Digital Realty Trust, Inc.

Good afternoon and welcome to the Digital Realty second quarter 2021 earnings call. Please note this event is being recorded. During today's presentation, all parties will be in a listen only mode. Following the presentation, we will conduct a question and answer session. Callers will be limited to one question plus a follow up and we will conclude promptly at the bottom of the hour. I would now like to turn the call over to John Stewart, Digital Realty's Senior Vice President of Investor Relations. John, please go ahead.

Thank you, Andrea. The speakers on today's call are CEO Bill Stein and CFO Andy Power. Chief Investment Officer Greg Wright, Chief Technology Officer Chris Sharp, and Chief Revenue Officer Corey Dyer are also on the call and will be available for Q&A. Management may make forward-looking statements, including guidance and underlying assumptions. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, see our 10-K and subsequent filings with the SEC. This call will contain non-GAAP financial information. Reconciliations to net income are included in the supplemental package furnished to the SEC and available on our website. Before I turn the call over to Bill, I'd like to hit the tops of the waves on our second quarter results. We continue to enhance our product mix, with a record contribution from our sub-one megawatt plus interconnection category. We extended our sustainability leadership with the publication of our third annual ESG report. We raised revenue and EBITDA guidance for the second quarter in a row, setting the stage for accelerating growth in cash flow. Last but not least, we further strengthened the balance sheet with the redemption of high-coupon preferred stock and the issuance of low-cost, long-term, fixed-rate debt. With that, I'd like to turn the call over to Bill.

Thanks, John. Good afternoon, and thank you all for joining us. Our formula for long-term value creation is a global, connected, sustainable framework. We continue to advance along these lines during the second quarter. Our business continues to globalize, and once again, we generated solid performance and strong bookings across all regions. Our full-spectrum product offering continues to blossom. with record sub-one megawatt bookings in the second quarter and regional highs in both EMEA and APAC. Together, with interconnection, the sub-one megawatt category comprised nearly half of our total bookings, demonstrating customers' enthusiastic adoption of platform digital to help accomplish their digital transformation initiatives. I'll discuss our sustainable growth initiatives on page three. In June, We were awarded the Green Lease Leader Gold Award from the Institute for Market Transformation and the U.S. Department of Energy for the third year. We remain the only data center provider to receive this award, which recognizes Digital Realty as a leader in the real estate industry that incorporates green leasing provisions to better align our interests with our customers and drive high performance and healthy buildings. During the second quarter, we published our third annual ESG report, detailing our 2020 sustainability initiatives, including the utilization of renewable energy for 100% of our energy needs across our entire portfolio in Europe, as well as our U.S. co-location portfolio, and reaching 50% of our global needs. We also reported progress towards our science-based target, ensuring a deep focus on our renewable energy energy efficiency, and supply chain sustainability initiatives. Our ESG report highlights many of our ongoing initiatives, including our diversity, equity, and inclusion efforts along with our community involvement. Digital Realty is committed to being an active member of and giving back to the communities where we operate globally. We encourage and celebrate community involvement and employee engagement activities through our Do Better Together initiative. We also recently underscored our commitment to transparency and accountability on our diversity, equity, and inclusion journey with the publication of our EEO-1 report. Events over the past year and a half have demonstrated that now more than ever, ESG belongs at the forefront of our business. I'm proud of our leadership in this area as we advance our broader goal of delivering sustainable growth for all of our stakeholders, investors, customers, employees, and the communities we serve around the world. Let's turn to our investment activity on page four. We are continuing to invest in our global platform with 39 projects underway around the world as of June 30th, totaling nearly 300 megawatts of incremental capacity, most of which is scheduled for delivery over the next 12 months. We are investing most heavily in EMEA, with 19 projects totaling over 150 megawatts of capacity under construction. Most of this capacity is highly connected, including projects in Frankfurt, Marseille, Paris, and Zurich. Demand remains strong across these metros, and each continues to attract service providers as well as enterprise customers from around the world, many of which contributed to a truly standout performance by the region during the second quarter in the up to one megawatt category. In North America, over half of our capacity under construction is concentrated in two hot markets, Portland and Toronto, that can sometimes be overlooked in favor of more traditional North American data center metros. We've had tremendous recent success in these two metros. We have 30 megawatts