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.

With that, I'm pleased to turn the call over to our CFO, Matt Mercier.

Thank you, Andy. Let me jump right into our first quarter results. We signed a total of 83 million of new leases in the first quarter, highlighted by a second consecutive quarterly record in interconnection signings and continued strength in the 0 to 1 megawatt category, particularly in EMEA, which nearly matched the record level from last quarter. 0 to 1 megawatt plus interconnection accounted for a robust 57% of total bookings. Our greater than a megawatt bookings moderated to $35 million in the quarter, though this activity was broadly dispersed throughout our global portfolio, with leases signed in Toronto, the U.S., Mexico, Europe, and South Africa, but nothing in Northern Virginia. These deals can be lumpy, and the downtick in greater than a megawatt leasing follows a record year in 2022, in which we signed more than 370 million and 288 megawatts of new leases. Importantly, our demand funnel remains quite strong, as a number of our highly strategic customers remain actively engaged and are seeking to add capacity across our global portfolio. Of course, as we have discussed on our last few calls, our largest scale market, Northern Virginia, is experiencing capacity constraints as a result of the power transmission issues that emerged last summer. Over the course of the last three years, including the second half of 2022, we signed approximately $20 million per quarter of new leases in Northern Virginia versus 2.5 million of new leases signed in this market in 1Q23. As I'll expand on in a moment, we expect the ballast to lower new lease volume to show up in better pricing, including renewal spreads. Turning to our backlog slide, the current backlog of signed but not yet commenced leases was 434 million at quarter end. as commencements were once again well over $100 million, partly balanced by new leasing. We expect the remaining $200-plus million of commencements in 2023 to be somewhat evenly weighted throughout the balance of the year. The lag between signings and commencements in the quarter was 16 months, principally due to a few larger long-term leases that require build-outs. During the first quarter, We signed 155 million of renewal leases with pricing increases of four and a half percent on a cash basis. Our strongest renewal pricing quarter since the early days of the pandemic. The strength was shared across both products and also across our three regions. So we're off to a good start relative to our full year 2023 guidance. Renewal spreads in the zero to one megawatt category continued accelerating. up 4.6% in the first quarter on $118 million of volume, nearly 400 basis points faster than it was in the final quarter of 2021, but also more than 100 basis points better than full year 2022. Greater-than-a-megawatt renewals were similarly strong in the first quarter, as cash releasing spreads increased by 4.4% on $30 million of renewals. We were also pleased to see 100% of the leases signed in the quarter roll up in this category, and we remain optimistic about the potential for the rest of this year. Turning to our operating results, our performance in the first quarter was a bit better than our expectations, highlighted by the continued improvement in our core operating performance, higher development returns, and a record quarter in interconnection revenue. In terms of earnings growth, we reported first quarter core FFO of $1.66 per share, a penny better versus prior quarter and a penny light relative to last year. On a constant currency basis, core FFO was $1.69 per share relative to the $1.67 we reported in the first quarter of 2022. Total revenue was up 19% year-over-year and 9% sequentially. As discussed on the last call, this revenue growth is somewhat distorted due to the significant increases in utility costs and reimbursements as the impact of last year's energy price increases went into full effect in January. As most of you understand, the large majority of energy costs are directly passed through to our customers. Excluding utility reimbursements, total revenue was up 13% year-over-year and 4% sequentially, while reimbursements remained a relatively consistent percentage of utility expenses at 92%. Due to a decline in spot energy prices between the fourth and first quarters, our top line revenue, including utility reimbursements from our customers, was more than $40 million below our original forecast. but this was directly mirrored by lower than expected utility expenses, since these expenses are directly borne by our customers. Interconnection revenue was up 5% sequentially, reflecting the ongoing improvement in our core operating performance. Other than utilities, expenses were well contained, as NOI margins excluding utilities remained steady, resulting in adjusted EBITDA growth of 10% year-over-year and 4% sequentially. On our last two calls, we've highlighted the improvement in operating performance that started to emerge with our stabilized same capital portfolio, but was largely masked by FX headwinds. These positive trends strengthened further in the first quarter, despite continued year-over-year currency headwinds. Same capital cash NOI grew 3.4% in the first quarter compared to 1Q22, demonstrating the turn in our core operations that we have been discussing. The step-up was driven by 90 basis point improvement in same-store occupancy as commencement's outpaced churn, upside from annual rent escalators, and the benefit of positive re-leasing spreads. Turning to our currency slide, Fifty-one percent of our first quarter operating revenue was denominated in U.S. dollars, with 25 percent in euros, 6 percent in British pounds, 5 percent in Singapore dollars, 3 percent in South African rand, and 2 percent in each of the Brazilian real and Japanese yen. The weakening of the U.S. dollar in the first quarter provided a slight sequential tailwind, but the dollar's strength through much of 2022 resulted in a continued headwind to year-over-year results. As a result, the dollar strength negatively impacted our reported revenue growth and adjusted EBITDA growth by about 300 basis points apiece on a year-over-year basis, whereas core FFO per share saw just under 200 basis points headwind. Turning to the balance sheet, our reported leverage ratio at quarter end was 7.1 times. while fixed charge coverage was 4.4 times. In January, we completed a $740 million two-year term loan with an initial maturity date of March 31st, 2025, plus a one-year extension option and an effective rate of 5.6%. Leverage remains above our historical average and our long-term target, and we intend to reduce our leverage toward our long-term target over the course of 2023. Our plan hasn't changed. We are in active discussions on our asset sale and joint venture plans and remain confident in our ability to execute on these plans over the course of the year so that our leverage moves back toward the six times area by year end. Our weighted average debt maturity is at five years and our weighted average coupon is 2.8%. Approximately 82% of our debt is non-US dollar denominated, reflecting the growth of our global platform. Over 80% of our net debt is fixed rate and 97% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, we have minimal near-term debt maturities with only 100 million maturing in 2023, together with a well-laddered maturity schedule. Lastly, let's turn to our guidance. We are maintaining our core FFO and constant currency core FFO per share guidance ranges for the full year 2023 of $6.65 to $6.75, and our first quarter results were consistent with this range. We are also affirming our full year adjusted EBITDA guidance of $2.7 billion at the midpoint as the downward adjustment in our overall revenue guidance is purely due to lower utility expenses. driven by lower spot electricity rates that are passed on directly to our customers. We are also modestly tweaking our euro-to-US dollar exchange rate expectations for the year to reflect the relative appreciation of the euro year-to-date. We also made meaningful progress on the turn in our fundamentals during the quarter, providing strong support for the organic operating metrics supporting our full-year guidance. including cash and gap releasing spreads over 3%, same capital cash and ally growth of 3% to 4%, and year-end portfolio occupancy between 85% and 86%. As I mentioned a few moments ago, we remain confident in our funding plan for the year, so we have reiterated our guidance for dispositions in JV Capital. We have tweaked our debt financing cost expectation to be consistent with the moving rates seen since the banking sector fallout last month, which will be largely mitigated by the upside we saw versus our core FFO expectation the first quarter. This concludes our prepared remarks, and now we will be pleased to take your questions. Operator, would you please begin the Q&A session?

