Digital Realty Trust, Inc.

Good afternoon and welcome to the Digital Realty second quarter 2023 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 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 second 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 Colin McLean 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 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 Andy, let me offer a few key takeaways from our second quarter. First, our customer value proposition continued to resonate. We delivered yet another strong quarter of leasing in our zero to one megawatt plus interconnection segment and saw a healthy rebound in greater than a megawatt leasing. And second, this past quarter confirmed the continued inflection of fundamentals we have been speaking about for much of the past year, supported by a strong pricing environment. Re-leasing spreads were the strongest in three years, and stabilized same-cash NOI grew by 5.6%, marking the second consecutive quarter of positive growth and the best growth in almost nine years. And third, We bolstered our total liquidity, which now stands at more than $4 billion, and further diversified our capital sources and reduced our leverage well off of peak levels through more than $2 billion of dispositions and JVs and over a billion dollars of equity issued under our ATM. With that, I'd like to turn the call over to our president and CEO, Andy Power.

Thanks, Jordan, and thanks to everyone for joining our call. Against the backdrop of an extraordinarily dynamic first half of the year, we have remained focused on advancing our strategic priorities and delivering on behalf of our 5,000-plus customers. Digital Realty made strong progress in the second quarter with improved operational results, progress on our funding plan and increased liquidity, continued organizational improvements, and increasing recognition of the critical role that data centers will play in support of both digital transformation and artificial intelligence. We posted sequential growth in revenue, adjusted EBITDA, and CFFO per share, while improving development returns, bolstering liquidity, and de-levering the balance sheet. During the quarter, we made progress on each of the three key strategic priorities that I laid out earlier this year. First, we strengthened our customer value proposition by enhancing our communities of interest with more connectivity options, posting record double-digit interconnection revenue growth, and the second highest quarter of new logo additions in company history. Second, we innovated and integrated, delivering enhancements designed to support high-performance compute, including AI, by enabling data centers to support liquid cooling solutions, while also broadening our existing partnership with NVIDIA with the certification of our first TGX H100 ready data center, and integrating with additional organizational enhancements designed to deliver a consistent structure and experience while leveraging data to improve our effectiveness and efficiency. Third, we accessed diverse capital sources during the quarter, including the sale of a non-core asset in Texas at an attractive 4.4% cap rate, and equity raised under our ATM. Subsequent to the end of the quarter, we formed a stabilized hyperscale data center joint venture with a new private capital partner that acquired an interest in two facilities in Chicago. And today, we announced a similar joint venture transaction alongside a second new private capital partner for three stabilized hyperscale data centers in northern Virginia. Just a little more than halfway through the year, we are now well ahead of the midpoint of our original funding plan for 2023, and we remain focused on putting Digital Realty's balance sheet into position to support the growing opportunity that lies ahead. The current state of the data center infrastructure landscape is very healthy. There is widespread demand for our data center capacity across various regions and products. However, There is limited new supply due to decreased power availability and tight financial conditions. The global expansion of cloud computing paired with continuous digital transformation of enterprises underscores the escalating importance of both data and AI in shaping demand. Presently, we are collaborating with numerous clients on AI-focused requests for proposals and implementations. The initial surge is anticipated in power-intensive training applications. followed by a rise in inferencing applications, including access to private data sets, which are expected to necessitate enhanced performance and reduced latency. Additionally, the intricate nature of these models is necessitating larger capacity blocks, which align seamlessly with our extensive product suite. As the global meeting place for data exchange and a full-spectrum provider of data center solutions, Digital Realty stands at a strategic vantage point, This allows us to cater to the needs of enterprises, facilitating their efficient integration of A applications within their digital transformation journeys. In the second quarter, we unveiled Data Gravity Index 2.0, which represents our extended commitment to data science. This tool is designed to assess the effects of enterprise data generation and consumption in both public clouds and private data centers, offering enterprises a framework to manage and derive insights from their data. Moreover, our innovative approaches in data gravity and comprehensive data center architecture were recognized as we secured a patent for these. Our patent further offers enterprises a roadmap to ensure their architectures remain relevant in the future. The evidence is clear. We have shifted from a physical economy to a digital economy, which now is entering a new form, the data economy. Our research shows that the surge in server demand can be attributed to the rising needs of both public and private cloud infrastructure, further augmented by AI training and inference processes. At the same time, the demand for storage devices is poised to grow due to data regulation. Let's move to our second quarter results. This quarter continued the inflection in the fundamental recovery we have been highlighting in our core portfolio over the past several quarters. Our pipeline remained strong during the quarter, helping to drive a sequential rebound in leasing volume, but also supporting strong pricing, with re-leasing spreads positive again across all product types and in all regions. New leasing during the quarter was $114 million, with continued strength in the 0 to 1 megawatt plus interconnection leasing, which represented 43% of total signings. Greater than a megawatt increased by over 60% sequentially, led by one of our strongest