under construction in Portland, or more specifically Hillsborough, that are now fully pre-leased, while our Toronto connected campus continues to gain momentum as the premier Canadian hub for global cloud service providers and enterprise customers. Finally, in Asia Pacific, we are accelerating our organic growth in this underserved region. We opened our third data center in Singapore, a 50 megawatt facility that received permitting prior to the moratorium on new data center construction. Demand for this scarce capacity is robust, and we have another 18 megawatts largely pre-sold and scheduled to open this quarter. Also coming soon in this region are a pair of MC Digital Reality data centers in Japan. With the world's eyes currently on Tokyo for the Olympics, we are opening a new Tokyo facility that's poised to win the gold medal. We are also opening another data center in Osaka this quarter, along with our first data center and the first carrier neutral offering in Seoul, Korea during the fourth quarter. We are very excited about the opportunity in Seoul. And earlier this morning, we announced that we've acquired another land parcel to expand our connected campus, enabling us to accommodate the hyperscale demand that has been clamoring for capacity in our first highly connected facility. Finally, Earlier this month, we announced our intention to enter India in partnership with Brookfield Infrastructure. Given the success of our existing partnership on the Ascenti platform in Latin America, the complementary skills and expertise that we both bring to this partnership, and with the significant growth opportunity available in India, we are excited to expand our footprint in this robust and dynamic market. Let's turn to the macro environment on page five. We are fortunate to be operating in a business levered to secular demand drivers. Our leadership position provides us with a unique vantage point to detect secular trends as they emerge globally on platform digital. The first of these trends is the growing importance of data gravity for global 2000 enterprises. Last year, we introduced the Data Gravity Index, our market intelligence tool which forecast the growing intensity of enterprise data creation lifecycle and its gravitational impact on global IT infrastructure between key global markets. Earlier this year, we took the next step and published an industry manifesto enabling connected data communities to guide cross-industry collaboration, tackle data gravity head-on, and unlock a new era of growth opportunity for all companies. Earlier this week, we announced a collaboration with Xeo to further our interconnection business through the creation of an open fabric of fabrics. With data sets exploding and data gravity challenges expanding, this initiative will enable multinational enterprises to connect these data oceans through fabric and orchestration. Third-party research continues to support data gravity's growing importance. Market intelligence firm Gartner recently conducted its sixth annual survey of chief data officers, and less than 35% of these executives reported their business have achieved their data sharing objectives, including data exchange with external data sources that drive revenue-generating business outcomes. Issues often arise due to multiple data hosting and processing meeting places, together with the need for appropriate security controls and the inability to overcome latency challenges with direct private interconnection between many counterparties. Platform Digital was designed to solve these problems. Digital transformation is compounding this enterprise data and connectivity problem. Recent research indicates that enterprise workflows utilize an average of 400 unique data sources by exchanging data with 27 external cloud products. Digital Realty's enterprise and service provider customers are turning to platform digital to overcome these issues by deploying their own data hubs and using interconnection to securely exchange data in and across multiple metros. Our leadership position is resonating with industry experts and influencers. For the second consecutive year, Digital Realty was named a Global Leader by IDC Marketscape for data center co-location and interconnection services, further acknowledgement of our consistently improving customer capabilities. This recognition reflects our execution against the platform digital roadmap, providing unique, differentiated value for customers with our fit-for-purpose, full-spectrum, global capabilities. Earlier this month, CloudScene again ranked Digital Realty as the strongest provider of data center ecosystems in EMEA for the second consecutive year. Digital Realty was ranked second in both North America as well as Latin America and jumped up three spots to number seven in Asia. Also in July, GigaOM published their analysis of edge infrastructure capabilities. Digital Realty ranked as an industry leader on multiple criteria across three broad categories. Our capabilities were ranked highest in vendor positioning and evaluation metrics comparison and second among the key criteria comparison. Given the resiliency of demand drivers underpinning our business and the relevance of our platform to meeting customers' needs, we believe we are well-positioned to continue to deliver sustainable growth for customers, shareholders, and employees, whatever the macro environment may hold in store. With that, I'd like to turn the call over to Andy to take you through our financial results. Thank you, Bill.