We will now begin the question and answer session. 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. As a reminder, we ask participants to limit themselves to one question plus a follow-up in order to keep the call to an hour and to give all callers an opportunity to participate. Once again, that was star then 1 to ask a question, and at this time, we will pause momentarily to assemble the roster. And our first question will come from Nick Del Dio of Moffett Nathanson. Please go ahead.

Oh, hey, guys. Thanks for taking my questions. First, I wanted to drill into the greater than one megawatt leasing a bit. Obviously, that's been a bit below history in Q1, and you called out Ashburn as a driver of that. I guess just thinking about some of the other drivers there, maybe can you expand upon the degree to which that was the result of making conscious decisions to maybe dial back a bit given the change in the cost of capital versus market conditions or other factors?

Hey, thanks, Nick. So I'll kick it off and then I'll hand it to Corey. I would say there's no conscious decisions in dialing back or waving off business necessarily. You could see from our development life cycle, we've continued to raise the bar on our most strategic projects and fine-tune capital allocations. I'd say it was a little bit lower than prior run rates, but if you look at the prior year, which was a record, had a record quarter in there in the third quarter, I wouldn't over-index to anything other than the typical lumpiness you may have in that category. It was healthy in terms of pricing. I don't think we had a single deal pricing below $100 per kilowatt. But, Corey, do you want to expand?