quarters ever in EMEA. Strong demand trends and reduced availability, along with growing recognition of our value proposition, continue to be supportive of pricing and are enhancing our expected returns. In the second quarter, we saw releasing spreads climb to nearly 7% on a cash basis, helping to drive the best-seeing capital cash NOI growth that we have seen since I joined Digital Realty in 2015. During the second quarter, churn remained low at 1.5%, and we added 133 new customers, our second best quarter ever, and a nice continuation of the 100-plus new logo streak we have going. This is a strong validation of the stability of enterprise IT spend and digital transformation that we are seeing and of the value that customers recognize in platform digital. Our P wins included. An innovative sustainability-oriented infrastructure provider that taps into stranded energy to support modular edge compute sites chose Digital Realty for AI applications utilizing Platform Digital's network control and data hub solutions. Data-intensive workloads are being deployed on Platform Digital by a major U.S. federal agency to reduce costs and improve sustainability while interconnecting with their key ecosystem partners. A leading European bank chose Platform Digital to help simplify and secure their hybrid IT strategy in compliance with data sovereignty regulations while leveraging the available cloud connectivity. A Fortune 500 quick-serve restaurant chain is updating their internal infrastructure on Platform Digital to improve reliability and security, support existing systems, and connect with key clouds to support the strong growth of their e-commerce business. A Global 2000 pharmaceutical sourcing and distribution services company is expanding to a new metric on platform digital to ensure global data governance compliance. And a Global 2000 auto manufacturer chose platform digital to upgrade their network architecture in Central Europe by adding key points of presence for the largest and most important production centers. Moving over to our largest market, Northern Virginia, In the years since we learned of the power constraints in this market, we've continued to work constructively with the power provider to confirm the commitments that we made to our customers and to provide growth capacity for our customers through new development and select churn opportunities. Over the course of the last several months, with the support of our local utility partners, we have been able to identify nearly 100 megawatts of incremental buildable capacity that we expect to be able to bring to market prior to 2026. This includes 40 megawatts of available capacity underway within the current development pipeline and the potential to move forward on almost another 60 megawatts. In addition to this Ashburn-focused capacity, we've made meaningful progress on our 192-megawatt development site in Manassas, which is now nearly in position to begin development. We are optimistic about the near-term potential to offer this availability to our customers. Moving on to our investment activity, as we outlined in February, 2023 was poised to be an active year for our investments team, and some of the fruit of their labor has been harvested since our last call. During the second quarter, we acquired the land and shell associated with a previously leased data center in Amsterdam, where we previously held a leasehold interest for $18 million. In a separate future proofing transaction, we purchased additional land adjacent to our highly connected Schiphol campus in Amsterdam, which could support another 40 megawatts of potential IT load, providing ample runway for both enterprise and service provider growth. We also closed on the first non-core disposition of the year in mid-May at a 4.4% cap rate, resulting in $150 million of net proceeds to digital realty. This facility was previously leased as a powered shell and was sold to one of its primary occupants. In July, we saw a significant acceleration in our capital recycling initiatives, closing on two separate stabilized hyperscale joint ventures in Chicago and Ashburn. These deals were executed at just over a 6% cash cap rate on average and raised more than $2 billion of net proceeds for digital realty. These transactions are an important validation of our current strategy as we remain focused on delivering shareholder value through the development of new data centers at double-digit unlevered returns and the monetization of stabilized hyperscale assets at a premium. But equally as important, we have substantially bolstered and diversified our sources of private capital so that we can execute on the opportunity that lies ahead without being overly reliant on any individual avenue of capital, while also increasing the efficiency of our balance sheets. While we've had remarkable traction on these transactions, and all due credit goes to Greg Wright, his top-notch team, and the rest of our platform for executing through a tumultuous capital markets environment, we are not resting on our laurels. We are well ahead of our plan on our stabilized hyperscale joint venture plan, but we see ample demand for the hyperscale development joint venture bucket that we have previously discussed and will provide updates as appropriate. Before moving on, I'm also delighted to welcome Jio, a Reliance Industries company, as our newest partner to our joint venture in India. The expanded partnership builds on the strong foundation laid by BAM Digital Realty through the addition of Jio's massive digital and connectivity ecosystem and strong enterprise relationships with 80% of large private enterprises in India. Before turning it over to Matt, I'd like to touch on our ESG progress during the quarter. During the second quarter, we issued our fifth annual ESG report outlining our initiatives for 2022. The report highlights the progress we have made toward our science-based targets commitment to reduce our global carbon emission by 68% by 2030. We've enabled our success by contracting for renewable energy wherever possible so that we have one gigawatt of solar and wind energy under contract in the U.S. This has enabled us to match 126 of our data centers with 100% renewable energy. In the second quarter, we also received a certificate of adherence from the Climate Neutral Data Center PAC. As a founding member of the PAC, Digital Realty worked with independent auditors to certify that we are on track to meet the overarching goal of the PAC for the industry to become climate neutral by 2030. We remain committed to minimizing Digital Realty's impact on the environment while delivering sustainable growth for all of our stakeholders. With that, I'm pleased to turn the call over to our CFO, Matt Mercier.