Let's turn to our leasing activity on page seven. We signed total bookings of $113 million in the second quarter, including a $13 million contribution from InterConnection. network and enterprise-oriented deals of one megawatt or less reached an all-time high of 41 million, demonstrating our consistent momentum and the growing success of platform digital as we continue to capture a greater share of enterprise demand. The weighted average lease term was over eight years. We landed 109 new logos during the second quarter with strong showings across all regions. Again, demonstrating the power of our global platform. The geographic and product mix of our new activity was quite healthy, with APAC and EMEA each contributing approximately 20%, the Americas representing nearly 50%, and InterConnection responsible for a little over 10%. The megawatt or less plus InterConnection category accounted for almost half our total bookings, with particular strength in the cloud content, and financial services verticals. In terms of specific wins during the quarter and around the world, we landed a top five cloud service provider to anchor our new Tokyo campus. Close on the heels of this magnetic customer deployment, Japan's most popular social media application selected Platform Digital on this same campus. Naver, the leading Korea-based cloud provider serving the greater APAC region, selected our new carrier-neutral facility in Singapore to support data-intensive workloads for their high-performance computing and AI-intensive technology-based platform. A European broadcaster is leveraging platform digital in Vienna and Frankfurt to rewire their network in favor of data-intensive interconnection with benefits in performance, scalability, and cost savings. A Global 2000 enterprise data platform is adopting Platform Digital in Amsterdam, Dublin, and Frankfurt to orchestrate workloads across hundreds of ecosystem applications, delivering improved performance, security, cost savings, and simplicity. In London, Platform Digital is supporting a top three global money center bank's fortification of their business continuity capabilities without compromising their data-intensive interconnection requirements. On the continent, Our connectivity and operational capabilities are helping two independent FinTech customers improve performance and enhance access to their connected data communities. Finally, in North America, a life sciences digital marketing firm chose Platform Digital to improve their network architecture and enable future growth. Turning to our backlog on page nine. The current backlog of leases signed but not yet commenced ticked down from $307 million to $303 million as commencement slightly eclipsed space and power leases signed during the quarter. The lag between signings and commencements was a bit longer than our long-term historical average at just over seven months. Moving on to renewal leasing activity on page 10, we signed $178 million of renewals during the second quarter in addition to new leases signed. The weighted average lease term on renewals signed during the second quarter was just under three years, again reflecting a greater mix of enterprise deals smaller than one megawatt. We retained 77% of expiring leases, while cash releasing spreads on renewals were slightly positive, also reflective of the greater mix of some one megawatt renewals in the total. In terms of second quarter operating performance, overall portfolio occupancy ticked down by 60 basis points as we brought additional capacity online across six metros during the quarter. Same capital cash NOI growth was negative 1.5% in the second quarter, largely driven by the churn in Ashburn at the beginning of the year. As a reminder, the Westin Building in Seattle, the Interaction Platform in EMEA, Lambda Helix in Greece, and Altus IT in Croatia are not yet included in the same store pool. so these same capital comparisons are less representative of our underlying business today than usual. Let's turn to our economic risk mitigation strategies on page 11. The U.S. dollar fluctuated during the second quarter, but remained below the prior year average, providing a bit of an FX tailwind. As a reminder, we manage currency risk by issuing locally denominated debt to act as a natural hedge, so only our net assets within a given region are exposed to currency risk from an economic perspective. In addition to managing credit risk and foreign currency exposure, we also mitigate interest rate risk by proactively terming out short-term variable rate debt with longer-term fixed rate financing. Given our strategy of matching the duration of our long-lived assets with long-term fixed rate debt, a 100 basis point move in benchmark rates would have roughly a 75 basis point impact on full year FFO per share. In terms of earnings growth, second quarter core FFO per share was flat year over year, but down 8% from last quarter, driven by a 12 cent non-cash deferred tax charge related to the higher corporate tax rate in the UK, which came into effect during the second quarter. Excluding the tax charge, which was not previously contemplated in our guidance, we outperformed our internal forecast due to a beat on the top line with a slight assist from FX tailwinds, as well as operating expense savings, partially due to lower property level spending in the COVID-19 environment. For the second time this year, we are raising our full year outlook for total revenue and adjusted EBITDA to reflect the underlying momentum in our business. The deferred tax charge does run through a core FFO per share, but as you can see from the press release, we are lowering the midpoint by just $0.05, which, all else equal, would imply a $0.07 raise, excluding the deferred tax charge. Since it is non-cash, the deferred tax charge does not hit AFFO. Most of the drivers of our guidance table are unchanged, but I would like to point out that we are lowering our expected recurring capex spend for the remainder of the year, setting the stage for accelerating growth in cash flow. As you can see from the bridge chart on page 12, we expect our bottom line results to improve sequentially over the balance of the year as the deferred tax charge comes out of the quarterly run rate and the momentum in our underlying business continues to accelerate. We do still expect to see some normalization in our cost structure with an increase in property-level operating expenses that have been deferred due to COVID, along with an uptick in G&A expense as we return to the office and resume a more normal travel schedule. so your model should reflect these higher costs. Last, but certainly not least, let's turn the balance sheet on page 13. As you may recall, we closed on the sale of a portfolio of non-core assets in Europe for $680 million late in the first quarter, which impacted second quarter adjusted EBITDA to the tune of approximately $10 million. As a result, net debt to adjusted EBITDA was slightly elevated six times as of the end of the second quarter, but is expected to come back down in line with our long-term range over the course of the year through a combination of proceeds from asset sales and growth in cash flows as signed leases commence. Fixed charge coverage ticked down slightly, also reflecting the near-term impact from asset sales, but remains well above our target and close to an all-time high at 5.4 times, reflecting the results of our proactive liability management. We continue to execute our financial strategy of maximizing the menu of available capital options while minimizing the related costs and extending the duration of our liabilities to match our long-lived assets. In mid-May, we redeemed $200 million of preferred stock at 6.58, which brought total preferred equity redemptions over the prior 12 months to $700 million at a weighted average coupon of just over 6.25, effectively lowering leverage by 0.3 terms. In mid-June, we issued half a million shares under our ATM program, raising approximately 77 million. In early July, we raised another 26 million with the sale of the balance of our Megaport stock. We also took our first trip to the Swiss bond market in early July, raising approximately 595 million in a dual tranche offering of Swiss green bonds with a weighted average maturity of a little over six and a half years, and a weighted average coupon of approximately 0.37%. This successful execution against our financial strategy reflects the strength of our global platform, which provides access to the full menu of public as well as private capital, sets us apart from our peers, and enables us to prudently fund our growth. As you can see from the chart on page 13, our weighted average debt maturity is nearly six and a half years, and our weighted average coupon is down to 2.2%. Over 70% of our debt is non-US dollar denominated, reflecting the growth of our global platform and serving as a natural FX hedge for our investments outside the US. 90% of our debt is fixed rate to guard against a rising rate environment, and 98% of our debt is unsecured, providing the greatest flexibility for capital recycling. Finally, as you can see from the left side of page 13, We have a clear runway with nominal near-term debt maturities and no bar too tall in the out years. Our balance sheet is poised to weather a storm, but also positioned to fuel growth opportunities for our customers around the globe, consistent with our long-term financing strategy. This concludes our prepared remarks, and now we would be pleased to take your questions. Andrea, would you please begin the Q&A session?

