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.

Thank you, Andy. Let me jump right into our third quarter results. We signed a total of 152 million of new leases in the third quarter. With broad-based strength across each of our two primary product groups, and geographic strength in the Americas and APEC. We leased a record $54 million in the 0 to 1 megawatt plus interconnection category, accounting for 35% of total bookings. This product segment remains a consistent and steady source of growth as we continue to execute on our global meeting place strategy. Interconnection bookings were strong once again at over $12 million as we added another 2,000 cross-connects in the quarter, finishing with 218,000 total cross-connects. Greater than a megawatt bookings totaled 97 million in the quarter with outsized contributions from Portland and Hong Kong. This was our highest greater than a megawatt signings quarter since we discussed sharpening the lens with regard to capital allocation decisions one year ago. Our greater focus and increased threshold have resulted in higher average returns in the greater than a megawatt category as implied by the growing expected stabilized returns in the Americas that we present on the development lifecycle schedule in our supplemental. Pricing continues to improve across most markets globally, with outsized pricing power experienced within the greater than a megawatt segment, which saw pricing on signed leases at the highest level since the first half of 2016. Turning to our backlog slide, The current backlog of signed but not yet commenced leases increased to a new record of $482 million at quarter end, as commencements of $110 million were more than offset by elevated new leasing volume in the quarter. We expect nearly 15% of the backlog to commence in the fourth quarter, with a little over 50% commencing throughout 2024. The lag between signings and commencements in the quarter ticked up to 12 months. driven by new development and build-outs to support larger scale leases. During the third quarter, we signed 156 million of renewal leases with pricing increases of 7.4% on a cash basis, the strongest re-leasing spreads achieved since 2015. While renewal pricing was strong across product segments and across our three regions, the overall result was upwardly skewed by a single transaction within our other category. Excluding this outlier renewal, releasing spreads in the quarter would have been up 4.5% on a cash basis and 6.4% on a GAAP basis. We feel that this is a more representative picture of the renewal spreads that we are seeing throughout the portfolio, which is consistent with the broad-based improvement we've seen throughout this year. With renewal rates trending higher over the first nine months of the year, we are raising our full-year guidance for renewal spreads to reflect the success year-to-date in today's improved fundamental environment. Renewal spreads in the 0 to 1 megawatt category continued their steady climb with 4.4% growth on a cash basis in the third quarter on $125 million of volume. Greater than a megawatt renewals continued to post strong results, with cash renewals higher by 5.6%, albeit on lighter volume of $19 million in the third quarter. In terms of earnings growth, we reported third quarter core FFO of $1.62 per share, broadly consistent with consensus expectations, but down $0.06 per share versus the second quarter. primarily reflecting the impact of the asset sales and the equity raised in the quarter and the redeployment of capital into accelerated and increased development. On a constant currency basis, Core FFO was $1.60 per share relative to the $1.67 we reported in the third quarter of 2022. Total revenue was up 18% year-over-year and 3% sequentially. despite the impact of the more than 2 billion of asset sales completed early in the quarter, as the benefits of improved pricing are starting to take hold. Importantly, year-over-year revenue growth also continues to be impacted by the significant volatility in utility costs and reimbursements, particularly in Europe. Most of these energy costs are directly passed through to customers. Excluding the impact of utility and other reimbursements, Total revenue was up 13% year-over-year. Interconnection revenue of $107 million marked another quarterly record and was 12% higher than the year-ago period. Excluding Terrico, interconnection revenue was up 11% year-over-year, the highest interconnection growth since 2018, and reflects the ongoing organic strength in our core footprint. Quarter-over-quarter, interconnection revenue was up almost 3%, 2,000 new cross-connects were added, increasing the total global installed base to 218,000. Moving over to the expense side, utilities were seasonally high given the warmer summer months and off an already elevated 2023 base. Rental property operating expenses remained essentially flat for the second consecutive quarter, partly reflecting the benefit of the removal of expenses related to the dispositions and joint ventures. However, on the non-controllable expense front, property taxes spiked higher quarter over quarter to $72 million, driven by an elevated reassessment on some of our properties in Chicago. While these expenses will be largely passed on to our underlying customers, they will also be disputed over the coming years. Net of this movement, adjusted EBITDA increased 10% year over year. One non-recurring item worth noting in the quarter was the $113 million non-cash impairment charge related to the lower value of our holdings in digital core REIT stock. The Singapore REIT IPO'd in December of 2021 at $0.88 per share, but was valued at $0.53 per share at the end of September, driving the non-cash adjustment in our