Thank you, Andy. Let me jump right into our second quarter results. We signed 114 million of new leases in the second quarter with broad-based strength across the zero to one megawatt plus interconnection segment in each region. We leased approximately 50 million in the zero to one megawatt plus interconnection category accounting for 43% of total bookings and becoming a larger part of our overall bookings since last year. Interconnection bookings were strong once again at over 12 million, concluding a record 12-month period. Zero to one megawatt bookings excluding interconnection were among our strongest ever at 37 million. Digital Realty has come a long way over the past four years, more than tripling our bookings in the zero to one megawatt plus interconnection segment through a combination of organic and inorganic growth. These results demonstrate that our full-spectrum strategy is working. Greater-than-a-megawatt bookings totaled $61 million in the quarter, a meaningful bounce back from last quarter's timing-oriented pause. EMEA was the standout, including strong contributions from Johannesburg, Paris, and Marseille, while we also saw notable strength in Northern Virginia and Tokyo. We also continue to over-index towards CPI-based escalators within our new leases, with 35% of the newly signed leases in the quarter containing inflation-linked increases, with fixed-rate escalators on the balance. Pricing has improved in many markets, with our largest market, Northern Virginia, seeing nearly a doubling of rates over the past year in response to supply constraints, illustrating the changing tide in Ashburn During the quarter, we opportunistically took back 8 megawatts of lease capacity from an existing customer and re-leased it to another customer at a substantial premium. The original lease was signed in the first quarter of last year. Accordingly, our new leasing for the quarter only represents the uplift in rent achieved versus the prior lease, rather than the full annualized value of the new lease. While we have previously tempered enthusiasm around the potential mark-to-market opportunity in Northern Virginia, we are encouraged by this recent transaction and our increased development potential and growing co-location and connectivity offering in this market. Aside from the shift seen in Northern Virginia, we have also seen an improvement in rates across the Americas, as well as in EMEA and APAC. Looking forward, our demand funnel remains healthy. with strength across product types and geographies. We expect ongoing and newly approved development capacity to be an important contributor to our growth through next year. Turning to our backlog slide, the current backlog of signed but not yet commenced leases was $437 million at quarter end, as commencements were once again well over $100 million, balanced by new leasing. We expect the remaining $150 million of commencements in the second half of 2023 to be somewhat evenly weighted between the third and fourth quarters. The lag between signings and commencements in the quarter was 11 months, as certain hyperscale customers await build-out completions. During the second quarter, we signed $211 million of renewal leases with pricing increases of 6.9% on a cash basis. our strongest renewal pricing in three years. This strength was shared across both product segments and across our three regions, continuing the broad-based improvement we saw last quarter. With renewal rates trending over 5% during the first half combined, we are raising our full-year guidance for renewal spreads to better reflect the success year-to-date in today's improved fundamental environment. Renewal spreads in the 0 to 1 megawatt category continued to climb for the sixth consecutive quarter to an increase of 4.8% in the second quarter on $133 million of volume. Greater than a megawatt renewals were even stronger in the second quarter as cash releasing spreads increased by a considerable 8.7% on $73 million of renewals, the largest increase within this category since the third quarter of 2019. Turning to our operating results, our operating financial performance in the second quarter was a bit better than our expectations, highlighted by many of the same factors we highlighted last quarter. The continued improvement in our core operating performance, another record quarter of interconnection revenue, and well-controlled expenses. In terms of earnings growth, we reported second quarter core FFO of $1.68 per share, 2% better versus the prior quarter and consensus expectations. On a constant currency basis, core FFO was $1.69 per share relative to the $1.72 we reported in the second quarter of 2022. Total revenue was up 20% year-over-year and 2% sequentially. Year-over-year revenue growth was impacted by both the inclusion of Terrico this year and the significant volatility in utility costs and reimbursements. particularly in Europe, over the past 12 months. Most of these energy costs are directly passed through to our customers. Excluding utility reimbursements, total revenue was up 12% year over year. Critically, our rental revenues in the second quarter included a $25 million one-time write-off of non-cash straight-line rent and a $6 million bad debt reserve related to a tenant that declared bankruptcy during the quarter. We also wrote off $3 million of non-cash straight-line rent related to the re-leasing opportunity we executed in Northern Virginia. These write-offs of non-cash straight-line rent of approximately $28 million combined are excluded from core FFO per share. Interconnection revenue was at a record level in the quarter, increasing by 12% year-over-year and 3% sequentially. Excluding Terrico, interconnection revenue was up 8% year-over-year, reflecting the ongoing organic strength in our core footprint. Bookings were higher in all three regions, and service fabric activations doubled in the quarter. Other than utility costs, expenses were well-contained, as rental property operating expenses and insurance were both flat sequentially, resulting in adjusted EBITDA growth of 14% year-over-year and 4% sequentially. Improvement in our stabilized same capital operating performance continued in the second quarter, with year-over-year cash NOI up 5.6% and 1.7% sequentially. This marked the strongest year-over-year growth in our same capital pool since 2014, demonstrating the turn in fundamentals that we have been highlighting. The improvement was driven by an 80 basis point increase in occupancy as commencement's outpaced churn with upside from rent escalators and stronger than expected releasing spreads. While we're very encouraged by the improvement we've seen to date in this metric, and the trend does indeed appear to be our friend, our enthusiasm for the second half of 2023 is tempered by the uncertainty related to a recent customer bankruptcy filing. We expect to know more about the potential impact by the time we report third quarter results. Turning to the balance sheet, As Andy outlined in his remarks, as of this week, we are meaningfully ahead of the funding plan that we laid out for you in February. We have already closed in approximately $2.2 billion of asset sales and stabilized joint ventures and expect to make additional progress on development joint ventures in the second half of this year. Specifically, earlier in July, we closed on the sale of a 65% interest in two stabilized hyperscale data centers and on our Chicago campus, raising $743 million of gross proceeds. And as announced this afternoon, we sold an 80% interest in three stabilized hyperscale data centers on our Ashburn campus, raising another $1.3 billion of gross proceeds. Including proceeds from the sale of the non-core asset in Texas we announced last month, we've raised over $2 billion in capital at a blended average cap rate of just over 6% so far this year. In addition to this capital recycling activity, during the second quarter, we raised 1.1 billion in proceeds from the sale of 11 million shares of equity under our ATM. Included in this total was approximately 3.5 million shares, or 335 million, that was structured as forward equity issuance. These shares were settled earlier this week. Our reported leverage ratio at the quarter end was 6.8 times while fixed charge coverage was 4.2 times. Pro forma for the JV transactions and the settlement of the forward equity outstanding at quarter end, leverage was 6.3 times, putting us on track toward our near six-time target by year end. Moving on to our debt profile, our weighted average debt maturity is nearly five years, and our weighted average interest rate is 2.7%. Approximately 84% of our debt is non-US dollar denominated, reflecting the growth of our global platform. Approximately 83% 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 during the rest of this year and a well-laddered maturity schedule throughout the out years. Lastly, let's turn to our guidance. We are affirming our full-year revenue guidance range of $5.5 to $5.6 billion and adjusted EBITDA guidance of $2.7 billion at the midpoint, as the recent acceleration in capital recycling has been balanced by better-than-expected re-leasing spreads and same capital cash NOI. We are, however, adjusting our core FFO and constant currency core FFO per share guidance ranges for the full year 2023 by $0.10 per share to a new range of 655 to 665 to reflect the following. Three cents per share tied to the acceleration of our funding plan, including greater than expected stabilized joint venture sales and over one billion of equity issuance. Five to seven cents per share for the write-off of unpaid rent and additional near-term uncertainty related to recent customer bankruptcy, and about a penny per share of lower non-cash straight-line rent tied to the opportunistic termination and re-leasing in Northern Virginia. Given the continued progress on the turn in our fundamentals during the quarter, we are also updating the organic operating metrics supporting our full-year guidance, including cash and gap re-leasing spreads moving up to greater than 4% and greater than 8%, respectively. An increase in our same-capital cash and wide growth guidance by 100 basis points to a revised range of 4% to 5%, despite the potential impact of the customer bankruptcy this quarter, partly balanced by a reduction in our year-end portfolio occupancy assumption to 84% to 85%, largely reflecting the greater than anticipated sales of stabilized hyperscale assets into joint ventures. Given the better-than-expected execution on our funding plan to date, We have also updated our guidance for dispositions in JV capital. We now expect total disposition in JV capital raised to fall within the range of our current $2.2 billion up to $3 billion. We have also reduced the amount of long-term debt financing needed to support our full-year funding plan, given the nearly $4 billion of liquidity currently available as a result of asset sales, JVs, and ATM equity raised. This concludes our prepared remarks, and now we'll be pleased to take your questions. Operator, would you please begin the Q&A session?