We will now open up the call for questions. As a reminder, participants will be limited to one question and one follow-up. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from John Atkin of RBC. Please go ahead.

Thanks. I got one question and then a follow-up. First on M&A, interaction is now more than a year under your belt, and then you announced kind of the JV expansion into India. Wondered if you could maybe summarize your strategy for inorganic growth as it pertains to the potential purchases of existing platforms or assets. Sometimes there can be assets out there with dislocated valuations, so I thought it would be worth asking about that topic and getting a refresh. Thanks.

Sure, John. Happy to provide a refresh. First of all, we don't comment on M&A speculation, particularly as it relates to specific opportunities in the marketplace. But to refresh everyone's memory, we try to do only strategic deals. And by that, I mean we're looking for investments that enhance either our geographic footprint or our product offering. You know, thinking about specific deals, when you look back on interaction, I think we were fortunate there we were able to do both. We were able to enhance our geographic penetration and add significantly to the co-location mix in Europe. As it relates to the – The Cyrus One situation, which I think is what you probably were alluding to, we think that's a good platform. We have all this respect in the world for both Bruce Duncan and Dave Ferdinand, but it gives us more of what we already have. And so I just don't think that's something that would be of interest to us.

And then on asset recycling that Andy mentioned towards the end, there was a press item from June about the potential formation of a Singapore REIT, and I wondered if you could give us an update as to what's happening and kind of the rationale.

Thanks, John. So I think there's two concepts kind of related. interlinked in your question. So non-core capital recycling, we've been doing a fair bit of that. Most recently executed on a portfolio in EMEA close to $700 million that was not core or strategically digital. And it's kind of similar to a transaction we did back in, I think, 2019. So focusing our portfolio where we see the most robust and diverse customer growth So that's one leg of the stool that you can see will continue on. We activated this year again in terms of funding our business plan by recycling that capital into more strategic projects. We've also done what I call private capital partnerships. So similarly with that same transaction back in 2019 with Maple Tree, we raised 80% stake in a billion dollar of core assets, assets that we would never really want to part with and we maintain operational control of as a minority partner. So I think you'll see us continue to do both, but there is a big difference in our minds. Non-core are things that we're willing to part with 100% and we wish the new owners well. And core, really keeping those assets as part of our collective platform and just trying to recycle capital out of the slower growth assets, both of which I think at the end of the day, It hopefully accelerates our growth and allows us to redeploy that capital into higher return opportunities.

Anything specifically about the press item from, I think, Bloomberg and Data Center knowledge about forming a REIT in Singapore?

You know, I can say that kind of ties to both the questions. Singapore REITs have been the buyers of our two biggest portfolio sales. They have not been the only buyers. We've also done other one-off assets sales to other private buyers that were non-core. As it relates to any vehicle that we would do like that, we would only think about that in a core context if we're going to extend our brand and sponsorship to it. So, I think I can't comment on what that specific rumor was kind of pointing to, but it kind of is interwoven with both concepts a little bit.

The next question comes from Jordan Sadler of KeyBank Capital Markets. Please go ahead.

Thank you. Good afternoon. So I wanted to follow up a little bit in terms of sort of investment opportunity. Bill, you've talked about strategic, accretive, and I think growth enhancing for some of the strategic objectives or criteria for acquisitions. If you can check those boxes, it would seem that an acquisition, even something domestic, could make sense. The piece that I'm struggling with a little bit, it may be like the growth enhancing. Strategic makes some sense, even though there's some overlap. Accretive, I get. We can figure that out. Growth enhancing, the piece I wanted to ask you about was, does market share help in terms of sort of the growth outlook? In other words, if you're controlling a greater extent of the marketplaces and certainly these large hyperscale, you know, tier one markets in the U.S., do you think that would mitigate some of the downside rent pressure we've seen in that vertical?

Yeah, Jordan, I guess when I think about what we're trying to accomplish here, and certainly in recent history, I mean, you saw the press release today, right, where we We bought a piece of land in Seoul, Korea, and we already own a carrier-neutral data center in downtown Seoul, and now we're going to build a campus out in the suburbs. And what we're trying to do is replicate in Seoul what we've created in other markets around the world, which is a connected campus with a carrier-neutral dense network that you can tether the the campus back into. And I think that when you look around the world today, there just aren't that many platforms. I mean, there's not an interaction in Asia. And I think that what you're going to more likely see from us is what you're seeing in Seoul. We are in fact pursuing similar models in other parts of Asia. and in other parts of the world where we're going into new markets and planting the flag with both network-dense facilities and campuses. So just to repeat what our criteria is, yes, it has to be strategically important to us in terms of either geography or product, additive to both. It needs to be – we'd like it to be accretive. to our near-term earnings, and certainly accretive growth, which is what Interaction was and Ascenti, and importantly, prudently financed. So, you know, a capitalization that is consistent with how we finance the rest of the business here at Digital. And anything you want to add? I got two out of three, right? You did. We're not going to lever it up, in other words. That was better than your high school grades, Jordan.