Yeah, I would tell you that, thanks, Nick. Nothing's fundamentally really changed in our relationship or our position with these hyperscalers in the greater than one megawatt category. Coming off, as Andy mentioned, I think Matt maybe did in the preparative remarks, a record year. And so I tell you, this is probably just a one-quarter timing issue. Our hyperscale demand remains really healthy and varies a little bit by customer, but it's broad-based across the globe. Keep in mind, we didn't do Ashburn deals on that. this last quarter. And I'd say that they're going through some digestion of their demand signals and maybe a little bit more scrutiny with the macro environment, but really confident in the macro demand, our relationships to execute. And keep in mind, we had our highest and our largest connectivity quarter with the hyperscalers this last quarter. And so I just say that one quarter doesn't make a trend. I'd suggest you look at the multi-quarter trends as well as as they expand in new markets, new products like the advent of AI and their edge nodes that we're winning, and just new deployments across the globe. We're in a really good position with them from a pipeline perspective and demand. Thanks, Nick.

Okay, that's helpful. Thank you, guys. And I guess, you know, more generally, obviously, the price environment is pretty favorable for you right now. I guess I'm interested in your thoughts on how you're balancing between raising prices on new space and renewal deals where market conditions allow it versus... you're kind of thinking holistically about your relationships with your top 10 or 15 or 20 customers that you do business with globally and try not to alienate them or hurt the relationships.

Sure, Nick.

So, I mean, we're always trying to take a holistic approach to these relationships. And as you can see from our top customer list, our largest customers can be with 20, 30, 40, 50 different locations. At the same time, the pricing is dynamic to overall supply-demand dynamics. And as inventory in various markets become more and more precious, we've seen that pendulum pricing move in our favor. We try to be straight shooters with the customer. We try to bring everything to the table in a holistic fashion. We've done this before in terms of bringing renewals and new business, expansions, all-in-one holistic approach. And I think this is not new. Even these big hyperscale customers are seeing costs of doing business going up. Many of them self-build themselves and seeing inflation in construction costs or labor. So I think the understanding that the pricing dynamic is shifting rapidly a little bit towards the providers is playing out in a natural fashion.

The next question comes from Jonathan Atkin of RBC. Please go ahead.

Thanks. So on Corey's response about kind of the leasing volumes telling us to look at kind of the prior multi-quarter trend, curious about interconnection and the trends going forward, given kind of the strength there, and any kind of mix shift that you could kind of point to there, maybe more, you know, how are you targeting your customers? Is a lot of that coming from existing logos or curating your sales line to focus on interconnect rich opportunities? And then secondly, I guess on the competitive front, given so many privately backed companies that are deploying a lot of capital into the sector. Does that affect your hyperscale sales pipeline at all?

Sure. Thanks, John.

On the first question, Sharpie and I will tag team that. I mean, I think I look at a few things. One, it's a holistic approach to these customers. There's a lot of good results in this quarter, whether it's the new logos, inflecting cup, 15% quarter over quarter, which was a high for several quarters, whether it was the overall interconnection plus less than a megawatt signings, the regional contributions, including a standout interconnection quarter. And I'd also mention that this is a building momentum. It's been building over time for several quarters now. I think it's the power of the platform coming together, servicing our customers across 50-plus metros on six continents. It's the great work Corey and the team have done on the go-to-market. And I still would say that we got even further progress and even better results to deliver over time. This particular quarter did have, let's say, a lumpier win. The call put it into the number one category in interconnection signings. So I'm not sure that's necessarily repeatable next quarter with another record. But some of the work that we're doing with Service Fabric that Chris can touch on, I think is going to continue to build that momentum. But Chris, pick it up from there, please.

