Digital Realty Trust, Inc.

Good afternoon and welcome to the Digital Realty fourth quarter 2023 earnings call. Please note, this event is being recorded. During today's presentation, all parties will be placed 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 fourth 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 Sharpe, and Chief Revenue Officer Colin McLean are also on the call and will be available for Q&A. Management will be making 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 also 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 fourth quarter and our full year. First, we are seeing a robust wave of demand across our platform, and we are optimistic about our ability to execute. Leasing in the quarter was healthy, highlighted by strong volume in the zero to one megawatt plus interconnection segment, record pricing in the greater than a megawatt category, and the second highest quarter ever of new logos added. Second, our fundamental metrics capped off the year on a high note, with the strongest cash releasing spreads and same capital cash NOI growth we've seen in years, as our unique and differentiated value proposition continued to resonate. And lastly, in the fourth quarter alone, we announced nearly $8 billion of new development joint ventures and completed over $1 billion of equity issuance under our ATM, bringing total capital sources raised during the year to more than $12 billion and reducing pro forma leverage below our year-end 2023 target. The execution on our funding and capital plan in 2023 has positioned Digital Realty to be able to support our customers' data center infrastructure needs as the next generation technology unfolds. 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. 2023 was a milestone year for digital realty as we made strong progress toward our strategic objectives despite significant volatility in financial conditions and broader uncertainty around the world. For me, 2023 will be revered as the year of AI's arrival to the data center forefront, ushering in an unprecedented new wave of data center demand, driving a step function of change across the industry's landscape, the year that digital realty enhanced its customer value proposition by adding connectivity-rich solutions while also scaling our capacity for hyperscale and AI workloads. We expanded our footprint with new connectivity-oriented locations around the Mediterranean and elsewhere, enhanced our joint venture in India with the addition of Reliance Geo, and increased the number of direct access points on our campuses to the leading cloud and service providers. We accelerated the growth of service fabric with more than 70 discrete services added to the platform and over 100 unique services available by year end, and enhanced its capabilities with new components like service directory. We also added 9,000 new cross-connects in the year, indicative of our growing connected data communities. 2023 was the year that we integrated and innovated at a faster pace than ever before. We strengthened our leadership team and aligned our platforms to three regions to be consistently structured around the world. We adapted our product portfolio to meet market demand, evolving our offering to officially support next-generation chips like the NVIDIA H100 in numerous data centers. Our high-density COLO capability deployed across 32 markets spanning all three regions is equipped to handle three times the H-100 requirements. And we continue to add green energy solutions to power many of these power-dense applications, like our large solar PPA in Germany and our agreements supporting 100% renewable power in Texas, San Francisco, New Jersey, and Sydney. And 2023 was the year that Digital Realty took decisive action to strengthen our balance sheet by developing a portfolio of private capital partnerships and vehicles that diversified our capital sources while enabling us to support our customers' fast-growing requirements. And we did all of that while continuing to provide the operational excellence that is expected of a global data center leader and that our customers rightfully demand. On this call a year ago, I outlined a plan to bolster and diversify our capital sources. Our goals were to reduce our levers towards six times by the end of the year, increase our liquidity to fund our development program, and diversify our capital sources to limit our reliance on the capital markets, increasing our ability to meet the accelerating demand for data center capacity and to enhance our returns on invested capital. We outperformed on each of these goals sourcing over $12 billion of new capital and commitments for new investment and debt repayment, reducing pro forma leverage to just 5.8 times when adjusted for transactions that have been announced or closed since year end. We also ended the year with five new JV partners and expanded some of our existing relationships. To round out the year, we announced three significant transactions in the fourth quarter. including two development joint ventures and the successful resolution to our relationship with Sixtera. We also raised $1.2 billion of equity under our ATM since the end of September. I will quickly run through the highlights of these transactions. In early January, Greg completed his famed Triple Lindy with his Sixtera transaction by selling $275 million of assets to Brookfield, along with the purchase of Sixtera's leasehold positions in Singapore and Frankfurt for $55 million, yielding net cash of $220 million to Digital Realty. In addition, Brookfield assumed three existing leases and amended three others in our portfolio to accelerate their expiration to the end of September 2024. Finally, Digital Realty obtained and exercised an option to purchase a Sixtera data center in the Slough Trading Estate, adding one of London's highly sought-after sub-markets to Platform Digital's connectivity and enterprise co-op offering. This transaction remains subject to customary closing conditions and is expected to close toward the end of the first quarter. In November, Realty Income purchased an 80% interest in two 400 million data centers that are under development and leased to an investment-grade financial services company. The tenant has the option to expand the facility up to an estimated potential cost of $800 million. We received $200 million upon closing and reduced our funding obligations for the remainder of this project to just 20% of the total capital, enabling us to reinvest the capital in higher return projects. Finally, the $7 