Digital Realty Trust, Inc.

Good afternoon and welcome to the Digital Realty third 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 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. Jordan, please go ahead.

Thank you, Operator, and welcome everyone to Digital Realty's third 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 third quarter. First, our customer value proposition continues to resonate. Leasing was strong across both our primary product category with record overall bookings in the zero to one megawatt plus interconnection segment, and an acceleration in our greater than a megawatt segment. Second, we saw a further continuation of the improvements in our fundamental metrics. Strong demand and tight supply remain supportive of pricing, and this is evident in our results. Same capital cash NOI growth was the best in more than a decade at 9.4%, while cash releasing spreads eclipsed 7% in the quarter. which caused us to raise full-year guidance for these metrics for the second consecutive quarter. Third, we continued to diversify and bolster our balance sheet with almost $4 billion of capital raised to date, including two hyperscale core joint ventures announced in July and another almost $200 million of non-core sales, bringing total dispositions to $2.5 billion year-to-date. The capital that we've raised this year has enabled us to increase our liquidity and de-lever while expanding our investment and development that we expect to generate double-digit unlevered returns. 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. The third quarter marks nine months since being appointed to my current role as CEO, and this marks the fourth official earnings call. While there has been about as much volatility in a single year as I can recall from my 20-plus year career, it has been a privilege and an honor to have the opportunity to visit and work with and to watch my digital realty colleagues across the globe execute on behalf of our customers and stakeholders during these extraordinary times. At the outset of this year, I highlighted three key priorities for our company. While we've got two months left in the year, I am very excited about our progress to date and look forward to finishing strong. As you recall, our key strategic priorities are, first, to demonstrably strengthen our customer value proposition, which means that we are adding connectivity-rich solutions and scale capacity to drive our global meeting place strategy. We are executing this through the addition and launch of new on-ramps, the expansion of our COLA capacity and markets, and also by providing visibility into longer-term hyperscale capacity in our largest core markets. We are making strides, and our customers are recognizing this by landing and expanding their IT infrastructure within our facilities. For example, over the past few months, we've added on-ramps from a number of the largest cloud service providers, including AWS and Oracle. Our second priority is to integrate and innovate. For the first time, we created an Americas region and formally organized the company into three regions to improve overall management and accountability. In addition, we moved global operations under an experienced digital realty leader, bringing standardization and consistency across our global platform. We also reorganized all things technology under our CTO organization. Consistent with our aim to bring innovation to our customers and the market, In the third quarter, we announced the launch of our first NVIDIA DJX H100-ready data center in Osaka, Japan. We also rolled out our new high-density COLA offering across 28 global metros to support high-performance compute infrastructure, addressing data and AI-related growth challenges. We are also partnering with other leaders around the world to enhance our open platform. In this vein, we recently added BT and Lumen to our service fabric platform, which connects our data centers globally, extending the reach of our customers and partners. And we made some nice progress on the sustainability front in the quarter, which I'll circle back to in a moment. Finally, we set out to bolster and diversify our capital sources. And to date, we've reduced leverage by 0.8 turns of EBITDA for the 1Q peak, and increased liquidity to three plus billion, including one billion of cash on hand. We executed on our funding plan that included the completion of two stabilized hyperscale JVs this quarter, tapping into some of the deepest pools of private capital. And we remain confident in our ability to add to this progress with development JVs in the near future. If we deliver on our key strategic priorities, we expect that this will translate into better, long-term, sustainable growth for our customers, team members, and in turn, our shareholders. Digital Realty continued to make progress in the third quarter, with further improvement in our operational results, highlighted by 9-plus percent same-capital cash NOI growth, strong leasing results with record 0-to-1 megawatt signings, the highest greater-than-megawatt pricing since 2016, record leasing at APEC with broad strength in the Americas, and record interconnection revenue with the strongest growth since 2018. The momentum across the data center infrastructure landscape is strong. Demand for our data center capacity remains broad-based, both geographically and by product, as reflected in our leasing results. New supply in our top markets remains constrained and is likely to remain so. due to limited availability of power, growing supply chain challenges, and tighter financial conditions. While the demand drivers we have enjoyed for the last several years, including cloud, digital transformation, and hybrid IT, remain largely intact, AI applications have added a meaningful new layer, which is just beginning to materialize in our leasing results this quarter. And we are ready for it. When Chris first started speaking publicly about AI and high-performance compute at our investor day in December 2017, we were already in the process of architecting and designing our facilities to support evolving densities and our most innovative and leading-edge customers. While there are multiple high-density workloads running in our portfolio since at least that time, in the last quarter alone, we were able to accommodate a handful of high-density compute deployments from one of our service provider customers and a 10-plus-year-old data center in one of our smallest markets. And we are currently supporting one of our customers' AI infrastructure deployments that will incorporate 