We will now open up the call for questions. 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. To ask a question, you may press star, then one 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 David Barden of Bank of America.

Please go ahead.

Good afternoon, everyone. Thanks for taking my question. You have Alex Waters on for Dave. Congrats on the new JV deal. Just wanted to know if you could walk us through kind of what line of sight you have for the development JV pipeline. And then looking into 2024, can you speak to how comfortable you are with the funding pipeline? And then secondly, on the core business, you've had strong releasing spreads on the greater than one megawatt side. Just curious, on what your expectations are for this bucket heading into the second half of the year and into 2024. Thanks.

Hey, thanks, Alex. Appreciate the kind words. I'm going to turn it to Greg to speak to where we're going next in terms of capital raising on development JVs, maybe tie in what's happened back after this year into 2024. Then I can pick it up on the core portfolio. Sounds good.

Thanks, Alex. Look, with respect to the development JV guidance, we're still comfortable with our full-year development JV guidance that we provided previously, that's roughly 750, give or take. And that's obviously the plug, if you will, between the one and a half to two and a half last time, which now becomes 2.2 to 3 billion. Look, we remain engaged on these transactions over the second half of the year. And what we're seeing out there, just as with the stabilized joint ventures, there's strong demand for the development joint ventures. You know, particularly given that these JVs offer the highest returns. You know, and they have a lot of moving parts, though. So, you know, given the strategic considerations here, these tend to take a little longer. So I'd say we remain optimistic and on track for those. With that, I'll turn it back over to Matt and Andy.

Thanks, Alex. I think your second question was about, let's call it the core operating results we saw in the quarter, year-to-date, and where we see in the back of the year, if I'm correct. We're certainly pleased on multiple fronts on the value proposition and pricing power coming through. We saw that in our new lease signings and ROIs, as well as our cash market markets, which flowed through to our same-store growth. We had a quite strong quarter on those stats. And you saw that we updated our guidance for the full year. So as of right now, we think that these trends on the cash market markets and pricing power will continue into the back half of 2023.

Yeah, I might just add that, you know, again, this quarter we saw all of our greater than megawatt renewals were in positive territory, and that includes across all regions as well.

The next question comes from John Peterson of Jefferies.

Please go ahead.