Yeah, appreciate it, Andy. And thanks for the question, John. A couple dynamics here where I think we've led, you know, by our core existing products. And I think your direct question to is it new logos or is it existing is It's both, right? I really want to emphasize the fact that the physical cross-connects reaching 214,000 and growing, it's something that we constantly have looked at, and Andy referenced this earlier, growing the platform, right? Investing and making sure that customers know how to access one another to get further value out of their deployments is absolutely important to us. And so just really watching how that evolves over time and with the advent of the service fabric and bringing that to market and what that's being able to do for our customers, we're just starting to see, you know, it's early innings, but future growth around virtual, right, where it's going to be married to where now they're going to be able to access multiple destinations in a more simplistic fashion. Because of that product being purpose-built in the way that we brought it to market, it really removes a lot of that technical complexity that has precluded other customers from getting the full value out of their deployments. But, you know, one of the things I'm just very pleased about is this customer-led and balanced approach that we've been doing on even new markets inside of europe we've talked about in the past where just bringing you know the the value or the pricing closer to parity in some of these markets we see you know really strong growth within germany and france where you know making sure that we're delivering those capabilities to those customers and all these critical markets around the globe and i would just say lastly i'm pleased with the fact that you know digital's been able to provide you know one of the greatest quarters of interconnection signings in the company's history, and that's just really representative of the value we're bringing to the customers.

And then, John, just to round out your second question about competition from private-backed, that's not a new phenomenon. We've been competing against private players for some time now, and the ones that have been taken private, they've been private for multiple years for some of them. I think what's changed is The ability to deliver this business for our customers has just gotten harder and harder at a global scale. And whether it's power constraints, staffing, supply chains, and certainly cost and access to capital has certainly not been a friend of some of our competitors. And I think our largest customers in the hyperscale arena turn to us given our permanence in our space. We're not here, gone, tomorrow. We've invested for the long run. We're future-proofing our growth. We're constantly building for that growth with our suppliers. And I think all those things probably make it even a little bit more advantageous versus some of those private-backed names in an environment like today.

The next question comes from John Peterson of Jefferies. Please go ahead.

Oh, great. Thank you. I was hoping we could talk about the leverage target. You guys reiterated getting down to six-time leverage, and I know you're working through these various transactions. But I guess if you complete the $2 billion of transactions, I mean, does that get you to six times? Like, can you just give us the moving pieces on getting to that target?

Yeah, thanks. So, I mean, the simple answer is yes. So our capital plan, I think, as we laid out last quarter and really hasn't changed, you know, coming into this quarter, is based on, you know, call it two plus billion of capital recycling from our joint venture opportunities as well as the potential for non-core dispositions. And, you know, as that capital comes in as well as, our expected growth in EBITDA this year, which is a little shy of 10%. You know, we believe that by the end of the year, largely those two items will get us back towards that six times area this year.

Okay, great. And then if I could just ask on developments, I'm curious, you know, given the shift in cost of capital, like what's the minimum development yield for Or maybe you could just talk broadly about how much those requirements for you guys have moved, you know, in the last year or so. Like, what does it take for you guys to start a development today in terms of return expectations?

Hey, thanks, John.

I mean, we do an incredibly granular market-by-market assessment here. So it really depends on the market and the relative risk-free rates and risk premiums. I would just, by and large, and this is not something that just showed up in our approach this quarter, three quarters ago almost, we basically took a posture that we need to raise the bar on capital allocation and prioritize our most strategic projects, call it highest return, but not only highest return, but also projects to generate the highest long-term growth as well. So, I don't have a single number answer to give you there, but I think you'll see that come through our development returns table as those numbers are inching into higher territory, and I can tell you more strategic long-term growth projects.

Great. Thank you.

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

Thanks, and good afternoon. I wanted to go back to the capital recycling topic. And just when we look at the guidance page, there's a wide range of outcomes. And what would be a good outcome for digital in terms of the yield? And what would this scenario be in which you may just decide there's alternative forms of capital that are better than recycling? And then just the second topic, but related, if I could take a step back, As I think about the comments you've made about considering both stabilized assets and development for monetization, I'm just curious if there's a more profound change in the business strategy and financial model that investors should be mindful of in terms of how this business over the next couple of years might look different in terms of the quantum of investment in a given year and the level of financial performance that you're driving off of those investments, just following on the comments you just made. Thanks.

