million new leases in the second quarter, with two-thirds of that falling into the greater-than-megawatt category, the majority of which landed in the Americas, with healthy contributions from both EMEA and APAC. Not to be overlooked, however, was the $40 million of zero-to-one-megawatt leasing and a standout 14 million of interconnection bookings, our fourth consecutive quarter exceeding 50 million in our zero-to-one-megawatt plus interconnection segment. Turning to our backlog, we commenced a record 176 million of new leases this quarter, which was largely balanced by the strong second quarter leasing. As such, the 527 million backlog of signed and not yet commenced leases moderated by only 2% from last quarter's peak and remains robust at more than 9% of our total revenue guidance for full year 2024. Looking ahead, we have over 175 million scheduled to commence through the remainder of this year, with over 230 million already scheduled to commence next year. During the second quarter, we signed 215 million of renewal Page 7 leases at a 4% increase on a cash basis, driving year-to-date renewal spreads to 8.2%. Releasing spreads were once again positive across products and regions. Last quarter, we noted that the underlying renewal spread, after stripping out two outliers, was 3.4%. Our cash renewal spreads in the zero-to-one-megawatt segment were up 3.8% in the second quarter, while the greater-than-a-megawatt segment was up 3.9%. As a reminder, the zero-to-one-megawatt segment is the primary driver of our overall releasing spreads, given the heavier weighting of lease expirations in this category, which are typically shorter-term leases with inflationary or better escalators. Zero-to-one-megawatt deals renew reliably and predictably, making them track closer market over time, thereby reducing the outsized movements that can come with larger or longer-term lease renewals. On the greater-than-a-megawatt side, renewals reflected the strong pricing environment, with leases renewed at $159 per kilowatt compared to the $133 per kilowatt achieved on greater-than-a-megawatt renewals last quarter. The key difference between the quarters was the rate on the expiring leases. This quarter, leases in this segment expired at $153 per kW, while last quarter's leases expired at an average of 112 per kilowatt. For the quarter, churn remained low and well-controlled at 1.6%, and our largest termination was immediately backfilled at an improved rate. In terms of earnings growth, we reported second quarter core FFO of $1.65 per share, reflecting continued healthy organic operating results, partly balanced by the impact of the meaningful deleveraging and capital raising activity executed over the course of the last year. Revenue growth in the quarter was tempered by the decline in utility expense reimbursements, a comparison that is likely to persist throughout this year, given the decline in electricity rates in EMEA year over year, along with the impact of substantial capital recycling activity. Despite the deleveraging headwinds, rental revenue plus interconnection revenues were up Page 8 5% on a combined basis year over year. Adjusted EBITDA also increased 5% year over year through the first half and remains well on track to meet our 2024 guidance. Pro forma for the capital recycling completed since last July. Rental plus interconnection revenue and adjustment EBITDA grew by 13% and 14% year over year, respectively, in the second quarter. Stabilized same-capital operating performance saw continued growth in the second quarter with year-over-year cash NOI of 2% as 3.6% growth and data center revenue was offset by catch-up and rental property operating costs, which were flat last quarter. Year to date, same capital cash NOI has increased by 3.5%. We have previously highlighted same capital NOI growth is expected to be impacted by nearly 200 basis points of power margin headwinds year over year, given the elevated utility prices in EMEA in 2023. Moving on to our investment activity, we spent 532 million on consolidated development in the second quarter, plus another 90 million for our share of unconsolidated JV spending. We delivered 72 megawatts of new capacity across the globe for our customers in the quarter, while we backfilled the pipeline with 71 megawatts of new starts. Blended average yield on our overall development pipeline moderated 20 basis points sequentially to 10.4% as a result of a market mix shift of completions and starts in North America during the quarter. In the first half of the year, we spent a bit over $1 billion in developing capex, tracking closely toward our full year guidance, as the second half should see a ramp from newly commenced projects, along with the typical seasonal uplift. Turning to the balance sheet, we continue to strengthen our balance sheet in the second quarter with the closing of the two transactions in April that we disclosed during last quarter's earnings report and was referenced earlier by Andy. Together, these two transactions raised just over 500 million of gross proceeds. Page 9 Additionally, since our last earnings report, we sold 14.7 million shares, including a 12.1 million share follow-on offering in early May and incremental ATM issuance, raising 2 billion of net proceeds, while using cash on hand to pay off a 600 million euro bond that matured in April and a 250 million sterling bond that matured last Friday. At the end of the second quarter, we had more than 4 billion of total liquidity, and our net debt-to-EBITDA ratio fell to 5.3 times, which is below our long-term target. Moving on to our debt profile, our weighted average debt maturity is over four years, and our weighted average interest rate is 2.9%. Approximately 84% of our debt is non-U.S. dollar denominated, reflecting the growth of our global platform and our FX hedging strategy. Approximately 86% of our net debt is fixed rate, and 96% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, after paying off the euro notes in April and sterling notes last week, we have zero remaining debt maturities through year-end. Beyond that, our maturities remain well-laddered through 2032. Let me conclude with our guidance. We are maintaining our core FFO guidance range for the full year of 2024 of $6.60 and $6.75 per share, reflecting the continued strength in our core business, hardly balanced by the front half-weighted capital recycling and funding activity, which helped to reduce our reported leverage by a full turn to better position the company to fund development in 2024 and beyond. We're also maintaining our total revenue and adjusted EBITDA guidance ranges for 2024, as well as the operating, investing, and financing expectations that we've previously provided. Looking forward to the balance of 2024, core FFO for share remains poised to increase in the second half as the backlog commences and the impact of prior deleveraging moderates. This concludes our prepared remarks. And now, we'll be pleased to take your questions. Operator, would you please begin the Q&A session? Page 10 Questions & Answers: |
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