carrying value of the investment. Improvement in our stabilized same-capital operating performance continued in the third quarter, with year-over-year cash NOI up a strong 9.4%, but moderating by 1.5% sequentially due to the expected increase in utility bleed during the seasonally warmer months. Even on a constant currency basis, year-over-year cash NOI growth was strong at 6.6%. These results demonstrate the strongest period of organic growth in our same capital pool since 2014 and extends the turn in fundamentals that we have been highlighting throughout this year. Turning to the balance sheet, we meaningfully strengthened our balance sheet during the third quarter, driven by the success that we've had on our funding plan. This progress continues today, and as a result, we have raised our full-year capital-raising target for the second consecutive quarter. In the third quarter, we generated over $2.6 billion proceeds from JV closings, non-core asset sales, and settlement of the equity forward. Roughly $1 billion was redeployed into our development program, and a little over $500 million was used to repay higher-cost USD borrowings on our credit facility. The remaining amount was kept in cash, earning interest at a rate in excess of the remaining borrowings under our credit facility. As a result, at quarter end we had over $1 billion of cash on our balance sheet and our leverage fell to 6.3 times net debt to EBITDA, down from 6.8 times at the end of the second quarter. And we are now within spitting distance of our near six times leverage goal that we set out to achieve by year end. Since the end of the quarter, we've paid off 100 million Swiss franc notes that matured in October, and are confident in our ability to execute on additional asset sales and development joint ventures that are left in our upwardly revised funding plan. Moving to our debt profile, our weighted average debt maturity is over four and a half years, and our weighted average interest rate is 2.9%. Approximately 84% of our debt is non-U.S. dollar denominated, reflecting the growth of our global platform and our FX hedging strategy. Approximately 86% of our net debt is fixed rate, and 97% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, we have less than $1 billion of debt maturing in 2024, and beyond that, our maturities remain well-laddered through 2032. Lastly, let's turn to our guidance. We are tightening our core FFO per share guidance range for the full year 2023 three cents at the high and low ends, to a new range of $6.58 to $6.62 per share, maintaining the midpoint of $6.60 per share. We are also tightening the range for full-year adjusted EBITDA, affirming our full-year guidance midpoint of $2.7 billion. Our full-year revenue guidance range is being adjusted down by about 1% at the midpoint to a new range of $5.475 to $5.525 billion to reflect the impact of lower pass-through-oriented tenant utility reimbursements given the moderation in electricity pricing in EMEA. Importantly, you'll recall that last quarter's core FFO per share guidance reflected a $0.05 to $0.07 per share impact from a bankrupt customer, including two cents that was realized in the second quarter. In the third quarter, we received all of the rent due from this customer across our portfolio, but we did incur a one penny write-off related to unpaid utility expenses, and we expect that we could see up to another two cents of dilution related to this customer in the fourth quarter. In addition, we could see up to a penny of drag related to the carry forward of increased Chicago property tax assessment and one penny of drag related to the acceleration and increase of development spend as we capitalize on the opportunities we are seeing in front of us. With the continued improvement in our fundamentals during the quarter, we are also updating the organic operating metrics supporting our full-year guidance, including cash and gap releasing spreads of over 5% up from 4%, same capital cash NOI growth of 6% to 7%, representing a 200 basis points increase versus prior guidance, and a reduction in year-end portfolio occupancy to between 83% and 84%, reflecting the delayed timing of the sale of a vacant non-data center asset in our portfolio. Given the successful leasing executed in the third quarter and the increased level of demand embedded within our pipeline, we are increasing our full-year development spend guidance to 2.7 to 2.9 billion for 2023, representing a 400 million increase at the midpoint. Similarly, reflecting the continued execution on our funding plan to date, we have also updated our guidance for dispositions and JV capital to 2.7 to 3.2 billion, representing a 350 million increase at the midpoint, which is in line with the increase in our expected development spend for this year. While development has been an important driver of our growth for the last decade, in the short term, we are experiencing the headwinds from the sharp regime change in interest rates. This year, we've sold assets at six caps and new borrowings on our liner at similar levels, whereas GAAP requires us to capitalize interest at our weighted average borrowing cost of less than 3%. In other words, increasing our development spend today to capitalize on the growing opportunities we are seeing is dilutive to near-term earnings. As projects underway are completed at incrementally higher yields and the relatively low rate of capitalized interest burns off, we expect development completions will become increasingly accretive to core FFO per share. The good news is that fundamentals are helping to mitigate a portion of this dilution. This concludes our prepared remarks. Now we'll be pleased to take your questions. Operator, please begin the Q&A session.