So, Mike, a good outcome is we essentially get the, call it $2 billion of funding completed, and the range is wide, but the majority of that capital, the range is not that wide. The wide range is due to some of the non-core asset sales as well as the development, which is called 25% of the $2 billion, right? But if you look at the majority, the 75%, which is stabilized joint ventures or development, development, those are zero-yielding projects. On stabilized joint ventures, listen, I think the cap rates are in the low single-digit type category based on what we're seeing called six-ish type territory. I think that's based on not what we see externally, but third-party transactions, what we've seen on region transactions with partners that we've recapitalized with our portfolio, and through our progress on these capital recycling and joint venture efforts. Holistically, more longer term here, we are looking to become more balance sheet efficient. What's Not new is called finishing out the non-core dispos. What's not new is joint venturing majority stakes in stabilized hyperscale-oriented projects that have lower long-term growth rates due to the credit quality and size of the customers, be it through rent bumps or pricing power. What is new is sharing a piece of both of our North America and AMEA development as it relates to hyperscale projects. And we're doing that with the view that these projects keep getting larger and larger and larger. That non-income-producing drag, it remains a headwind, even though it is significant long-term value creation. And we believe there's ample partners to work with us on those projects, which will ultimately make our balance sheet more efficient and more rapidly accelerate

Revenue and EBITDA drop into our bottom line.

The next question comes from Michael Elias of TD Callen.

Please go ahead.

Great. Thanks for taking the questions here. I guess first, just to double-click on what you said about balance sheet efficiency, just as it relates to the development JV, aside from recouping the previously spent CapEx, is the intention of that JV to structurally reduce the on-balance sheet capex for digital, or is the intention to keep capex more or less the same while being able to increase the set of opportunities you can pursue? And I have a follow-up.

The simple answer, Michael, is we're looking to partner around large-scale development projects where there will be incremental spend that we and our partner will jointly fund over time. So it will – we're looking for – these are large projects, large swaths of acreage, large quantities of megawatts. Hence, the quantity of capital our spend is not the entirety or near the entirety of where the project ultimately will be over time. So they would fund alongside us through coming quarters.

Okay. Maybe just to shift gears a little bit. You know, earlier on the call today, you know, you're really emphasizing the steps you've made on the colo slash enterprise side. Today you also announced the appointment of Steve Smith. Clearly a focus on accelerating colo and connectivity. I mean, my question for you would be, you know, as we consider the path ahead, what are the changes that you feel need to be made internally in order for you to really accelerate on that call it zero to one megawatt side? Thanks.

So, Michael, I mean,

Again, I think this ties back to the first of three strategic priorities I laid out in the prior call about really strengthening, demonstratively strengthening our customer value proposition. We took advantage of this call to remind folks that this is not something we started with me becoming the CEO four months ago. This is something that's been in the works for roughly eight years through both inorganic and organic measures. putting together critical puzzle pieces, expanding across the globe in terms of where the customers need our capacity, adding key connectivity hubs, and innovating and bringing more to our customers. We've changed up our go-to-market motion over time. Where we go from here is, again, accelerating from that success. A piece of that, delighted to have Steve Smith on board to lead our essentially newly created Americas region. Steve comes with tremendous background of really driving one of the only U.S.-only focused interconnection and co-op platforms and previously a very formidable competitor. And I think he's going to be very added to that, our team, our leadership table. Incremental things that we're doing in terms of continuing to innovate and bring more value to our customers. Chris touched upon service fabric, which I still would characterize as just out of the barn in terms of where we're going, in terms of bringing more partners onto that platform and drilling more value to our customers. There's a whole host of things that I'd say we're doing behind the scenes to continue to accelerate our growth, and I think the fruits of our labor are continue to build each and every quarter in terms of success. So I think there's multiple angles that we're moving towards in that endeavor to be one of a very short list of global interconnection co-op providers. And I think the industry demands and the broader competitive backdrop also are wins that are sales.

