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.