We will now open up the call for questions. In the interest of time and to allow a larger number of people to ask questions, callers will be limited to one question. To ask a question, please press star followed by one on your telephone keypad. If you are using a speakerphone, you will need to 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 the roster. And our first question comes from John Atkin of RBC Capital Markets.

Please go ahead.

So I was interested in the development JVs that you alluded to. It sounds like there's something relatively imminent or maybe a couple of transactions. Can you point to the leverage reduction benefit that we should expect? And then related to that, give us a sense of the tailwinds and the headwinds that might affect core FFO per share for next year. Thank you.

Thanks, John. Why don't you let Greg touch on his activities? It's been the tip of the spear on our development JVs, which unfortunately we couldn't time not just one but two announcements like last quarter, but we haven't been idle and been making some great progress. But, Greg, why don't you give us color?

Yeah. Thanks, John. Look, I think, as Andy mentioned, look, last quarter, which we already announced, we had our two stabilized joint ventures with TPG in Northern Virginia, and obviously GI in Chicago, which generated about $2.2 million of proceeds. And what we found in that process was demand was very robust to invest in data center assets in the private market. And the same holds true. We're continuing to see even more demand for stabilized assets. And I would go as far as to say it's even greater investor demand when you look at the development, you know, potential development JVs. All I can tell you is we're working hard, and we hope we have something here, you know, in relatively short order to report. But right now, you know, no more guidance on that.

Other than that, demand remains strong, and we remain encouraged.

The next question comes from David Barton of Bank of America.

Please go ahead.

Hey, guys. Thanks for taking the question. I guess I want to follow up a little bit on the second part of Jonathan's question, which was thinking about 2024. You know, when we began 2023, we were looking at, you know, same-store cash NOI growth in the mid-3s, and now it's pushing towards 7%. We're talking about, you know, decade-level improvements in interconnection and sub-megawatt leasing and greater than one megawatt leasing. Andy, you frequently talked over the year about how re-leasing and greater than one megawatt, you couldn't confidently say would be greater than zero, and here we are. And then, you know, we've lapped the first year of the Terrico acquisition, which was supposed to be dilutive in year one, you know, neutral in year two, accretive in year three. So outside of some accounting issues,

issues it kind of feels like uh all the needles are pointing up into 2024 and before i get too excited tell me where i'm wrong thanks thanks david we appreciate the kudos there uh before i hand off to matt to give you a 2024 guidance on this call which i i can tell you we weren't prepared for i'll just chime in with uh just some colors so um you're right with the The trend has been our friend on multiple fronts, and I think we tried to signal this at the outset of the year, and we were a bit of a show-me story. But we saw our value proposition resonating. We saw the pricing environment firming and continued that momentum, whether it's asking rates, ROIs on our development pipeline, at cash market markets in both product sets. And I would say that environment is continuing. But before Matt takes the air out of the balloon with no early guidance, I mean, there are obviously headwinds that Matt can talk to that we're still working through. But, Matt, why don't you give us your thoughts?

Yeah, sure. Thanks, David. I mean, I think we – and we kind of talked about this a little bit towards the end of my prepared remarks. But I think, as you know, we've been – one, we've been – pretty clear about a desire to deleverage, which we've made substantial progress on. We started the year close to seven. We're at 6-3. We're making progress on that, like I stated, the start of the year. And we're doing that through a level of capital recycling, asset sales that are going to have an impact not only on this year, but we'll have some follow-through into next year. And we're doing it at a time also where we're looking to take advantage of What we see is a great opportunity in the market where supply-demand fundamentals are about as strong as they've been, and we see opportunities to deploy capital. But that capital is coming at a higher cost today than it was, and therefore it's dilutive near-term until that capacity comes online.

And we think it's the prudent thing to do, but that's part of the dynamic that we're dealing with.

The next question comes from Michael Elias of TD Cowan.

Please go ahead.

Great. Thanks for taking the questions. First, you know, could you help us think about the sources of funding? And really what I mean by that is you raise equity at $97 a share, but you didn't raise equity when your stock was at $130. Presumably the cost of that equity would have been lower than selling assets at call it a 9% cap rate. Just wondering how you're thinking about the use of equity as you march towards that call at 5.5 times leverage target next year. And then I have a follow-up. Thank you.