Oh, great. Thank you very much for taking the question. Good job on the execution on the JV deal. I wanted to ask about the eight megawatts where you had an uplift in rent. I know you talked about it, but I'm sorry. Could you maybe break down what kind of drove your ability to push those rents higher? And if you were to take that out, what were the rents per kilowatt hour and the greater than one megawatts in America.

Thanks, John. So I'll walk through the dynamics. I'd like Matt to quote the actual rate on the new deal to give you a sense of the market. I mean, this is obviously a market that is very tight on supply. And when working with our installed customer base, if anyone had capacity that was idle or they didn't have near-term need for, so hence we were able to take back, a capacity from a customer since we let them out of a contract. And that contract was signed called a year ago at a much lower rate. And we were able to help a different customer that had immediate needs and were able to sign that at a much higher rate. But, Matt, why don't you walk through the stats?

Yeah, sure. So just to be clear, the deal that we're talking about here is not included in our renewal stats. What we are doing is showing just the net incremental revenue that we expect to recognize within our signing stats. And you'll see that more clearly when you look at page eight of our supplemental. In particular, in North America, they're greater than a megawatt. You're going to see a deal. You're going to see the $300 KW rate. And that's because we're only showing the incremental revenue and not the associated megawatts attached to it. If you put that deal in at, call it 100%, that $300,000 to KW would come down to $148,000. But again, it was a substantial uplift from the in-place lease. It was over 50% higher than what we had currently.

I'm sorry, that's $148,000 on the 8-megawatt deal or $148,000 excluding the 8-megawatt deal?

including that would be our blended rate. If you look at page eight and our supplemental versus, versus the 300. Okay.

Okay. And then just one follow up, just to stick with Nova. Uh, so with the power constraints there, as long as nothing's changed, it seems like nothing, nothing new can really come online until 2026. Are you already seeing leasing demand for people that are wanting to sign leases and commit that far in advance?

So John, the Nova market, um, The facts, I would say, remain the same in terms of transmission lines and arrival of utility power, which has really created an environment of demand well outpacing supply. We are, I'd say, less right now focused on signings that don't commence until 2026, based on the uncertainty of when in 2026 exactly that power arrives, and quite honestly, making sure that we're maximizing the opportunity at hand for us. That market has seen dramatic price improvement. We've signed deals in the larger categories, call it 140 or north of that per kilowatt. Again, that market was in the 70s not so long ago. And the good news, as we reported, given our breadth and history in that market, we've been able to work with our utility provider and really cobble together incremental growth capacity for our customers across our campuses. If you add them all up prior to the 2026 arrival, by 2025, if not sooner, you're approaching, call it, 100 megawatts of growth capacity in Ashburn, which is in addition to our growth capacity that we have in Manassas.

The next question comes from Michael Elias of TD Cowen.

Please go ahead.

Great. Thanks for taking the questions, guys. To start, in recent months, we've seen the volume and size of deals increase. And to that point, there are many requirements on the market right now that are over 100 megawatts. As you consider the strategy moving forward, is it your intention to compete for these deals? And if so, are you willing to pursue these deals with or without a development JV lined up with the understanding that these projects will drive long-term shareholder value? And then I have a follow-up.

So I can tell you we didn't sign any 100-megawatt deals in this quarter. We are certainly around some of these opportunities. We're very focused on, call it, maximizing our footprint in for its highest and best use in helping our customers the best way we can. Some of those deals, obviously, have led itself towards the AI domain for training models that need that large scales of continuous capacity. I can tell you, look at our footprint. We have extensive locations around the globe that we can help those types of customers. We are... But we've made great progress bolstering our capital sources, as you saw just in literally the month of July, really got back into firmer footing to support our customers' growth. Adding to that a development partner, I think will put even more fuel to the fire to support that growth. So I think when it comes to bigger, bigger deals, we've got to make sure that they land in the right locations for digital realty and make sure we're maximizing the opportunity for in terms of what I call is really precious capacity in our land bank, in our sales, and in our inventory runway.

Great. And then just to piggyback on that point about maximizing the opportunity, if I go back to the third quarter of 2022, you guys were clear that you were sharpening the lens through which you looked at investments with the intention of driving a higher risk adjusted return. Now, as we think about hyperscale deals in which you would lease an entire building to a single hyperscaler on a turnkey basis, could you give us a framework for thinking about what the appropriate spread between your unlevered development yield and your cost of capital should be to make it worth it to lease it to the hyperscaler? Thank you.

Thanks, Michael. I think Jordan can see the future because he thought he was going to ask this question. Honestly, we haven't been thinking about that because we've been raising the bar and demand has been outpacing the supply where anything that even kind of feels skinny or close to not just breaching our cost of capital has not made it onto where we're investing our dollars. And you can see that in our development lifecycle where you have the whole schedule of the 377 plus megawatts underway north of 10% ROI. That includes the Americas region, North America, that it's caught 9% and still weighted down by projects that were called open book yield on cost projects, almost legacy in vain, that it's weighted down those averages. I can tell you these opportunities we're seeing even for larger capacity blocks in these tight markets, be it in Northern Virginia, be it in Singapore, be it in Frankfurt or elsewhere, we're certainly into the double-digits unlevered ROIs, which I think that well exceeds the risk-adjusted of deploying capital and really coming down more to supply-demand dynamics than just call it premiums. And I think if you look at the great work our investments team did on transacting on some of these JVs and the new partners we brought in the fold and called the 60th cap area, I think you're seeing a lot of value creation in our model.

