Digital Realty Trust, Inc.

Good afternoon and welcome to the Digital Realty first quarter 2023 earnings call. Please note this event is being recorded. During today's presentation, all parties will be in 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 aim to conclude at the bottom of the hour. I would now like to turn the call over to Jordan Sadler, Digital Realty's Senior Vice President of Public and Private Investor Relations. Please go ahead.

Thank you, Operator, and welcome everyone to Digital Realty's first quarter 2023 earnings conference call. Joining me on today's call are President and CEO Andy Power and CFO Matt Mercier. 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 on today's call. 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 certain NIGAP 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 Andy, let me offer a few key takeaways from our first quarter. First, our customer value proposition is resonating as we delivered yet another strong quarter of nearly $50 million of leasing in our zero to one plus interconnection segment, including our second strongest quarter of bookings in EMEA, and record interconnection bookings, helping to push interconnection revenue over $100 million in the quarter for the first time. Second, the first quarter delivered on the inflection and fundamentals we have guided to for 2023, as demonstrated by 4.5% releasing spreads on renewals and a 3.4% increase in stabilized portfolio cash and OI growth. And third, we remain confident in our funding plan for 2023. We are deeply engaged in the process with multiple institutional buyers, including new and existing partners, and we'll update you on specifics once we finalize the transactions. With that, I'd like to turn the call over to our President and CEO, Andy Power.