I hope this wasn't the interview.

But to put a finer point in on it, we're not going to lever up these assets to make the numbers work.

Andy, if you have anything else, I have a follow-up.

I think the second or third part of your question was, can you drive pricing power through market share, which I think episodically there's opportunities to do that. I think if you look back to our DuPont-Fabris transaction, that was a market share moving transaction where we up-tiered our relationships with many customers to kind of control near-term supply. And I think that concept maybe works in more overall supply-constrained markets, predominantly outside the U.S., or even like a Santa Clara for that example. I do not, I'm not confident. I think your line of thinking would be other domestically focused larger footprint players. Does that M&A create better pricing power? And today's backdrop, I don't see that chain of events playing out again like such in America.

That's helpful. And then coming back, Bill, to sort of, you know, being around the world, India, can you guys potentially just size the India JV opportunity for us? You know, just sort of initial sizing. I mean, is this, can we see a platform purchase like Ascenti? Like is it with Brookfield then there, or is this going to be a de novo opportunity?

I'm going to hand that one over to Greg. Okay, thanks. Hey, Jordan. Look, I think to describe the India joint venture, Jordan, is it's actually a hybrid. Look, as you know, we've had a strong relationship with Rupert Field. We've had a great experience with them in CENTE, but when we purchased the CENTE, we came into that platform together and purchased an existing platform that had 14 assets, eight of which were under construction, six of which were operational assets, and a team in place. This is going to be different from that, but we are, again, going in 50-50 joint partners joint branding and the like, which you've seen in some of our press materials. But here we're going to be, and we have some folks that are already residing in the JV, but we're actually going into India here to build a platform. And ultimately, we expect it to be like Ascente, being a standalone platform with a strong management team that drives the business. And I think when we look at India, we're not looking to go into India and just do like for like product. We're looking to do differentiated product, and we think, you know, Brookfield is a partner here, and given their presence in the tower space and given what's happening in India in the mobile market and the like, you know, we think we have a great opportunity to do that. And so, but the, you know, the general governance and construct, if you will, is very similar to Ascenti. But the basic premise of going in, we're going in to build a platform. We're not buying a platform. So I'd say that's how I describe it.

The next question comes from Sammy Badry of Credit Suisse. Please go ahead.

All right. Thank you. First question I just wanted to just run by you guys is maybe you could give us a little bit more color on what's going on on releasing spreads because in the greater than one megawatt releasing spread slide, which is slide 10, there was meaningful improvement in spreads. And I think we were going from down 11% to just down 1%. And I was hoping you could just walk us through this. So that's part one of the question. Part two is, are we essentially done with a lot of those high negative renewal spread type leases that we've kind of been discussing on the last couple of quarters? Are you guys in the clear? Is this, you know, are we going to see some lumpiness? You know, thank you.

Thanks, Sammy. Let me tackle that. So, like for like, great megawatt, north of a megawatt, quarter over quarter, certainly saw an improvement from down just close to 11% on the prior quarters, 30-ish megs. The 23.5 megs came renewed this quarter or came due this quarter. Basically flat, negative 90 bps. Overall also improvement basically at 0.1% positive and over 2% positive gap. So definitely moving in the right direction. At the same time, I wouldn't call it be standing on the aircraft carrier with a victory flag just yet. We're still working through some still certain contracts. that are above market. Hence, we maintained our called language around a full year guidance of slightly negative. I did some parsing through both categories. In that category, literally 82% of the megawatts that renewed were positive. So close to 2% positive. So it really was like one or two negative that drug down the category to be flat. And in the over to the left of that, the greater the percent positive cash market markets in terms of the megawatts renewed. So I would call it still episodic, moving in a better direction, and that's a thematic thing that I don't think this one quarter was a massive inflection point. We've just been gradually getting to better territory this year versus last year and also feel that same trend kind of continuing based on the mix we see in the future. Sam, if you'll remind me of your second question, though.

I think you kind of already hit it, but the second part of the question was just kind of, have you guys essentially gone into the clear regarding a lot of the high negative renewal spread leases that came with the DFT portfolio? You kind of answered it, but that was the second question.

I wouldn't kind of go to my victories piece here. I don't think we're fully out of the woods, but the trend is moving in our direction and And we benefit from an incredibly diverse platform. And as you look at our expirations going into the rest of this year or 2022 and beyond, the mix just is improving, right? The bars have gotten shorter. The concentration in the greater than megawatts has become more international, places where we've had greater pricing power. So not fully in the clear, but I feel like we're inching our way into better territory every day. Got it. Thank you.

The next question comes from Brendan Lynch of Barclays. Please go ahead.

Great. Thanks for taking my question. Maybe, Andy, I'll just follow up on that renewal issue. It does seem like things are going better now. Is it possible that a few years out renewals could actually be a tailwind or are the escalators structured so that it's generally neutral at best?