And then, Andy, just one thing to add from a go-to-market perspective. We've had a ton of success around the channel. We're continuing to grow the channel. I think this last quarter, 38% of our new logos were from the channel. Prior years, it was 31. We're continuing to build on that success. We see the channel as being a huge advocate and a partner through their lens with all the enterprises, so we're going to see that continue to build. So we're doing a lot of functional and strategic operational items that we need to do. We're also continuing to tweak and evolve our go-to-market that we think is going to continue to add value.

The next question comes from Frank Luthan of Raymond James. Please go ahead.

Great, thank you. On the releasing spreads, thinking about greater than a megawatt in particular, but kind of with all of them, is there anything you see coming up in the year that could possibly push those spreads back negative, any large renegotiations? And then what is sort of the longer term outlook with the bookings down a little bit, but pricing doing better? What sort of yield are we looking at going forward versus, say, you got in the last couple of years when the bookings were higher?

I'll have Matt kick it off in releasing spreads, and then we can tag some of the long-term, long-term outlook pieces.

Yeah. So, Rick, thanks, Frank. You know, I think, one, first I'd reiterate we're obviously off to a great start here with positive releasing spreads, again, not only across all product types but across all regions. I will say we feel confident that this positive pricing environment that we're in is sustainable and it's here to stay. I'm not going to necessarily speak about every single quarter, but again, I'd come back and reiterate that We're off to a great start. We see that come for a full year, that we expect to be positive for the full year, not only in the zero to one megawatt category, but also in the greater than a megawatt category, which I think is, again, something we haven't seen in a few years and reflects the positive environment and turning fundamentals that we're seeing, not only from that, but then down into our stabilized portfolio as well.

Frank, do you want to repeat in that second part of your question just to make sure we hear it correctly?

Yes. Leasings are down a little bit, but obviously better pricing. What does the yield look like now versus, say, the last couple of years ago when bookings were higher and so forth? How long do you think this is sustainable? What sort of yields are you seeing coming in now, even though the absolute bookings are a little bit lower?

Frank, I direct you to our development table to see the progression of yields. I would say the yields are improving in our favor. The pricing dynamic is outpacing the inflationary pressures. It's not an overnight phenomenon, but we are moving into better territory. You can look at episodic things like Ashford, Virginia, where, quite frankly, the rates have pretty much doubled in a pretty short time, from deals in the cold low 70s to now in the cold market rates of cold 140. And that's flown to the bottom line and enhancing those yields dramatically. So I think that table is a work in progress in our SUP because it's got a lot of pre-leasing, some of which was signed prior to some of this price progression. But as we continue to add more projects to that that are not pre-leased or we fill out the leasing on the available capacity, I think there's ability to raise those yields. And I would also say the North America piece of that has a large project in it that is an open book, build a suit to a very highly rated financial institution on a triple net lease basis. So it's an apple to the oranges there in a good way. It's been dramatically de-risked in terms of its build and in terms of its ongoing revenue and EBITDA stream, yet at the same time lowering our America's yields.

Okay, great. Thank you very much.

The next question comes from David Guerino of Green Street.

Please go ahead.

Hey, thanks. Andy, in the press release, you were quoted as saying that you're seeing broad-based demand and reduced data center availability. I was just wondering, why do you think that isn't translating into outsized growth in rental rates, like we've seen across other commercial real estate sectors, like industrial or self-storage and I mean, it definitely feels like the pendulum has firmly swung back to landlords, but data center rents just aren't rising like we've seen elsewhere.

I would say, I mean, it's a new phenomenon in terms of recent history of the data centers, which is still, I would call, a nascent asset class, but we are seeing it. If you look at, call it, our less than a megawatt signings, either in America's region or in the Maya region, where there's critical, consistent, massive new signings, the rates have been up, call it, four quarters in a row. and the example I gave you in Ashburn, Virginia, from rates going from $70 plus C to $140 plus C, that is quite a run, and I know I'm picking out one particular market there as an example, but it is the largest and most diverse market out there, our largest market as well, and it's It flanks the East Coast with a power constraint problem, but the West Coast is having the same one, with Santa Clara now having power constraints that likely outpace when power comes online in Virginia. And I think this phenomenon is going to continue in other parts of the world, not just the U.S., and I think you're going to continue to see those rates move more and more in our favor. And, David, I know you're a student of the traditional real estate asset classes. I mean... It was a good 20 years where industrial had no rate growth before it's had the renaissance that's been experienced the last few years. And I'm not saying that that's going to happen to data centers, but it feels like we're teeing ourselves up for a healthier pricing environment for the incumbents.