Thanks, Michael. So Jordan's got us playing by new rules to make sure everyone gets at least one question on the call. So we've got one question, but we'll try to hit you on the next round for your follow-up. I think our actions are speaking louder than our words, hopefully, here, whereby we had tremendous success. In the first half the order dribbling into the month of July on they both non-core dispose followed by major hyperscale stabilized assets And the fact that we haven't moved forward with any additional equity issuance of common stock I think this speaks to our conviction on the next leg of private capital reasons with development joint venture or joint ventures being the next leg of the stool so And I think those are things that are strategic and different for our company relative to prior experience where we're going to share the non-cash flow period of these projects that are large, massive, capital-intensive, and long-term projects and allow some of these great fundamentals we've seen flow through to the bottom line. That doesn't mean we're 100% adverse to ever issuing equity at the right time, the right quantum, or the right price. But I think we believe we've got some incremental milestones or wins to put on the board here that are in the not so distant future Before we be ready and this is on the back of tremendous progress We've taken the balance sheet down what point eight turns of EBITDA literally in two quarters worth of reporting so and and so I I'm pleased with the progress and And I would say that we have more good news to come. One last thing. I want to hand over to Greg because you made a comment on the non-core dispos. I think that we should clarify what that really means to us.

Yeah. Thanks, Andy. Hey, Michael. Look, I don't think it's right to say you're selling an asset at a 9% cap rate versus what your implied multiple is on your company. In our minds, from a capital allocation perspective, those are two very different things. One is, you know, the assets we sold, you know, they're non-core assets, right? One's in Watford, one's in Chantilly. And, you know, what does that mean to us? I mean, these are non-campus assets with limited connectivity, right? And when you look at, you know, Chantilly, while it's in Nova, it's in neither of the major markets of Loudoun or Manassas, right? And so when you look at these assets individually, they're older, they're standalone assets. Now, this is a very, very small portion of our business. But, you know, we call these assets out. So I don't think we can sit here and assess, you know, a cap rate on one or two non-core assets versus selling equity in the business. These are assets that are not part of our core business going forward. And, you know, non-strategic to us, that's a very different analysis. So I would just caution folks to say, hey, here's a couple assets that were non-core that were signed as a nine. Therefore, that's not the right cost of capital play or the right capital allocations.

I think it is.

The next question comes from David Garano of Green Street.

Please go ahead.

Hey, thanks for taking the question. On page nine of your presentation you put out today, it feels like those new leasing bars, they just keep reaching to the sky. You think there's a sustainable pace of activity for digital realty, and maybe even broadly, is it a sustainable pace for the industry as a whole? Or is there a risk maybe that that dirty word digestion phase starts to come back into our vocabulary again?

Okay, thanks, David. So, I mean... What's great about this quarter is not just the size of that bar, but just what really went into it. And as I said in the prepared remarks, we usually call it, or we historically let off with the top-line number, but I think it was even more important to start with a tremendous foundation. Less than a megawatt interconnection signing was a granular quantity of customers, broad-based across the regions, including interconnection, was at a record level. It was up dramatically, not just year over year, close to 28%, but 9% quarter over quarter. And that is that flywheel success that we've been investing in and starting to see more and more harvesting of the fruits of our labor. On the bigger portion of that, it was not one single deal. I think our largest deal is not even a third of the total signings. It was brought based across the GOs as well. And these are playing to a continuation of demand trends that have been here for a little while, but certainly not exhausted. When you look at the pace of how fast the cloud is growing, digital transformation, hybrid IT, you look at our new logo contribution, largely enterprise-based, 117 from around the globe, and Artificial intelligence, which is something we've had a hand in supporting for many years in high-performance compute, power densities, that is just starting to blossom in our numbers. And I think that is just an incremental tailwind of demand where it doesn't feel like the digestion period is anywhere near coming to the amount of capacity demands we're seeing

for the industry overall.

The next question comes from Eric Lubko of Wells Fargo.

Please go ahead.

Great. Thanks for the question. So I wanted to touch on kind of your outlook for renewal spreads, which have been pretty strong the last couple quarters. So if I look at your expiration schedule, it looks like your in-place rents really start to look even more attractive, you know, the further out you look. So maybe you can talk about kind of the near-term outlook? You know, is it going to be a little more subdued as you work through some of these higher-end place rents? And then maybe, are there any of your larger footprint contracts that have any contractual terms that may limit your ability to push rents as high as you would like? Thank you.