Thanks, Jordan. Thanks to everyone for joining our call. Digital Realty remains focused on our customers and executing our strategic plan while delivering a strong first quarter despite global uncertainty. This included reaching another major milestone with our platform now supporting 5,000 customers worldwide. We posted strong sequential growth in revenue, adjusted EBITDA, and AFFO, and remain focused on disciplined capital allocation while benefiting from the strong secular trends supporting the data center industry. Last quarter, I identified strengthening our customer value proposition. as one of our key strategic priorities. Let me expand on this a bit. Digital Realty has been on a journey since 2015 when we acquired Telex to expand our product offering and global footprint in order to provide the full spectrum of data center solutions to our customers. At the time, we said that we were seeking to expand our product mix and presence in the attractive co-location and interconnection space. When we announced that deal, our annual co-location revenues were about $88 million, which is less than the bookings we posted in the last two quarters in the 0 to 1 megawatt plus interconnection segment. Since 2015, we've expanded our co-location and connectivity capabilities, both organically and through acquisitions, including the EquiCity portfolio, InterAction, the Westin building, Altus IT, Lambda Helix, Medallion, and TerraCo. Today, our zero-to-one megawatt segment revenues are well over $1 billion and represent 35% of total annualized rent. Including a few COLO and connectivity-oriented organic new market additions that are currently underway and other important subsidy-capable landing station-oriented facilities, we expect to soon have a presence in more than 30 countries across six continents. According to CloudSeen's H2 2022 Data Center Ecosystem Leaderboard results, which ranks operators based on their data center footprint and performance with a focus on service providers and cloud on-ramps within their ecosystem, Digital Realty ranked in the top two slots within North America, Europe, and LATAM while taking the top slot in the Middle East and Africa region. Meanwhile, we've also shed non-core assets recycled capital out of stabilized core assets, and created joint ventures with some of the leading institutions around the world to own, operate, and develop data centers. Along the way, we've added connectivity-related product capabilities, such as Service Exchange, Cloud Connect, and last summer, Service Fabric, while targeting the additions of cloud on-ramps in our data centers around the world. These initiatives have meaningfully improved our customer value proposition and bolster our results within the colo and connectivity segment. Since the end of 2015, our interconnection revenue has grown nearly 150%, while our colo and connectivity bookings have increased almost 400%. We now have 214,000 cross-connects across our portfolio, an increase of over 250% over the same period. But there is more to do. Our vision is to serve our large and growing customer base that is focused on digital transformation and empowering their business through technological advancements at global scale today, tomorrow, and for years to come. To do that, we serve as the meeting place offering the full spectrum of data center solutions globally, enabling our customers with the color capacity and connectivity solutions needed to support their hybrid multi-cloud deployments, and also providing line of sight to feature availability of scale capacity and infrastructure advancements. Consistent with our strategic priority to strengthen our customer value proposition, we are pleased to announce the hiring of Steve Smith as Managing Director of our Americas region. Steve joins us following nearly eight years at CoreSight, where he most recently served as Chief Revenue Officer. Steve's experience and expertise within the coal and connectivity segment in the U.S. will be invaluable as we look to accelerate and enhance his offering in our largest market. We welcome Steve and the team and look forward to his upcoming start in July. Let's move to our first quarter results. This quarter marked an important inflection in the fundamental recovery we've been anticipating in our core portfolio. as releasing spreads were positive across all products and in all regions, and scheduled price escalations translated into a positive inflection in our stabilized same capital portfolio growth year over year. New leasing during the quarter was $83 million, led by a strong zero to one megawatt plus interconnection leasing, representing 57% of total signings, helped by the best quarter of interconnection signings in company history. We continue to over-index towards CPI-based escalators within our new leases, with over 40% of the newly signed leases in the quarter containing inflation-length increases, with fixed-rate escalators on the balance. During the first quarter, churn remained low at 1.1%, and we added 122 new customers, continuing the streak of 100-plus new logos that we've added each quarter since closing the interaction transactions. Our key wins included a Global 500 pharmaceutical sourcing and distribution services company who were exiting their legacy data centers and expanding on platform digital to ensure European data governance and compliance. A Global 2000 insurance provider doing a campus migration from a competing provider. A key differentiator for this new customer was improved resilience over their incumbent provider. together with robust multi-cloud connectivity and expansion capabilities. One of the largest public power companies in the U.S. and a new logo for Digital Realty is leveraging platform digital to modernize its infrastructure with network and control hubs. This company is modernizing its infrastructure to embrace AI, improve analytics, and provide data to its B2B customers. One of the largest financial services firms is building a new trading platform with Digital Realty, driving an entirely new ecosystem to capture global trading as it happens. Their requirements include low latency and high performance. One of the largest global retailers also joined Platform Digital to support its local business presence, diversify transit nodes, and re-architect their network topology. Moving over to the power transmission issue in our largest market, Northern Virginia, We've continued to work constructively with the power provider in this market, and last quarter we were pleased to be able to confirm the commitments that we have made to our customers. While the overarching conditions in this market have not changed, we continue to work in partnership with the local providers to maximize potential availability within our 500-plus megawatt footprint. and we remain cautiously optimistic that we uniquely will be able to provide growth capacity for our customers in this market through new development and select churn opportunities. For now, Ashburn remains highly constrained, and pricing is reflecting the decreased availability of data center capacity. Moving on to our investment activity. During the first quarter, we acquired a three-acre parcel of land in Osaka, Japan, through our MC Digital Realty joint venture to support future development. We also monetized a 10% interest in a data center in Ashford, Virginia, in the quarter, alongside our joint venture partner. While the transaction was driven by our partner and is not a meaningful component of our capital recycling plan for 2023, it did indeed demonstrate the appetite for well-located data centers and strong valuations. This asset was sold at a valuation of nearly $17 million per megawatt which represents a substantial premium to our development cost today for new data centers in this market and significant value creation. Given the ongoing process that we are undertaking to bolster our capital sources and increase the efficiency of our balance sheet, we remain confident in the institutional appetite to invest in data centers. Notably, over the course of the last few weeks, we've seen the announcement of the sale of a European hyperscale data center platform to a well-known global institutional investor at multiples that are consistent with where similar platforms have traded over the last few years. And we have witnessed the recapitalization of another data center platform by other institutional investors. We know that investors are eager to hear updates on our progress, and we will provide those once we have a transaction to announce. Since our IPO in 2004, Concerns have been periodically raised about various potential risks to data centers, including technology, customers, demand, supply, and obsolescence. This seems somewhat par for the course for a relatively nascent and growing asset class. Over the last year or so, we have witnessed the latest misinformation campaign cast upon the data center sector by those interested in seeing the price of our stock go down. I'd like to clarify a few important points. First, we operate a global portfolio of carrier-neutral and cloud-neutral data centers that facilitate communication and the exchange of information and data among and between enterprises, service providers, and individuals all over the world. While we are focused on building what we call the meeting place for service providers and enterprise customers who are in pursuit of hybrid, multi-cloud, and state IT architectures, We are also facilitating the connectivity and communities of interest supporting latency-sensitive applications and platforms. These are things that cannot happen in a standalone on-prem data center and aren't serviceable by a single cloud service provider. Second, in contrast to the narrative that hyperscalers have forced prices lower, after a few years of negative signature growth, the tide has turned. as the supply of data center capacity in the low-cost, abundant capital environment that exists for much less than 10 years has slowed meaningfully now that rates are higher and capital is more precious. With continued robust demand, strong net absorption has driven vacancy lower, which has been supportive of data center rents. Accordingly, our releasing spreads have inflected positively, as have our same capital core growth metrics. Our team delivered on our objectives in the first quarter and we reiterate the recoveries we anticipate for these metrics for 2023. Lastly, despite claims almost a year ago that hyperscalers would soon insource their data center requirements, 2022 was a record leasing year for digital realty, partly driven by demand from hyperscale customers. We believe the demand from these and other customers within our pipeline, driven by digital transformation and soon artificial intelligence, remains robust. Data centers support the growth and evolution of technology that is improving our standard of living, productivity, and the overall quality of our lives. We have not witnessed a meaningful and sustained pullback in demand in the nearly 20 years that we have been in business, and we are not seeing a pullback today. While an economic recession could slow capital spending, third-party data centers also benefit from the trend toward outsourcing. customers often make the decision to lease rather than build on the availability of capital titans. We saw the same thing during the great financial crisis. For many of our customers, data centers can also help drive revenue growth or facilitate lower costs or even enhance overall productivity. We are optimistic that our business will remain resilient in 2023 and for years to come. Before turning it over to Matt, I'd like to touch on our ESG progress during the quarter. During the first quarter, a leading ESG ratings provider included Digital Realty in their 2023 top-rated ESG companies list, noting that we are in the top 6.5% of companies in the U.S. and Canada region. In addition, Digital Realty continued its efforts to incorporate renewable energy resources. We were named by the United States Environmental Protection Agency as one of the EPA's top 25 green power partners. We furthered our commitment to sustainability by signing a 10-year power purchase agreement for a 115 megawatt share of a new solar project in Germany to increase our total solar and wind power under contract to over 1 gigawatt of renewable capacity. Subsequent to quarter end, we announced additional renewables to support our portfolio in Australia, while our business in Japan also announced renewable procurement for a portion of its portfolio. We are committed to minimizing our impact on the environment while delivering sustainable growth for all of our stakeholders.