I think there's definitely potential for viewers out cash market markets to be a positive tailwind here. I mean, if you look at the diversity of our product here, it's a very sticky product. We're typically doing renewals in many markets better than rates on new deals, given the propensity and inertia for our customer to stay. Our interconnection capabilities kind of furthers that stickiness. These markets where we're even bringing on new capacity are running up to physical barriers, whether it's supply of power, access to land, connectivity, government moratoriums are popping up in certain countries. And then the whole concept of inflation and its impact to newer incumbents and overall cost structures, all those things point to a world of higher pricing power in this aspect and certainly more so for digital with Relative to a new rent.

Great. That's helpful. And maybe a question for Chris as well. Chris, maybe you can give us just a little bit of insight on the fabric of fabrics platform and kind of simplify that for us. If you can.

No, absolutely appreciate it. Yeah. So. You know, it's a continuation. We've been investing in platform digital to make it more robust, where we have over 4,000 customers today. And, you know, as Andy alluded to earlier and Bill's comments earlier, that we're adding 100 new customers every quarter. So what we've talked about with the fabric of fabrics and the partnership that we've pulled together with Zayo is that these capabilities are proven to be very successful with our enterprise customers. And I think what we're talking about here today is about expanding those capabilities and those connectivity capabilities to a broader set of customers. And so I think that's one of the core things that we're really starting to drive and it's resonating well with our customers and that, you know, a lot of enterprises are out there looking for an open platform to really achieve their goals and remove complexity out of their deployments. And so that's what the platform digital is and what Fabric to Fabrics means is we've pulled together a carrier-grade partner with Xeo, and they're the first partner that we've executed this with, and you'll see other partners coming online to expand that value focused on our customer success.

The next question comes from Mike Funk of Bank of America. Please go ahead.

Yeah, thank you for the questions, and good evening, everyone. First was a basic math question to check my facts. I think the first quarter you did core FFO of 167 a share. I think you guided saying kind of down 10 cents sequentially due to a number of factors. But the 12 cent non-cash charge wasn't in that guide, right? So, you know, if you strip that out, you know, you're actually really only down about a penny quarter of a quarter, right, for the core FFO. And if you think about rolling that forward to the second half of the year, saying you really had an $0.08 core FFO beat, why wouldn't that core FFO per share beat, excluding the $0.12? Why wouldn't that recur in 3Q and 4Q? What's going to change in those two quarters stripping out that one-time charge?

So two data points. One, we are increasing FFO. the guidance net of the 12, right? So the 12 is a non-cash deferred tax hit, essentially revaluing a liability that due to the UK changing its corporate tax rates by 600 basis points, that 35 million to 12 cents flows through one time and it's non-cash, does not hit AFFO, which you can see is that I think the lowest payout ratio we've had in five quarters now. So, by the fact that we've increased the guidance, notwithstanding that 12 cents, it's essentially would have been a raise. And if you backed out the 12 cents to the midpoint, our new guidance, you're close to what would be 6% year over year growth on the core flow. The reason it doesn't all. The beat in this quarter, to the heart of your question, Mike, doesn't all flow through, is some of the beat, I would say, is OPEX timing. So timing relative to some of our OPEX spend, which got pushed out from 2Q into back half of the year.

And that was related to some of the deferred OPEX in 2020. Is that still what you're talking about?

Correct. Correct.

I would call it COVID-related catch-up a little bit. Got it. Understood. And then you made a little bit of commentary on the lease environment. I know there was a little bit of concern about leasing this quarter for the industry, but, you know, came in very strong. Given the visibility you have into the back half of the year, whatever that might be, you know, what are you seeing in terms of demand from hyperscalers and or demand picking back up from enterprise customers?

I think, Corey, why don't you pick us up there?

Yeah, sure. Thanks a lot. Thanks, Mike, for the question. With regard to enterprise demand, and then Andy, I'll let you handle the hyperscale, I think was part of his question as well. But in our opening remarks, we mentioned that over 50 million of our business was from the sub-1 megawatt plus interconnection, which is really approaching about 50% of our bookings. That's really a proxy for our enterprise business. On top of that, our best channel quarter ever, We also saw an increase in multi-site, multi-region customers, which are all indicative of kind of the strength of the enterprise demand and where we're going. So I would tell you that for the second half, we see strong to sufficient demand across all the regions as they take care of and address the needs for data gravity and hybrid IT architectures, all of which have been driven by enterprise customers across all the regions. We mentioned the strength in each of the region's both AP and EMEA, as well as North America. So we're seeing that kind of flow through. And looking at our funnel, we see strength across all those regions, multiple industries and verticals, financial services to cloud and others. So we're pretty excited about where we are and confident in demand from the enterprise side. And I feel like that's going to continue. I don't know if, Andy, you want to talk to the hyperscale part of it.

Yeah, I'll just add on real quick on the larger hyperscale customers. Strong America's Quarter, which was really largely, we did have a top five CSP land with us in Sao Paulo, but the lion's share was Hillsborough and Toronto. So some great wins from hyperscalers in that market. Top five hyperscalers landed both in Paris and Frankfurt, or grew with us in Paris and Frankfurt, and then over in APAC, As mentioned, prepared remarks that the leading Japanese social media platform landed with us in Tokyo, in addition to a top five CSP that I think we've announced as the anchor to our Tokyo campus on the prior call. So, I think dematically two things are playing out here. One, the hard work in terms of creating this global platform for these hyperscalers across approaching 50 metropolitan areas on six continents. and really trying to be their trusted partner of choice around the globe is certainly benefiting our leasing or signing activity. And I would also say we're making some great inroads to whether you call it next-tier or next-gen hyperscalers. I think a couple quarters ago we had a hyperscale win with a Singaporean-based technology company. I mentioned the Japanese social media company. We mentioned Korean company Naver. So definitely penetrating a broader cast of customers than just top five CSPs at the same time.