32,000 NVIDIA H100 GPUs. This doesn't mean that Digital Realty will be chasing large AI deployments far and wide, as we will continue to assess the longer-term opportunity set of remotely located, single-tenant, non-differentiated data centers. But it does mean that there has been an increase in demand for our highly connected campuses in core markets. We're being thoughtful in how we approach these opportunities. As we consider leasing our capacity, I expect that we will seek to support our long-term engaged partners that have become embedded within our meeting place community, that value our strategic locations and the connectivity across platform digital. At the same time, In certain markets, we will selectively support customers that have a differentiated product offering, as we've always been at the forefront, supporting leading technology companies as they push their infrastructure capabilities. Let's move to our third quarter results. This quarter continued to demonstrate the fundamental recovery that we've been highlighting throughout this year. Leasing activity was strong and broad-based across product types, and reflected the pricing recovery we have seen throughout our portfolio. While we routinely lead with our headline leasing figures, it is important to point out the record posted in the 0 to 1 megawatt plus interconnection segment in the quarter, which increased by more than 9% sequentially and nearly 28% over the prior year period. Total new leasing during the quarter was $152 million, with record 0 to 1 megawatt signings. representing just over a third of total signs. Greater than a megawatt signs moved higher for the second consecutive quarter, led by the Americas region. Our team also put up a record quarter in APEC. Pricing remains firm, with notable highs achieved across the greater than one megawatt segment, with strength in the zero one megawatt category. Growing recognition of our value proposition, including our comprehensive product offering, along with strong demand trends and reduced availability, are supportive of pricing and are helping to drive better core growth and higher returns on investment. In the third quarter, we saw re-leasing spreads climb to 7.4% on a cash basis, contributing to the strongest same capital cash NOI growth in more than a decade. During the third quarter, churn remained low at 1.1%, and we added 117 new customers extending our string of 100-plus new logos per quarter to three and a half years. Another strong validation of the value that enterprise customers around the world recognize in platform digital. Our focus on deepening the value of our campuses has resulted in enhanced cloud access for digital realty. Recently, four out of five top B2B cloud providers completed multi-site on-ramp and edge expansions to serve data-intensive workloads on two continents via Platform Digital. In addition, AWS announced a Direct Connect location in Seoul, the first carrier neutral facility in the market, while we announced the Oracle Fast Connect availability in Madrid to their EU sovereign cloud. Other key wins during the quarter included a speech-to-text AI provider completed their second HD COA deployment in six months on Platform Digital, multiple new logos in the healthcare vertical in the quarter, two Global 2000 healthcare companies deployed on Platform Digital, one supporting data-intensive AI workloads, and the other implementing a two-site data compliance solution. An international Tier 1 telco added a multi-metro expansion across two continents on Platform Digital to support their retail enterprise customers. A Global 2000 bank is implementing multi-site, multi-region network hub deployments, now totaling 15 metros. And a Global 2000 insurance company is expanding a distributed data hub on Platform Digital to support M&A data compliance. Moving over to our largest market, Northern Virginia. More than a year since we learned of the power constraints in this market, we have continued to work constructively with the power providers 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. As discussed in our last earnings call, we've identified almost 100 megawatts of development capacity in Loudoun County that we expect to be able to bring to market prior to 2026. This includes 56 megawatts of available capacity underway within the current development pipeline and the potential to move forward on another 40 megawatts. In addition to this Ashburn-focused capacity, we continue to advance the ball on our 192 megawatt development site in Manassas, and we are now officially underway and will soon be patent-ready to support construction of the first of two buildings on this site in early 2024. We are very excited to be able to offer this availability to our customers. Moving on to our investment activity, Digital Realty's investment team has already had an extraordinarily productive year, including the $2.3 billion of JVs and non-core asset sales completed in the third quarter. Within the non-core bucket, we sold two facilities during the quarter, including one in the UK and the other in Chantilly, Virginia, totaling almost $200 million. Including the $150 million non-core disposition in Texas that we completed last quarter, we're tracking well toward our $500 million target for the non-core asset sales in 2023. We closed two separate stabilized hyperscale joint ventures in July with the contribution of two assets in Chicago and three in Northern Virginia, raising $2.1 billion of proceeds. We've also made substantial progress on the third bucket of our funding plan, the development joint ventures, and we expect to have more to say about these in the fourth quarter. Before turning it over to Matt, I'd like to touch on our ESG progress during the third quarter. We've continued to make progress on our water conservation initiatives, including a water saving initiative for cooling towers at our SIN10 facility in Singapore. The project won the inaugural Green Innovations Water Solutions Award at the Singapore Environment Council's Environmental Achievement Awards. The project is expected to save over 1.2 million liters of water each month and improved water usage efficiency by 15%. The solution is now being evaluated for wider rollout across our portfolio. In the third quarter, we also announced that we are ranked in the top 10 on the U.S. EPA's national top 100 list of the largest green power users from the Green Power Partnership. The company also ranks seventh on the EPA's list across technology and telecommunication providers. 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.