billion development joint venture with Blackstone is our largest and most forward-looking transaction and accelerates the monetization of nearly 20% of our 3-plus gigawatt land bank. This JV involves the sale of an 80% interest in nearly 500 megawatts of capacity across four campuses in Paris, Frankfurt, and Northern Virginia, and enables us to better support our hyperscale customers' needs. Approximately 20% of Venture's total potential data center capacity is expected to be delivered through 2025, we will retain a 20% interest in these developments and earn fees for developing, leasing, operating, and managing these facilities. All told, in 2023, we announced or completed joint ventures and asset sales, driving leverage down roughly 1.3 turns from the first quarter peak, accelerating our ability to deliver needed capacity to our customers and enhancing our returns on invested capital. I would also be remiss if I did not mention Digital Core REIT's successful 120 million follow-on equity offering last week, which will support the REIT's planned acquisition of an incremental 24.9% interest in our jointly owned asset in Frankfurt for 125 million. Let's shift to a brief recap of our results and offer some insights into the trends we are seeing across our business. I'm pleased with our results for 2023, which helped to lay the foundation for an acceleration in long-term sustainable growth in earnings and free cash flow that should take shape as we head into 2025. Our fourth quarter results were broadly consistent with the first three quarters of 2023, with continued strength in our operating performance KPIs and incremental improvement in our financial position as we continue to execute on our value proposition with a goal to support the increased demand for data center capacity. Leasing remained healthy, especially in our targeted zero to one plus interconnection segment with 134 new logos, bringing our total new logos for 2023 to a new annual record of more than 500. Renewal spreads were strong for the fifth consecutive quarter, remaining positive across product types and regions. Same capital cash NOI growth continued to demonstrate the underlying strength of our business with 9.9% year-over-year growth in the quarter. and churn remained low and well-controlled at 1% while occupancy was impacted by the delivery of significant vacant development capacity. The combination of cloud and AI is driving unprecedented demand for scale and hyperscale capacity alongside the steady enterprise and connectivity-oriented demand we're experiencing within our zero to one megawatt plus interconnection segment. Supply constraints driven by limited availability of power and global supply chain delays have continued to drive the pricing pendulum in our favor, while our growing value proposition is increasing interest in our existing inventory and the new development that we have underway. Ongoing conversations with customers pretend a significant potential acceleration of leasing and development, and we believe we are well positioned. The demand seems to be spilling across most markets, particularly for larger capacity blocks, though there are a few pockets of strength worth noting, including Northern Virginia, Santa Clara, New Jersey, Paris, Frankfurt, Singapore, and Seoul. Our new capacity is concentrated in core markets aligned with our global meeting place strategy. While the scale of data center infrastructure opportunities has increased alongside AI's arrival, we remain disciplined and thoughtful, prioritizing locations that enhance platform digital connectivity, and our connected campus communities. During the fourth quarter, Digital demonstrated the benefits of collaborating with our partners, with the signing of an Oracle Cloud Infrastructure dedicated region deployment by a financial services customer, showcasing the potential of the collaboration between Oracle and Digital Realty to fulfill enterprise customers' hybrid cloud requirements. Other customers are recognizing the growing value of Platform Digital's broad and open structure. an AI service provider leveraged Platform Digital's pre-provisioned high-density colo offering to improve their time to market in order to extend their North America AI cloud offering that provides managed AI as a service for a global manufacturing client. A global service provider and partner targeting enterprises' customers added more connectivity for their hybrid offerings on Platform Digital, enabling them to upgrade their IT environments to a consumption-based IT infrastructure and managed services model. A Global 2000 leader in material sciences for industrial and scientific applications needed a data center provider with global interconnectivity and access to cloud providers in Seoul and chose Platform Digital to enable them to employ and interconnect a private AI node. A Global 50 financial services company is migrating from an on-prem data center to Platform Digital and utilizing service fabric to improve sustainability, resiliency, scalability, security, and carrier diversity. And a leading global 2,000 consumer goods manufacturer grew their presence on Platform Digital by adding two additional metros to support their IT workloads and cloud connectivity. Moving over to a quick update on our largest market, Northern Virginia, We have over 100 megawatts available for lease today in Loudoun County and nearly 200 megawatts of capacity available for lease in Manassas. We are currently in active negotiations with a handful of customers for substantially all of our capacity in Loudoun, though in contrast with the rumor mill, nothing has been finalized just yet. Beyond this capacity, we have another 900 megawatts of buildable capacity at Digital Dulles, which we are cautiously optimistic will gain access to power in 2026, and beyond. We also expect to benefit from the active and ongoing management of our existing 500 megawatt portfolio in this market over time. Before turning it over to Matt, I'd like to touch on our ESG progress during the fourth quarter. We continue to be recognized for our strong ESG performance in the fourth quarter and in 2024. We placed second on Sustainability Magazine's list of top 10 sustainable data center providers. We improved to number eight on the U.S. EPA's Green Power Partnership National Top 100 for renewable energy use, and we were named as a top-rated regional performer in North America by a leading global ESG ratings provider. 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 over the call to our CFO, Matt Mercier.