Sure. Thanks. So, I think, first off, I think as a note, you know, we feel pretty confident about the pricing environment right now and that the I think we demonstrated that with the continued increase in releasing spreads that we put into our guidance where we said greater than 5%. And we've called out some items this year that have been, we'll call it slight outliers, but we still see a strong pricing environment, and we expect that to continue into the fourth quarter. where we expect positive renewal spreads across all of our product types. I think going into next year, again, not giving guidance, what I would say is come back to the environment that we're in. I mean, there's nothing that suggests that pricing won't continue to be robust and strong across all of our major markets. Where things might be different, again, that you were alluding to, is the basis against which those strong pricings are compared against. We're not seeing the same, I still expect that we'll have positive renewal spreads next year, but we'll be able to provide more granularity in terms of the level that that is once we give guidance next quarter.

The next question comes from Frank Luthan of Raymond James.

Please go ahead.

Great, thank you. So when you guys are having conversations with a customer that's primarily looking at an AI deal, when you win an AI deal, what is it that they're coming to you for versus maybe some of the less expensive campuses, kind of the middle of nowhere that we've heard about and that sort of thing? So how are you winning in AI and what is it that they're looking to get from digital versus some of your peers or some of the private players?

Hey, thanks, Frank. I'm going to toss this to Colin in a second, but there's many shapes and forms of AI, and I should reiterate, this is still early innings of what's going to be a vast build-out of required infrastructure. So our intersection of supporting AI is called in the single megawatt or two for enterprise adjacent to the existing workloads. Expansion into multiple, many, many megawatts of contiguous capacity and everything in between. And we're in a world right now where it's about large language model training, where obviously the inference, the dawn of inference and the implications will hopefully point to incremental locational latency sensitive needs. The private consumption of AI or the public consumption of consumer consumption is well outweighing the enterprise. That's going to change. So I think this demand case, I think, is going to grow and change, and it feels like come in our favor. But, Colin, why don't you speak to some of your experience front line with the customers?

Sure. Thanks, Andy. Frank, appreciate the question. I would just amplify what Andy was saying is the demand principles are not monolithic. I mean, you're talking about a wide gamut of requirements across the customer platform, which really plays well to our broad-based portfolio. So I think we do as good a job as any to support broad-based requirements and continuous capacity, but also having mixed dynamic requirements in terms of densities. And so what we try to do is to map that right customer to right market to right workload. And again, across 300-plus data centers, I think we can serve that pretty well. We also feel pretty strongly that core market orientation is i.e. proximity to eyeballs and GDP is still going to remain a core requirement for much of this AI workload.

So we feel like that maps really well to our course of assets across the globe.

The next question comes from Ivan Liu of Evercore ISI.

Please go ahead.

Hi, thank you for the question. So Greg mentioned the strength and demand for both stabilized and development JVs, but in light of a more volatile rate environment, especially in recent weeks, have you sensed any meaningful shifts in the appetite for JVs when you're discussing with potential partners?

Greg, has your phone been ringing any louder? No. Look, it's a good question, but the answer is no. Remember, when investors are out there making investments in different sectors, everything's on a relative basis. And I think when investors look at data centers today and they look at the quality of the facility, the quality of the customer base, the term of the lease, the strong organic growth in the business today – It's the best place for them to invest. In fact, I would argue that over time, you're going to continue to see data centers becoming more mainstream investing rather than niche play investing when you look at the level of demand out there, whether it's through pension funds, endowments, sovereign wealth funds, and the like. So, no, I mean, it's also an interesting – there's pockets of capital that that are driven, will do this unlevered, so they're willing to be patient and wait for leverage and wait for rates to come back down. And I think that also, to your point, Ivan, I think that's what I mentioned earlier, there's even an outsized demand on the development side. I think the fact that we're in a higher rate environment is driving more demand, if you will, towards development. But no, we have not, in fact, I would go the other way. I would say that we've seen an acceleration in demand

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

Thanks, and good afternoon. When you take the demand that you're seeing, the backlog, and the target for the development joint ventures, can you give us a bit of a preview on the range of development capital that digital will place on balance sheet in 2024?

Thanks, Michael.