The next question comes from Michael Rollins of Citi. Please go ahead.

Thanks, and good afternoon. Just a couple questions. Now, first, if you look at the bookings trajectory and just some of the commentary we just heard, as well as just the backlog position, should 2022 be a better year for organic revenue growth and core FFO per share growth relative to 2021? And then secondly, on a separate topic, just curious, As you have a range of assets in your portfolio, some very young, some older, what are you seeing in terms of the maintenance capital and the pricing on facilities that are a bit more tenured relative to maybe similar facilities that are a bit newer in vintage? Thanks.

Sure, Michael. Why don't I try to tackle those in reverse order? In terms of maintenance capital, obviously, the older the facility, the more you approach end of life on various components. But that's no different than any piece of infrastructure or real estate. So, replacing a roof, replacing a chiller, you kind of get to these 20, 30 year end of life and one by one. Now, the good thing is we've built this portfolio over many years. and essentially keep adding newer products to the mix at the same time. So we've been able to keep our recurring capex at a pretty modest hit to our AFFO. We actually dialed it back slightly just for the year on our guidance table. So I wouldn't say any material upticks. And we do a lot of maintenance throughout the year in terms of fixed repair, preventative, and to ensure that there's no looming infrastructure headaches on the horizon. From a pricing standpoint, obviously, there's smaller nuances, whether it's PUE efficiencies or power densities, which we certainly are innovating and bringing to bear new technologies in terms of legacy facilities. But net-net, the biggest driver is supply and demand of the market. A data center that becomes available for us in Santa Clara or Singapore or Frankfurt or markets that are competitively demand outpacing supply, customers are craving the availability and not looking for the birth date. So I think that's more of a driver of the pricing activity. Going to your first question, I mean, on call 2022, I mean, we're only called halftime here. So not ready to roll out season two or wherever, but I would say a couple things that set us up for accelerating growth overall. One, I spoke a little bit to the cash market market position, and it's been improving this year relative to last year, and see a rise in where it could continue to improve. Two, this year we took Relative to or certainly Asheville, we took back a significant amount of capacity that we're chopping wood on releasing. So that we're having downtime from that vacant capacity in our numbers this year. You can see it in our occupancy as well. And you're going to see that come online as we refill that and have a greater contribution to revenue in 2022 than it does in 2021. So I think those elements and the fact that I think we've now put up I should count this, but I think it's close to eight pretty darn good quarters of consecutive leasing, right? You obviously have to adjust to our pre-interaction days relative to our denominator, but the leasing has been pretty darn consistent for some quarters now. So, I think all those things paint the picture, as well as a pretty attractive development pipeline, which will obviously create a contribution to 2022 and 21.

The next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

Great. Thank you very much. Good afternoon. Great to see the enterprise coming back this quarter. Do you think we're pretty much back to normal now in terms of your operations? I know there's been COVID picking up again in certain regions. Any comments around supply chain inflationary impacts and how that might be affecting you?

Let me try to divvy up that question because I think there's a couple of great points in here. Maybe, Corey, you want to pick up on enterprise demand. I was really pleased on that front. I mean, north of 19 million in May, 0 to 1 megawatt, close to 50% of our bookings. But, Corey, you can speak to that. And then maybe Chris and I can ham and egg inflation impacts on our customers and our supply chain.

Thanks. Yeah, thanks, Simon. I went through it a little bit with some of the kind of, I'll say, proxy items for enterprise success. and the fact that we've got a strong pipeline. And I'd call it a strong, well-qualified pipeline with quality as well. So really feel good about where the enterprise is and the follow-on. All of the acceleration in the hybrid IT and the move to, I'll call it work from home, I think has just accelerated the enterprise demand. and how we're set up with our channel initiatives and what we're doing there are just going to help us continue to build on that. So rather than repeat what I think I answered with Mike earlier, I would just tell you that the enterprise demand is strong, and I think we're in a good place going forward. It's been accelerated a little bit by the pandemic in the last couple of years, but in a good place going forward.

Yeah, no, thanks, Corey, and I appreciate the question, Simon. I think, you know, from a supply chain and what we've seen in the industry, we haven't seen any material impacts or delays at this point in time. We work extensively with our customers to understand their needs and their requirements for the infrastructure in their deployments, and so we align their orders to manufacturing dates. There's been some delays, but most of the time, we can signal that right in the beginning of the sales cycle to ensure that they can order them and and not miss any kind of delivery dates from that perspective. But again, it's something we constantly watch with the different types of manufacturers out there. And I think, you know, Andy referenced this earlier, our VMI program with the infrastructure that we leverage in delivering our own services, we're way ahead of that. And I think we've really differentiated ourselves with the weight in the market that we can execute, I think, beyond most of the other companies out there. So it's something that we watch closely, but no material impacts to date.