That's encouraging to hear. And maybe kind of sticking with that theme you said, we've been hearing some similar chatter also about difficulty securing power in some other markets. I've heard Chicago come on the radar and possibly even Hillsboro now. So, you know, given just it feels like these are popping up everywhere across the industry, what do you think that means for your pace of new leasing activity going forward? I mean, are the things we saw in the years past probably unlikely to happen just given the power constraints?

If you look at our

Financials, we've got a sizable amount of contiguous land capacity and available power that's committed to us outside of these called zones of disruption. But longer term, eventually, we will exhaust that, and you could have that phenomenon. At the same time, when you're doing business at twice the rates, you'll have to sell half the kilowatts in certain markets. So I'm not sure... I'm not sure that the top-line pacing on our new signings will be all that disrupted near-term based on what we have in the stable in terms of capabilities and committed power. But I agree with you. This assessment is going to continue. The other thing I'd emphasize is we're actively managing our platform and our capabilities, and we're essentially – always looking to reproductize for higher and better use when applicable. So if we have churn, which this is not a totally static business, it provides opportunity to release that capacity at higher rate opportunities and often higher and better uses towards some of our granular enterprise co-location-oriented customers. And on a big company like Digital, you probably don't see that. It's not tops of the waves, but that's happening in terms of how we manage our footprint.

Great. Thank you.

The next question comes from Matt Nicknam of Deutsche Bank. Please go ahead.

Hey, guys. Thanks for squeezing me in here. Just two, if I could. First, on the capital recycling, not to beat a dead horse, but you did talk about being deeply engaged in the process. I'm just wondering if there's any more color you can share on the progress made thus far across the different buckets that you've laid out. And then maybe switching gears on AI. I mean, we've heard so much about this over the last several months. I'm just wondering, how has the increased focus on AI impacted your customer leasing plans and your conversations with them as they think about deployment plans over the next year? Thanks.

Yeah. Thanks, Matt. I'm going to have Greg tackle the first one, and then Sharpie and I can tackle the second one.

Thanks, Matt. Look, I'd say, look, with respect to our capital initiatives, I'd say we're still on track with the plan we outlined in our earnings call in early February. which, as you recall, that was the $500 million of the non-core dispositions. Call it roughly $750 million from core JVs and $750 million from development JVs. And I would characterize it, without saying too much, is that we're making good progress in these transactions, and we've received significant interest from multiple institutional partners, whether it's sovereign wealth funds, infrastructure funds, you know, PE, real estate funds, pension funds, insurance companies, and the like. So the way I'd characterize it is we're executing on the plan, and we feel good about where we are in each of these processes.

And turning to your second question, just one quick thing before I turn it over to Chris GPT to give his view on AI. I think a misnomer here is that, in my opinion, that everyone thinks every data center is going to turn into one that's going to be supporting artificial intelligence. The use cases, the applications, the workloads that exist today are still going to be thriving within the global data center footprint at digital. Yes, we have many data centers that lend themselves towards supporting the increasing power densities and cooling environments that will be required, and we're doing a lot of that as we speak. But I look at more the bigger picture around AI is that this is an incremental development major wave of long-term demand that will certainly need to have proximity to the major data that sits today. And the first two waves of demand of moving from on-prem locations to hybrid locations, and the second wave of multi-cloud haven't even hit the shore yet, while this next wave of demand is falling behind it. But Chris, why don't you speak a little, your view on AI?