So, I mean, this is a new news and I think I framed this at some of the investor meetings we've had through the fall or even going back to Narek. Listen, we are a large, the largest global player in the space here. and we are taking a strategic change to how we're funding the business was one of my three top priorities. And what we're not going to do is tie ourselves to a partner for all time and reduce our flexibility, but we're going to be looking at targeted, large-scale projects. These are projects that are supporting or will support customers we believe in and their growth, campuses, multiple megawatts. So not non-core at all, like things that we would invest 100% if we weren't looking to change our funding strategy to drive more bottom line growth. And I think you can think the concentration of those type of projects to date are mostly in North America and Europe, given our business is already in a shared, in a venture in Latin America and we're a little bit smaller in APAC. And I think it's gonna be very targeted trying to find the right capital source that is like-minded in terms of their vision for the asset class, and looking for a partner that wants to really invest alongside what we think is the best in class in this industry.

The next question comes from Matt Nicknam of Deutsche Bank.

Please go ahead.

Hey, guys, thanks for taking the question. Just one on cash flow. So accounts receivable looks like it increased another $167 million sequentially, and it's been a drag of over $400 million a year to date. Just wondering if there's any color you can share on what's driving this and then maybe how to think about the prospects for any sort of reversal in upcoming quarters. Thanks.

Yeah, thanks, Matt. This is Matt as well. I think the important points that I'd call out here are two things. One, the majority of the increase that we've seen over the last couple quarters in our accounts receivable has been tied to actually VAT receivables as a result of the increased construction that we've had, particularly internationally in EMEA. When you look at our trade payables, which are know really only uh actually roughly half or a little over half of that balance uh we you know we have increased uh trade payables over the period but it's also been fairly much in line with our increase in revenue as well um and we've uh we've actually been able to bring down our uh amount of trade payables in the last couple of quarters as well but again it doesn't doesn't appear that way when the total uh receivables balance is increased but again I think the two salient points are roughly only half of that balance is tied to what I call trade receivables, which are actual rent and other billings that are sent to customers. A good chunk is related to VAT receivables tied to our construction, which has been the part that's been growing more substantially, which also has a liability offset as well.

The next question comes from Ari Klein of BMO Capital Markets. Please go ahead.

Thanks. Maybe following up on the JV question, fundamentals are really strong and it feels like you believe there's a lot of runaway there. Obviously, there are funding considerations, but have you rethought perhaps pursuing a JV versus going at it on your own and essentially keeping the upside to yourself?

Hey, thanks, Ari.

So I think consistent with what I've reiterated on this call, we believe that this opportunity when it comes to our space, digital transformation, cloud computing, hybrid IT, and now the advent of artificial intelligence really coming to fruition is so large, long-term, capital intensive, that really tapping into both private and public capitals in different measures is the right way to maximize value for our shareholders. And we are certainly experiencing an inflection in our operating fundamentals that has built upon good results throughout the year. We've been doing a tremendous amount of deleveraging this year. We'll be called rounding third base on the deleveraging next year, getting back to the targets Matt's laid out. We also have headwinds when it comes to, call it some modest amount of debt coming due in terms of refinancing. But we view that a development joint venture remains to be the right move to drive more to the bottom line. And again, as I said in a question or two ago, we are not tying ourselves to this strategy and partner for all time. This is allowing us to accelerate those earnings and and then be able to throttle the levers here to how much we share in terms of development joint ventures with partners down the road.

The next question comes from Simon Flannery of Morgan Stanley.

Please go ahead.

Thanks a lot. Good evening. If I could just check in on the development CapEx point again, you raised the guidance 400 million at the midpoint for this year. We've obviously just got a couple of months left here. Could you just go through a little bit what we're seeing that increase being spent on? Is that higher cost per megawatt coming through on some of your existing projects? You're pulling stuff forward from next year. What else might be contributing to the increase? Thanks.

It's not budget overruns or anything like that. It is called conviction in the demand landscape. And, I mean, Matt can run through it, but I think the biggest piece is Northern Virginia, which goes back to our success in freeing up called 100-plus megawatts in the Loudoun County pinch point and now activating that. But, Matt, anything else I'm missing there?

No, I think, Andy, you hit it. I mean, the majority of our development pipeline increased roughly 60 megawatts. We had 100 megawatts of new starts. The vast majority of that was in North America and in Northern Virginia specifically. If you look at our supplemental quarter-over-quarter, our cost per megawatt, I think broadly, globally, has been roughly flat. So it's just a view of New development starts. I'm looking to get those completed as quickly as possible so we can deliver on time for our customers and take advantage of the market that we're in.