The next question comes from John Atkins of RBC.

Please go ahead.

Thanks. A couple questions. Wondered how to kind of think. You said you're not going to issue any more debt this year. But given some of the other moving parts around possible asset sales and so forth, are there any more of those to come? And how can we think about the leverage trajectory of getting perhaps into the high fives or whatnot? And then secondly, was curious just about India. Is your partner contributing any assets prospectively going forward? Thanks.

Matt can speak to the funding and our sources of uses and the guidance and leverage. And then Chris and I can ham and egg the India piece. Greg?

Yeah, so thanks, Anthony. There's a couple aspects here I think are important. wanted to reiterate, as of today, we've got $4 billion of liquidity, thanks to the execution of the broader team. If you look at where our funding needs are going forward this year, based on looking at our life cycle, what's remaining to be spent, our guidance in terms of what's left to be spent, we're talking about somewhere in the one, two to one, three left to spend this year. So that gives us, you know, pretty significant runway into 24 to be able to fund, uh, the continued growth and opportunities that we see going forward. You know, on top of that, as we, as we also noted, we're not stopping in terms of, uh, you know, the execution on, you know, asset sales, as well as, uh, the potential, uh, that we're, we're continuing to seek for development, joint venture partners that'll, that'll give us an even broader, access to capital and be able to help us to fund not only some of that capital need into 24, but also potentially this year as well, which rounds out into your question on leverage. We've made considerable progress, again, on that front as well. As I noted in the prepared remarks, you look at us on a pro forma basis. We're at 6-3 now, so made considerable progress on that. You layer on top of that, you know, our expected view of continuing to grow our EBITDA as we've left that guidance line unchanged. Again, as well as continuing to seek development joint venture partners that will continue to help us on that deleveraging process. So we feel pretty good about progress to date on both liquidity and leverage. And I'll turn it over to Greg on the India JV topic, Orit.

Just on India, I think it's less about the assets. Obviously, they're going to be sharing development opportunities in a huge market with a lot of growth, but it's really about a great, fantastic new partner to the partnership. And maybe Chris can touch on GEO and what we think they bring to the table here.

Absolutely. I appreciate the conversation, John. So it's a culmination of expertise, right, where Brookfield brings local investing expertise you know, digital really, we bring the data center expertise to that market. But I think, you know, what really GEO brings is that local operating expertise and Maybe many of you already know, but Jio is one of the largest mobile media platforms throughout India. And I think their extensive reach and ability to interconnect critical enterprises or other destinations is something that's going to allow us not to deliver a like-for-like product. And I think Greg and I have been talking about this for many years and looking at the fact that we wanted to be able to differentiate our ability to be successful within India. And so that partnership with Reliance and GEO has really elevated our ability to service the broader enterprise customer base, which quite frankly is unique in that it's a lot of our large hyperscale customers as well. So the amalgamation of that trio coming to market is something that we're excited about. We're still early innings, so you'll see it evolve over time, but pretty excited about the opportunity in India.

If I could quickly add on interconnect trends and anything to expect going forward in terms of just the trajectory, any particular reason why it might see pressure because of grooming or acceleration because of new use cases, and does AI play a role at all in interconnect at this point? Thanks.

No, appreciate it, John. Just to further jump into that, yeah, interconnection I think is something that's evolving rather quickly. I think, you know, artificial intelligence is definitely evolving and it's in its early stages to date. I think where we've been watching and what I think has shown through and we referenced in the prepared remarks is the fact that It's the highest five-year growth, two straight quarters, surpassing $100 million. I think that's very unique to us in the platform that we represent in the market. I would also say that some of the activities that we've been doing around service fabric, which, quite frankly, is tailored to streamlining the technical barriers that have been placed upon the customers to access all of these destinations where data resides. which at the core of artificial intelligence, where I think your question is at, you have to have access to data. And so being able to be a part of one of the largest open platforms that quite frankly allows customers to access these data oceans of both public and private deployments, I think the platform is starting to pay off. And I would say that, again, early innings with AI, but we're very excited about what that demand is going to represent inside of our portfolio. And, you know, as we evolved and were, you know, stable stay of what we did in the foundation of cloud, you'll see us be able to be at a steady state with a lot of these customers evolving AI as well.

The next question comes from David Garano of Green Street.

Please go ahead.

Hey, thanks. So looking at your development tables, you guys are developing assets at 10% stabilized yields and It feels like if that stays, you can sell assets at six cap rates. That's a pretty healthy spread on the development profit margin. So I guess I was just wondering, since you've already hit your initial disposition target, that range you set out, why do you see the need to do more JV developments at this point? Why not just look to sell more stabilized assets?

Hey, David, it's Greg here. Look, I think when you take a look, as we laid out and Andy laid out at the beginning of the year, the reason for finding these development partners is, Look, when you look at this opportunity in the hyperscale business today, it goes well beyond our balance sheet, even at $55 billion. So when you look at that, what it tells you is you've got to have third-party capital to meet the customer's needs within, you know, throughout the globe for that business. So as we sit here today, even though we have, as you said, we've exceeded our guidance on what we were going to do, you sit here and look at this strategically go forward, and we think that's the best way to fund that business, to create value for our shareholders. So, you know, that's why we're going to continue to fund it through development. And we think that's the most prudent way to move forward with it.