The next question comes from Eric Rasmussen of Stifel. Please go ahead.

Yeah, thanks for taking the questions. So, you know, Q2 leasing was somewhat steady in the quarter. I know you called out, you know, U.S. and hyperscale came back, and then I think there was strength on the less than one megawatt category. But were there any limitations with overall capacity in certain markets, or is there anything else to sort of call out that could have put a damper on or kept a lid on sort of your leasing in the quarter?

I mean, in any given quarter, there's always certain markets that are called tighter on the inventory standpoint. I mean, we spoke about that, how we ran into that in Ashburn. Luckily, it was a good time for us to run into that in Ashburn because the market had softened. What comes to mind right now, Eric, are a few markets that are certainly a little bit on the tighter side. We have, I don't think we've done much activity in Santa Clara for several quarters now because that market's been so tight, and we're waiting for our new capacity to come online. In Atlanta, where we're really solely focused on COLA connectivity, our 56 Marietta, which is the most highly connected data center in the southeast, is 100% full. We're waiting for an annex building, essentially, to bring on several megawatts of coal capacity. Outside the states, Frankfurt has been a bit of the Tetris game in terms of fitting the customers in in certain markets. And then Singapore, that's a market where I don't think we're fully sold out, but we've raised our rates given the supply demand, tremendous supply demand imbalances. We do look at any turn we'll have in that market where we look to reproductize for enterprise co-location and connectivity. Those are the ones, the namely ones that come top of mind. But, I mean, across 47 metros and developing on new capacity, at least half of them, I'm sure there's one or two else that would be similar.

Great. And then maybe just staying with the leasing, Europe seemed to – there was some lower leasing on the greater than one megawatt category. Has there been any change in sort of the hyperscale side that would suggest that things might be slowing or that we could be getting a little bit of an air pocket there? Or I wouldn't say air pocket, but just slowing. Or is it more of just sort of timing in that market and just the lumpiness nature of overall hyperscale?

I don't see anything close to an air pocket in Europe. So as a reminder, Europe had a pretty phenomenal fourth Q and a pretty strong one Q. So you're coming off two quarters of pretty good leasing. And what we're seeing in the back end of the year, I think that trend in the Northern Megalod territory is going to continue. It's broad-based. It's certainly flap-oriented. We talked about Paris and Frankfurt as two standout markets. But we're also seeing some great demand outside the flat markets. And we now have a European platform that's across 10, maybe 12 European countries. So we're servicing the hyperscalers and some larger enterprise requirements in many of them. But I think what I hate that Europe didn't have a great north of a megawatt quarter because it had a really fantastic less than a megawatt quarter at over 19 million and had numerous markets do a major contribution to that. less than the megawatt interconnection category. So, NetNet is still really pleased with Europe.

The last question comes from Frank Luhan of Raymond James. Please go ahead.

Great. Thank you very much. On Singapore, you know, what goes up comes down. It's been a really nice boost this year with kind of their – the way they've restricted the supply. At some point, it probably resolves itself. What kind of terms are you getting there with the higher prices, signing leases, or customer just taking shorter duration terms given the price hikes? Are we looking at some of this pulling back a little bit in 12 or 24 months, or do you think this is going to be a longer-term situation there?

One, I would say the customers are not seeking shorter contract durations because we price those at higher rates. You saw the activity. The Singapore rates are clearly shown through our APAC rates, which you can see are up again quarter-by-quarter. Singapore is one part of the world that I have a high degree of confidence what goes up may not come back down. I mean, one, it's an island state. It is incredibly government controlled. Everyone's operating under long-term ground leases with the government. And they take a very thoughtful and measured approach to supply chain overall, who gets land, who gets to bring data center capacity online. And they're really trying to curate it so they have the right providers and do so in a more environmentally friendly way. That's the genesis of this, right? So, that's a market I do not see, in addition to the fact it's an island. So you're going to more quickly run out of natural resources in Singapore.

Great. All right. Thank you very much.

Thanks, Frank.

This concludes the question and answer portion of today's call. I'd now like to turn the call back over to CEO Bill Stein for his closing remarks. Please go ahead.

Thank you, Andrea. I'd like to wrap up our call today by recapping our highlights for the second quarter as outlined here on the last page of our presentation. One, we continue to enhance our product mix with record bookings within our sub-one megawatt plus interconnection category, demonstrating the progress we've made in offering the full product spectrum to our customers globally. We are also committed to delivering sustainable growth for all stakeholders, and we provided additional transparency with the publication of our third annual ESG report. We've also raised four-year revenue and EBITDA guidance for the second quarter in a row, setting the stage for accelerating growth in cash flow. Last, but not least, we further strengthened our balance sheet, redeeming high coupon preferred equity and raising very attractively priced long-term fixed-rate financing who support customer growth around the world. I'd like to wrap up today by saying thank you to the entire Digital Realty family, whose hard work and dedication is directly responsible for this consistent execution. I hope all of you stay healthy and safe and enjoy the rest of your summer. We hope to see many of you in person again later this year. Thank you.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.