The next question comes from Nick Del Dio of Moffitt Nathanson.

Please go ahead.

Hey, thanks for taking my question. Andy, you've talked about being more disciplined about returns and the sort of deals you accept. Do you feel like you're successfully winning your targeted share of higher value or more strategic deals at your desired returns for each product? And kind of along those lines, do you feel like customers' perceptions of what you have to offer and where you add value is consistent with how you're trying to reposition the company's assets?

Thanks, Nick. So I could tell you just yesterday, my team and I were on a called recurring check-in with one of our top cloud customers and that dialogue was multifaceted it was obviously concentrated on how we can support their growth and their availability zones how can we can commence faster there's operational elements it ranged across all the theaters and it also had how we can drive greater consumption to their cloud and and their services from our 5,000 existing customers, from the hundreds plus we added this quarter and the next quarter, how we're integrating them onto our service fabric natively, and so I think we are, and I think you're seeing those results paying dividends in that customer appreciation, and You're seeing that in the litany of call it magnetic destinations, be it the on-ramps we announced around the world, as well as the pickup in the demand that we characterize as less than megawatt interconnection accelerating. So I do see a connection there. I think we deliver a tremendous amount of value to our customers, improving their top lines and their bottom lines in a safe, secure fashion. And When obviously I think some of your question was dovetailed also to some of the larger customers. I think that we're just being transparent and honest with these customers that we're really trying to build a durable business that stands the test of time. And that doesn't mean we try to win 100% of a hyperscalers market share. But if we're in 50 metropolitan areas, there's probably 25 or 30 where we have something that they really need and we can really help them like no other. And that's through our supply chain, our large campuses that future-proof their growth, operational excellence, and other value adds, and just being a one-stop shop for all their needs.

So I think that's a long, long-winded answer to yes.

The next question comes from Eric Rasmussen of Stiefel.

Please go ahead.

Yeah, thanks for taking the question. Just getting back to the development JV, this is obviously the missing piece in the capital recycling efforts. But I saw that you raised the disposition guidance for the year. Is 750 still a good range for this? And I guess from your commentary, it seems like there's more than one deal that this can represent.

Hey, Eric, this is Greg. The answer is yes, 750 is still a good deal, and yes, we are working on more than one.

The next question is a follow-up from Michael Elias of TD Cowan.

Please go ahead.

Great. So I want to ask about the unlevered return environment, particularly for hyperscale. I think earlier in the call you mentioned something to the effect of double-digit unlevered yields. When you're thinking about doing some of these larger footprint deals with your top customers, I'm just curious where you're seeing those deals clear, and as part of that, where do you think that this could evolve to overhaul it the next year? Thanks.

Thanks, Michael. Listen, I think I'd point you to our development schedule, which is now in the double digits category across the board for the whole portfolio, including an increase in called 65 megawatts quarter over quarter. North America, where I would say is the current home to the largest deals, is in double digits by itself and has moved up dramatically. When we look at the risk-reward, there's obviously episodic scenarios where returns for big deals with hyperscalers could go higher, but I think that once you kind of descend into the double digits, given the current state of cost of capital in general, I think you're in the proverbial end zone in terms of creating value on many ways. So I wouldn't bank on incremental stair shifts of shifts beyond that. But I think we're in a time in the world where the demand remains robust and diverse, outpacing supply. That dynamic does not feel to be abating. And I think we've got a great hand to support tremendous customers' growth around the globe and create a lot of value for a lot of stakeholders.

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. Please go ahead.

Thank you, Andrea. Digital Realty had a strong third quarter. Our results demonstrate that our value proposition is resonating with our customers. We posted another quarter of strengthening organic operating results with record zero to one megawatt bookings, strong releasing spreads, and our best-seemed capital cash and ally growth in over a decade. During the first nine months of the year, we've raised over $3.5 billion of new capital, enabling us to meaningfully delever while reinvesting to support our customers' growing needs. And we are not done yet. I'd like to thank everyone for joining us today and express my personal gratitude to our dedicated and exceptional team at Digital Realty, who keep the digital world spinning We look forward to updating you on our progress and meeting with many of you at NAREIT in L.A. in a few weeks. Thank you.

The conference is now concluded.

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