Okay. And then maybe switching topics on the tenant bankruptcy, Matt, you were talking about, which I think is a former public data center company. Can you walk us through what eventually happens to that space? Are you guys just waiting now to renegotiate with the tenants? And I guess how soon, if that's not the case, can you start releasing that space?

Hey, David, my... Just to add on to the last question, and Matt and I can ham and egg the second part of your question, I think there's been a – our balance sheet today has caught more than 3 gigawatts of growth capacity around the world. And we see that expanding. And having the balance sheet to be helped funded alongside some great partners is another part of becoming more efficient and more quickly driving growth. returns and results to our bottom lines. In a market and an opportunity backdrop that keeps getting bigger, it was large to begin with. Cloud computing accelerated that with hyperscale demand, and AI is just an incremental lift to this wave of demand. Hence, we believe the best way to tackle this opportunity and support our customers while driving results to the bottom line is in partnerships on the capital front. When it comes to the customer bankruptcy, Obviously, this customer is in the middle of bankruptcy, so can't share too much. The typical playbook is the creditors essentially have to run a process for the assets or the business, and as part of that, make decisions on either accepting or rejecting leases. We have not to date had any leases rejected so far. while they have rejected other providers or landlord leases. I don't think you can assume that every one of our leases, despite that fact, will be accepted. But from a strategic lens, this is why years ago we'd increased our capabilities and be able to expand to the co-location or connection offering and support end customers. So if and when reseller customers would have issues, we can essentially step in and support the end customers and have adequate financial outcomes in the end of the day given our capabilities. So there's a little bit of wait and see as this customer works its way through bankruptcy and I think we'll have more to report by the third quarter call.

The next question comes from Mike Rollins of Citi.

Please go ahead.

Thanks and good afternoon. Just a couple follow-ups. So first, as you're looking at the portfolio, what's the value of data center assets that you own that could be considered for future joint ventures? So what's left in terms of opportunity for recycling? And then also, can you just provide us an update on how you're doing and the opportunities to improve whether it's overall occupancy or same capital occupancy within the portfolio? Thanks.

I mean, Hyperscale is still a large piece of our business in terms of our stall base and certainly a lot of what's going into our current development pipeline as it stands. I think in conjunction with the creation of Digital Core REIT, we came to an estimation of call $15 billion of value as a round ballpark. in terms of things that would fit the bill, essentially similar to the transactions we just announced in the month of July, fully stabilized, hyperscale-oriented, long-weighted average lease length. Honestly, core assets, parts of our campus, but the slowest organic growers of our portfolio, less interconnection-rich, less customer rich. I think the more recent portfolios we've sold have called 10 plus or minus customers in them. We're supporting 5,000 customers here at Digital Realty. So we still think that there's an opportunity to continue to build on these partnerships, like the great partnerships we just announced, and essentially be able to maintain 100% ownership on the highest growing pieces of our puzzle. When it comes to the same store growth, Matt, why don't you pick that up in terms of the levers that we've been pushing hard to drive that?

Yeah, so I call out a couple things. So first, I mean, we have been making what I would say is good to great progress so far. If you look at it versus last year, we're up 80 basis points on our stabilized pool. We're going to continue, we think, to improve that over the course of this year and the next year. And that's going to be a mix of essentially twofold, spaces where we believe that there's opportunity for larger customers. We're going to continue to target that given density requirements and the growing need for capacity across a global portfolio that we have. We're going to find opportunities to fill that in. But I think part of it and part of why it's going to take a little bit more time to continue to improve the overall occupancy is that we're also looking where we can convert some of that space that we do have into product high COLO, at least that over time because we see, you know, the growing need for enterprise demand and where we want to be able to capitalize that, which is a higher return and a market that we want to be able to penetrate and grow even further from where we are today.

The next question comes from Frank Luthan of Raymond James.

Please go ahead.

Great. Thank you. Can you comment on the situation in Singapore, I guess, with the government allowing a few new players coming in? How do you think that affects the pricing there? And then looking at the capital recycling, where do you go from here? I know you continue to look at other diversification strategies. Does this kind of sort of finish this out, or what are some other areas of capital sources that you could look at to reach that goal? Thanks.

On the first one, Singapore, I mean, I think what you're seeing is supply still to get metered out at very small and rational clips. When after years of no supply, the big unveiling is literally four different players getting 20 megawatt increments is relatively modest. I mean, our latest data center built in that market was, I think, almost double that size of a need. And this is not only happening in Singapore. You're seeing power constraints, be it from transmission or generation, moratoriums, broader nimbyism, environmental concerns, just ratcheting and making the supply constraints be more rational. That's why we're quite pleased. that we have on our balance sheet a long runway of growth for our customers with our campuses across 50-plus metros on six continents and the supply chains to support their growth. And this is all against a backdrop where that demand is outpacing the supply. Greg, do you want to reiterate where we're going next on the capital recycling?