Yeah, no, absolutely. I appreciate the question. A couple pieces. Just to reiterate what Andy said, the existing cloud infrastructure we have today AI is cloud adjacent because of a lot of the applications it's empowering and the way that customers are bringing it to market. It's something we've been watching for many, many years. And I think one of the pieces I always try to emphasize is that a lot of the R&D from the hyperscalers and from the technological providers has been happening within digital, which has allowed us to evolve our infrastructure with this demand. And I would reiterate also that there are pockets of AI that we're able to support rather efficiently. And I think this is something that's unique to digital designs and the R&D work that we've been doing with some of the cooling technologies. It's really important for us to continue to support the broader spectrum of the customer requirements. So not only their traditional type of digital transformation, but we are seeing more and more customers show up with AI-specific requirements and association with that digital transformation. And then the last one is, you know, really emphasizing that, you know, to the customer base to design early and understand the implications of not only the power but the interconnectivity. And just to circle back to why we believe the value of platform digital is differentiated is the ability to interconnect in an open fashion with the right partners in a very simplistic manner is what's making a lot of these AI deployments successful. And so that's the core of how we continue to focus on AI and bringing that to market in a very repeatable fashion. And so you'll see some recent sales tools we'll start talking about publicly to visualize how you tie together this infrastructure on a global basis. So very exciting about this additive demand coming to market. And you'll see more and more of the use cases and case studies coming out on the success that our customers are having within platform digital.

The last question comes from Eric Lubko of Wells Fargo.

Please go ahead.

Hey, thanks, guys, for squeezing me in. I wanted to touch base on Ashburn. It sounds like a transmission line has been approved to be in service by late 2025 near digital dollars. So when do you think you might be able to start additional development in that market? And do you think you're seeing any spillover impacts in terms of other markets or sub-markets where you're seeing additional activity levels because of the tightness in Ashburn. And I guess just related to that on the pricing front, I think you mentioned that you're seeing rents as high as $140. I think a lot of your rents in Ashburn are rolling at $80 or $90. So just wondering if you have any color on what you've seen on the leasing spreads across that market and what you expect going forward. Thank you.

Thanks, Eric. So we touched a little bit on this in the prepared remarks earlier.

The good news is that the powers that be in the region are sorting out ways to bring incremental power to the region by 2026. From there, I think you'll see a much more rational providing of power to that market And I do think it's going to behoove ourselves to be our history and track record working in that region is going to keep us top of queue when power becomes more freely. Between now and then, we last quarter had the good fortune of having worked with the local power providers to be able to deliver on all of our customer commitments, which is fantastic. We do believe that that we will be able to bring on incremental growth capacity in this market between now and 2026 through some development as well as some churn. We are working through all the resources we have in terms of excess power at sites, customers that may not be using their suites and be able to spare some capacity. So I don't have a a fine point of quantity, but I don't believe our shelves at digital will be barren and we will be able to support our customers. Certainly our co-location customers and some of our hyperscale customers will be able to grow with digital in Ashford in the coming years. And as we get a finer point on the quantities, probably in lockstep with leasing of that capacity, we'll certainly be happy to share. In terms of spillover effect, the spillover is real. Manassas, I think, is front and center of a spillover market to the Loudoun County pinch point. I would say that's, we've seen the greatest spillover effect. But there's always potential some of the non-Northern Virginia markets will continue to be an option. But I don't think, I don't see anyone packing their wagons and leaving Ashburn due to this. I think The momentum has been building for years, and it's called that escape velocity in terms of its criticality to the data center industry and its customers.

Great. Thank you.

This concludes the question and answer portion of today's call.

I'd now like to turn the call back over to President and CEO Andy Power for his closing remarks. Andy, please go ahead.

Thank you, Andrea.

Digital Realty is off to a strong start to the year. Our results demonstrate that our value proposition is resonating with customers, which was confirmed by our record interconnection signings, continued strength in the 0 to 1 megawatt category, and strong new logo additions. We expect that our operating momentum will continue through the year and that the steps we are taking will further accelerate our progress. We also remain confident in our funding plan and I look forward to updating you with further developments on this front at the appropriate time. We are very excited to bring together our customers and partners on May 24th and 25th at our Marketplace Live 2023 event. The theme this year is the crossroads of the digital world, the data meeting place. The entire digital realty community from around the world will come together virtually to network, gain inspiration, and bring their digital strategies to life. Please join us. You can register at MarketplaceLive.com. I'd like to thank everyone for joining us today and say a special thank you to our hardworking and exceptional team at Digital Realty to help keep the digital world running. Thank you.

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