Yeah, thanks, Frank. Look, I think as we said, we're going to continue to focus our efforts on the remainder of this year on our development joint ventures we talked about. But to answer your question specifically, you asked about other sources of capital, you know, how we think about it. Look, I think as a whole, we've done a pretty good job so far. As we said, we have the, you know, the dedicated core REIT in Singapore, so that's a public vehicle. You know, we've obviously just announced two transactions where we have characterized as distinguished blue chip investment partners in both GI and TPG. And look, we continue to see strong interest across the board. So not just PE shops, but we see infrastructure funds, sovereign wealth funds, pension funds, insurance companies, and the like. So we're seeing a broad-based demand here looking at transactions, both, you know, stabilized core assets and development assets. So, look, we're bullish on that. And when we look at that again, we think that's the prudent way to fund our growth go forward.

The next question comes from Eric Lubko of Wells Fargo.

Please go ahead.

Great. Thanks for taking the question. So, Andy, I think You've talked about getting down to five and a half times leverage longer term. So maybe you could just walk through the path to get there beyond this year and how much incremental capital recycling or JVs or other forms of capital you think you might need if we look past this year. And is the goal here to ultimately becoming more self-funding so that you can share more of the economics yourself instead of using development partners?

Yeah, so Matt, I'll take that. I mean, you know, we do have, you know, our longer-term plan is to get down closer to five and a half times. Again, I think we've done a considerable amount of work. We said this year we'd look to be closer to that six times. You look at us based on what we've achieved and executed so far with the $2 billion from the joint ventures that we've done on stabilized assets, the billion we've raised in equity so far to date. which has come in. We're at pro forma at 6-3. And we see the path going forward to getting back even further down is as we have backlog and continue to execute on leasing that comes online, our EBITDA continues to grow, and we execute on these development joint ventures. We believe those are going to be two of the major components which are going to help us get down to that five-and-a-half times target as we start to look through 24. But we're not in a position at this point in time to give 24 guidance yet, but I think those are the two main levers that we're going to be looking at to continue to drive and improve our balance sheet and our leverage position.

Okay, great. And then just one follow-up. I think you still had some non-core portfolios out in the market today, and I guess given how successful you've been with capital recycling so far, is that kind of becoming less of a priority as you look forward? Or, you know, do you still plan to transact on some of those markets that are out there today?

You know, look, Eric, as you said, we've been fortunate. We've had good demand and good execution this year. And look, we're already, we're 30% of the way through and we have other transactions we're working on. But as we always said in the past, the good news for us is these non-core assets are all a very, very, very small piece of our portfolio. So, you know, we have the benefit of being disciplined and making sure we get what we think is fair value. So we're going to continue with that approach like we have historically and continue to pursue them. But again, we're seeing demand for those assets as well. So, you know, we'll continue to work on it and, you know, we'll continue to post you as we have things to talk about.

The next question comes from Irvin Liu of Evercore ISI. Please go ahead.

Hi, thank you for the question. I have one in a follow-up. So within your improved bookings this quarter, are you able to call out whether there was any sort of contribution from AI or any AI-related deployments from your customers?

Hey, Irvin, that's a great question. I'm going to turn it over to our CRO who really grabbed the baton and ran through the finish line strong, Colin McLean, the to talk to what we saw on the AI front and maybe just give a little bit more color on the court in terms of bookings and new customers.

Yeah, thanks, Andy. I appreciate the question, Irvin. Yeah, certainly AI is becoming a growing part of our conversation in pipeline overall. Just to revert back a bit on the overall pipeline dynamics we're seeing, I would say describe it overall. The pipeline is strong, healthy, and diverse across the board, particularly strong in the zero to one megawatt side. and growing part of that. AI is definitely a part of not just the hyperscale piece of the business, but also the zero to one megawatt. And we've had some strong contributions on that front. And so overall, we really feel like both the results and the pipeline itself that demand to be a testimony to invalidation really of our pivot to serving the entirety of the client needs network enterprise and hyperscalers. So I would say, you know, both on the AI front and frankly, the cloud and hybrid IT, we're seeing some really growing success and and growing conversations with clients. So we remain optimistic and serving both the pervasive needs of clients as well as AI. And I think that's going to be a growing part of our portfolio as we move forward.

Got it. Thank you for the color there. So my second question is on the strong pricing that you saw over the past two quarters. Can you just share with us how pricing trended quarter to quarter and the overall linearity of pricing trends now that we're one month into Q3?

I would call this a continuation of the commentary that we've been saying now for several quarters, and that the pendulum on supply-demand fundamentals has been winded our back and growing. Our value proposition with our customers has been more and more well-received. That's from our installed base, who's been growing with us. The majority of our signings were from the existing customer base. That's also from, I think it was our second highest new logo quarter, 133 new logos or new customers. And that has been broad-based, as Matt mentioned, across regions and product types. In the less than a megawatt category, it's been more steady, Eddie, but obviously inflecting, call it like-for-like increases. And on the greater than megawatt, it's been a little bit more volatile, but in a positive fashion, as Demand has remained intact, if not further increased, and precious large capacity blocks have become fewer and fewer far between, and the future of that supply bottleneck's really changing course does not seem to be near-term whatsoever.

That 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.

Thank you, Andrea. Digital Realty had a strong second quarter. Our results demonstrate that our meeting place value proposition is resonating with customers. Just since our last call, we raised over $3 billion of new capital, positioning the company for the tremendous opportunities that lie ahead. We posted strong organic operating results with the results confirming the continued inflection in our core data center business. I'd like to thank everyone for joining us today and recognize our dedicated and exceptional team at Digital Realty who keep the digital world turning.

Thank you.

The conference has now concluded. Thank you for attending today's